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How to fix inflation


With only a week to go until the US midterm elections, inflation is the issue at the top of most voters’ minds. As Democrats and Republicans make their cases for who can get prices to come down, one thing remains true: High prices are not going to go away overnight. Economists Mike Konczal (@rortybomb) of the Roosevelt Institute and Michael Strain (@MichaelRStrain) of the American Enterprise Institute discuss how we got here and the least painful way out of this.


Is the cure for inflation worse than the disease?

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To beat inflation, the Fed might have to trigger a recession

What aren't we doing to fix inflation? 

Student Loan Forgiveness Plan Won’t Make Inflation Worse—Even If It Adds $400 Billion To Deficit, Goldman Says 


Jonquilyn Hill (@jonquilynhill


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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
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We're visible. We're the wireless company with nothing to hide. Seriously. Hidden fees? We don't have them. Annual contracts? Not our thing. Grit wireless on just one line? Now that's more like it. Get unlimited 5G data powered by Verizon for just $25 a month. Taxes and fees included. That's right, $25 a month, every month. Sorry hidden fees, we're just not that into you. Sometimes the choice is just visible. At visible.com. Rate with service on the Visible plan. For additional terms and network management practices, see visible.com. - Hi, everyone. Welcome to another episode of The Weeds. I'm John Glenn Hill. If you can believe it, we are only one week away from the midterm election. Topic that's at the top of mind for most of us while we get ready to vote. Inflation. And even though it's hitting our wallets, it's still really complicated and difficult to parse out.
Understand the economy can make you feel like you're on that one episode of Parks and Recreation. I recently invested in some shirts I got at a garage sale. Left those at Wendy's. On the way home. So, the economy. butt No matter how much you know, and no matter which party takes control of Congress in the New Year, Is still going to be there. We wanted to help understanding it all, so we called up two economists to help take us on a deep dive into the current state of the economy, and to make sense of it. Of both parties' plans to tackle inflation. Mike Consul is the director of macroeconomic analysis at the Roosevelt Institute, a progressive think tank here in D.C. And Michael Strain is the Director of Economic Policy Studies at the American Enterprise Institute. A center-right think tank here. The economic world is really small, so of course...
- First Michael and Mike already knew each other. - Mike Konsole? - Yeah, hey, what's up, man? Looking forward to this. - How are you? - I'm good, I'm good. - You're like half an inch tall on my screen and I couldn't even see your face. - Right here. - It's nice to see you. With you, Mike, the newest GDP numbers are out and the economy grew 2.6%. And this ends a streak of contractions we've seen with the economy, what does that signal if... Anything about where we are right now? Well, the GDP number was really positive, and I think it reflects a really strong recovery we've had over the past two years. I think this economy-- Has been defined by two things, a really strong recovery in growth and employment. GDP has recovered. Basically to the pre-pandemic trend, what people thought the economy would be at in terms of how much we're producing before the pandemic.
Producing it now as a result of all the investments and spending we made, which is a pretty remarkable achievement. And it really is different than the great. Where we never kind of returned to that trend. Employment is very strong, you see income is very strong. The flip side is that-- Is much higher and broader than people had anticipated, even anticipated at the beginning of this year. And so... We see that in the GDP numbers and other numbers related to them. And those are two signs of the fundamental thing that the economy is dealing with. Really good and really positive on some dimensions, but also very hard and a very long slog to try to bring down inflation on the other hand. - And Michael, what is that inflation? looking like right now. I mean, you know, we see this growth in the GDP but if you... Person at the grocery store, prices are up. Where are we with the state of inflation right now? Well, we're not in a good place. I think that you could make a plausible.
Case that underlying inflation has been getting worse throughout 2022, but it's not getting better and that is a problem. Because it really does need to get better. We need to return to a situation of low and stable price growth. And if we're not seeing improvement even after Considerable efforts by the Fed to get prices under control, then that means that the Fed has to be more aggressive. That it currently is and that in turn puts at risk a strong labor market, which is of course-- Important for the prosperity of millions of Americans. Michael, that aggressiveness. You're talking about very likely could lead to a recession. Is a recession inevitable at this point? Is that what it's going to take to end inflation? Is inevitable. I would say the odds of the Fed being able to...
Cool the economy being able to put the rate of inflation on kind of a glide path back down to its 2% target without causing a recession are in the 25% range. If there's a 25% chance of rain, you probably bring an umbrella. If somebody told you there was a 25% chance you'd get hit in the head by a brick. You'd probably put a helmet on. But I think the strong likelihood is that the economy will experience a recession in 2023. Okay, so let's say there's a 25% chance of us being hit with this brick that is a recession. We have our helmets on. Mike, what would a recession need? now look like? Do we know? I mean, when I think of recession, I think of the Great Recession. Like I was graduating high school, I had
Friends graduating college. It was a scary time. Is that what we're risking right now? I want to make the case that we might not need a recession. So, you know, the Fed has hiked quite a bit, quite dramatically, the quickest rate of hikes in decades going back 1980s, and everyone, I think, believes that it takes a long time for those to take impact. Some things that affect through financial— Really quickly. We've seen mortgage rates go up. We've seen the housing market cool quite dramatically. But the other effects will continue for some time. There's already been really positive developments towards The Fed had been calling a soft landing. That's really backed off that language in recent months. Wage growth has moderated. Job openings and other signs of really hot labor market activity has pulled back quite a bit in the last three or four months. GDP number we just saw, a lot of consumer spending started to return to trend. Very good numbers, but they're not quite the white hot burning numbers that we were seeing earlier this year and late last year. This is also during a period of
in which we added 1.1 million jobs over the last three months. So if we think that... Those things are causing inflation, we would expect it to cool down inflation in the months and quarters ahead. And so, in addition to supply chains, normalizing in addition to some things in the housing market and the way it's measured. There's a lot of reasons to think and... Because it is so high and being driven by so many different things, there's a lot of reasons for it to pull back. Now, if some of those things-- down inflation, that means a recession or any kind of contracting would have to be a lot less. Or whether or not we have a recession where unemployment goes up a little bit versus goes up a lot because if unemployment goes up a lot it has real deep and lasting consequences for workers. So we really want to try to avoid that circumstances. Yeah, and wages are up, you know, people have jobs and I think a lot of people like that. They like the fact that you know they have bigger salaries and they have a place to work. What's the fix here? Well, one of the problems with
inflation is that it's eroding the purchasing power of those higher wages. That's not true at the bottom of the wage distribution, the lowest wage. Workers have seen their wages grow faster than consumer prices are growing. So they've come out ahead. But workers in the middle of the wage distribution, middle wage workers with middle skills. And then workers on the higher end of the wage distribution have seen their wages grow, certainly, but they've seen the rate of consumer prices grow faster. And so their inflation adjusted wages and incomes have been falling. But I think you're right that even And if we see the kind of wage picture improve as prices come down.
If we see the unemployment rate go up, then that's going to be really bad for the people who lose their jobs. And that's something that I think really should be front and center in policy discussions. It's something that should be front and center as the Fed. Figures out what to do. I think we spend a lot of time talking about whether or not we need a recession, whether or not we'll have a recession. We spend less talking about what that recession might look like. And a lot of people, I think in the The public debate have in mind the 2008 financial crisis and the subsequent great recession. That was an extremely traumatic event. That was the worst downturn the United States has had since the Great Depression. And the labor market was in terrible shape for years and years and years after the 2008 crash.
I don't think we need anything like that in 2023. I don't think we're gonna get anything like that in 2023. I expect that the unemployment rate will go up and I. The recession to be not only mild but relatively short as well. And I don't see any reason why the economy can't get back to growing with appropriate fiscal and monetary policy pretty soon after the recession cools things off. So. Short recession, a mild recession, a recession where the labor market cools most by employers canceling job vacancies and Recession that's relatively light on layoffs and that produces an unemployment rate that certainly higher than the unemployment rate we have now, but that is kind of well within the historical norm for the unemployment rate.
We're likely in for and I don't think we need much more than that to get consumer price growth back to a reasonable level. Why does job loss seem to be the go-to way to cool down the economy? Avenues to, you know, slow things down and stop inflation? I think the answer to your previous question is yes, the economy can be too strong. Fundamental problem we have right now is that consumer demand for goods and services is well in excess of what the supply side of the economy is able to handle. And you can push the supply side of the economy pretty hard and businesses will respond by producing more goods and by offering more services. But there are real limits, you know, there are only so Many workers, there are only so many factories, there are only so many restaurants, there are only so many hotels, there are
it's on an airplane, et cetera, et cetera. And when you push the demand for goods and services further Last set of the economy can handle, then that's where you get inflation. And so what the Fed needs to do is to cool off demand. And the Fed needs to make it more costly to. Charge things on your credit card to buy a home, if it costs more money to charge things on your credit. Card, you're going to buy fewer things, you're going to go to fewer restaurants, etc, etc. If it costs more money to buy a home, then that's gonna affect home construction, it's gonna affect furniture stores, it's gonna affect appliance stores, and all that sort of stuff. Consumer demand cools off as a consequence of higher interest rates, then businesses are going to need fewer workers. And in this instance, I think that's the way to understand what the Fed needs to do.
As Mike said, we're in a period of extremely strong demand for workers, at least in the over the last, you know, 20 years or so where we have have good data on that. And so my hope is that the kind of bulk of The labor market cooling that we need can take place by businesses just saying, Hey, just not going to expand the number of workers we employ. We have, you know, vacancies for five open jobs, we're going to get rid of all of them. We currently employ 20 workers We want to employ 25 workers. Oh boy, the economy's cooling. We don't need those five extra workers anymore. Now it may be, and I think it will be the case, that that business might say instead of 20 workers we need And so the business eliminates five vacancies, but in addition it lays a couple of people off. I think that's what we're in for. I think that's what the
Overall economy needs, that's really bad news for those two workers. And public policy needs to support those workers and find ways to help those workers to pretty quickly. Get a new job once the economy gets back to growing. That's why we need the rate to go up a little bit that not because the unemployment rate The rig going up will have some sort of magic effect on you know, what your grocery store charges you for a box of cereal. But instead, because the underlying problem is economic demand and excess of what the economy is able to supply. And we'll see you next time. Need demand to cool and one effect of demand cooling will be that businesses want to employ fewer workers. Recently, my colleague Noelle King on Today Explained spoke with Neel Kashkari. Who's the Federal Reserve Bank president of Minneapolis. And, you know, the Fed just...
Knowledge like, yeah, this is going to disproportionately affect black people and also low income people. Like we feel bad about it, but it's happening. Inflation literally affects everybody. The devastation of unemployment, unfortunately, fortunately and unfortunately affects a smaller number of people. And it's easier for the government to target assistance to those smaller number of people than it is to try to support all of the American people who are facing this high inflation. So there's an issue of numbers, but it's, that's not an easy story to tell somebody who loses their job. Frankly, that sucks. Like, how do we get out of this without disproportionately affecting people? I'd emphasize two things. One, to build on what-- what Michael said, you know, in 2019, unemployment was three and a half percent, right about It is now and inflation was not a problem then. So you wanna look at some of the other things that are moving alongside that unemployment.
People buying a lot more goods rather than services, a lot of non-unemployment labor market indicators being very tight, a lot of consumer spending relative to trend. Land war in Europe, other things that are unique to what's happening right now, vis-à-vis just the baseline unemployment rate. That unemployment rate has not changed or at least I would not concede that it's changed that much. I think there's other things that are are. Much more relevant to the inflation dynamics that we're seeing right now. Two is, yeah, it's absolutely the case that black unemployment tends to be twice the level of white unemployment. That we've seen a lot of gains, particularly in this recovery, which has been a broader labor market recovery than I might have imagined a year or two ago. We know who's going to be the first to lose their job. We know who's going to suffer the most in this. So I think it's incredibly important that we try as many things as possible to bring down inflation, both on, you know, administrative side, on supply side. I think it's also really important that the Fed not overreact. I think you can't psychologicalize the Federal Reserve.
You know, they obviously believe that they under-reacted last year, and I think there's a little bit of worry that they're over-reacting right now. You see conservative economists like Greg Mankiw. Sounding the alarm that they're probably pushing a little too much too fast, given the lag, given all they've done, given the softening we're seeing in the labor market. And it would be nice if they could just increase unemployment a a lot, but there's a little bit, you know, there's a metaphor that goes around about it's recessions like stretching a fabric until it tears. You can't just tear it a little bit. It just rips and it's tough to put back together. And so there are deals With really powerful things here to slow the economy, and they might be administering far too much medicine, given that they haven't seen what's already happened so far. WOJNAROWSKI We need to take a quick break, but when we come back, we're going to talk about some of the moves the Biden has made to fight inflation and help the economy, and whether or not those moves have worked. Thank you.
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Enterprise Institute, and Mike Consol from the Roosevelt Institute. We are right now. But I want to take a step back and look at this in the context of the midterms. Republicans are blaming Democrats. For inflation in the run-up to the midterms. Mike, I'll start with you. How accurate is that blame? - Well, I think there's a lot of things that are resulting in inflation that are obviously not the Democrats' fault. Long COVID, the reopening, the fact that so many people... Purchase way more goods than services. Inflation has a real global character to it. Inflation, even before the... In Ukraine was increasing quite rapidly in European countries. It's higher than it had been in countries like Canada. Our inflation...
Went higher quicker, but so was our growth. We had a much more rapid growth than peer countries, and we had a much more early growth. So, as much as that inflation went with growth, we experienced it a little bit earlier and quicker than some of our peer countries. Obviously, people are very upset about inflation, so it makes a very effective attack ad. Democrats have tried doing a lot. They've turned their signature bill, the Inflation Reduction Act, to have deficit reduction in it. Help bring down demand, things like prescription drug price controls and energy investments to help try to do some. More in the medium term than in the immediate term to help bring some of those prices in line. And you know, there was a lot of actions taken last year by the Biden administration to try to deal with supply chains, try to get ports. Open, you know, work with engineering teams and worker teams to try to make sure that goods were delivered. On time for Christmas. Given how surprising inflation was to everyone across both public and private economic forecasters, I think the...
The buying team has tried really hard and done a pretty good job given the reality that inflation is in fact a very hard problem to solve. Michael, how much of the state of our current economy do you think rests on the shoulders of the Democrats? I agree with a lot of the factors that Mike pointed to as being very important factors for inflation, not just in the United States, but in other countries as well. I do think that both fiscal and monetary policy in the United States have contributed to our Problem to a pretty substantial degree. We can start with the Fed. The Fed was still purchasing mortgage-backed securities in an attempt to support housing and the housing adjacent parts of the economy.
Current year. The Fed waited too long to begin increasing the short-term interest rate that most people think of when they think of what the Fed does to affect the economy. If the Fed had begun raising rates sooner, then the rate increases that we would be seeing now would be less aggressive and the risk of recession would be lower. So the Fed contributed to inflation and by contributing to inflation, by supporting the economy for longer than was advisable, the Fed is also--
To the recession risk we currently have. The same thing is true of fiscal policy. The American Rescue Plan that was signed into law in early 2021 was too big, and it pushed the demand side of the economy much harder than was advisable, and it contributed to the demand for goods and services being much stronger than the supply side of the economy can handle. And that, of course, is why we have inflation. It's not monocauseal. There are a whole lot of factors that have contributed to the inflation that we have right now and that's so politically salient right now. But I think fiscal policy and monocauseal... Policy are two important contributing factors to the United States. And you mentioned the American Rescue Plan. Can you remind us what all that entailed? Yeah.
The American Rescue Plan included stimulus checks to households, a large expansion of the tax credit for children, which put additional cash in the pockets of households with children. The American Rescue Plan that unemployed workers reci from the unemployment insu Insurance Program, the American Rescue Plan, GATE. You've a few hundred billion dollars to state and local governments. And that is where some of the state level stimulus checks, state level tax cuts have come from. So the ARP a lot of provisions. It was $1.9 trillion and a lot of that $1.9 trillion went into the pockets of consumers in one way or another. These checks and the American rescue plan didn't cause the supply chain problem and can be actually credited for a lot of economic progress.
In a short amount of time. Can you talk about that a little more? Let's take it in two parts. So one is, you know, one point-- Trillion in addition to the almost trillion that was passed in December of 2020. Kind of a winter of a second round of large stimulus to help get through the end of the COVID pandemic. Resulted in a really robust recovery in GDP and in the labor market. Gross Domestic... Product is one measure of our economic wellbeing. It's not a perfect measure, but it's a really important one. And that is back to where forecasters thought it would be. If COVID had never happened. And over the last several recessions, that's just not happened. Usually when there's a recession, we're kind of permanently poor. Important way. We don't really kind of return back to that trend. But here we have in large part and we... People were debating a V-shaped recovery where it went down really quick, but also rebounded really quickly.
Instead of the kind of L shape where it goes down and just kind of like hovers there. That's really remarkable. The labor market, unemployment's back to 3.5%. Labor force participation is in very important ways almost back to where it was before. For the pandemic, there's a lot of measurement issues and a lot of questions, but when you look to like the percentage of the population that's working, especially among prime age workers, it's almost back to where it was in 2019, was 11 years after the Great Recession started. That's a really remarkable recovery. Now, when we talk about whether or not there was too much-- I think one way to think about it is if Republicans had united control in 2021, they had a probably would have passed an ARP that was about half a trillion dollars. I think, you know, Mitch McConnell and others were talking about a second wave of package through the fall of that year. So there's a lot of uncertainty. There still would have been some spending in 2021. It probably would have been a trillion dollars less if the critics had their way, maybe a trillion or a trillion and a half. I think if you talk to independent economists.
An extra $1 trillion of stimulus above what the economy can do doesn't produce the 7% inflation we have. It can pick up spending. But that amount of spending, this is I think one reason a lot of Wall Street economists, for instance, were really blindsided by the level and intensity of inflation we've seen. because fiscal policy is very powerful, but in the models people tend to use, it's not that powerful to push up inflation that high. So when you're thinking of inflation, We do want a couple of different inputs into it, including things like long COVID and the impact on older workers, disability, things like. The distribution of how people are spending their money, which has changed rapidly and caused a lot of businesses to rapidly shift how they're performing. You've seen things which we know is inflationary in the short run. Last, you know, they're doing it in real time, right? It's a hard thing to do. Jay Powell was looking at the economy last fall and thought,
Come down a lot in August and September of last year. A lot of the inflation looked like it was really in automobiles and a couple things that were traded in very specific ways and didn't look like the... Broader inflation we ended up seeing. So they made the call to delay raising interest rates to the spring, thinking that they could get to the recovery of 2019. Much faster with much less inflation. Retrospect, that was not true, but at the time you understand why they made that call. What we do moving forward and you know how much we can bring down inflation without causing a lot of economic pain. Let me quickly address something Mike said about the American rescue plan because I think it's important. I basically agree with his diagnosis. Critics of the American rescue plan Acknowledge that it contributed to a really rapid recovery, a recovery that's much more
rapid than we normally see. And supporters of the American rescue plan don't want to acknowledge that it contributed meaningfully to inflation. And I think those are both two sides of the same coin. And I think the ARP Push the demand side of the economy really hard. One effect that had was an extreme extremely rapid recovery of employment and an extremely rapid recovery of output. Had was increasing the rate of consumer price inflation. You can kind of think of the economy as a bathtub and the amount of water the bathtub can hold. Think about that as the kind of productive capacity of the The economy. And if the bathtub is half full, that's what happens in a recession, where the... The economy could be producing a lot more than it is. It's not full because workers are unemployed.
Because factories aren't being used at their full capacity. The kind of Goldilocks situation is where the bathtub is full, but not overflowing. That's when the amount of output being produced is a Pace that's sustainable over the longer term, where everybody who wants a job can have a job. Everybody who wants to work full time can work full time factories. Or equipment are being used at their at their full capacity, but you're not spilling water The floor. You're not pushing the economy harder than it needs to go. The ARP filled the bathtub up for sure. And that brings with it some really good things, including a full
employment recovery. But then, you know, the ARP kind of kept going and a bunch of water spilled on the floor. And that water on the floor is the inflation we're experiencing. The ARP did not contribute, you know, we had inflation of about 7% in 2021. The ARP did not contribute 7 percentage points to that 7% inflation. I think that's a wild overestimate. You can, I think, make a pretty good case that the American Race Complaint was responsible for say three percentage points of the inflation that we had in 2021. So without the ARP, we would have had 4% inflation. That's still a lot of inflation. That's still double the Fed's inflation target. So we still would have had a problem with inflation if it weren't for the ARP. The ARP just made that problem worse in my view. You. In that kind of line of thinking of moving forward, I mean the American Rescue Plan isn't the only piece of legislation
looking to, you know, address the economy. There's also the inflation reduction. Act. Can you remind us what that will do in the long term? Let me take that one first, just a little bit. - So the Inflation Reduction Act is a series of investments and cost control measures designed to kind of modernize and build out the economy. Of it is an investment in credits for climate and green energy, a kind of all-the-above approach designed to kind of build out and meet our climate objectives through tax trends and through... There's a series of prescription drug price controls and other things, taxes on corporations designed to To raise revenues and create a more equitable and just economy. You know, each of these things I think are good ideas. Democrats have wanted to do for a while. And I think they're grouped in a way that I think will help with inflation in the medium term. I think there's reasons to think that things like.
Prescription drug price controls really do impact healthcare prices. We saw that in the great recession with the sequester. And some studies found that things that cut Medicare costs did in fact. Show up in inflation years later. We do know that there's a real chance, many times think that the ability of the IRS to go after tax cheats could have a. Real deterrence effect, which would in turn raise a lot more revenue than I think a lot of forecasters think. And those things add up and I think they would help with the Fed over the course of a few years. Now, are they going to bring down inflation tomorrow or this year? No. Need to think of it over the next year or two, what the economy is going to look like. I think it's a really good point that you raised that, you know, if this works, it's not going to be an overnight fix. Michael... How long will it take for something like this legislation to make an impact? it's trying to make. No, I don't think it'll make the impact that the people who are marketing it as an inflation
Act. I don't think it will ever meaningfully affect the rate of inflation one way or the other. I think the Inflation Reduction Act may be a good law, may be a bad law, but it's not going to really have much of an impact on on inflation. Any impact it would have on inflation would happen several years from now after a lot of this money is spent and after a lot of these investments are made. But over that kind of a time horizon, I think economists correctly kind of think about inflation as being the Fed's responsibility. And so if over that time horizon, the Inflation Reduction Act were able to increase the productive capacity of the economy, then the Fed should respond to that in order to keep the inflation If the inflation production act fails to increase the productive capacity of the economy, then the Fed should factor that into its decisions as well. So I think the right kind of economic answer to the question is that over the...
Short term, the inflation reduction act will not have any impact on inflation. And over the longer term, it may impact the economy, but the Fed should be taking that into account and inflation will still be the Fed's responsibility. When we get back, we'll talk about the supply side of the economy and also get into student loans. Stay with us. We're visible. We're the wireless company with nothing to hide. Seriously. Hidden fees? We don't have them. Annual contracts? Not our thing. Great wireless on just one line? Now that's more like it. Get unlimited 5G data powered by Verizon for just $25 a month. Taxes and fees included. That's right. 25 a month. Every month. Sorry hidden fees. We're just not that into you. Sometimes the choice is just visible. At visible.com. Rate with service on the Visible plan. For additional terms and network management practices, see visible.com.
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Markets. We've talked about how one way to bring down inflation is to bring down consumer demand. We have inflation is the supply side. There aren't enough cars and houses and other goods to meet the demand. So when you... - You're thinking about the supply side, interventions and policies, what comes to mind? Mike, I'll start with you. - I'd start by saying it's hard. It's hard for a couple of different reasons. One is that economists don't have a great sense of where growth comes from. You know, there's some simple things to do. You have good government, invest in education. Invest in infrastructure, but that's not easy to do quickly and that's not easy to do at scale. And we've already done a lot of those things in this country. So make the economy grow faster, increase our supply, productive capacity.
It's easy to say to do and it's great to envision, but it's often very hard in practice to imagine how to do it. Second is that a lot of the things we know to do are going to have very strong political components. We can increase growth by allowing... For more immigration, although that obviously has a big political fight associated with it in this country. We could make it easier to build. Particularly housing, but we know that often has a really strong local and regional and state component that has a lot of regulations that prevent that because homeowners Combat homeowners don't really like that. And one thing that I think is a challenge right now is that when we want to increase the supply side of the economy in order to combat... Inflation, we also want to do stuff with demand too. So we might want to bring down the cost of college, which has gotten Extraordinarily high, but we might want to take those savings and create more Pell Grants or better community colleges or vocational training.
Make it easier to access daycare and childcare, but we also want to increase the wages for daycare and childcare workers, because they're very. Oh, and so a lot of the interventions is designed to make it very hard for them to fight inflation. That said, I think there are a few things that are quite important. I already mentioned, which is infrastructure to help with some of the supply chain problems we've had, residential, particularly housing for people. Rents are a big part of what we're seeing in inflation right now. The ability to bring that down would help quite a bit. It's also just a good idea in the medium-term period. And lastly, I think we want to look at some of the corporate margins we've seen over the past two years. when you Look at where inflation has ended up, what's been the driver of it or where it's been reflected, I think is the right verb for it. Wages per se, wages are actually below inflation for most workers. It's really on corporate balance sheets.
If there's some way to help boost competitiveness and competition policy to help bring down some of these margins, which have gotten very. Over the past two years. You know, ideally we'd like to see more competition to bring prices down, which would help. With combating high prices that consumers face. - And Michael, what about you? I'm curious what you have in mind. - I agree with- all of that, but I agree with a lot of that. You know, I would adjust the framing of this a little bit. I don't think there's very much at all that we can do on the supply side of the economy to affect inflation. Certainly not to affect inflation in 2023, but that's not really an argument against doing doing things to increase the supply side capacity of the of the economy. I think that's if you want more people to work. If you want them to earn higher wages, and you want them to have higher incomes, and you want them to, you know, you want more people to be able to afford to go to college, more people to be able to afford.
To own a home, you know, then I think looking at the supply side of the economy is is really, really important. But again, that takes a while to And you know, I don't even know where to where to start. There's so many areas that we need. To improve on. You know, one area that people don't really think about is K-12 education. We have an education system that fails far too many of our children. And if we did better there, then high school graduates would have more skills. They'd be able to command higher wages in the workforce. People who go on to college will be better prepared for college. And that would be terrific. More affordable so more people could go would increase the skills of the workforce and make the workforce more productive. Certainly housing, zoning laws, things of that nature, are really important way to reduce the price of rent,
Price of housing, of buying a home. And there are all sorts of really great economic. Effects from that, not just that more people can afford the kind of home they want to have, but people can live closer to work. And that creates economic efficiencies that can increase productivity, things of that nature. I completely agree. With Mike on immigration. Economic growth is kind of a mystery, but it's also at the same time very Forward. You either need to grow your workforce or you need to make your workforce more productive. and And one way to grow your workforce is to have more babies. And the other way to grow your workforce is to let in more immigrants. To me, that's a no brainer in certain parts of the economy. You know, we, um... We allow foreign-born people to come here and earn degrees at our universities, and a lot of them want to stay, but we tell them that they can't.
It's like an act of economic self-sabotage. We right now have a massive labor shortage in the agriculture sector. And I talked to folks up on the Hill in both political parties who would love to see us Let in substantially more agriculture sector workers. Bipartisan agreement. Can we just do that please? There are, you know, obviously... Broader questions around immigration and around border security and making sure that we actually have control of our immigration. And the people who come to this country do so legally, but from an economic standpoint, I think we need more workers and we need to be more welcoming of foreign-born workers. There's just a lot of stuff that we can do. Of things. I mean another one I just mentioned quickly that I don't think Mike mentioned. There's some good evidence. Than increasing the generosity of earning subsidies increases workforce participation.
And I think that's a great piece of low hanging fruit that we could pick to pull more people into the workforce. That'll, you know, strength. Supply side of the economy, it'll also mean more people are more people are working. And that those people get all the all the benefits that come from that come from employment. So there's just there's just a lot of stuff a lot of stuff to do. So, Michael, I want to talk about student loans for a second because a lot of conservative economists have argued that Forgiveness is going to have an inflationary effect. But, you know, I can look in my phone and my group chats right now and there are so many happy people texting me. About, you know, the fact that they, there's like 10 or 20 thousand dollars that they don't need to pay back now.
Happiness and inflation are not incompatible. You can't have both. For example, Halloween candy is 13% more expensive this year than it was last year, but I think a lot of children will still be happy eating it and perhaps some of their parents will. Well. Yeah, yeah. But can you talk about that inflationary effect and these two things? Things going on at once, you know? There are people who are like, Whew, all right, that's one less thing to worry about, but also dealing with inflation. Like, what is— inflationary impact that student loan cancellation could have. I think a lot of issues in public. Policy are characterized by concentrated benefits and diffuse costs, where there are a relatively small number of beneficiaries of a policy and the cost of the policy and they benefit a lot and then the cost of the policy are more broadly distributed throughout everybody else.
Who lives in the United States, this I think is an example of that. I mean there's no question that people who are receiving ten thousand dollars or twenty thousand dollars of student debt forgiveness are being made better off financially as a consequence of that. But, you know, the kind of macroeconomic implications of debt forgiveness, you can And think of it as a wealth transfer, and people consume out of their wealth. They don't consume as much out of their wealth as they-- do out of their income. I think economists generally believe that when people's wealth goes up, they spend a And that's one way in which student debt forgiveness will be inflationary. It will lead people to spend a little more because a whole lot of people...
Are wealthier now than they were before the policy was enacted. I'm assuming the policy survives court challenges. A second way is through the president's modification. Payments program, which will leave people with higher monthly income and people will people will spend out of that as well. out of that as well. I think that it's important to kind of separate the question of, will this be inflationary from the question of, was this a good idea? I don't think that there's much debate that this will. Be inflationary. I think there's debate about how, you know, the extent to which it will be inflationary, the magnitude of that. But I think that there's general agreement that it will be inflationary. But just because it's inflationary doesn't mean it's a bad policy. Now, I happen to think it's a terrible, terrible policy. But I would think that even… And if this were done in the year 2018, it wouldn't have contributed to a--
probably inflationary environment. - Mike, I'd love for you to respond because I know you cited a Goldman Sachs comment that said. That this targeted cancellation could reduce demand and in turn bring inflation down. And how are you thinking of, you know, student loan forgiveness in the context of the economy right now? I'm going to beg the listeners to keep listening through because this is going to involve the most. And mind-numbing things, which is debating about baselines and what's the proper baseline to compare against. Your friends and your friends. Chats are very excited about debt forgiveness if they're able to receive it. However, they're probably not excited about resuming payments in January. Maybe it's so they're so despondable they don't even bother to bring it up. But it is in fact the case that payments will restart in January. Payments restarting January will absolutely be a net drag on demand, relative to the last two years. You are going to spend less money.
In your monthly checking account after you've made that student loan payment. So that's going to bring down demand. It is also the case that for many people, particularly people who aren't in the top 5 or 1% of the income distribution, Who have student debt, there's going to be a wealth effect from having their partial. 10 or $20,000 of loans forgiveness. Now that's not a check for $10,000. That is the removal of a liability for you. So it's an increase in your net wealth, but it's more of a-- balance sheet effect. And that's something you're not going to like. It's not like you have $10,000 to go to the mall now. It's that, you know. If you're going to get a loan, if you're thinking about investing in something, you suddenly have more breathing room on your balance sheet to take out a little bit more that will have a pro. I mean, that will, people will buy a little bit more cars. They may purchase something a little bit more expensive.
Mean that they have a little bit more breathing room in terms of their loans and assets. But that's not the same thing as if we cut everyone a check, which is I think sort of getting confused. I think those two things will probably net-- cancel each other out. Everyone having to start making their payments in January versus A little bit more breathing room on their, or maybe even a lot more breathing room on what they owe, largely will cancel out. Now, one might argue, and many people have argued, why not just start payments and not do the forgiveness? Bring down inflation more. And yeah, you could argue that, but then you also have to argue the equity of the question at hand about whether or not this is a good or bad policy. And I agree with Michael, you wanna separate out the two questions. And I don't think we should have a big debate about student loans right now specifically for that. I think there's a lot of good and careful studies that says a lot of people would immediately start defaulting on their student loans Even though this economy is really strong still a lot of people who have a lot
Lot of debt load, a lot of student debt load, and you'd see a real rapid increase in defaults. And once people start defaulting, it's harder for them to make other kinds of payments. They end up in a kind of financial distress, which really does have a cascading problem to it. Is it going to buckle the system? No, but it is bad for those people and bad for the economy to have that level of debt distress in it. So I think it's a political. Question how you balance the equity. I think it's a good choice, but I understand how people disagree on it. But the net effect where we're coming from, I don't think is going to impact. Inflation much one way or the other once you consider the fact that payments are restarting. Through, you know, there's the policy itself and there's also the politics involved. When it comes to the economy, the Republicans have a narrative, the Democrats have a narrative. How should voters make sense of, you know, what they're hearing from both parties and trying to figure out whether it's who to vote for or what...
To believe how should they make sense of this right now? - I would say two things for what voters should pay attention to. One is balancing inflation as it's being experienced recovery as well. There's a very good reason why people are upset about inflation. It's also Experience happening to them where, you know, the very robust labor market we're seeing, the ability of people to switch jobs or upgrade their skills isn't as. Is being created by the government spending that happened that helped produce this rapid and robust recovery. But try to keep that in balance. It would be One thing I'd notice. Second is that I want voters to pay attention to all the bills that have been passed, all the investments that are gonna be unleashed, to get prescription drug prices under control. A lot of the administrative initiatives like hearing aids becoming much cheaper. Obviously a lot of those things don't command the big attention that inflation is getting, but I think added up they're really important, and I think voters should keep those in mind. And last I'd say, like, fundamentally...
Inflation is going to come or go in the next couple years, and I hope that we have a better recovery, a better resolution of our... Inflation challenges rather than a worse one. But in a couple years from now, inflation will be in the rearview mirror one way or the other. The Federal Reserve has made it very clear they plan on bringing inflation down and policymakers have made clear that they want to bring it down. They want the Federal Reserve to play a role in that. So that will happen. But what will still remain are the fundamental questions about how we want a market economy to exist. More or less social insurance, social security, Medicare, things that the government can do to help prevent the worst outcome. Or do we want to leave that to private actors and private initiatives and individuals and families? And there I think the two parties really still do have People talk a lot about all the different realignment, but at the end of the day, the two parties are presenting two very different visions of what kind of market society that they want to have.
And that's going to matter more on these economic, on the weeds issues, on the economic issues, on the macroeconomic issues even. Those are going to matter a little bit less, especially because it makes sense why the Republicans aren't offering a big vision on inflation because it's a very hard problem without easy solutions. But they're also still providing a different vision than the Democrats when it comes to things like Social Security, Medicare, Medicaid and government spending. And investments that's already been made. And it's a question of what voters, what kind of economy voters want to have. What about you? How should voters be navigating all of this right now? I guess I would make two observations. The first is that politics is often a competition of half-truths. And I think we're really seeing that right now on display your Democrats Arguing that their economic policies have led to an unusually
rapid recovery. That is true. Republicans are arguing that Democratic policies have... Contributed to an unusual surge of inflation. Also true. You know, and neither side wants to acknowledge that the other side is speaking a partial truth. And voters have to I think, navigate that competition of partial truths in many areas of our public conversation, not just in this one. But I think the broader observation is that it is not the job. Of Congress or the present end to manage the rate of inflation. And there are a whole bunch of reasons why that's the case, but at the end of the day, handle inflation and we should be looking to our elected leaders for kind of
Longer term issues. A lot of the questions that Mike raised, you know, what do you think about social spending? What do you think about taxes? What do you think? about institutions like the minimum wage or labor unions or things of this nature. And that's where I think the debate between Between the parties should be focused. And I think voters should be looking at the-- debate we're having and trying to figure out from it what the parties want to do. To address some of these longer term issues that were around before the pandemic. That were around during the pandemic and that will be around after the pandemic. Issues that were around when the big problem we had That it wasn't high enough and issues that are around now when we have inflation that's way too high. Really where Congress and the president can make a difference. They're not going to make a big difference on how quickly we get it.
Under control in 2023, but they can make a big difference addressing some of those longer term, slower- challenges and it would be more healthy if we focus more of the debate of the Debate there, but of course that's not where the folks running for office want to keep the attention. Kind of brings me to kind of the thesis of all of this. How do we bring down inflation without getting-- Of some of that COVID era economic growth. You know, I think of me and my friends, we were finally able to like save. And pay off credit cards. And it's like, oh, wow. How do you keep that good stuff and bring the inflation down? Is that possible? I don't think it is possible. I think we're going to have to see The economy weaken. We're gonna have to see the unemployment rate go up. Again, not like what happened after the '08 financial crisis,
to see an increase in the unemployment rate and we're gonna have to see a reduction in consumer demand. There's no reason why I don't think we can get back to a very strong economy. I think we've learned a lot about how low the unemployment rate can go, and we've learned about the beneficial effects of a low unemployment rate. And a labor market that's really tight and really strong. Had any big shift in the structure of the economy. So you know, you might be concerned that, you know, yes, we were To push the unemployment rate down into the threes in 2019 without sparking inflation. But now that we've had this inflationary episode.
We're not going to be able to do that again. I don't think that the data support that view. I think we'll be able to have a very low unemployment rate, a very tight labor market again. I do think people have been able to pay off debt and do some of the things that you described. But, you know, most people have seen. Their inflation adjusted incomes drop as a consequence of this inflation. Not true of the lowest wage workers, but true of most workers. And that's not something we... Want to sustain. So I think we can have some of the beneficial aspects of a Strong economy with a low unemployment rate and tight labor markets. But right now we're in a period where most people's inflation adjusted incomes are falling most people's inflation are falling and we really need to get the rate of consumer price growth down.
Once we've done that, then I think we can get back to a lot of the good things that we've seen. What about you, Mike? How do we stop this and keep all the good stuff? I think there's three parts to it. First part is to see some cooling in the economy, the so-called soft landing, which we still think is very relevant. So that's some parts of the labor market cool off without unemployment going up. Spending coming down without spending going into like negative territory or you know GDP coming down. We have been seeing this in the past two months. The second part would be for a lot of our markets to kind of work a little bit Goods to become cheaper for a lot of the housing that's come online and been built in the last two years to help bring down prices. To see corporate margins be competed away, all of which would reduce inflation a fair amount. And then third is I think we need to reconsider a 2% inflation target.
Right now, inflation is too high. Depending on what you want to measure, it's probably about 5%, depending on-- there's a lot of different measures that do different things, but it's about 5%. We want it around 2%. The number is really arbitrary. There's a lot of other countries with just as good as not better macroeconomic performance than thinking like Australia or Canada, which have ranges. Inflation. You know, they target 3% or between 2.5 and 3.5%. And, you know, that 2% number is really arbitrary. You could imagine our Fed targeting 3%. And a half percent. A lot of economists, especially during the Great Recession, called for a higher inflation target. We could be in a world where inflation comes down quite a bit, say from five to four percent. Let's say five to three and a half percent. Real wages are now back up. People are getting a little bit more breathing space. The economy is still very strong. You have to ask if it's really worth all the carnage
down to 2%, given that 2 versus 3% doesn't seem to have, in terms of macroeconomic growth or the kind of big picture things we care about, a lot of consequences. And a lot of other countries do it a different way. The timing's off on it, but I also worry that the 2% inflation target means that we have These periods of either kind of perpetual quasi-depressions like the Great Recession or these really herky jerks. Reopening or like really sharp overshooting on demand side policy, you can't have a more balanced approach to keeping the economy going. It's too early right now with inflation as high as it is, but if it comes down a little bit, I think we really need to reevaluate where we want to end up and not have it really sacrifice a lot of people's lives based on a fairly arbitrary number. - All right, Mike Consol and Michael Strain, thank you so much for joining us and helping us parse all of this out. - Thank you so much for having me. - Yeah, this was really great. Thanks everyone.
That's all for us today. Thanks to Mike Consul of the Roosevelt Institute and Michael Strain of the American Enterprise Institute for joining me today. Our producer is Sophie Lalonde. Afim Shapiro mixed this episode. Libby Nelson is our editorial advisor. Our editorial director is A.M. Hall. And we had additional editorial help from executive director of audio, Catherine Wells, this week. I'm your host, John Quillen Hill. As part of the Vox Media Podcast Network.
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Transcript generated on 2024-05-26.