For this special end of the year edition of Macro Musings, Heather Long, Ryan Avent, and Cardiff Garcia rejoin the podcast to reflect on the biggest economic surprises and stories of the past few years, while giving their outlook and predictions for the future. Heather Long is an editorial writer and columnist for the Washington Post, Ryan Avent is the trade and international economic editor for the Economist Magazine, and Cardiff Garcia is a veteran journalist for the Financial Times and NPR as well as the host of the New Bazaar podcast and the co-founder of Bazaar Audio. Specifically, this returning panel of guests discuss the major economic themes throughout the pandemic, the most overrated and underreported stories that have dominated the headlines over the past few years, what issues are primed for prominence within the next decade, and a lot more.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Hey, Macro Musings listeners. This is your host, David Beckworth, and today is a special year end episode where a panel of guests are joining me for a contemplative look back at the pandemic as well as a peek into the future. These guests are no stranger to the show having appeared multiple times before, including our special 100th episode where we all came together to do a similar program on the Great Recession. Our guests today are Heather Long, Heather is an editorial writer and columnist for the Washington Post, Ryan Avent, Ryan is the trade and international economics editor for The Economist Magazine, and Cardiff Garcia, Cardiff is a veteran journalist for the Financial Times, the NPR, and the founder of Bazaar Audio and the host of The New Bazaar Podcast. Heather, Ryan and Cardiff, welcome back to the show.
Heather Long: Thanks for having us.
Ryan Avent: It's great to be here.
Cardiff Garcia: David, you didn't tell us before we had to be contemplative on this show. I thought we were here for the Christmas music and the eggnog and stuff.
Beckworth: All of the above. We're going to have a good time. In fact, I would encourage listeners to go back and check out that 100th episode. So we did this last time in March, 2018, and it was a show on the Great Recession and the decade after it. And we’re coming back together to do something similar here in 2022 on the pandemic; what we’ve learned, what we’ve seen. That show was a lot of fun, so I thought it would be great to bring us all back together, bring the band back together for another show where we look at the past 3 years. So, let me begin with our first question for this conversation, and I'll start with you Heather, and then we'll work around the group. But other than the initial pandemic outbreak itself, what are the biggest surprises over the past three years for you?
Biggest Surprises Over the Past Three Years
Long: Well, I'm going to let somebody else talk about inflation. For me, the big one was the labor market shift. I mean, I don't think anyone would've predicted quite the upheaval that we've seen in the labor market in the last few years. Obviously this trend of decreased labor force participation, some of that coming from early retirements, this trend of the Great Resignation, or I like to call it the great reassessment of work, people for the first time, in some cases in their lives, having time off, forced time off during those early days of the pandemic. And so many people would tell me, "It was the first time I had to get up in the morning, look in the mirror and not go to work and really think, what's my life for? What is this about?"
Long: And so what people wanted to do with their lives, and particularly with their working lives, totally, totally changed in the last couple years. We're seeing that in the work from home trends. We're seeing that in people just not wanting to return to the workforce generally. We're seeing that in the changes through immigration, and also this huge surge. I mean, again, if you had predicted that there would be these big attempts to unionize at places like Amazon and Starbucks and that some of them would be successful a couple years ago, you probably would have been laughed off this podcast. And yet this is a huge, huge dynamic shift that we've seen.
Long: And again, I remember early on when some of these trends were starting to happen in early 2021, some executives kind of shrugged them off like, "Oh, this is temporary, short term. By the end of the year we're going to have the power back," basically as the executives. And obviously that's not what's happened. We've still got the Federal Reserve chair giving massive speeches in recent weeks trying to unpack what is going on with the labor force and where do we go from here. So I think there are many books still to be written, much research still to be done as we try to understand these labor market shifts, what's permanent and what's not. But clearly this is a huge turning point.
Long: The other one that I wanted to mention that surprised me is the whole friend-shoring trend, what's been happening with supply chains. Some of this started under the Trump regime and his hatred of the various trade with different parts of the world. But it really hadn't changed at the end of the Trump administration. It really took the pandemic, the China lockdown, then the war in Ukraine, and the supply chain shocks from that. On top of that, some government aid towards incentivizing companies to re-shore or onshore, again, various supply lines. But again, I was thinking about it as, driving out here, that if anyone on this show had predicted even a couple of years ago that we would be building chip factories to make microchips in the United States of America in the year 2022, I think people would've thought that person was crazy. And yet that's exactly what we're doing. And so I think that's been a big shift on both the left and the right and in economic thinking.
If anyone on this show had predicted even a couple of years ago that we would be building chip factories to make microchips in the United States of America in the year 2022, I think people would've thought that person was crazy. And yet that's exactly what we're doing.
Beckworth: Those are some big shifts. Ryan, what about you?
Avent: Well, there's obviously been a number of big surprises. I'll go ahead and say inflation, I didn't see it coming. Definitely didn't think we'd be reliving the 1970s again. And Heather's added some good ones as well. I guess it might sound weird to say, given what we went through in late 2020 and early 2021, but I think one big surprise has been how functional the US has been overall. And that really began in 2020 with the relief package passed by Congress, Operation Warp Speed, tremendous success. And then it's been shocking the way that it's continued this year with the legislation that we've seen finally actually getting some infrastructure measures done, getting some additional things done to secure supply chains in various ways. And obviously there might be some negative consequences that go along with some of that. But I just wouldn't have thought it possible that the US could get its act together in that way, given how dysfunctional things seemed in the 2010s.
Avent: And then I guess the flip side of that would be the dysfunctionality of China. And certainly that's I think probably not what people would've guessed maybe in the first half of 2020 when it seemed like China had COVID whipped in a way that the rest of the world had not. But there's just been sort of failure after failure there over the past couple years. The inability to get away from the zero COVID policy, the inability to fix its property market mess, which continues to be a huge drag on the economy, the weird policy zigs and zags that Xi Jinping has made in trying to rein in private business in a way that's really, I think, undermined the operation of its economy. As recently as mid-2020, I think the story kind of felt like this is the moment when China of seizes the mantle of being able to show what a functional country is like. And actually I think if you look back now, that's not how it's turned out at all. That's really been kind of a surprise.
Beckworth: All right. Cardiff?
Garcia: Yeah, lots to chew over there. And I think what I'm going to say might be a little controversial to the people at this table, maybe just mildly. So let me just preface this by saying first that we're here to talk about the economy. This is not about the policy response on the health side, the unbelievable tragedy of more than a million people dying of COVID, tens of millions more getting COVID and still suffering from it and so on. This is about the economic policy response. And to me, the overwhelming sensation that I've had over the last three years is that things didn't turn out so much worse.
Garcia: If you had told me in 2020 that the following things would happen, number one, that something like 25 million people would lose their jobs in the span of a couple of months, that we would see a collapse in consumer spending, the likes of which we've never seen in our lifetime, and that in the aftermath of that and everything that came with it, terrible projections about the future, the wonkiness even in the US Treasury markets, et cetera, that in the aftermath of that, Republican president, Republican Senate, Democratic House, would've actually ended up passing this large and reasonably well-designed package that would've started the recovery. And that it would be the first of several legislative moves to bolster the economy in the aftermath of COVID. And that the results of that would've been the following: that we would've gotten back to something resembling almost full employment, that income and wage inequality would've actually shrunk. Are you kidding me? Something that hadn't really happened in decades. And that the benefits of these policies would disproportionately go to lower income folks, something that was needed even before COVID, obviously. I just would not have believed it. There's no way I would've believed it.
Garcia: We have a lot of challenges now, of course, we're going to talk about inflation, we're going to talk about the possibility of a recession next year. People will suffer if that happens, of course. But when we contextualize all of this over the course of what's happened in the last three years, the fact that this happened in a way that was largely bipartisan, the scale of what we were facing at the beginning of the pandemic, I just would not have believed that things would've turned out so well. And I don't mean this to sound as some kind of triumphant thing, I think we have to celebrate the good things that have happened, partly so that we don't forget their lessons. That is, to me, the overwhelming shock of the last three years, especially after having witnessed the unbelievably terrible and sluggish economic growth of the 2010s and the terribly inadequate government response in the aftermath of the great financial crisis.
As recently as mid-2020, I think the story kind of felt like this is the moment when China of seizes the mantle of being able to show what a functional country is like. And actually I think if you look back now, that's not how it's turned out at all. That's really been kind of a surprise.
Beckworth: Well, those are all great surprises to talk about and observe. And I'm glad I had you three on because you bring a broad perspective. I'm going to be a macro economist and narrow down into macro surprises here. But everything you just said was wonderful. And I'm going to piggyback a little bit off of Ryan and Cardiff's comment about the response that we had. And I'm going to frame it in terms of something that everyone at this table knows I love, nominal GDP level targeting. And we didn't do that per se, but what we did do, we actually tried a form of level targeting. We actually did make up policy and I was shocked that we actually did it.
Beckworth: Now, to be clear, we overdid it, we overshot, and we have a little bit of excess heat to deal with. But the fact that we did it, like you guys said, is just surprising that we could actually pull this together. We effectively did wartime financing, strong fiscal policy, supportive monetary policy. The Fed's new FAIT framework probably contributed as well. But I was pleasantly surprised. Not only did the US do that, but if you look over to Europe, their nominal GDP level is back to trend as well. I'm worried they're going to go back below it though pretty soon because they're tightening I think a little too aggressively. But with that said, I'm just surprised that we could do this, as you guys have alluded to.
Beckworth: Two other surprises I want to bring up. The first one is, I think we rediscovered how much people hate inflation. A little inflation was okay, but when we got near 5%, it seems to be this threshold where everything just really went off the rails. And there's a number of studies or indicators that I found interesting that point to 5%, or something near there being an important threshold for people to really start paying attention. The first one is, if you look at just polls, as I mentioned, I want to mention one poll that I've followed pretty closely, it's the Ipsos global poll of 29 countries, 20,000 people are surveyed and it shows spring to mid-2022, it becomes the number one concern and it's way above any other concern out there. I mean, it's remarkable. Unemployment, social issues, crime, it's just way above it. And that tells you people care. But it took till about mid-2022 for it to really take off. And what you see, if you plot that figure of the concerns in the poll against a G20 inflation measure, that's where you see that inflation rate pop above 5% and stay up there. So 5%, above that level and you keep it up there for a while, seems to really get people's attention.
Beckworth: Another indicator along these lines that suggests 5%'s important, the BIS had an annual economic report, then they went back and looked and they found usually when inflation got to 5% or more, the diffusion of the price increases went everywhere. So everything began to go up. People begin to pay attention, they begin to worry and they begin to kind of bid in higher prices. And finally, one that we can all relate to, Google searches for inflation takeoff near four to 5%.
Beckworth: So all of these indicators suggest there's a threshold effect where we discovered it. And in my mind, it helps me understand Paul Volcker's fight against inflation. If you go back to the 1970s, it was the number one polling issue, higher than Watergate, Vietnam. And you're like, well, how could that be? Because at some point people really care about this. And I'm getting ahead of myself here, but one little lesson from this is, any kind of political party or framework really has to take that seriously. If you want to be successful, you can't have a program that's going to run inflation above 5% for some sustained period of time.
Beckworth: Last big surprise and then I'll be quiet and let our wonderful guests be able to talk some more, is just the scale and speed of the rate hikes this year. In the US, we'll probably have over 400 basis points by the end of the year. In Europe, 200 basis points. And it's been just in a short few months, I never would've dreamed it would've got this higher this quick. It truly is shock therapy. So I'll leave it at that and I'll move on to the next question. Any observations on what we've said here before we move on?
Garcia: I don't hate inflation as much as most people do. I don't like it, nobody likes it. But I think it is sort of the curse, not just of the social scientists, but frankly of the human mind that it's hard to process counterfactuals, right?
Garcia: And if the choice is between a lot of people being thrown out of work versus if it's temporary, just a couple of years of high inflation, I know what I would choose. But I agree with you that people in general hate, hate, hate inflation. That's true.
When we contextualize all of this over the course of what's happened in the last three years, the fact that this happened in a way that was largely bipartisan, the scale of what we were facing at the beginning of the pandemic, I just would not have believed that things would've turned out so well. And I don't mean this to sound as some kind of triumphant thing, I think we have to celebrate the good things that have happened, partly so that we don't forget their lessons.
Avent: Well, and just to piggyback on that, I think, thinking about the numbers you were giving us there, David, the other interesting counterfactual is what does inflation look like and how does it feel to people in a world where Russia doesn't invade Ukraine? And obviously we'll never know. But I do think the intense spikes we saw in energy and food prices maybe felt a little different and were experienced a little differently than the demand driven inflation we'd seen before that.
Beckworth: Well, let me just say this. I'll jump ahead and I'll steal one of my answers from a question we're going to talk about later, and that is our outlook near term. And I'll just say this, since we're on inflation, I do think in a few years we won't be talking about inflation. I think this will be behind us. We'll look back, have a good chuckle about it. And Cardiff, to your point, I think we'll better appreciate how worse it could have been. This inflation was the price we paid for that really quick recovery. Now, I do hope we learn how to better calibrate policy going forward, stimulus checks versus unemployment insurance, things like that. How do we gauge it better so we don't overshoot? And one of my concerns is that this high inflation may have harmed future prospects for makeup policy. So we can come back to that in a bit. But let's go move on to our next question and that is, what do you see as the major themes during this time? Now we've kind of touched on that in some of our responses, but anything we want to add to this? Any overall themes that explains or sets the tone for what happened these past few years, Heather?
The Major Economic Themes of the Past Few Years
Long: Yeah, I think another one of the big underlying ones was these supply shocks that we're talking about. And I think that also, I mean, not just made the inflation worse on the good side, those shipping prices spiked and that went through to the inflation numbers. But I think one of the things that, as Americans, we were not used to experiencing is not being able to get something. Even if you were willing to pay almost any crazy price. I always tell the story that about a year ago I was going to open houses for homes and you felt like you were literally in that swarm of insects. 100 people would show up to an open house. Even if you were willing to put in and pay way over the asking price for that car or for that house, you might not get it. And that's a very different experience, particularly for the middle class and the upper middle class in the United States of America.
Long: And it just kept coming. Then we couldn't find the baby formula, then you couldn't find the cabinets. It was like every couple of months there's something else that's out of stock or that's really hard to get. Now we can't find kids' Tylenol. It just keeps coming, these supply mismatches. And so I think that's something we're still trying to unpack and understand. And we, as a field of economics, we're way too quick to say, "It's transitory. There's a quick explanation for what's going on. As soon as we get a few more months down the road, it's going to be fine." And it's like whack-a-mole, so many different products that are experiencing this, it stays in the headlines and it really stays in people's minds more than I think any of us appreciated when we started writing about this.
Beckworth: That's a good one. And it helped me better appreciate the 1970s. I still think excess aggregate demand played a role in the 1970s, but I definitely have a little more humility in thinking through these large supply shocks that back then probably were important too. We just had forgotten how complicated and tricky it gets for policymakers in such environments. Anyone else want to weigh in on major themes?
Avent: I'll just jump in real quickly. I mean, I think Heather's exactly right and I think you can even think about it as two different things, one being that supply matters. And I think that's really been hammered home in the way that even the political discussion is unfolding now in a lot of different places. And then secondly, the other side of that is that shocks happen and that efficiency comes with the cost sometimes and it's worth paying maybe a little bit more to build in some resiliency to the system. But I think the other big theme, the thing which maybe would also be a surprise, would be the failure of cooperation in the face of a major global challenge. I think if you told me before, in 2019, that this is happening, what do you expect? I would've expected much more of the world coming together, much more of an effort to make sure that poor countries were helped through this. And it's actually been quite disappointing the way in which countries have looked out for them themselves, and rich countries in particular, which could have afforded to do it differently.
Garcia: And for my part, it seems like we've entered a kind of era where these seemingly unstoppable, inexorable trends of the last few decades, we've learned that some of them can reverse for at least a couple of years. I mentioned earlier income inequality rising for decades in the last couple of years, we've realized that that was a policy choice, that can be reversed. Declining dynamism in the US economy for decades. Last couple of years, there's been this elevated rate in the number of startups that get started every month and it has sustained, which is sort of surprising. It continues. Going back to what Heather said at the beginning of the chat about the labor market, people switching jobs, workers having a little more power. That's new. I mean, it's not unprecedented, but it's relatively surprising given the trends of the last few decades. And we've mentioned a few of the other ones already. Ryan mentioned the declining faith in the Chinese economic model as having figured something out. I think we're seeing that that's just not the case at all. I see the last couple of years as just super striking for the way that these things that seem like they would go on forever have reversed, at least for now.
I think if you told me before, in 2019, that this is happening, what do you expect? I would've expected much more of the world coming together, much more of an effort to make sure that poor countries were helped through this. And it's actually been quite disappointing the way in which countries have looked out for them themselves, and rich countries in particular, which could have afforded to do it differently.
Beckworth: Let me add to that, the zero lower bound.
Garcia: Yeah, higher rates.
Beckworth: It's possible, inflation, higher rates, it's definitely a policy choice. Again though, my concern is have we burned through our political capital in terms of being able to replicate this moving forward? Because I do think on the other side, we'll probably return to the same structural factors that had us low inflation, low rates before 2020. And I'll add one more observation about these past few years, which for me at least, and this is last economic, more social, political, and that is this growing polarization in the US and it does have economic implications, but just Ezra Klein has a book on this, David French has a book from two different perspectives, but it seems to me a real troubling, and at the current time, unfixable problem, just the country's going in two very different directions politically. And we see it with Supreme Court decisions pushing increased federalism. There's a lot of things happening that I wonder about where it will lead us in the long term. Alright, well let's move on to the next question and that is what was the most underreported, but important story during this time?
The Most Underreported Stories of the Past Few Years
Long: Alright, I'm going to cheat and do two. But I think two that pop up on my radar, number one is the total immigration drop off that we saw, particularly in the legal immigration channels into the United States. But some of this started under the Trump administration, but it's carried through in these early years of the Biden administration. And we basically had four to five years now of just anemic levels of immigration into the United States. Part of that was they were dissuaded maybe by Trump or the policies changed, made it harder. Then we couldn't really interview people very well to get their applications processed to get them in. But it's obviously helped exacerbate these labor supply problems. And it's amazing to hear business owners across the political spectrum shouting, "Why can't we fix this? Why can't we do this better in the United States?"
Long: The other one that has surprised me just watching numbers the last few years is the massive productivity decline. To be talking in the first half of the year that the lowest productivity in the United States since 1947, even worse than the inflation, you have to go further back than that. And this certainly surprised me. I mean, I was more optimistic that, as horrible as the pandemic period was, that we were learning new ways to work, that we were making all these innovations around getting those vaccines going and this mRNA technology, that some of this was going to be able to be utilized to make us more productive. And at least the early evidence is it's gone the other way. And I think it's hard to know, if this sticks around, this could be a drag on the economy for years to come that we don't fully understand, why are we in this productivity deep slump right now?
Beckworth: Well, can I ask a question, maybe to Ryan, but piggybacking off of your observation about declining productivity. One of the puzzles has been why can we be at full employment, really strong, full employment, but have declining real wages? You would think it'd be the other way around. Well, one explanation is declining productivity, so if workers aren't producing as much, their value's gone down, the real income they earn goes down. And that seemed like a plausible story for the US. And then I was wondering about the rest of the world. And I saw some charts, it seems to be going on around, or at least in the advanced economies. Is that right, Ryan? And is that in your view, a plausible explanation for why we see that?
Avent: That we have falling real wages despite high unemployment because of low productivity growth?
I was more optimistic that, as horrible as the pandemic period was, that we were learning new ways to work, that we were making all these innovations around getting those vaccines going and this mRNA technology, that some of this was going to be able to be utilized to make us more productive. And at least the early evidence is it's gone the other way.
Avent: Yeah. I mean it's so hard to know. Data wise, it's been such a noisy few years and there's so much going on, it's really kind of hard to pin it down. I mean, I think low productivity is a problem. I think trying to understand why it's a problem is its own challenge. Are we seeing low productivity because we're seeing such a high amount of churn because we're seeing so much sector to sector movement, but in a way that maybe we should think that, actually, productivity will bounce back at some point as workers develop skills on the job, as some of these things like digitalization or remote work actually yield some productivity gains? I think that's a possibility. But it certainly is a hugely important question. I wish I had a better answer for you.
Avent: I would say though, and since you mentioned the rest of the world, my answer on what's been really under-covered has been the woes of emerging markets and frontier markets. They were just hit by a massive shock in 2020. The rich world was largely able to spend its way back and the US is back to the pre pandemic trend. Most of the rest of the rich world is in that neighborhood. For emerging markets, they're just not. They’re way behind and not really closing the gap. And I think because there haven't been massive financial crises cascading across the emerging world, the rich world has kind of ignored it. But it's billions of people who are looking at the potential of a lost few years, potentially a lost decade because of the after effects of the pandemic and it really hasn't gotten the attention and the urgency that it deserves.
Garcia: So, productivity growth is my answer to a later question of what did I get wrong in this era? That being said, I'm pretty hopeful that there will be a bounce back here. And also we know that productivity growth is notoriously difficult to measure in the short term, that you do have these occasional big swings. Obviously productivity growth itself as a concept, as a thing matters immensely. Maybe nothing matters more, but I'm pretty optimistic about the future there. And I think there could be something to the explanation that there has been so much labor market churn and dynamism that it just takes a little bit of time for people to get accustomed to their new roles and the new things that they're doing.
Garcia: That being said, in terms of other stories besides the ones that Heather and Ryan already mentioned that have been relatively under-covered… for me, the answer is, is the US giving up way too soon on pandemic preparedness for the future? This is something that I think a lot of journalists have noted. It gets noted sometimes on social media. But to me this is a huge deal. What the hell are we doing? And I think this, to be clear, I know that this is an econ podcast, this to me matters enormously for the economy, that if we find a way to combat future pandemics better, it's going to yield huge gains later on. And it does seem like we've given up quite quickly on it. That would probably be my answer there.
I think because there haven't been massive financial crises cascading across the emerging world, the rich world has kind of ignored it. But it's billions of people who are looking at the potential of a lost few years, potentially a lost decade because of the after effects of the pandemic and it really hasn't gotten the attention and the urgency that it deserves.
Garcia: The other thing is just demographic trends generally, what's happening in terms of the aging of the workforce. Why is it, and how does this interact with the fact that labor force participation has not bounced back the way other parts of the economy has bounced back, the way output and employment have bounced back? What is going on there and how does that relate to demographic trends? Anyways, but I love the other answers, love Heather's point about immigration, the point about productivity growth, these are all under-covered and super important.
Beckworth: These are great stories and ones that have been underreported. I'm going to throw one in there, and you might think it's not underreported as of recent, and that is AI, the emergence of really useful AI. Because just this past month we've had a lot of excitement about OpenAI's ChatGPT. I'm sure all of us around the table have played with it and had fun with it and our listeners have as well. But that's just one of a series of developments over this past year or two. And it's been fun to follow this. ChatGPT had a predecessor that was writing poems, articles, conversations. As a former professor, one thing I had to deal with was plagiarism, book reports or essays. I'm pretty sure I would not be able to catch it now. There used to be software where you could try to figure out who was doing it. I'm sure they would beat me at the game now if I had to go back to teaching.
Beckworth: DALL·E 2 creates original art, animations in the works, other AI finding new proteins, diagnosing illness, writing music. I mean all these things are just beginning to emerge and it's huge. And maybe we'll come back to the implications, but hugely disruptive. I mean, think of all the creative work. In fact, I'll go there right now, I because remember Cardiff and I used to get into this discussion, well, when are driverless cars really going to arrive? And we used to talk about the first ones to go will be the truck drivers. They're going to lose their jobs. Well, lo and behold, it might be the graphic designers, it might be the artists, the creative class that goes before the truck drivers.
This...matters enormously for the economy, that if we find a way to combat future pandemics better, it's going to yield huge gains later on. And it does seem like we've given up quite quickly on it.
Garcia: How about us at this table? [inaudible] traffic in ideas and words.
Avent: The journalists. Someone think of the journalists.
Avent: We need a universal basic income now.
Beckworth: We had a conference this morning here at Mercatus on AI in the financial sector. And one of the participants said, "Authors in the future will be more like editors. They'll tell AI, 'I want to write a story or a book even," he said, "'on this topic, include these things.' and then you'll go back and just make sure that it flows the right way, the right things were covered and you'll be the author." Pretty remarkable. And even I think that's been underreported and I think it will be increasingly more important going forward. And we're just beginning now to see the tip of the iceberg there.
Garcia: I hope we come back to that at the end of the chat when we talk about long-term things.
Garcia: Because that's a great topic.
Beckworth: Let's go to the other side of this. What was the most overreported but less important story during these past few years?
The Most Overreported Stories of the Past Few Years
Long: Well, other than transient inflation? I regret every ever using that word in any story. But for me what came to mind immediately was in 2020, predictions of massive small business failures. And in 2021, predictions of massive evictions across the country as the eviction moratorium expired. And I think going back to Cardiff's original point at the top this podcast, this is really a victory lap for policy and for public policy response. We didn't get it all right, obviously there was a lot of fraud that is still being rooted out, but by and large, to have gone through what we've been through, and with some exceptions, like restaurants in downtowns have certainly suffered, particularly smaller restaurants, but to not have massive business failures and to not have a massive rise in homelessness. Or you think about the foreclosure crisis after the Great Recession, to not have something like that happen again is a huge, huge success for policy and for people, for the lives and living standards of people in this country. I think those, in a good way, were overreported because it got the warning signs out there and we reacted to it.
Beckworth: Pleasant surprise.
Avent: Well, I was struggling to come up with something here, but what I settled on was the retail trading phenomenon and crypto, both in the sense that we had this incredible surge in asset prices for a bunch of seemingly silly things. And people were spinning all sorts of narratives about how markets were changed or what the possibilities were for some of these things moving forward and how they might revolutionize stuff. And seems like, at least for now, a lot of that hasn't panned out. And then on the way down, we've gotten lots of stories about how everything's going to blow up. And certainly some things have blown up, but it also kind of seems like there's been no systemic problems so far. I should probably knock on wood. But yeah, it just seemed like a lot of sound and furies signifying nothing. I mean it made for some great Matt Levine columns, but apart from that, not much there. Could have done without some of those column inches.
Garcia: Crypto has proved to be a kind of isolated hobbyist thing. In other words, there has been no systemic contagion from it. So in terms of the economy overall, certainly we've probably paid too much attention to it. It's very interesting in and of itself. It's a fun thing to follow, but it's not nearly as important as might be suggested by how much breathless coverage it gets. I love Heather's point about the eviction crisis. I regret to say that I myself contributed to the over-reporting of the possibility of an eviction crisis and it just never materialized, and to her point about how this is a win for policy.
Garcia: The other thing I would bring up is that the US has this reputation, in many cases well deserved, for stinginess. If you criticize it for it, if you're maybe of a more conservative or of right wing persuasion, you'd call it frugality, of not being as interventionist in the economy as certainly the social democracies of Europe, say. But when it comes to the response after the pandemic, the US actually spent one out of every $3 globally according to IMF estimates in fighting the pandemic. And that includes both the economic response and the money that was put into the health response, right? Separate estimates from Christina Romer, which I actually thought were pretty conservative, shows that this wasn't just because the US is super rich and has more money to spend. We tied roughly with New Zealand as a share of our economy, the money that we spent in fighting the pandemic. So I am still just shocked, stunned. I don't know what to say, I walk around with my jaw dragging the concrete, right? But my vote for this year's overreported story is quiet quitting, which I just haven't seen any really convincing case that this is a thing. It's all very circumstantial.
Long: Other than low productivity?
Garcia: Yeah, but that's what I mean, is that I have trouble believing that that's because everybody suddenly got lazy and didn't feel like doing anything at the job. So, yeah.
Beckworth: Okay. Well I will make the case for fiscal dominance now. I don't see as much of that right now, but for a while there was a lot of stories on, this is it, we finally have hit fiscal dominance with high interest rates, with large amount of debt, the Fed's going to become subservient to the Treasury, it's going to have to support the government to keep it solvent. And it's understandable, inflation was high and it seemed to be persistent, rates were going up, but as we speak today, the 10 year Treasury yield is back down under 3.5%. It was up over 4%. And I really believe, and maybe I need to put some money on this guys, but I'm willing to bet that if we come back in a few years, that rates will be back down to 2%, maybe 2.5% 10 year Treasury yield. I think we'll get back to that world of secular stagnation. This will be a one and done kind of blip for inflation and for temporarily higher rates. So I think fiscal dominance was overreported and it's not going to happen.
Long: Well, I hope you're right.
Garcia: Let's specify this, though. So let's say end of 2024, you're saying the 10 year Treasury will be less than what? 2%?
Garcia: 3%. Less than 3%.
Garcia: Okay. Good.
Beckworth: Yeah, I'm fairly competent because, and I'll lay out my reasons here on the table, the structural forces that had them low before the pandemic haven't disappeared. In fact, they're getting worse. The aging of the planet. We touched on China. China is both shrinking, this next year they're going to start shrinking. I mean, India's going to grow rapidly, but China's going to lose, I believe a quarter of a billion people over the next 40 or 50 years. And they're aging, they're shrinking, they're going to be like Japan. What is Japan then? Japan has increased the demand for bonds, for safe assets. So that tendency, that trend is only getting stronger. I think the regulatory demand will be there. Risk aversion from all these experiences. There's a literature that talks about if you've lived through a recession, you tend to be more risk averse than as someone who hasn't. Think of… your generation has lived through the Great Recession, you've lived through the pandemic. So I just think on balance, all of these things are here with us and they're not going to fade away. So what I see happening these past few years is more like a price level shock, not in an inflation shock. And when that comes down, so will rates. So that's my bold prediction, and I may live to regret it, but I've said it.
Garcia: Can I ask you a question, David?
Garcia: Have your views on the relationship between monetary policy and fiscal policy changed throughout the pandemic given the experience of the last few years?
Beckworth: Well, I would say that it has reinforced my journey toward the importance of the linkages between the two, that's for sure. I think we wouldn't have escaped the zero lower bound without the large fiscal policy of support. We've had this conversation before. I do think the Fed's commitment to a form of level targeting was important, but I do think it needed the back support, the fiscal push from what we had 2021 and 2020. But fundamentally, there's still an understanding that the Fed sets the price level target or the inflation target, but I think behind the scenes very strong linkages. Did that answer your question?
Garcia: Yes. I passed back the hosting conch to you.
Beckworth: Okay, thank you. In fact, I will note to listeners, you can go back on the archives of the podcast and Cardiff actually is someone who has hosted a Macro Musings podcast and I was on the other side of it and it was a hot seat to be in, and I can say this, because he didn't tell me anything beforehand. He just threw curve balls and sliders and fast balls at me. So we'll-
Garcia: Hey man, it was based on your paper on NGDP targeting.
Beckworth: It was.
Garcia: I think you were ready, I think you were prepared.
Beckworth: I was, I was, but Cardiff, he's a master at podcasting. Okay. Let's move on to then the question all of our listeners have been waiting for, where did you get something wrong over the past few years?
Incorrect Predictions Over the Past Few Years
Long: All right, humble pie time. I even looked up the headline. In August of 2021, I wrote that the US could be on the verge of a productivity boom. That certainly was very ill timed. So I definitely bought into the story of the AI and the story on our new ways of working could-
Garcia: You were early, not wrong.
Long: ... I know.
Garcia: You were early, not wrong.
Long: I very much hope there's a huge revision in the data coming soon. I think another one I'm probably best known in the last few years for being early to write about was the Great Resignation. I called it the great reassessment of work and a month later, the professor from Texas went on TV and called it the Great Resignation. I wish I had done that. But what I will say, having written a lot and spent a lot of time thinking about it in the last two years, a lot of people obviously changed jobs, but they didn't necessarily shift sectors. You can certainly find some great stories of people who reinvented themselves by going back to school or getting a real estate license or whatnot. But if you actually look at the early data that we have from California and some other states, it shows that a lot of people changed jobs, but they still generally stayed within the same sector, which I think is kind of interesting and we'll see how those dynamics go forward. I think I was a little bit too excited by some of these anecdotal narratives of somebody who quit their job, for instance, at a big box retailer and went into working on windmills and these sorts of things.
Beckworth: Keep believing, Heather.
Long: I know.
Beckworth: Alright, Ryan?
Avent: Well, I whiffed big time on inflation. I totally got that wrong. I over learned the lessons of the 2010s. Didn't pay enough attention to NGDP, how could I do that? What a critical mistake. But I basically, when Larry Summers and others started making the case that we should start to expect serious inflation, I was less focused on the demand impulse and more thinking about the structural forces that had helped to keep inflation down and just thought… I didn't see that they had changed all that much. And it's funny, there are parts of the story I got right in that there would eventually be an unwinding of supply chain problems and we would see employment continue to rise and all those things, but it just didn't bring inflation down and that was the thing that mattered. So definitely learned some hard lessons, both about remembering to think about demand and NGDP and keeping that front of mind, but also about the importance of humility and et cetera, et cetera.
Garcia: Yeah. I, too, was too early on sustained productivity growth accelerating. But in the interest of adding something new, here's something I got wrong, but I was happy to get it wrong, which is I had become very skeptical that there would ever be any actual anti-NIMBY policy victories. It just was so grinding and it was taking so long, and it seemed like the movement was getting a lot of enthusiasm, but not a lot of real victories. And then seemingly, in a span of just a few months, there were a lot of these victories, primarily at the state level, but that's where it needs to happen. So I was quite happy to see that. And I think it's part of this broader intellectual shift that is a sort of silver lining of high inflation, which is that there's a lot of emphasis now all across the ideological spectrum on how to do things on the supply side to really try to expand the economic capacity of the US economy.
Garcia: Janet Yellen, I think, has referred to this as modern supply side economics. There have been some writers who have referred to it as the economics of abundance, as Derek Thompson says, or supply side progressivism, as Ezra Klein has called it. And in general, I think that's a really healthy thing. And if it leads to more and more of these kinds of changes, people sort looking more carefully at investing more in public sector R&D or fixing regulations that maybe were well intentioned but have actually had bad consequences and so forth, then I think that could be a really nice thing. And I've been surprised to see this develop the way it has the last few years, I had become a little too pessimistic from just decades of being beaten down and losing these kinds of arguments in the policy arena.
It's part of this broader intellectual shift that is a sort of silver lining of high inflation, which is that there's a lot of emphasis now all across the ideological spectrum on how to do things on the supply side to really try to expand the economic capacity of the US economy...And if it leads to more and more of these kinds of changes, people sort looking more carefully at investing more in public sector R&D or fixing regulations that maybe were well intentioned but have actually had bad consequences and so forth, then I think that could be a really nice thing.
Beckworth: Believe also, Cardiff. Choose to believe. Two quick things from me. One, I didn't push this really hard, but I did have a podcast, I did tweet a little bit about it, but this is the idea of reverse hysteresis. I was like, hey man, we're going to run the economy hot. We finally get to test this idea. I was very hopeful. But I think I need to eat some humble pie on that front, unless productivity numbers get revised dramatically. So I think that was an area where I was over-
Garcia: Keep believing, David.
Beckworth: ... Keep believing. Okay. Someone play some Journey music for us here. The other thing, I'm going to go back to what Ryan said, was my inflation call was terribly wrong as well. In fact, the previous podcasts we have out, last week, I did my mea culpa, I've done it several times, but I was invited to do a New York Times op-ed in February, 2021. And the title said, *Stop Worrying About Inflation.* And it's forever recorded in the paper of record.
Beckworth: I was following forecasts like most people, the bond market, and where I went wrong, like Ryan, I was following nominal GDP, Ryan. The problem was I was following what was coming out ex post. So the problem was I was looking in the rear view mirror. And what that really taught me is I need to look at forecasts of nominal GDP. So we have this measure at the Mercatus Center called the nominal GDP gap. And because of this painful experience, we now have a forecasted nominal GDP gap, and it shows where the consensus forecast is going. And we went back in real time and we saw that had we been paying attention to that, we would've seen by early to mid-2021, there was going to be an overshoot. I think that's key, is more forward looking, still rely on nominal GDP. Alright, let's go in the time we have left to the big issues over the next few years and the longer term, let's just combine those, but what do you see as the big issues in the next few years and then over the next decade, let's say?
The Big Issues Over the Next Decade
Long: Alright, I'll start. I think a big theme that keeps coming up in this discussion is how do we fix labor supply? And hopefully we'll have some sort of discussion and movement on immigration, but it's just so sad in Washington, DC to sit here, any time you bring it up, people say, "Yeah, we really should do that." But it's probably not going to happen. I've even had discussions with folks in Treasury about this where they're like, "Yeah, we even debate whether to bring it up at White House meetings with other staff because we know that this needs to change for the economy long term, but it's seen as dead on arrival in Congress." I hope that really changes. I think another part of that, kind of pivoting off what Cardiff was saying a bit ago, I wrote a lot about childcare problems during this pandemic. And part of fixing our labor supply is also fixing our care infrastructure. With an aging workforce or an aging population, we've got both people trying to care for their elderly parents and elderly relatives, and we don't have enough infrastructure for that. We're also trying to care for young children. And so a lot of policies in the US could be way, way better around those issues.
Long: The other one that's kind of come on my screen a little bit more recently is, it's going to be really fascinating the next few years to see what happens to downtowns. Downtown major urban areas in the United States have not really come back after the pandemic. Sitting here in Washington, DC, most days, these office buildings are fewer than half full compared to where they were pre pandemic. And in the United States, a lot of cities, including DC, were really built up in the eighties and nineties when certain types of people didn't want to live downtown. And the policymakers in these cities decided to really lean into commercial office buildings, thinking we're going to bring the suburbanites to work downtown, and at least we'll get some revenue from these commercial buildings.
Part of fixing our labor supply is also fixing our care infrastructure. With an aging workforce or an aging population, we've got both people trying to care for their elderly parents and elderly relatives, and we don't have enough infrastructure for that. We're also trying to care for young children. And so a lot of policies in the US could be way, way better around those issues.
Long: And so there's parts of DC where, if you look, it's over 90% commercial buildings. And now we don't need that. And how do you rethink what an American city should be? And are we going to take some of these commercial buildings and make them into apartments or entertainment centers? On the one hand, it's costly, and really, do we have any money left to do this? But on the other hand, I think it's really exciting that for the first time in a long time, we have a big chance to rethink what the future of American cities really looks like. And so I think that's a big challenge and opportunity.
Beckworth: Absolutely. Ryan?
Avent: Well, it's hard to say. I mean, I can't remember a time when things felt so uncertain about so many important questions where you just really… it's so hard to have a sense for what things are going to feel like over the next five to 10 years. But I think climate, what it feels like to be in a 1.5 degree warmer world is going to be a huge thing. I think technology, the effects of AI and other new technologies are going to be profound. We've had this long period of techno pessimism, and now I think actually we are on the cusp of transformative change.
Avent: But the thing I'd probably draw most attention to is geopolitics, and in particular what happens with China. We spent 40 years building this global economy that had China at its heart, supply chains run through it. At this point, it's a massive economy, has a huge effect on markets of all kinds. And now it seems like we're really going to start disentangling from it in key ways. And there are shocks that don't seem like they're that unrealistic that could happen, that could force that disentangling to happen very quickly. And we just have no idea what that's going to be like, what it's going to mean for geopolitics, what it's going to mean for the way the global economy functions for workers in rich countries and poor ones. It's just a completely unprecedented situation, one that, I think, even as we've started to appreciate how dramatic the changes are in China right now, we really haven't worked through those implications. And you still have US companies that are massively dependent on suppliers in China in a way that just makes them hugely vulnerable to disruptions. It's going to be a scary thing to watch unfold. And there are good ways it could go and bad ways, but it's going to define, I think, the next 10 years.
Garcia: Those are both awesome answers. And to Heather's point about the change brought on by working from home, this was something where I did anticipate early on that this was a semi-permanent shift, and I think increasingly that looks like it really is the case, that this is going to change, not just the way a lot of people work, but the very nature of cities. And where I am in New York, there's tremendous vacancies even still in Midtown, Manhattan. It's going to be a problem for tax revenue and I think it means that New York is in for a tough couple of years, maybe more. In the long run, I think it will be good for the city. It'll make it a little more interesting, a little more diverse. But there's going to be some growing pains and I don't think it's limited to New York. And to the point of China, as Ryan was discussing, it's not just that we built up this economy with China at the center, it's that China's going to be in relative decline, but still very powerful. And still, even if it's disentangling, it's from a standpoint of it's being an enormous presence in these global supply chains.
You still have US companies that are massively dependent on suppliers in China in a way that just makes them hugely vulnerable to disruptions. It's going to be a scary thing to watch unfold. And there are good ways it could go and bad ways, but it's going to define, I think, the next 10 years.
Garcia: But I'm all in on thinking that artificial intelligence is going to lead to some really dramatic changes. And that's the thing that I'm focusing on. And what's funny about this is that I'm usually the anti-hysteria guy. I'm usually the guy who's like, "Calm down, people, you don't need to freak out just because this chatbot's doing whatever." But actually in this case, I think that the broader hysteria on AI generally, and not just on the chatbot thing, and not on GPT-3, is warranted. Hysteria is the wrong word by the way. The sort of uncertainty, the immense excitement, but also the nervousness of what it could mean is actually merited. Because we're going to see something totally different, which is, we've gotten used to the idea that automation typically targets those middle class, middle income jobs, the routine jobs. And now if it really is coming for the non-routine tasks and the non-routine jobs, which tend to be concentrated at the very highest end of the income spectrum, and at the very lowest end, that's going to have very different changes also for how society reacts.
Garcia: You can imagine one way, for instance, and here I'm way out in the realm of speculation, but if it does start coming for the tasks and the jobs that tend to be performed by college educated or grad school educated folks who make a lot of money, then the response might be a little bit different in terms of, well, what does the US safety net end up looking like? Because those tend to be the people with a lot of economic, cultural, and political power, not necessarily fairly, but that's the case. And so if there is a response there, you could see maybe a little bit more energy geared towards a safety net that makes sense for everybody. And not a lot of the sort of passivity and indifference that was greeted by the outsourcing of a lot of middle-class jobs, the de-industrialization of the labor force.
Garcia: So it's very exciting, but when I say exciting, I don't mean it with a positive connotation, I mean it… in totality, it's going to be very exciting. But how it actually ends up affecting us, if it affects us the way that I think it might, is it’s up to us and it's up to the policy response and whatnot. Yeah, I'm with you, David. I've been doing a lot of research on this recently. My next episode of the New Bazaar is with Avi Goldfarb, who wrote Prediction Machines and a more recent book on AI, and I can't wait for it. But I have a feeling that [AI] is going to lead to a completely different economy in ways that are impossible to imagine. It’s not just about disrupting tasks in the labor market, but it's about completely challenging all of the institutions that we've come to rely on in ways that I can't quite envision, I'm not smart or imaginative enough. But I think it's coming and I think it's going to happen within the next couple of decades.
Long: I think the other one that I will just throw out, since we are on the Macro Musings podcast, and I hope I'm wrong about this, but you could easily see the Fed's credibility and other central banks' credibility really being challenged, maybe even their independence being chipped away at, independence in quotes. But I’ve been amazed in the last year or so, I mean, some of it, rightfully so with getting a little bit of the inflation story wrong, how many prominent voices, mainstream type voices, not people who would've been considered the fringe, who always hated the Fed and want to go back to the gold standard or something like this, but prominent voices who've really questioned whether this system works that we have now or whether we need something very different. And so I don't know how that's going to play out. Hopefully we come through 2023 and we can have a better than expected economy, and some of this will go behind us. But if it doesn't, I think this could be a really difficult road.
Beckworth: Something to watch. So let me provide my long term concern first, then my short term. I say a concern, my outlook, but it is a concern, and I'm going to piggyback off of what Cardiff was saying about AI. I was just looking today at an article about the animation industry being decimated in five years because of the AI that creates art and can create animation. And I texted my son who's in college. Now, he's not an animation major, but they have this major on campus. And I said, "Son, you need to share this with your friends. This is probably not the best degree to go pursue right now." But there's a whole host of them, graphic designers, podcasters, as you alluded to earlier, journalists. I mean, there's a lot of things we do, creative classes. My wife does a lot of wood art, and I'm like, well, in the future, will some AI do wood art and take a 3D thing or burn the art? It easily could-
I have a feeling that [AI] is going to lead to a completely different economy in ways that are impossible to imagine. It’s not just about disrupting tasks in the labor market, but it's about completely challenging all of the institutions that we've come to rely on in ways that I can't quite envision...But I think it's coming and I think it's going to happen within the next couple of decades.
Garcia: There are no good college majors then, okay? So you might as well tell your son to pick whatever he wants and relax because he won't be able to do anything when he gets out of college anyways.
Beckworth: Well, that's where I want to go with the positive. I do think, and Ryan's been really good on this, any time we've had these technological changes, rapid ones, they have caused dislocation, but eventually new jobs are created, real income is created. How we get it allocated across the economy, how people are able to tap into it is a different story. But I'm hopeful that AI may actually be the solution to this other big concern, and this is the depopulation problem. We're losing people, it’s an aging population, who's going to take care of all of the old people? Who's going to pay for Social Security? Who's going to build real things in society? And maybe these two trends will cross paths and be a solution. So that's my hope.
Beckworth: Near term real quick, I think inflation will still be a big thing for the next few years. And then I think China… And I want to plug a book, it's a little bit of a strong book, but I really enjoyed it, it's called, Danger Zone: The Coming Conflict with China, by Michael Beckley and Hal Brands. And they talk about, I think what you alluded to, is that because China is in decline right now, it makes them more likely that they're going to lash out. They have power, but they realize they're in a state of decline so there's a greater tendency that, “if we're going to do something, we better do it while we can.” And so Taiwan might be a more likely scenario than would otherwise be the case if they were still growing and had a more hopeful future.
Garcia: Let me, just real quick, respond to that because I think it may sound as if I'm exclusively negative about the potential for AI. I think it could bring some wonderful, wonderful benefits. You're right, Ryan's written a ton about the fact that eventually these technologies do in fact lead to new jobs that we can't imagine right now, there's been a lot of research on that. But as Ryan has also written, the process from getting from here to there can be incredibly bumpy. And we've seen this going all the way back to the Luddites and whatnot. So it's a policy challenge, it's a societal challenge, but it's also a massive, massive, massive opportunity. And in general, I tend to be an optimist about new technologies, but I think we just have to have our eyes open about it. So anyways, I just wanted to make that point.
Beckworth: Well, it sounds like we solved the problems of the world here in an hour, although we'll have to come back together maybe in a decade and check up on our forecasts, our outlooks. Well, I want to thank our guests, Heather Long, Ryan Avent and Cardiff Garcia for coming on the show. It was a real treat.
Long: Thank you.
Garcia: Thanks, David.
Avent: It's a pleasure.
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