Jared Bernstein on Fiscal Reform, Trade, and the Financial Crisis

Fiscal policy should act as a complement to monetary policy, and creating automatic stabilizers would be a good step in that direction.

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and previously served as chief economist and economic advisor to Vice President Joe Biden in the Obama Administration. Jared also writes regularly for the Washington Post. Jared joins the Macro Musings podcast to discuss fiscal reform, trade, and the financial crisis.

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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: Jared, welcome to the show.

Jared Bernstein: Thank you. Thanks for inviting me.

Beckworth: It's a real treat to have you on. And with all my guests, I like to ask them, how did you get into the economic policy world? What was your journey into it?

Bernstein: Well, I grew up in a liberal household. There was a picture of FDR, a big picture of FDR on the wall. And that period of the New Deal and a lot of the progressive policies that followed, I mean, not in those words.

Beckworth: Right.

Bernstein: Was elevated as a model period for government in our household. And so, when I grew up, I decided I wanted to be a social worker. This was part of my orientation from my family, which was if you're not part of the solution, you're part of the problem.

Beckworth: Interesting.

Bernstein: And so I was a social worker for a while in New York City, working in East Harlem. And this was in the 1980s, when things were quite rough. A lot of homelessness. I remember walking over homeless people to get on the subway. That was a regular thing. And it became quite clear to me that the interventions I was doing at a very micro person-by-person level were insufficient for the magnitude of the problem. I was always interested in number crunching and quantitative arguments. And so, economic policy became a natural place to go. But what I ended up doing was getting a PhD at Columbia in social welfare through the social work program, where you choose a discipline by which you will analyze and overarching problem.

Bernstein: And my discipline was economics, so I studied economics. I did a pretty econometric PhD. I did a time series panel, which back then was a big deal, and now is nothing. It took me months and months. I was literally taking data off of microfiche and spinning mag tapes. I'm not kidding.

Beckworth: Sounds like fun.

Bernstein: Yeah. But that was a thing back then. My dissertation advisor was an econometrician named, Harold Watts. Only old fogies, like me, will remember Hal Watts, who's one of the first guys to back out actual empirical elasticities using the SIME-DIME experiments back decades and decades ago. At any rate, what I'm telling you is that this is some ancient history, but that's my trajectory. Yeah, then I got into economic policy. I went down to Washington, worked for the Economic Policy Institute, and went into the Obama Administration. After that, went to the Center on Budget and Policy Priorities, where I am to this day.

Beckworth: Well, that's neat you talk the talk and walk the walk. You'd actually been down in the trenches doing social work. You've seen it all. You've seen it from the personal up close to the macro view being in the president's administration.

Bernstein: Yes and no. I mean, I've never been a really poor person, like many of the clients I worked with back in the day. But I did grow up with a single mom, and I think that made a difference. To this day, when I hear conservative policy makers embaying against single parents and trying to implement policies that, I think, will hurt them, I think that's wrong on a substantive basis. But I think it gets me emotionally too.

Beckworth: It's interesting that you were a social worker. You've gone from being a social worker, dealing with cases, to the Obama Administration, where you needed the macro view of trying to solve these problems. I mean, what would you think of the following rule: that every economist has to be a social worker for, at least, a year. How would you like that?

Bernstein: Well, that would be very interesting. I like that idea.

Beckworth: Okay. Well, let's move onto some of your interesting work you've been doing. You've been writing, and I encourage our listeners to go look at Jared's page of the Washington Post. He writes fairly regularly for them. And, at this time, it's now September 2018. We're 10 years out from where the worst part of the financial crisis occurred. There's a lot of soul searching going on, a lot of looking back. Very few mea culpas, but there's a lot of like, "What can we-"

Bernstein: A lot of back patting, actually.

Beckworth: Exactly. A lot of people saying, "Hey, we did a fairly good job," right?

Bernstein: Right.

Beckworth: What have we learned? Any big lessons to draw from the past 10 years? Maybe the crisis itself or the recovery? What do you think?

Bernstein: It's such a big question. It's a critical question. One of the first lessons that comes to mind, that's probably germane to the way you think about these things, Dave. Is the importance of getting monetary and fiscal policy right as a one-two punch? That is, I think monetary policy did pretty well, and we can argue about details. But I think fiscal policy dropped the ball. And so, one of the first lessons that I walk around with, and it's actually a pretty significant concern about hitting the next downturn, is the extent to which we will be ready to answer the next shock with ample fiscal response.

Bernstein: I think macro economists talk a ton about the monetary response and, perhaps, even over analyze that, because I think it's actually less of a problem relative to the potential fiscal response, which, I think, last time was somewhat inadequate, next time will be more so. So that's one lesson. Another big lesson is, interestingly, you're right, there's been all this retrospective, but one question you see asked very little among all the question asking is how did we miss it? And I've always thought that that was a great question. How is it that we didn't see that housing bubble and its interaction with finance? I happen to be good friends with an economist named, Dean Baker, who did see it, and was just shouting to everyone back then in the 2000s. Starting, pretty early, in the 2000s that there was a housing bubble forming.

Bernstein: Dean was ignored far too much, while top flight economists were saying, "Coast is pretty clear." And so, I think that our ability to recognize bubbles and their interactions with financial markets is another lesson that should be learned. And then, I guess, third, is a lesson that I think, to some extent, has been learned. It has to do with financial markets. Financial markets have long been seen, and to this day in many macros models, are still seen as just purely an intermediate input into the economic growth process. And we know that's wrong. Arguably, three of the last three recessions were credit bubbles dot com, realestate.com, real estate again.

Bernstein: And if you listen to Ben Bernanke, he will say, "We need to be more mindful of the role of financial markets in economic shocks." And Jay Powell has recently said, "Hey, we should watch inflation, but we should also watch financial excesses," so they're putting that into their calculus. So this, to me, is somewhat of a lesson learned. But if anybody is walking around still thinking about financial markets as a pretty passive, highly efficient allocator of capital to its most productive places, full stop. That's definitely wrong.

Beckworth: Okay. Let me go back to the first point you made about having fiscal policy queued up so that it compliments monetary policy. And I'm wondering, given the difficulties of doing fiscal policy, you've got Congress to deal with, there's these lacks involved. In your ideal world, would you have just bigger automatic stabilizers, or would you just want more discretionary use of it.

Bernstein: Precisely for the reasons you put it, and I'm thinking of our particular Congress, at the top of my mind. The less discretion, the better. So I would have much more on automatic, and to be precise, there's a couple of things I would do. One is that, you may recall, we kept going back to Congress to get extensions on unemployment benefits. Well, that's because some of the triggers in the unemployment benefit program are not sensitive enough to slack. And so, we want to make sure that those triggers don't take the program off too soon. We also want to make sure it doesn't last too long. So I think we need unemployment benefit trigger reform that would make that automatic stabilizer more durable in a downturn.

Bernstein: But the other one, and this is different, is one of the things that... But the other one, and this is new, the unemployment benefit triggers exist, they just need work. One of the things that really worked well in the last downturn, I think it's somewhat of an unsung success story, is fiscal relieve to the states. So states have to balance their budget every year. I don't know if everybody recognizes that. The Federal Government doesn't. The image I had in my mind back then is you've got 50 states in a lifeboat, and Uncle Sam's at the head of the lifeboat, and the lifeboat's taking on water, and only one person has a bucket, and that's Uncle Sam. The federal sector can run deficits, the states can't. And so, fiscal relieve to the states turned out to have a really significant multiplier. There's good research on that. And I think that should be made an automatic stabilizer, not a discretionary one.

Beckworth: Yes. The critique or the observation looking back, I think you hear is that fiscal policy, if though you had the big stimulus from the Federal Government, was actually overall relatively tight, because the states and localities were actually retrenching. You think of school districts were cutting back.

Bernstein: Right.

Beckworth: Local spending on utilities, everything was being contracted because of the collapse of the economy and local tax base.

Bernstein: Right. Now, you have to remember, I was traveling around the country back then with Joe Biden, the Vice President, who was the implementer and chief. People may recall, Obama gave him the assignment of making sure the Recovery Act does what it's supposed to do, that was the big $800 billion stimulus package. And so, I remember going to events where mayors would very dramatically say, "I have six pink slips for teachers in this hand, and a check from the Recovery Act in this hand, and I'm going to rip up the pink slips and use the check." And so, that was a firsthand example of what you're talking about. And there's a mechanism, I don't want to get too much in the technical weeds.

Beckworth: Sure.

Bernstein: But there's a mechanism that has to do with the way we fund Medicaid. There's a mechanism by which we can do automatic fiscal state relief that ramps up in downturns. I think that would be one of the best fiscal measures we could do. If there's anybody out there looking for a dissertation topic, please take this one. Simulate it, see what it does.

Beckworth: Contact Jared, he'll be glad to respond to you. I've heard another proposal, I want to hear your take. And that is, do automatic stabilizers via the payroll tax. Take the payroll tax cut when the economy bottoms out and vice versa. Thoughts on that?

Bernstein: I think that can be helpful. We tried that and we had a payroll tax holiday, and I saw some of the results. I think it was Allen Krueger, he always pulls these surveys out of his hat. I think he managed to come up with some analysis of its effectiveness, and I have to say that it was more of a one and a half cheers kind of result, if I'm recalling correctly.

Beckworth: Okay.

Bernstein: So I think you have to be very empirical about that. One thing that I remember back in the time is that because demand contraction was so deep, I do remember that when we were contemplating this sort of an idea, a payroll tax holiday or a wage subsidy of some sort, we went to employers and we said, "What do you think?" And many of them said, "Look, you can do whatever you want. I'm not going to start hiring until I see more people come in the door, or more investors wanting to buy our intermediate good outputs." And so, tweaking the wage side may not be as portentous in terms of getting you to where you want to get then trying to do more on just the aggregate demand side.

Beckworth: Okay. Also, want to go back to the Dean Baker point that you mentioned. He saw the housing boom and was worried about it early on.

Bernstein: Bubble, yeah. The boom and bubble.

Beckworth: Boom and bubble. He was yelling from the rooftops and I wonder...

Bernstein: The over leveraged rooftop.

Beckworth: The over leveraged rooftop, right. I'm wondering to what extent this critique might be generally more framed as the policy makers at the top, that you mentioned, were succumbing to group think. That they all had a similar vision. They pat each other on the back. Having another voice, I had Andrew Levin on the show a while back...

Bernstein: He's a good friend of mine.

Beckworth: Yeah, I had him on the show. And he was inside the Fed, as you know, during this time, and his critique is there was group think. He goes, "We could've just talked to someone on the street back then during the crisis, and got another perspective." So I wondered if, maybe, one lesson is we need more diverse views at the FOMC, at the top of policy making world.

Bernstein: Of course. I recall back when I was in the Obama Administration. I know I'm telling lots of war stories, but...

Beckworth: These are great though, listeners love them.

Bernstein: I remember back, I was on TV once, and it was one of these call-in shows. And this was at the beginning of the recovery, and we had started talking about green chutes. There's green chutes in this recovery. It's starting to bloom. And a caller called in and said, "You guys must be smoking green chutes." Sure, group think is a problem. I think Paul Krugman says, "Once you get inside the borg," when he talks about the Fed, "Your thinking changes." But I think I would go a level, probably, I don't know if it's deeper, but what I would argue is that it's a particularly type of pernicious group think, which is economic group think.

Bernstein: And so, I'm particularly reminded of the Greenspan assumption that financial institutions, banks, non-banks, any lenders, would self-regulate. Their interests were such that they would self-regulate, because they wouldn't want to get into a situation where they, themselves, would be vulnerable to non-performing loans. Well, he knew, as well as anyone else, that the securitization phenomena was deep and pervasive. So if you can offload your risk, the likelihood of underpricing it goes up. So, yes, it's group think, but it's group think that has embedded in it a set of economic assumptions that fly in the face of reality. And Greenspan, to his credit, finally said, "Boy, I was wrong about that," but that was a big mistake.

Beckworth: Yeah. These are all great points. I really like your first point though about the automatic stabilizers. I think, for me, one of the big lessons is that even if Bernanke... I think I've been critical of Bernanke in the past on the show and I apologize for being too critical sometimes. I do think he was subject to a lot of political constraints both inside the Fed and outside Congress, right? I think this notion of automatically having things built in place, so you don't have to contend with the...

Bernstein: Well, remember Ben was going to Congress every two weeks saying, "Please give me more fiscal policy." I think we could probably have a good argument about how the Fed and Bernanke performed. I don't think it was perfect, but I think they got a lot right. I'd actually be interested in your critique.

Beckworth: My critique is that the Fed could never tolerate the kind of bounce back needed to quickly get back to full employment.

Bernstein: Okay. So this is a good critique. To me, this is the critique that the Fed pulled its punch. It said, "We really want faster growth and higher inflation. We also really want that 2% inflation anchor to stick." So I take your point there, and I think that's one of the reasons why the recovery took so long to get going, and why the Fed missed its target for so long. I think the point that I'm making is that Bernanke was extremely conscious of the need for interest rates to be as simulative as they could, for as long as they could. And what he recognized was that he couldn't do it by himself. He needed the one-two punch of monetary and fiscal policy.

Bernstein: So monetary could set up the credit conditions, but absent the demand side from the fiscal policies, he was pushing on a string. And so that's what I appreciated about his actions back then. You're into a more subtle critique about the way the Fed signaling got a little bit crossed there with the pulling of the punch and expectations.

Beckworth: Yeah. And maybe even more than just the Fed, it's like what is the body politic tolerate? It's maybe a critique of inflation targeting, in general. That once you've been so successful at it, everyone expects that you got to keep inflation low always, every day, no exceptions, even if what's needed is a temporary overshoot to get things heated up again.

Bernstein: Yeah. To be more specific, I totally agree with you. I would say it's not just inflation targeting, it's sending a signal that 2% is your ceiling, and that you're going to be happy with inflation rates that are, maybe, a little bit below, and maybe at, but not at ones that go above. And that asymmetry... I mean, there are people, like John Williams, who will say, "That creates a downward bias on inflation," and the data show that very clearly. So you could, perhaps, get out of that. I have a feeling you're going to NGDP targeting here, which is your one, and I get it. It's your show. In fact, in case listeners don't know, they just gave me a beautiful mug here that has an NGP target on it, so not too subtle.

Beckworth: Highly valued.

Bernstein: I think you might be able to get to a good place, maybe not as good as you would like, by really making clear that 2% isn't a ceiling.

Beckworth: Yes.

Bernstein: That 2% is an average over a pretty long time period. Which strikes me analytically is closer to what you're going for than where we are.

Beckworth: Yeah. And even if we don't get the nominal GDP targeting, I look at places like Israel, the Bank of Israel. They have, I believe, it's a range, a one to 3% inflation target range.

Bernstein: Yeah.

Beckworth: So it gives them some flexibility, and moreover, if you look at the GDP deflater... I know if you look at their CPI measures, just a little bit different story. But if you look at their GDP deflator, it almost moves in the mere opposite direction of GDP, since 2008 to the present. You see GDP goes down, the deflator, inflation goes up, and vice versa. And so, it creates this very flexible inflation. Again, I don't know what it takes to politically make that tolerable, and maybe be successful with inflation targeting it's hard to do that now.

Bernstein: I think it's a really interesting point that you're making, because if you listen to Yellen and, now, Powell, you hear them striving, to my ears, for a certain type of flexibility, of the type you're talking about. Jay Powell says, "Yes, there are all these star variables. There's R star. There's U star. There's Y star." I'm sure, do our listeners know what we're talking about?

Beckworth: Yeah. Well, go ahead.

Bernstein: So U star is the natural rate of unemployment, which is the lowest rate of unemployment consistent with stable inflation. R star is the same concept for interest rate. It's the neutral interest rate that's neither stimulative nor detracting from growth. Y star is the highest potential GDP given your underlying supply side variables, productivity, labor, labor supply. All of these are unobserved variables.

Beckworth: Right.

Bernstein: If it has a star next to it, we don't know what it is. And so, you hear Jay Powell and you heard Janet Yellen saying... Jay's been very explicit about this, "We don't know what these values are, and so we have to be more flexible. We have to look at the data." This, to me, is another analogy of this pulling punch. At the same time, we're targeting 2% as a ceiling on Tuesdays, an average on Thursday. There's some lack of clarity about that symmetry around that. And so, I do think those messages get mixed. I'm for more discretion. I'm for a pretty discretionary Fed. I think rules are misguided and, in fact, dangerous in the sense of politicizing the Fed.

Bernstein: Remember, I live in the swamp, and work in DC. And so, I go to testify to Congress, where Republicans say, "We want to tailor a rule that has these coefficients in it," literally, and that's bad. I do value flexibility. And I think that an NGDP level target maybe gives you more of that in the sense that you're talking about.

Beckworth: Yeah. I mean, in terms of the whole rules versus discretion, I think you can frame the appropriate response function in terms of a rule that does provide this flexibility that you're talking about, right? If you had a nominal GDP level rule, so to speak, it would say, "Hey, allow that bounce back, if needed."

Bernstein: Yeah. And I should be explicit that I don't think that there's anything wrong with rules. If I landed on Mars, and I wanted to understand their monetary policy, I'd say, "Where are you relative to the Martian Taylor rule," just to get a baseline.

Beckworth: Sure.

Bernstein: But that's not where I'd stop. That's where I'd start.

Beckworth: Okay, fair enough. Related to this look back at the crisis in 2008, there's been some commentators who are making the case that the rise of populism, the backlash against trade, the election of President Trump...

Bernstein: Brexit.

Beckworth: Brexit in Europe, it's all a byproduct under this crisis. That the crisis, itself, unmasked this deep unease of the status quo, and maybe some of it had been built during globalization. But the crisis, itself, was a catalyst that really put the pedal to the metal.

Bernstein: Yeah.

Beckworth: What are your thoughts?

Bernstein: Well, I've been reading Adam Tooze's book Crashed, and listening to some of his recent talks about it, and he espouses that view. And I am somewhat convinced by it. I think the way Tooze says it is something to the effect of, "If your solution to a crisis created another crisis, then maybe your solution wasn't the right one." I'm totally paraphrasing. So if it's true that by saving the banks, by doing much more to reflate the credit system, than we did on the demand side to save households who are losing their homes, people who lost their jobs, spent long times in unemployment or only now recovery in terms of incomes and wages, then we created a political dynamic that haunts, not just us to this day, but as you mentioned, Europe five star in Italy.

Bernstein: Now, even in Sweden, we see this kind of anti-immigration movement take hold. And there is excellent literature. One of my favorite papers of the last few years is a paper by Danny Rodrick talking about connections between, in his case, globalization and populism. That argue that if you're not really helping people who are hurt by large economic trends, that economists pretty blithely cite. If I ask an economist on the street, "What's the cause of economic inequality?" They're going say, "Technology and globalization," which they think of largely pretty benign trends. And yet, if you don't address them, and then you have a financial crisis, because you were following, as I stated earlier, a set of unjustified economic assumptions about how firms would self-regulate. Yeah, you're going to deeply piss a lot of people off.

Bernstein: So I think there's something to that.

Beckworth: Yeah, I do too. And there's a paper, I mentioned before on the show, it's published in the European Economic Review and it is titled, Going to Extremes: Politics after Financial Crises, 1870 through 2014. And it's really, to me, a really convincing paper. They look at 20 advanced economies over the past 140 years, looking at 800 general elections. And what they find, to me, is the most interesting part is that these trends emerge, populism emerges, anti-globalization feelings emerge. But only after financial crises, ordinary garden variety recession doesn't do it. You need a financial crisis to really get that anger to the surface.

Bernstein: It's part of it the bailout of the financial crisis that gets under people's-

Beckworth: It maybe, because they don't and look in depth in each financial crisis.

Bernstein: I think too, where the Toozean hypothesis, which is what we're talking about here. What I would very much add to it, why I think it's somewhat incomplete, although, I must say, I haven't finished his book, he may get into this, is that it wasn't the crisis and the bailouts, themselves, that got us to where we are, it was the fact that for years, if not decades, before that I think policy makers were insufficiently attentive to the downsides of globalization, of technological change, of de-unionization, of discrimination, of unjust criminal justice policies. So there was a lot of stuff going on that was leading people to believe that the elites who were running the country only had the backs of the top 1%.

Bernstein: I mean, this is somewhat of a Bernie Sanders' or Elizabeth Warren argument, but I think it's correct. And that policy makers really didn't care or have much in their quivers to help them. So Obama comes along, and he's a real beacon of hope for a lot of people who believe that he really understood this division. And for a whole set of reasons having to do with the nature of the downturn, and the nature of the Congress, and a very hostile set of politics, I think his regime, of which I was part of, so I'm blaming myself here, was disappointing in that regard. And people still felt that they didn't get the help they need, and yet they looked across the street and saw that the bankers were, not only held whole, but if you look today, the profitability of the financial sector, and the corporate sector, especially post-tax cuts, is off the map.

Bernstein: And yet, incomes are just barely recovering to their levels 10 years ago.

Beckworth: Yeah. Very interesting observations, and Crashed is a great book. Brick Monett to our listeners, as well. So one of the consequences, as we mentioned, of the financial crisis, the fallout, the slow recovery has been this backlash against trade, against globalization.

Bernstein: Yeah.

Beckworth: And President Trump's policies are a manifestation of that very clearly. And just this week, on this Monday, the tariffs got ramped up. I mean, China retaliated, the US has stepped up the game. So we really have taken the trade war to a new level no one expected, even that maybe a few weeks ago, months ago, this seemed at a new level of intensity. Are you concerned about it or is this just a bump in the road to further trade liberalization?

Bernstein: I'm definitely concerned. I think that this is bad trade policy. I'm very much a believer in the benefits of global trade, of trade flows, and not just to us, but to poor countries that are trying to climb up the economic ladder. On the other hand, there are significant downsides to trade that have often been overlooked by economic elites in this country, and that's very much in keeping with our earlier comments as to what delivered Trump onto us. And, in fact, if you go back and you try to figure out how the heck did he vanquish a field of 16 or 19 or whatever was the size of that Republican primary. He was taking a position on these issues, trade and immigration, that was very much antithetical to those of the elites and was signaling to people who've been hurt by globalization that I've got your back.

Bernstein: Now, there were lots of other really nasty xenophobic and racist signals in there, and I don't want to overlook those, but those signals were real. It turns out, though, taking it back to your question, that this policy doesn't really help them. This policy doesn't help people who've been left behind by trade. And I can talk about policies that would help, but let me talk a little bit about the macro economics because that's our raise on dextra here. I think that people who say, "That, at this point, this trade war is going to deal some sort of death blow to the economic cycle, or even a really significant tick up," maybe wrong. We don't know. There's a large residual that none of us can figure out.

Bernstein: But if you look at the numbers, take the 200 billion, so 200 billion on tariffs from Chinese imports of goods is less than 10% of our annual goods imports, which are north of two trillion. 10% is the tariff rate on that, at least for this year. And here's a key number that isn't so commonly understood. Only about 20% of those goods are consumer goods. So if you take the product of those various small percentages, you can convince yourself that at the end of the chain, even considering full price pass through, inflation maybe gets bumped up by 10 basis points, maybe 20, maybe even 30, so that inflation instead of running at 2.7 runs at 2.8 or 2.9. And that's not nothing, don't get me wrong, but that's neither a crippling effect to the expansion nor something you'd probably be able to parse out of natural forces that are pushing up both inflation and interest rates.

Bernstein: Those are the direct effects. Now, what a lot of people talk about, and I think you may have asked about, Dave, are the indirect effects. Uncertainty, should I make this investment, I don't know if I should build this factory, and that's in there too. But I've got to tell you, I have this antenna that goes off whenever somebody says, "Uncertainty." I just don't know how seriously to take that, because economies are inherently uncertain. Life is uncertain. Every day is uncertain.

Beckworth: Sure.

Bernstein: I didn't know exactly what questions you were going to ask me today, but I didn't come in here fearing uncertainty. So I think that, that's a bit of hand waving that we sometimes do. I don't like the policy, because I don't think it's going to really help the people who've been hurt by trade. I'm somewhat less worried about its macro economic impact. Trump maybe crazy, but in some ways he's crazy like a fox, and I don't mean the cable channel. He's doing this mystagogue on trade at a time when the economy is really strong, and when, in fact, some of his policies are pushing quite hard in terms of tailwinds on the fiscal side. So he's creating some fairly, I would argue, small headwinds, while he's also creating some fairly large tailwinds.

Bernstein: And so, if you're going to do something dumb on trade, maybe now would be the time, but I still don't think it's a good idea.

Beckworth: Right. So if you're going to make a mistake, it's better to do it when you have full employment than otherwise. But that does leave me still concerned, in the following sense, even if what you're saying is correct that there won't be a big trade effect, consumers won't see huge spikes at Walmart, could it not embolden him to do more? In other words, he's got a way with putting 10%, 20% tariffs on Chinese goods. No one is complaining because they have their job, they don't see big prices, so he takes it to the next level, until we do get to a point where you begin some pain.

Bernstein: That's a very good point. I take that point. And I think there are two ways we can know if we've gone really too far in terms of macro tripwires. One would be the other... I think 267 billion is the number they throw around. I guess that's the rest of the Chinese imports that haven't been taxed yet, so that would be one. And I think that, that would really probably kick up inflation in a way that's very concerning and, perhaps, invoke Fed reactions, which could potentially mean hard versus soft landing. And the other would be if we really go after autos. I think when you start going after autos big time, as opposed to some of the stuff we're doing with autos parts, I don't like any of this, don't get me wrong.

Beckworth: Right, right.

Bernstein: But those, to me, suggest two tripwires that would go too far, and your point is very well taken. To the extent that Trump doesn't see macro upheaval behind all of this, he could easily create more damage.

Beckworth: Okay. What would you do for the losers of globalization? You alluded to them earlier, but what specifically do you have in mind?

Bernstein: In order to help people hurt by trade, I'd respond on two levels, micro and macro. From a micro perspective, we have to make sure that people in places that have been left behind have ample opportunities for good employment. And that requires a pretty aggressive subsidized employment program for places where, even at full employment, labor demand is inadequate. You might say, "Well, those people should just move to other places and go to somewhere you can get a caramel macchiato latte, because there's lots of demand there." But people aren't implementing that kind of geographical mobility. It's just not happening.

Bernstein: And so, I'd bring employment to places where there's actually a lot of stuff to be done, but not enough labor demand. And I've written about these subsidized employment ideas. By the way, there are numerous policies now proposed by legislatures. They're not going to see the light of day with this Congress, but there are written proposals for subsidized employment programs, guaranteed employment programs, which go a lot farther than I've advocated. But really interesting ideas that are out there germinating in exactly this space, to help folks who've been left behind, where there isn't enough labor demand, even at full employment.

Bernstein: On the more macro side, though, I think we have to run really very hot labor markets. The bar to putting on the economic brakes, if you're the Federal Reserve, has to be very, very high at times like this where we have so many people and places that have been left behind. And then, finally, I'd really rewrite the trade agreements. And I'm here I'm sounding a little bit like Trump, but I'd rewrite them differently, to be much more reflective of the needs of working people on both sides of the border versus handshakes between investors, which is how I view these trade agreements. I've dug pretty deeply into the agreements themselves with great help from Lori Wallach. We wrote a paper about this called something like, The New Path to Better Trade Deals, or something like that.

Bernstein: And the point is that you need a set of rules that elevate workers' rights, environmental consumer rights, much more than the current trade agreements do. I actually liked a recent tweak to this NAFTA agreement with Mexico, where... I'm just giving this as a microcosm example of what I'm talking about.

Beckworth: Okay.

Bernstein: Where they said that unions in Mexico could have secret ballots. So Mexico has unions, but a lot of them are Potemkin unions. They're not real unions. They're unions that are setup by management to look like unions. And so, using trade agreements to enforce rights that actually might raise the living standards of working people is another part of the trade agenda that I would go with.

Beckworth: Well, let me go back to the point you made as part of this checklist, and that is the decline in labor mobility and people in regions hit hard by globalization. And there's been a lot of talk in the profession about this very thing. And you suggest bringing maybe production employment to those spots.

Bernstein: Right.

Beckworth: What about giving some kind of subsidy that would allow them to go search for a job? What would be better? To bring industry, somehow get employment in those rural communities or give them funding that would allow them to move away?

Bernstein: Well, perhaps it would be a good idea to do both, but I think the problem that you're facing is that there is a profile of someone who is longterm unemployed in rural America. Where, if you landed them in a city with an unemployment rate of 2%, which there are cities like that, they still would have a great deal of trouble holding down a really remunerative job. And so, I would say that you can't just send people to other places, wash your hands, and think you're done. You can send them to other places, but then you're going to have to make sure that there is employment there, in those places, that will provide them with the incomes they need.

Beckworth: Okay. Well, let's move, in the time we have left, to the upcoming elections. And many forecasters say that the House will turn, or could turn, to the Democrats. What happens to the economic policy if this occurs?

Bernstein: Well, it probably stays mostly gridlocked. It's probably not a very satisfying answer for people, but it's also a very commonsensical one. I mean, just because Democrats take over the House, doesn't mean that the Senate, if it remains in Republican hands, or the White House, are going to bend to the will of House Democrats. But that said, I do have one hopeful prediction, and it has to do with infrastructure. If the Democrats take the House, I believe that in fairly short order they will drop a bill to invest about $1 trillion over 10 years in infrastructure. We can talk about where they've got that $1 trillion, but I can also tell you that there are a lot of House Democrats who are in less mood to talk about paid fores than they were before the Republican tax cuts.

Bernstein: Why do we always have to be the fiscal grownups? Is a question they're asking themselves. Now, I have my own answers to that, but put those aside. So you might say, "Well, okay, they'll have a $1 trillion infrastructure bill. Big deal, why will that go anywhere?" Well, Trump is a builder, and his infrastructure plan was just nothing. It was an asterisk. It really held no water, at all. Their plan, it's public, I've seen it. You can find it. It's a comprehensive plan. It does a ton of different stuff, water systems, the usual roads and bridges, but there's some internet wireless connectivity in there. Really, an ambitious plan.

Bernstein: Suppose they said to Trump, "We're spending $1 trillion, we're going to give you two billion for a wall." Now, I think that's dumb, but it might bring him, and the White House, along. And there are a lot of people in the Senate, a lot of Republican senators, who fear going against Trump. Now, they might fear it less after the midterms than they do now, but they do fear the Trump. And so, it's not out... I would give it a probability that was non-zero, well below 50, but non-zero, that we could see a big infrastructure plan post-midterms.

Beckworth: Very interesting. Haven't thought of that, but that makes a lot of sense given Trump's, as you've said, his interest in infrastructure and building, and his earlier attempts along those lines. What about trade policy though? If you get Democrats in the House, and some of them don't like trade, Trump doesn't like trade, any collaboration there?

Bernstein: It's a great question, David, and I think you maybe onto something. There are Democrats who support Trump's trade policy.

Beckworth: Right.

Bernstein: I mean, Sherrod Brown is one, I believe.

Beckworth: Exactly.

Bernstein: He's in the Senate, of course, but there are Democrats in the House who have long invade against trade policy and trade deals in much the same way Trump has. And so, that probably could strengthen us in. Now, that said, I know a lot of those Democrats, and they feel more like I do than like he does. So it's not like they necessarily believe broad sweeping tariffs are a good idea. What they want to see are trade deals that elevate workers' rights and damper investors' rights. And there, to some extent, I'm not sure that Trump is with them. Now, I said to some extent, because actually in the US-Mexico trade agreement that just came... I mean, the trade framework that just came out, and this is part of the NAFTA negotiations. Bob Lighthizer, who's the current US trade representative working for Trump, took out some of the investor dispute mechanisms that House Democrats and progressives on trade really dislike.

Bernstein: So you maybe right. There maybe more of an illusion there than I realize, and that could be a positive or a negative.

Beckworth: It could go either way.

Bernstein: It could be a negative. It supports more of the sweeping tariff approach that I firmly reject. It could be a positive if it gets us more toward trade deals that elevate workers' rights over investors' rights.

Beckworth: All right. So you've got, potentially, infrastructure, movement, maybe some more movement along trade lines that Democrats like and Trump can go along with.

Bernstein: Well, I can tell you something else. Here's what else would come out of a Democratic House. Remember how the Republican House, every two weeks, would put out a bill on repealing the Affordable Care Act? I think they had 60 of them. And it looked absolutely ridiculous from anybody on the outside, including me. I kept saying, "What are these men and women doing?" It just looked ridiculous, because every time they passed this bill it would go nowhere. And yet, now I realize it was part of a... I should have realized this before. It was part of an obvious strategy to signal to a bunch of voters that they were doing their bidding, and that's what the Democrats in the House will do. They will put up, every week, a progressive bill that will raise the minimum wage, that will be a guaranteed job program, that will be an ambitious infrastructure program, that will push back on a lot of horrible stuff the Republicans want to do on immigration, things like that.

Bernstein: And those bills will go nowhere, but they will send a message, and actually, from my perspective, perhaps a useful one to the electorate.

Beckworth: Okay. One other area I could see maybe some collaboration between Trump and the House Democrats would be on applying pressure to the Federal Reserve not to raise rates as fast as they're doing, right?

Bernstein: Interesting, interesting.

Beckworth: Trump has gotten very political about the Fed, and it's been all talk from my perspective. I don't think there's anything really alarming about it. He's just saying, "Hey, come on now, slow down." And, honestly, from my perspective-

Bernstein: He's just saying what a lot of presidents have thought.

Beckworth: Right. And I think actually, to be frank, what I'm thinking too. I don't want to see the Fed invert the yield curve. I know there's pushback. It's different this time, but nonetheless, Trump has been pushing that view. And then, if you get Democrats in the House committees that, when Jay Powell comes before them, they would be badgering, "What are you doing? Why do you want to choke this heating up of the economy? Let it run. Let's have an experiment." Now, of course, it would go to the Senate side and he'd get grilled from the other direction. But it would be interesting to see if pressure from the White House, from the House, might, at least, give pause...

Bernstein: It's another great point. I'll bet you're right. I'll bet you that if House Democrats win, that the Humphrey Hawk concessions in the House, when Powell comes up there, look different and members are a lot more explicit in telling Jay Powell what they want him to do with interest rates, and not just with interest rates, with governance of the Fed. I sometimes work with a group called Fed Up. Are you familiar with them?

Beckworth: Yes.

Bernstein: So Fed Up works with lots of members of Congress, and just yesterday I participated on a panel where Congressman Ro Khanna was introducing a bill that was telling the Fed, "Go ahead and do your dual mandate, we get it, but when you're thinking about full employment, you can't just look at the unemployment rate. You also have to look at involuntary unemployment, at median wages, at racial differentials on these labor market variables." And so, I think you're probably right about that, but I also think that the Fed is a lot more psychologically insulated against that stuff than people think.

Bernstein: I must say, I did not clutch my pearls and reach for the vapors when Trump said what he said about the Fed, because those are big boys and girls over there, and they're going to run interest rate policy the way they think they should. That said, I think Fed independence is so deeply important in this day and age. And if you ask yourself, just ask yourself, "What institution out there in America, right now, is really functioning really pretty well?" It's not the Federal Government, by a long shot. It's not the Congress. It's certainly not the White House and the presidency. I don't think it's the courts, I'm afraid to say. The Federal Reserve really looks good to me, as an institution that's well functioning. And it's largely because they're independent.

Bernstein: So I'm not saying I don't worry about some of this jawboning, but I think the people at the Fed have to stiffen their spines and just do what they think is right.

Beckworth: All right. Well, on that positive note, our time is up. Our guest today has been Jared Bernstein. Jared, thank you for coming on the show.

Bernstein: Well, thank you for inviting me.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.