Josh Zumbrun on Challenges and Angst Facing the Economics Profession

Trust in the economics discipline has waned in the aftermath of the Great Recession, and there may be multiple driving factors.

Josh Zumbrun is a national economics correspondent for the Wall Street Journal. Josh joins Macro Musings to discuss what seems to be the diminished status of economists in a populist era and what role economists will play in the Trump Administration. Josh also shares his thoughts on life as an economics journalist in the digital age.

Read the full episode transcript:

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: Josh, welcome to the show.

Josh Zumbrun: Thanks so much for having me.

Beckworth: It's a real treat to have you on. With all my guests, I always start the show off by asking, “How did you get into this field,” in your case economic journalism, so what's your story?

Zumbrun: Well, I actually studied economics in college. I had done it because it was the practical thing. I had always wanted to be a journalist. My grandpa used to write these op-eds for the local newspaper and I thought that was the coolest thing. I'd always wanted to do that as a career, but even when I was in college, it was pretty apparent that the journalism industry was in a lot of trouble. It was obvious that the print newspaper was a dying thing and that whatever the economics of internet journalism, were it was clear even 10 years ago that they were much, much worse than the economics for printing newspapers. And it was clear to me that the profession was moving too slowly to adapt to the internet.

Zumbrun: I always wanted to do the journalism, but I had this sense that journalism, as it was practiced at the time was a dying thing. And so I had studied economics as the backup that if the journalism career didn't work out, then I would have this practical, analytical skill to fall back on. 10 years later, the profession is still surviving. I'm still able to work in journalism. And so I've just continued to do it. I got into the economics journalism just because it was a niche where there's a shortage of people that have the interest in the more literary writing aspect of journalism, but also the interest in the numbers side that you need for the economics. There's not a lot of reporters who really have both sets of interests.

Zumbrun: A lot of reporters will make no secret of how much they went into reporting because they didn't like the math. It creates a shortage for that particular skill set. I've ended up in that for almost 10 years now doing economics. It's not necessarily the only journalism that I would have been interested in, but it's just the way it's worked out. It's what's been able to keep me in the profession. So, I've stuck with it.

Beckworth: Well, how do you go about doing a story? You're a columnist now, right? Or are you still a journalist?

Zumbrun: Well, I'm still a journalist, but I don't have a specific beat the way a lot of people do. For a long time, I did. I covered the Federal Reserve for Bloomberg and it was very easy because whatever the Federal Reserve does that day, that's what you write about. And in my current job, I don't have that specific narrow focus. You have to figure out what's an interesting thing and how would you frame it to write a piece about it, write a column about it, what's the new interesting angle or what's the new tidbit or new data that you're able on earth to come out a story that a lot of people have maybe already been writing or thinking about.

Zumbrun: That's the challenge, is figuring out what's new and interesting to say, because most of the things we talk about in economics, they're debates that have been out there for a very long time. And so it can be a challenge. How do you find something new to say about how inflation works or how productivity works? And that's the constant challenge is to figure out what the new and interesting way to tackle those topics.

Beckworth: So, how do you do it? You get up every morning, read the papers, go on Twitter? How do you get those juices flowing in your mind to find the nugget that you're going to do the next story on?

Zumbrun: Well, it almost always flows from the previous stories. You talk to people about some particular topic and you'll come across some interesting thread and you want to pull that thread more. You'll start out and you'll be doing a story about inflation and someone will say, “Well, you really ought to look more at what's going on with commodity prices,” or something like that. Then you'll do a story on commodities and it just flows from there. Every story builds on the base of what you did for the previous ones.

Beckworth: It sounds like though you got to be an intellectually curious person. You got to really enjoy learning, digging deeper and just get a joy out of learning new things.

Zumbrun: Yeah. And that's what I always liked about journalism, was the aspect of being able to get into some issue and learn a little bit about how it works and shed some light on that. Yeah. I think it's a career path that works well for people who are curious.

Beckworth: Yeah. And what about the profession itself in terms of young journalists trying to get in? What would you recommend to a budding young economic journalist? Is there any hope? Is the field getting narrower? What do they do?

Zumbrun: When I started in the field, it was nothing but predictions of doom and gloom. At the time, everyone was afraid that the blogosphere was going to come along and completely supplant traditional news organizations, that you would have expert bloggers in every field who would be more specialized than the journalists could possibly be. And therefore they would be the ones that would get all the news and would interpret all the news and understand all the news and that it would just wipe out the model of having more generalist reporters. In 2005, 2006, that seemed like a really plausible story about what would happen and blogs, they were growing so fast and some of them were developing such huge readerships.

Zumbrun: Then for some reason it didn't happen. The traditional news organizations still had a lock on generating news in the world. If you look at the actual news that comes out of Washington … Blogs still do tremendously good analysis and they do tremendously good interpretation and explanation, but if you look at the scoops that come out, they almost all come out of a traditional news organizations still. And so it's something about the incentives that reporters have to try to unearth a piece of really new information and the fact that those are the stories then that everybody has to link back to, it increases the value of those stories for reporters and news organizations.

Zumbrun: It's actually worked out a lot better for traditional news organizations that most people thought it would. It worked out for traditional news organizations a lot better than I thought it would. I thought 10 years ago that I do journalism for five years and then the industry would probably collapse and everybody would be bloggers. And then I'd use my economics background to go work in banking or something, but it's held up. And so there's still a lot of pessimism out there and it's obviously still a tough industry, but there's a lot more opportunity out there than people would have thought.

Zumbrun: As a young reporter, as a new reporter, if you can find a corner of the world that you can generate news, if you can get to know an agency that not a lot of other people know, and you can find out new things about what's going on in that industry or that agency or whatever it is, there's huge demand for that. It's still something that's very hard to do. So, if you're able to do it well, there's definitely a career path for people who are able to do that.

Beckworth: Okay. Very interesting. Well, let's segue into our discussion today, the main part of it, and that is the challenges and arguably the angst facing the economics profession. You've written on that. And there's a number of observations you've made. I want to begin first with one that I've seen. I want you to tell me your thoughts on it, and this one's a soul searching, maybe even a food fight within the economics profession. One example, there's many examples, but one recent one would be like Noah Smith had an article in Bloomberg View titled, *How to Restore Faith in Economics.*

Beckworth: Let me just read an excerpt from that piece. And it says, “Should you trust economists? For many people nowadays, the answer is no. Economists failed to predict the Great Recession. Their prescriptions, quantitative easing, for example didn't seem to help speed the recovery much. During the past three decades, a lot of their big policy ideas didn't seem to have worked out so well for the economy. And their seeming tone-deafness on inequality and the problems of workers displaced by trade and new technologies often makes them seem like clueless elitists.”

Beckworth: Even the queen of England, I believe went to the bank of England said, “How do we miss this, the Great Recession?” So you have this critique that we didn't get the Great Recession right. Maybe some of our policies haven't been that great. There's been no recent work by David Otter and his colleagues and the China shock. And a lot of the maybe conventional wisdom is being questioned. And so there's maybe this internal debate going on. I'm not entirely convinced that it's an existential threat to the economics profession, but some people are. I'd love to hear your thoughts on this as an observer.

An Existential Threat to the Economics Profession

Zumbrun: Well, first of all, existential threat is a pretty high bar. What's the scenario where we abolish economics because of, but is it a threat? I think it really does go back to the financial crisis. That's where you have to start. What went wrong? And it's a question of what went wrong with the financial crisis? And economists have a lot of different answers to that. One question I always think about a lot there is, this was in a JP Morgan report a few years ago. I thought it was a really a clarifying insight. And it's that, almost by definition a financial crisis type of event, it has to be something that the profession didn't foresee. If people always foresaw that a recession was coming a year in advance, then you would be able to take actions to head it off.

Zumbrun: And so, we've always had recessions. Every economy in the world has always had recessions. And the take away from that JP Morgan report to me is that you're asking too much of a profession to always be able to see the future and prevent them. You can't see all the times that threats were correctly identified and stopped. By definition, you can only see the times that the profession missed something. And so it sets it up for a very unfair bar. There's just no way that you can possibly prevent every bad thing from happening because I think economists don't get any credit for the successes.

Zumbrun: Now, that said, the bigger problem that I think happened around the financial crisis is that a fairly, I think it was a small part of the economics profession, really got overconfident about what they were able to accomplish. They really allowed the belief to develop, that economists have the tools to prevent a bad recession from happening again. There's this view that because of the success of economic policy, we're in this great moderation. The great moderation was what everybody talked about back in 2007. And if you looked at the last 20 years of data, it seemed like a plausible thesis. After the recession in the early 1980s, there'd been two expansions that almost lasted an entire decade. There'd been a fairly mild recession in 1991, a very mild recession in 2001, then another six years of growth.

Zumbrun: And so you'd had a quarter century where you'd had two short recessions and a lot of growth. And the mistake, I think a lot of economists made was some of them, and I think it was a minority started taking credit for that. They started taking credit for it too much. They started letting the idea grow that Alan Greenspan and the Federal Reserve accomplished this and that listening to economics is the reason this happened. And so, I think that was really the original sin here. And if the view had been we've had a very good stretch, we don't totally understand what happened. We think maybe we can get more stretches like this in the future, that was where the actual economics was. There was no real basis to believe that there wouldn't be recessions or severe recessions again, in the future. It was just the observation that we hadn't one for 25 years.

Zumbrun: So, if some people in the profession hadn't allowed that expectation to build that they were the ones that had caused this to happen, I don't think the blow back would have been nearly as severe. You can imagine an alternate world, I think where maybe a sociologist or something said, “Oh, we're the reason that there hasn't been a recession of 25 years,” and everyone started to believe that. And they started to put sociologists on the cover of Time Magazine calling them the committee that saved the world. And then you had the recession and everybody would have been mad at sociologists, but it wasn't the sociologists that did that. It was the economist that came out there and said, “We we're the ones responsible.”

Zumbrun: And they posed for the photos on the front of Time Magazine. And so when the crisis happened, there was a lot of people all over the world who had always been skeptical that economists knew as much as they said they did and were eager to have that come up it's moment. In 2007, in 2008, when it became clear that the economy was in recession, you really started to see a nasty backlash from people who felt like the economists had gotten too high on their hog and were really trying to take them down a peg.

Beckworth: Yeah. There's been a lot of talk along these lines about heterodox views coming into play or reconsidering mainstream views, but from where you sit, does it seem that mainstream economics is still dominant? For example, the Fed is still run by a similar vision that it was maybe before the crisis, there's new tools, new thinking. There hasn't been a serious revamping of how we do economics. Is that right?

The Dominance of Mainstream Economics

Zumbrun: I think that's right. That's certainly true when you look at the major institutions. That's certainly true when you look at the Federal Reserve. The top staff economists there, most of them have been there for 10, 20 years. And so they're the people that had the, they had the same backgrounds that they did before the crisis. And obviously Janet Yellen herself is a figure who she'd been a Fed governor in the 1990s. She was a San Francisco Fed president during the financial crisis. She's certainly someone who was there before and has had the kind of perspective that was there before. They definitely haven't overhauled the way they approach economics.

Zumbrun: I think one thing to keep in mind is that it's certainly true that the economics profession, they didn't predict that the Great Recession was going to happen the way that it happened. They weren't able to take actions to prevent it from happening. And of course, like I said before, if they had taken actions to prevent it from happening, we never would have known that they did it because it wouldn't have happened, it would've been a big major news story. Anyways, so it's clear that the economist did miss something. I think that the thing that's not clear is whether there's some other field or some other approach that would have foreseen all these things and that if, “Oh, if we just switched to this perspective, then we wouldn't have those types of recessions. If we just switched to this perspective, we wouldn't have these kind of forecasting errors. If we just switched to this perspective, we wouldn't have allowed free trade to cause a devastation in rust belt communities.”

Zumbrun: It's never been obvious to me what that alternative perspective is that gives us a better ability to predict and control the future. I think that's why the current strain of thought still dominates at the Fed, is because although people have been able to point out the things that economists have missed, I don't think anybody's been able to come in and articulate this is the clearly superior way to approach these issues. And so the Fed keeps operating the way it has operated because it knows it's not a perfect system and there's certainly a lot more humility at the Fed. They no longer go around claiming … There's no longer the confidence that there was in the Greenspan era that we've really got everything under control.

Zumbrun: Did they have an idea of what the better approach is? They don't know what the better approach is yet. They are still using the old approach. They know it's not a perfect approach, but they don't know what that perfect approach is. I think that's basically why we still have the same economics as before the crisis.

Beckworth: All right. Well, let's move from the soul searching from within the profession to some of the maybe external challenges facing it. And you've written on this. Let's move to an article you wrote for the Wall Street Journal. Was titled, *Top Economists Grapple with Public Disdain for Initiatives they Championed.* Tell us about that article, the context. What problems does it present for the profession?

The External Challenges Facing the Economics Profession

Zumbrun: Well, every January, a lot of the academic, almost the entire world of academic economists goes to this conference called the American Economic Association Annual Meeting. And it's a fascinating conference because it serves a couple of different purposes. One is that it's where economists will present a lot of the big research projects they're working on. You go to this conference and the top academic economist in the world will present these really fascinating presentations on their cutting edge research. The other thing that happens though, is it's a giant job fair. It's where almost every new PhD economists, they finish their PhD and they go to AEA to job hunt. It's probably a process you went through. Right?

Beckworth: Yeah, I did.

Zumbrun: It's typically the first week of January because that's one of the cheapest weeks to do a conference. And they often put it in very cold cities. And this year it was in Chicago because they're even cheaper. It's really cheap to book first week of January conference in Chicago is below freezing this year. Anyway, the kind of theme that dominated all these discussions, it came up in everything, you could be discussing a topic that had very little to do with politics, but all the discussions would come back to this grim gallows humor that it wasn't clear that anyone in Washington cared anymore. And the reason for that is simply that the backlash against economists really, it really caught on especially in a lot of more conservative policy circles.

Zumbrun: And so when Donald Trump caught fire, one of the issues that he had was this anti-elitism. And one of the ways that that anti-elitism has really manifested itself, is that Trump just does not surround himself with professors of any sort. It seems to be an approach to the world that he doesn't find interesting or impressive at all. And so there's just none of these people in his orbit. During the presidential campaign, I think it was August or September, something like that, he unveiled who the people were that were advising him on economics. And none of them were PhD economists, except for one person. Peter Navarro was the only actual PhD economist on his economic council.

Zumbrun: And Peter Navarro is an economist who has views, especially on trade that are very heterodox in the economics profession. He views trade deficits differently than almost every other economist. And so basically the only economist that Trump was listening to was someone who wasn't really in the mainstream of the profession at all. And so typically, AEA would have a panel each year where they have Republican and Democratic people who had served on the Council of Economic Advisors talk about the policy environment. And this year there was just nobody to represent the new administration on that panel because there's just no economists that are really in the circle anymore.

Zumbrun: And so you add the fact that literally no economist, except for Peter Navarro is advising the president in any ongoing way. And you add that to the angst that people were already feeling about all the blow back they'd gotten in 2008, it reopened that wound from 2008. And so, it just dominated everywhere, economists really wondering like, “What's the point of this?” A lot of people I think go into economics because it looks at social problems and tries to come up with a real analytical framework to address those problems. A lot of economists view the field as a very practical field with real world impact. That's part of what they find appealing about it. And some of them look down their noses a little bit, maybe at English professors or something who they, and I don't know if you're one of them then, I don't mean to imply or disrespect you-

Beckworth: No, no. Hey-

Zumbrun: I don't mean to imply you disrespect your colleagues who are English professors, but there is this view that economics is like a real world discipline. And when they're no longer a part of the real world policy making process, it really challenges the entire reason that a lot of people got into economics in the first place. We're trying to solve these social problems and nobody cares about the work we're doing in Washington. It really does create a crisis of confidence. And so you saw that, just all over AEA this year.

Beckworth: You sense the mood in the air then?

Zumbrun: Yeah.

Beckworth: Interesting.

Zumbrun: Well, I mean mood in the air, it was just literally every conversation literally turned to it. Every panel would include mentions, and you talk to people over coffee, outside the sessions, and it was just really at the forefront of so many people's minds.

Beckworth: Did you get that sense also from the graduate students looking for jobs? Were they worried that maybe job prospects wouldn't be as readily available?

Zumbrun: Well, I think, I don't know if I'd go that far. The grad students themselves don't have as long of a view on things. And of course most of them just really want to … They're not quite at the point where they've been working on an issue for 20 years and suddenly nobody cares, and they're deeply disillusioned by that. It is a little different.

Beckworth: Okay. A little different for them.

Zumbrun: A little different for them. If they come out of there and they get a tenure track professor job at a big university, they're happy. They'll worry about the rest of that in 10 years, when they had to work to publish all this work to get tenure and nobody reads it.

Beckworth: Right. Well, let's go back again. And some of the disillusionment is because of the treatment or the approach like you said, Trump has given to issues, it does not include economists. You mentioned the CEA, the Council of Economic Advisors. In the past, the chair of that has been a cabinet level position. And he actually demoted that. Is that right?

Zumbrun: That's right. There was some talk. There were some stories that came out in January, February that the administration was even interested in not having the CA at all or not filling the position. Those stories ended up being a little overstating the case. What ended up being true, I think we were the first to report this, was that Trump wasn't going to put this Council of Economic Advisors in his cabinet at all. Now, being in the cabinet is kind of a formality. What really matters isn't whether or not, this is actually something that Jason Furman told me who was the chair of the Council of Economic Advisors for Obama. He was on your podcast just recently.

Zumbrun: One of the things he said is, “It doesn't really matter if the position is in the cabinet. What matters more is that you have someone who has this perspective and the president is listening to that person.” And so in that sense, there's still reason to be concerned from that perspective because the CEA has been demoted from the cabinet, but it's also unfilled. There's no one in the job, they still haven't nominated someone for the job. We've reported and other people have reported that they're considering Kevin Hassett, who is an economist at the American Enterprise Institute, used to work at the Federal Reserve. He's a PhD economist. Has a long track record is being considered for the job, but no such appointment has come through.

Zumbrun: And so for now, it's more than two months into the new administration and there's still no economist in that job providing advice and helping provide the president with the perspective of what do we know about economic topics.

Beckworth: Right. So, the president has put down the CEA or put it in the less important position. Also, I think it's the fact that he's taken a very unorthodox view toward trade, which goes against standard trade theory by the profession. Probably also is disillusioning for many of these economists. And then immigration as well, the approach he's taken in immigration. All of these views run counter to maybe mainstream economics. I guess that's some of the … We've worked all these years, we've taught all these students, published all these articles and this is what we get?

Zumbrun: Yeah. Well, and the criticism on a lot of these is pretty overstated. The view of economists on free trade had always been that the games to society from free trade would be larger than the costs to society from free trade. And the view was never, as far as I know, very common that every single person in the society would personally benefit from free trade and that nobody in society would be harmed by it. And in fact, most of the work on trade suggested that if you did free trade, you would want to have something in place to help ameliorate what happened to people who suffered under free trade.

Zumbrun: You think of the example of a factory that closes because the kind of work goes overseas, or maybe because it gets partially automated, the standard prescription of economics, I think always would have been that there's going to be gains to the country as a whole from that. And you need to make sure that those gains are in some way filtered back to the people in the factory that just closed. And that was always the economics prescription. Policymakers just didn't follow through on the second part of that. They put in place the trade agreements and they just did much less on any follow through for the people that were affected by that. There was trade adjustment assistance, and there was some programs like that, but it's clear now and a lot of people, I think at the time always argued that those programs were insufficient for the amount of displacement that was occurring.

Zumbrun: A lot of times economists get criticized for things like this that are actually not a shortcoming of what economists had thought, but they're a shortcoming of a vice from economists actually getting implemented by policymakers. Economists have had a lot of influence, there's no doubt about it. Economists, I don't think there's any in Congress. I don't know. The presidents have sometimes listen to economists, but they're not the only people that presidents listen to. The policy that we've actually had in the real world is influenced by economist, but it's not like economists set all the policies that are out there. And therefore, anytime something goes wrong in society, it's the fault of economists.

Zumbrun: I think that's part of what has been missed in the trade discussion. Blaming economists for what happened with trade as opposed to the way the political system incorporated economics, those are two pretty different things. And if what happened was that economists got it wrong, then maybe you should demote all your economists. If what happened was that the political system didn't work really take on board the full advice of economist, I think people ought to think a little more carefully about whether or not that's the nature of that mistake. Is that a fault with the economics profession or is that some kind of failing of the political system?

Beckworth: I completely agree. And as a former economics instructor, I can tell you firsthand when you teach, comparative advantage trade theory, you always do highlight that there are going to be losers and winners overall that there's net gains, but trade does affect certain industries, certain workers adversely. There's no getting around that. I think you're absolutely right. That message has always been there. I think probably some of the recent emphasis by David Otter's work with his coauthors that the China Shock that some of the pain was larger than we thought, but that's maybe to be expected, given China was so big and it came into the world and that's a onetime event too, that's the other thing about China.

Beckworth: I would also mention about some of this trade theory critique with Otter's work in China, even though it's a nontrivial effect, they find it's large compared to what we thought we might've found, it's still small compared to the losses of manufacturing jobs coming from automation and a number of commentators that have noticed. Even Paul Krugman said, “Look, yes, Otter's work shows that a lot of manufacturing jobs, the industrialization of American economy has been affected by trade, but a more important factor has been automation.” In some sense, maybe trade just hasted where we were going in any event. We don't want to lose sight of the bigger picture and just blame trade theory and comms for that.

Beckworth: But nonetheless, it still has created this angst, going back to the bigger point here that people are for better, for worse pointing the fingers at economists or Trump is pointing his finger to economists once they'll do with them. That's the first critique. You've also mentioned another challenge though that Trump has presented for economists and the way they do analysis. And that is the use of data and facts. You have an article titled *Senate Democrats Raise Concerns About Labor Department's Data Under Trump.* And I think you've written other pieces as well. Let's speak to this issue. What are some of the concerns economists have with the way the Trump administration is using data and numbers in their own analysis?

Concerns over the Use of Data in the Trump Administration

Zumbrun: Yeah. This is another key source of the angst right now in the profession is that economists have worked. There's a whole field of economics that really focuses on these measurement issues. And they've worked really hard and they've thought for decades about what's the right concept for unemployment and how do we measure it and how do we measure all the different kinds of unemployment? And one of the things that Trump always came back to on the campaign trail, was the idea that these measurements were all phony and the real unemployment rate was 42% and the subtext, and sometimes it was explicit. And sometimes it was just implicit was that somebody in the Obama administration was manipulating the numbers.

Zumbrun: They would maybe go out and run the survey. And the survey would reveal the truth that 42% of people are unemployed and they labored a core department. Economist would sit down in a Star Chamber type room and they would say, “All right, we want to get Obama reelected. We're going to lie. And we're going to say the number is something else.” And this is not at all what the process is like at these agencies. They feel these really big surveys and they sit there and they tabulate it all up. And the kind of conspiracy theory version of it, it's so implausible. To take the unemployment rate as an example, the survey is actually fielded by the Census Bureau.

Zumbrun: The Census Bureau is the one that actually goes out and conducts the survey that's used for the jobs report. And then it's the Bureau of Labor Statistics, which is in a different department that processes that information into the report. But then shortly after the Census Bureau actually releases the raw version of its surveys, the micro data. An economist can go, “You can go in there if you're interested in doing so and you can go in, you can take that micro data, you can process it yourself and calculate all the unemployment rates that the BLS produces.”

Zumbrun: So, in order to have the kind of conspiracy that's been alleged on the jobs report, you would actually need economists in the Census Bureau and the Department of Labor to get together and collaborate to manipulate the numbers at an individual response level. There's 70,000 responses, and you'd need to go into that sheet with 70,000 responses and alter all of those numbers and send that up as the document. The government is not that capable of collaborating on anything. The idea that they're sitting around with this inner agency data manipulation process, there's just no way that this could go on.

Zumbrun: And certainly the economists who actually run this stuff have been doing it for 20 or 30 years, but nobody's interested in the actual process and they don't totally understand the differences and all the different numbers the Labor Department puts out. And so when someone comes out there and says, “The current incumbent administration is trying to take credit for a really great economy.” But you know it's not great, you feel that in your everyday life that it's not great. People are very receptive to that message.

Zumbrun: In fact the Labor Department has gone out of its way to report a lot of different ways that you might think about unemployment, should you only include people who are actively searching? Should you include people who have gotten discouraged for whatever reason and they'll tell a surveyor that they want a job, but they're not actually out there looking for one, should you include those people? Should you include someone who, they have a part-time job, they have some money coming in, but it's not the job they want? Should you include that person as unemployed?

Zumbrun: And so the Bureau of Labor Statistics has been producing all this data all along for all these different ways you might want to look at it, it's easy to take shots at them for it. And in the past there have always been people who have said, “Well, you really ought to include those part-time for economic reasons.” Those are clearly people who want a job that they don't have. That's a clear example of someone who's dissatisfied with how the labor market is working out for them.

Zumbrun: And what happened with Trump is there was kind of nobody there who was telling the president, or if they were telling him he chose to ignore it, who was saying, “Look, the statisticians are measuring all these different ways and we can focus on different numbers, but they're not sitting around making up concepts and making up new concepts and that message never got through. And so I think that was deeply discouraged. It's profoundly discouraging for the people that work in statistics to sit there, carefully document their stuff and put out the individual responses so you can double check it and the methodology is so carefully explained. It has been worked on for decades and it's been deeply discouraging for them, how easily all that work has just been completely ignored.

Zumbrun: And largely because of kind of these things we were talking about earlier; missing the financial crisis or getting wrong the effects of trade. Those were not faults of the people that work in economic measurement and yet suddenly they're thrown out with the rest of the bath water.

Beckworth: It's a full frontal assault on the professional or parts of the profession. I think it's telling that the White House press secretary, Sean Spicer said after the last job report because he was asked about this very issue, because they were praising it. They're taking credit for last month's relatively robust got job numbers. Spicer said that, “Trump says job reports may have been phony in the past, but they're very real now.” And he laughed. He laughed about it. It was kind of a joke that, “Yeah, in the past that those numbers were phony, but now we buy them.”

Beckworth: At one level this is just a politician picking and choosing what he wants. But I think it's maybe even a little more than that. It's gone to another level because that got 42%, I look at number up. How did he even come up with 42%? He read it somewhere, someone else has concocted this total number of potential hours, able bodies could work, actual hours worked, very crude non-official calculation.

Zumbrun: Well, if 42% is also just the number of people who are not employed. It's true that 42% of people over the age of 16 are not employed, but that's because you're including my 89-year-old grandmother. It's true, my 89-year-old grandmother does not have a job, my 89-year-old grandma, she has no job whatsoever. But it's kind of ludicrous to think of someone like that as unemployed. That figure also includes college students, high school students. When I was 17, I was also unemployed, I was going to high school all day and I didn't go to work afterwards. Obviously that's not a very useful concept of unemployment.

Zumbrun: Anyway, I think there's kind of two things that you can make of that comment, the more charitable interpretation is that the previous criticism was, it was just campaigning and this isn't actually something they plan to make a big issue of. And so far there's no evidence that the Trump administration has tried to interfere with any of the data collection processes. The other interpretation is that the comments like that, they further undermine people's trust in the system and further undermine the work that economists do and make it all up here political. I think the funny thing about it is that those numbers come from the Labor Department.

Zumbrun: Trump hasn't put a single person in the Labor Department yet. His initial nominee fell through and the second nominee hasn't gone through yet, and they haven't appointed a commissioner of labor statistics yet. So, the people doing these numbers are exactly the same as the people that were doing the numbers before, it's not like they've changed.

Beckworth: But now it's not phoning.

Zumbrun: They've changed no personnel, they've changed no process. But now they're real.

Beckworth: Well, I guess in an encouraging note, the Treasury secretary, Steve Mnuchin, he is using those numbers too. You have article that highlights this. He's using a broader rate indicator. I think it's a fair point looking just at the standard unemployment rate, you miss a lot of stuff. And so he's looking at broader measures, labor force participation rates. You wrote about this. I guess there is some silver lining here, and maybe that Trump may say some bizarre, interesting things, but his senior administration officials are taking a more nuanced look.

Zumbrun: Yeah. This came out on Mnuchin's confirmation hearing, where he was asked about, comments that had been made, the numbers are phony and all this stuff. He said, “Well, look.” He made the argument that a lot of economists have made, that the main headline on unemployment rate, what you just said, it misses a lot of things. And what we ought to do is look at these broader measures. The one he kind of highlighted is the unemployment rate, which is known as U5, which includes people who, they're not actively looking for jobs, but they tell the survey collectors that they'd like to have a job. And they've just given up looking because they're discouraged about their prospects in the labor market.

Zumbrun: That's a pretty reasonable thing that we ought to think a lot about those kinds of people. If you're talking to a family member and you're talking about kind of your Uncle Bob who lives on the couch and you said, “Oh, what does uncle Bob do?” And someone says, “He's unemployed.” It'd be really weird to say, “Well, he hasn't actively searched for a job in the past month.” “He's not unemployed.” It's like, “No, he lives on the couch. He's very much unemployed.” That's how people use the term unemployment. And that's really kind of what they're arguing ought to be the standard here. That's a very reasonable kind of debate to have. The Labor Department for a long time has put out numbers that allow you to look at it that way.

Zumbrun: And so, if that's the approach that's taken, that would be reassuring for a lot of people because there is data collection on this, and we think we understand how to do it. And if the only thing that comes out of the Trump administration is we end up focusing on a couple of different labor measures, that's okay. Most people think that's okay. And the concern is that it would always be just cherry picked to whatever favorable, and there'll be no sense that anything is done for any reason other than political gain. Right now, it could still go either way, but there is the angst in the profession that it will go the bad way.

Beckworth: Well, let's hope it goes the right way. Well, let's move on to another issue that's caused angst for the profession, particularly for monetary economists, macroeconomists, Fed officials. And that is what causes inflation? You had an article in December, 2015 titled *The Mystery of Missing Inflation Weighs on Fed Rate Move.* Can you tell us about that and maybe give us an update on what we've learned if we've learned anything since then?

The Enduring Inflation Mystery

Zumbrun: Sure. Well, this is one of the examples, I think, where economists know that they don't quite have this answer right, but nobody has quite figured out what the alternative is. So, since the financial crisis happened, the Fed responded, they lowered rates to zero. They launched all this QE. A lot of the people who were, especially people who were so hard on the Fed for having kind of missed the financial crisis came out there and said, “This is going to cause hyperinflation. This is going to cause a gas prices to go to $10 a gallon. And this is going to cause gold to go to $10,000 an ounce. And the US is going to turn into Zimbabwe.” We used to talk about Zimbabwe all the time, that the US was going to turn into Zimbabwe.

Zumbrun: The Fed said, “No, we don't think that's going to happen.” So, it's an example of the Fed got something wrong and then the critics came in and said, “Well, the Fed got it wrong in the past and they're going to get it wrong this time too. And we're going to have hyperinflation.” And so like actually the critics here who came in with the hyperinflation, they did even worst job in the Fed at forecasting. The idea that we had to switch to the framework behind whatever predicted hyperinflation, it's probably fair that the Fed doesn't find that persuasive, but the Fed did get its inflation forecast wrong. They did get it wrong. They have pretty consistently for the past seven, eight years now predicted that they were just about a year away from 2% inflation.

Zumbrun: What's happened for the past, basically that entire period, is that the trend in inflation has been below that and it didn't move back up the 2% on anywhere near the sort of timeframe they were predicting. It's kind of the question of how did the Fed, because supposedly theory predicts, a lot of people have a framework that the Federal Reserve is the ultimate thing that controls inflation. And so they ought to be able to control it pretty tightly. And if they have the right policies, they ought to be able to get inflation to 2% pretty easily. And they just weren't able to do that. It was coming in soft. The economy was coming in weak and it raised a big of soul searching about why could the Fed not execute policy the way everyone thought it would.

Beckworth: Yeah. And you have a great quote in there. I want to read from your article because it mentions Janet Yellen. And it says, “The Fed's poor record of predicting inflation has set off a debate within the Central Bank over the economic models used by central bank officials. Fed chairwoman, Janet Yellen, in a 31-page September speech on the subject acknowledged, “significant uncertainty” about her prediction that inflation would rise. “Conventional models,” she said, “have become a subject of controversy.” So even Janet Yellen was doing some soul searching about what really is the process through which … If I might step in here the Federal Reserve, I think kind of their dominant view of the inflation generating process is related to output gap or economic slap. The Phillips Curve. And there are some questions about that. Why hasn't this Phillips Curve? Why hasn't the amount of slack in the economy led to more disinflation? One question is why can't they hit 2%? Others have asked, “Well, why haven't we seen even more disinflation given the slack that was around after the crisis?

Zumbrun: Right. There was three predictions after the financial crisis. The one was that the Fed is doing this stuff it's going to cause hyperinflation, the Fed's view was that, we can show inflation tightly. We want 2% inflation. We're going to get back to 2%. The other view which comes from this more kind of Keynesian version of thinking about things says, “That there's a huge amount of unemployment right now. That's going to put huge downward pressure on prices that we're going to end up with deflation or a deflation spiral.” That also is kind of what happened in Japan, is that Japan had a big financial and a bubble and it burst and they took rates to zero and they tried QE, but their economy was in a deflation trap.

Zumbrun: And so those were kind of the three predictions and all of them were wrong. All of them were wrong. What happened was the inflation was positive, but persistently under the Fed's target. And this is part of the challenge of economics is that nobody really had come out there early in 2009, 2010 and said, “This is what's going to happen.” And so when they tried to say, “All right, what framework should we have?” It's not like there was one framework, I don't think there was a framework that predicted the outcome that we got. And so it makes it very hard for them to figure out how to change their models. Yes, they got it wrong, but what's the right? They don't know.

Beckworth: Well, I have my theories as you know. I don't want to get into my theories extensively here. I do want to mention along these same lines, your paper had another article, not written by you, but one of your colleagues, come out just recently and it was titled, *Everything the Market Thinks About Inflation Might Be Wrong.* Which further adds to this discussion about what really is driving the inflation process. And it was based on an article that was presented recently at the US Monetary Policy Forum. And this article reinforce with more rigor that this point that the output gap, inflation expectations, even money growth are not tied to inflation. Statistically they confirm what Janet Yellen was saying in her speech.

Zumbrun: Yeah. In the view that I think a lot of economists at the Fed are coming around to on the basis of this paper and their experience of the past eight years, is that the Fed policy doesn't vary, it controls the inflation rate maybe over some sort of medium or long-term, but did they have very little ability to kind of fine tune over the course of the next year or the next five years or something like that? They've really lost faith in the idea that they have the ability to control things very tightly. I think a lot of people and especially in models, it makes a lot of sense to think, “Okay, if inflation is 1.7% and our interest rate is 1% maybe we can lower our interest rate by a certain amount and that'll push the inflation rate up by a certain amount.”

Zumbrun: That kind of thing works really well in a mathematical model. And just doesn't seem to work at all for the Fed in actual practice that it's not a real clean process. And so they're starting to think about, “Okay, what are these other factors that can knock us off our target for years at a time?” So, there's paper at the Monetary Policy Forum looked at the effected demographics, there seems to be a lot of international experience now to suggest that a country with aging demographics has a lot of trouble getting its inflation rate going the same way it used to.

Zumbrun: Another factor that's really interesting is just the role that international price setting appears to play in this whole process. You actually wrote a paper recently about how much of global monetary policy is kind of determined by the Federal Reserve that like the Federal Reserve ends up kind of exporting US Monetary Policy to a huge part of the world. And I don't know if you would draw this conclusion, but I read that and I thought, “Man, if that's right, and I think it certainly is right then you have to think that what matters when the Fed's sets policy and you think about its economics affects, you want to think about the labor market and the output gaps that you might have in this entire block of countries that the Fed is setting policy for.”

Zumbrun: The Fed has historically just focused on the US inflation rate and the US unemployment rate. Those have been the primary kind of targets of policy. But if you're actually setting monetary policy for 70% of the world … I think that was the figure in your paper, right?

Beckworth: Right.

Zumbrun: If you're actually setting monetary policy for 70% of the world, you probably have to figure out a way to look more rigorously at what the economy is for the entire part of the world you're setting monetary policy for. It could be the case I think that one reason that the Fed has been unable to get their inflation forecast right over the past five years, is that they were kind of trying to calibrate things off the amount of slack in the US economy and how that slack would impact prices in the US economy. And maybe they needed to be looking at the amount of slack in that entire global block and how that was affecting prices that a lot of prices that are set internationally. That's one version of the thesis that people are starting to talk about, that's not just the thought that I've had.

Zumbrun: The new president at the Dallas Federal Reserve, I think has talked about the fact that maybe we need to think more carefully about what's going on globally and how the monetary policy, and how the economy was affected by these global forces and it just another thing that the economist at the Fed they clearly know that they don't have this perfect yet and they just haven't figured it how to quite get it right.

Beckworth: We could spend a whole podcast discussing that very issue. One of the challenges the last point you made is, of course the Fed's mandate is domestic and has a hard time thinking beyond … There's been a few, Governor Brainard, has often discussed the international role the dollar in international perspective, but it's very hard for them to think outside US borders. It gets complicated, but that argument you've made that maybe we should look at the global output gap as opposed to the US has been made by some. I think there are other reasons. Again, for the sake of time, I can't get into right now.

Beckworth: I do want to stick to this theme of economic angst, one last topic that you've written on, and that is both good news and bad news, but I think it still creates some confusion or uncertainty for economics. And that is this recovery we've had. You've written the third longest recovery on record, although it's been some weak growth associated with it. Tell us about that record.

The Long Road to Economic Recovery

Zumbrun: It's an amazing statistic really. It's been such a crummy period by most metrics. Unemployment was really stubbornly high at the start of this recovery and obviously the recession itself was the worst we've seen since the great depression, a lot of economists argue. It's been a fairly bad economic period, but it's now been a really long time since that recession ended. It's amazing that the recession, the financial crisis really started in 2007. It really started a decade ago. And we're still thinking about the economy largely in terms of this event, that's 10 years old now.

Beckworth: It's hard to believe.

Zumbrun: You don't typically stay stuck on one event for such a long period of time. And it's remarkable when you look at US history to see that this is now, yeah what you just said, this is the third longest time that we've gone without some sort of mild recession or without some sort of stumbling back. These records go back to the 1850s, and this is the third longest growth stretch we've ever had. And so it says something really interesting about what's going on with the economy. But nobody knows really, exactly what it is or how to think about it because going back to what started this all, the ability to predict turning points is still one of the things that economists, they just can't quite do.

Zumbrun: And so no one really knows what to make of this. And I think it's a really interesting question. Does the fact that this recovery has gone on for so long, does that kind of excuse the slowness of it, that we've got to go a really long time without a renewed acute relapse?

Beckworth: Slow, but steady as opposed to more rapid growth?

Zumbrun: Yeah.

Beckworth: It's interesting. I've run into a number of people who asked me because they know I'm an economist. Is it time for the next recession? Because they hear these anecdotal stories. Well, we've gone long enough historically we should have had a recession or coming up on a recession soon.

Zumbrun: And the stock market too. The stock market now has been rising for eight years. It was over eight years, March, 2009 was when the stock market bottomed and now we're in March, 2017 and we're still in a bull market. I think it's the second longest bull market in stocks, which man, talk about an opportunity for investors, but how long can it possibly last? And these are questions that economics doesn't have an answer for, but neither does anybody else.That's the theme I keep coming back to is that it is clear that economics doesn't have the answer to a lot of these questions about what's going to happen in the future.

Zumbrun: And the problem is that nobody else has better answers. There's nobody else who can tell you when the market is going to crash and if there were, would the market even still crash? So, it's not even clear that the kind of future predicting that people want is even possible.

Beckworth: Which tells me I'll have a job for a long time then. Thank you, but it was interesting. I do want to mention one last thing about this conversation. It is so green or almost awing when you think it's been a decade. I recently filled in for someone and taught a class in economics, undergraduate class. And I was talking about the great recession. In my mind, it's fresh. These students were like 10 years old. Some of them, 11 years old, 12 years old and they don't remember, they don't recall it. And I was asking, “Do you not remember your parents struggling or having some hardships?” Most of them had no recollection other than maybe what they've heard or read. For them, it's not a vivid memory. It shows how long we've come and how old maybe I'm getting too.

Zumbrun: Maybe it's more of those people get into the labor market, kind of all these… Yeah, all these anxieties will fade. It's like the new graduate students in economics. They don't quite have the anxieties because they haven't been around long enough. Maybe that's how we kind of regenerate as a society, is we wait for the new young people to come along and I don't remember any of this and then we can do it all over again.

Beckworth: Okay. Well, our time is up. Our guest today has been Josh Zumbrun. Thank you, Josh for being on the show.

Zumbrun: Thanks so much for having 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.