Dr. Bruce Yandle's December 2023 Economic Situation Report

Bruce and Patrick discuss trends from 2023 and what's in store for 2024.

On this episode, Patrick McLaughlin, a Senior Research Fellow and Director of the Regulatory Studies Project here at Mercatus, chats about the latest economic situation report with Dr. Bruce Yandle, who is a Distinguished Adjunct Fellow here at Mercatus. They discuss interest rates, rising household wealth, growing debt, and much more.

If you would like to connect with a scholar featured on this episode, please email the Mercatus Outreach team at [email protected].

Check out Bruce's report here.

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please send us an email.

PATRICK MCLAUGHLIN: Welcome to the latest episode here. I'm Patrick McLaughlin. I'm here once again to discuss the latest quarterly economic situation report written by Bruce Yandle, who is also, of course, my guest today. Bruce, once again, it's my pleasure to be hosting you here today.

BRUCE YANDLE: Delighted to be with you, Patrick. We have just plenty to talk about.

MCLAUGHLIN: We do indeed. As always, I find your quarterly reports interesting. In fact, for me, it's one of my best ways to keep up with a lot of the macroeconomic issues that really everyone should be keeping up with.

YANDLE: Thank you.

MCLAUGHLIN: Let's jump right in. Here we are approaching the end of 2023. Can you summarize what happened during this year's economic rollercoaster?

YANDLE: Right. I would say if I were looking for one word, key words, two come to mind, turbulence and resilience. We heard resilience used a lot in describing our economy, but I think to put a handle on the year, we need to go back a bit to some major thrust shocks that were hitting the US economy as we got to this year, 2023. Two of those I want to mention. One is we were still coming out of COVID effects, supply chain disruptions, shortages of inventories, particularly automobiles and things related to them. Then to counter COVID, our economy had been shocked with a lot of cash. Close to $1 trillion had been shipped out in 2020, 2021.

In a sense, we all got those checks in the mail and a lot of businesses received payday protection plan money, so a lot of new money was washing through the economy. At the same time, we get other shocks on the supply side. We get the war in Ukraine that gets going really hot, very painful, but particularly painful in an economic sense in terms of what it was doing to energy prices and slowing down European economies, which then transmitted something to the US economy. By and large, the US is in good shape on energy, but the rest of the world had some interruptions that affected us.

We had an economy then starting in January, February, March, not at a very exciting pace in terms of GDP growth, a little better than 2%, and we were bouncing along with the forces that I just described. The Fed had been hitting the brakes, trying to counter inflationary forces that had been caused, I would say, primarily by the huge amount of money that got washed into our economy, chasing a limited number of goods. The Fed was hitting the brakes, interest rates were going up, so that during 2023, we saw mortgage rates move up from a little better than 6% in the first of the year, to as high as seven and three quarter. By the way, it's down below 7% now.

As the economy moved along, as we approached the third quarter, things began to accelerate, and that's when what had been turbulence began to be described as resilience. Even though the Fed was attempting to slow things down, the economy was surging with retail sales growing, employment looking good. When we looked at the year in terms of key data, we saw that for the year, GDP growth turned out to look pretty good contrary to the recession talking expectations that we had all been engaged with as the year was progressing. We had no recession.

We had an economy that seemed to be getting up on its feet, trying to gallop, very strong GDP growth in the third quarter, and unemployment stayed low, and so 2023 turns out to be a pretty good economy. Inflation is down, growth is up, employment is good, and then there is still the Fed hitting the brakes. Now, they have taken their foot off the brakes. We now have a new economy in the sense that we always do, that we will try to sort out as we look ahead to 2024.

MCLAUGHLIN: Let's go ahead and look ahead a little bit, if you don't mind. You mentioned the Fed taking their foot off the brakes. They've, I think, predicted three cuts over the course of 2024 to the interest rate.

YANDLE: That's right.

MCLAUGHLIN: That's one thing we can anticipate, but the other thing I wonder if we can anticipate is, you mentioned all of the part of the success being generated by pandemic-related and other government stimulus payments. Does that carry over to 2024 as well?

YANDLE: Yes, it does, Patrick. I think part of the strength that we were seeing in the third quarter data will not look quite as pretty when we see fourth quarter data for this year, but part of that strength is coming from large expenditures included in what's called the CHIPS Act, an effort by the administration to accelerate US production of microchips, and then what was referred to as the Inflation Reduction Act, which has to do with a huge amount of spending on public facilities, highway infrastructure, more connections to the internet, a long list, but big spending. That big spending is taking place. That, I think, is one of the major forces that has lifted and given us this resilient economy, but let's look at 2024.

That spending will be ongoing, but at the same time, the Fed, while it's taking its foot off of the brakes, has taken actions to reduce the money supply. Let's turn the page and talk about monetary economics for just a minute. Dramatic reduction in the amount of money coming into the economy has been taking place since December a year ago. The effects of that are generally felt 12 to 15, 16 months later, and so, in a sense, that's now. The effects of the slow growth, it's actually negative growth in the money supply that began last December, but those effects should be being felt right now, and more so as 2024 opens up and progresses.

If you look at state growth data, if you picture a map, outline map of the 50 states, and you compare one-- these are produced by the Federal Reserve Bank of Philadelphia, by the way, but if you compare their most recent map, which is for October, with a similar map for August, you will see the colors, the hues on the map turning darker, I would say uglier in terms of growth, just in that three-month period. I think we are already seeing slowdown, not a recession, but a slowdown as this 2024 year opens up. I doubt that 2024, when all is said and done, will look as good as 2023 did, but there's always room for surprises. There are other boulders that fall in the lake.

MCLAUGHLIN: Wow, Bruce, this makes me remember a previous conversation we had where you pointed out that the money supply, the monetary supply is going to be ultimately the driving force for inflation or disinflation. Right?


MCLAUGHLIN: You predicted this exact lag, and here we are with inflation finally starting to recede to levels that I would say you predicted, so congrats on that. One of the rare macroeconomic predictions that does appear to bear out in around the same time as you predicted it to happen.

YANDLE: Yes, something that is part of our trade everybody who does economics when we say, "If we hit a reduction in the growth in the money supply, we can expect to see falling deflation." We often are a little bit more careful and add other things being equal, but as one of my sons used to say, "Dad, other things are never equal," and that's the other boulder that's falling in. Sometimes we make a forecast, turns out to be relatively accurate, and usually it's because other things were equal during that period.

MCLAUGHLIN: One of those things that is not going to be equal, to use your term here, going forward is the total debt for the economy, right? US economic-


MCLAUGHLIN: -national debt rather. That is an issue that maybe doesn't matter so much for 2023 or 2024 growth rates, except to the degree that this spending increases those growth rates, but that check's got to come back at some point. I wonder what your thoughts are on that. How well prepared are we to handle that? If you want to also address at the same time, how does the demographics of the US population play into that? Do you have a section in your report about the aging population and how that might be relevant for considerations of national debt?

YANDLE: Really important point, I think, Patrick, and a good question to open up some exchange between us on it. The first debt, the big burden of the debt that is currently being felt is the interest cost of the debt. As the Fed was driving up interest rates, it certainly mattered to people who were trying to buy a home or to purchase an automobile or just looking at their credit card statement, it mattered, and as the number got larger, it mattered a lot, but for most of us, we don't think much about the federal government's debt, it's sort of, "Well, that's somebody else's.

They're not sending me a notice for me to pay my part," but we do have to pay the interest cost of that debt, and it has risen markedly as interest rates have gone up. That bill has to be paid now. Now the interest cost of the debt has gotten to be the third largest item in the Federal budget. Defense, Social Security, Medicare, interest cost of the debt. That means as if that continues, there's going to be a squeeze, as if there were not already with our politicians attempting to satisfy all of our political demands and things are getting tighter. Then, as you indicate, there's a demographic challenge here.

It's interesting, I think, in the sense that it's made the Fed's job more difficult. About 18% of the US population is over 65. We're about as old as we have ever been as a people, and the same thing applies to our elected representatives. This year, the average age in the Senate and the House is the second oldest it has been in history. Last year was the oldest, and so we're talking about people who have what we sometimes call a horizon problem.

As we get older, there's a tendency for us to focus on things that we hope will happen in our lifetime, and as our lifetime projection becomes more abbreviated, then we are thinking about maybe tomorrow or next year, "Let's not talk about 10 years from now." That causes us to be present-oriented. Now, let's go to the Fed. They put their foot on the brakes, interest rates go up, but we old folks still want to keep on shopping and we're saying we are okay when the interest rates go up.

We like that because that means our savings accounts are throwing off more income, and so what might be hurting young married couples, high interest rates, for the old folks, "Hey, this is a bonanza." That segment of the population is so large that it matters. Now we get the politicians and the old folks working together, we can be certain that nobody is going to be messing with Social Security or with Medicare or most likely with Medicaid. That puts the squeeze somewhere else, somewhere else.

We've got a lot of defense expenditures going on, and I would suggest we should try to keep it going, and we're trying to help some other people defend their countries, too. It's going to be a tough time for the politicians. That's the game they chose to play, but things are becoming more binding. The combination of age, the combination of debt, interest on the debt, and a demand for more of a particular kind of public expenditures.

MCLAUGHLIN: If the politics never line up to cut back on something, on some form of spending, whatever it is, in 10 years or 15 years, what has to happen? It seems to me like inflation has to happen.

YANDLE: That's right. We can get out of trouble of the sorts you are referring to, basically, two ways, if we continue to get the same nominal level of public support. We can print money, and so that's the same thing as taxing. The dollars that we would earn will buy less, or we can raise taxes so that the dollars we earn are smaller because we're paying taxes, either way, the bite has to come.

I would suggest, given the way the world works, which is the way we voters want it to work, given our democracy and our rules of engagement politically, we can bet on inflation, printing money as the way to deal with the problem. Of course, the other alternative is to go bankrupt. Let's not explore that one, because I think we will have a lot of inflation before bankruptcy harkens.

MCLAUGHLIN: Yes. You actually begin your career in public service I think in an era of inflation back in the '70s, I think that's when you started in public service.

YANDLE: That's right.

MCLAUGHLIN: You spent a lot of your time in academia as well following your time in government trying to help people understand how a regulatory system produces unexpected outcomes, including possibly inflationary outcomes. Back in the '70s, you were a senior economist on President Jimmy Carter's Council on Wage and Price Stability, and you were around for the first fuel economy standards for automobiles, so I find this an interesting story. In the update, you explain how those rules, those initial standards, fuel economy standards helped set the stage for the Ford F-150, which is pretty inefficient automobile, but it's topped the bestseller list, I think for 41 consecutive years.

YANDLE: That's right. There was a small group of economists, about seven, as a part of the president's Council on Wage and Price Stability staff that focused on regulation. There were a larger number of people who focused on wages and prices and attempts to try to affect inflation that way. We thought we were working on the supply side of the economy. If we could make regulatory approaches less costly, making it not be as troublesome to achieve certain regulatory goals, then the economy could be operating at a better pace, that was our idea.

I was assigned to go over to the Department of Transportation and be a participant, basically a listener and also commenting in some proceedings that had to do with setting the precise average fuel economy that was to be achieved between two endpoints. Congress had passed a statute setting the amount for the American fleet to be achieved in 1978, the statute was passed in '75, and for 10 years later. The idea was that we would hit 18 miles per gallon in 1978. At the time the law was passed, we were doing about 13, give you an idea, and that we would hit 25.8 10 years later, so we had the endpoints.

The regulatory proceeding had to do with filling in specific fuel economy standards to be achieved in intervening years. As we came in, there were some people who were crying, Chrysler being one of them, saying, "There's no way for us, given what we have in terms of manufacturing capability, to hit anything that we are seeing here. If you push too hard and you front load these fuel economy standards, we'll go bankrupt." Everybody there said, "Hey, give that guy a towel." Then someone else said, "There's not enough four-cylinder engine capacity in the world for the US fleet to make a rapid transition to smaller engines."

The person who was there from Ford Motor Company said, "The only way this can be achieved will be for us to go 100% with subcompact automobiles." Now, I should add that Congress left it up to the Department of Transportation to deal with pickup trucks. Congress didn't give any numbers for trucks. At the time, light trucks accounted for less than 20% of the US fleet, and there was no such thing as a sport utility vehicle. They hadn't been invented yet.

The Department of Transportation went easy on pickups, they went heavy on automobiles, and so as time passed and people began to be a little bit concerned about the small rollercoaster automobiles that were being presented to them, they were worried about safety. Fuel economy might be pretty good. They began looking at trucks. Then Ford came along and said, "We'll take our ranger pickup truck and we'll put a four-door body on it. It'll still be a truck because the federal government has defined what a truck is. It'll still be a truck. Now we'll have a passenger vehicle big, with a lot of power, safer in terms of how people perceive it, and we will still be accomplishing the truck fuel economy standard."

That opened up, of course, a whole new line of products. Suddenly the Ford F-150 pickup truck became the most popular vehicle in America. Big engine, lots of room, good speed, feeling of safety, and that became the model. SUVs, as we all know, became the vehicle of choice. We now have what I mentioned in the report that it's a common site, if you drive up to a parking lot of a large grocery store, what you will see in the parking lot primarily will be SUVs and pickup trucks. Technically, they're all trucks according to the federal government's definition. Here we come buying a loaf of bread, getting in a $40,000 vehicle with 300 horsepower driving home, and it's the result of the way we regulated.

No one could have predicted it. Some people began to realize it, but in a sense, if you want to call it Pandora's box, let's just call it a regulatory box. Once that lid came off, the market forces began to dictate the outcome that we have seen. As I look back on it, I think it's a fascinating story, but, as you know better than I because you've looked at a lot more regulatory episodes than I have, you begin to see unexpected outcomes, sometimes people call them unanticipated outcomes because they were unanticipated, and a few times I think they were anticipated. What looked strange was what somebody really wanted.

MCLAUGHLIN: That's a wonderful story about how the details of a regulation, and you could say policy in general, but of a regulation can lead to all sorts of consequences, and then you can categorize those into anticipated and unanticipated. Some of these unanticipated and arguably the unintended consequences are dependent on the second-order effects. You have this regulation that's supposed to increase fuel economy, the second-order effect is you're going to see shifts in demand for the different products as the products lineup shifts in response to the regulation, but what you couldn't necessarily anticipate was how strong that demand is going to shift to a new line of products. That was the third-order effect. There's this pickup truck that previously no one thought of as a passenger vehicle and now it suddenly is.

YANDLE: That's right. It also speaks to the creativity of human beings in a market economy.


YANDLE: When you get hit a set of regulatory constraints, the smart folks start trying to figure out a way, "How can I satisfy some customers out there given all the rules?" All of a sudden, you've got a fleet of pickup trucks running around. [laughs]

MCLAUGHLIN: Then SUVs are invented. Exactly.

YANDLE: SUVs. That's right.

MCLAUGHLIN: As always, let's finish up here in the last couple of minutes that we have with what's been on your reading stand lately. This time it's Swiss psychoanalyst Carl Jung's 1957 book called The Undiscovered Self. Can you explain why, as you say in the report, this book is short but the profound issues explored in it are eternal?

YANDLE: This is a book and all of us book lovers, which would include all academics, I'm sure, have books on the shelf that we may have read 30 years ago, or maybe we never got around to reading, but there they are. You pick up one of these old books and you start reading sometimes and you say, "Wow, I wish I had read this sooner. It really applies to some of the issues we're dealing with now." That's the case of Carl Jung's book. It's just 100 pages long.

It's a collection of his essays. Carl Jung is viewed as a preeminent psychiatrist, almost an inventor of certain parts of psychiatric medicine. The thing that captured my interest is that Jung is talking about human behavior in a political setting when people begin to get caught up, swept into activities that lead to new rules, new order in a political setting that they would never do on an individual basis, and so it is sort of mass psychology. He was deeply troubled at the time. The book is published in 1957.

He was worried about communism, he was worried about the Cold War, and he was worried about the fact that a lot of people would go out to a gathering of tens of thousands and find themselves marching and shouting slogans that led to an authoritarian regime gaining more power. He also expressed concerns about the West and the tendency in the western part of the world to do something similar. In a sense, it was that that caught my attention. Basically, what Carl Young was pleading for, to put it simply, is to think.

He's pleading for human beings to think. To stop and think, to call on your conscious mind as well as your unconscious mind, to consider the elements of the challenges about us so that you might back away from a large mass participation where you march off to the sound of a big brass band, or you participate in a raid on the US Capitol, for example, doing something you would never do by yourself or with two or three people.

In a sense, it's that that caught my attention, a plea to think. Patrick, we can certainly say those of us who've been in the university classroom realize that's what we're pleading for, both for ourselves as professors but for our students, because thinking does not seem to come naturally. We try to avoid having to think. Maybe a plea to think and then to avoid mass actions that can take away freedom was his concern.

MCLAUGHLIN: It's hard for me to imagine a better message for us to end this podcast on. I think we should just stop right there with your plea. Thank you, Bruce, for once again joining me. It's been my pleasure.

YANDLE: Best of the season to you.

MCLAUGHLIN: You as well.

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