Dr. Bruce Yandle's September 2023 Economic Situation Report

What's the role of money in the economy right now?

On this episode, Patrick McLaughlin, a Senior Research Fellow and Director of Policy Analytics 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 recession predictions, federal debt, the role of money in the economy, 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 latest report here.

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].

PATRICK MCLAUGHLIN: Hi, this is Patrick McLaughlin. I am a senior research fellow at the Mercatus Center at George Mason University. I'm here once again to talk to the esteemed Bruce Yandle, who's joining us to talk about his quarterly situation report. Let's jump right into it, Bruce. Thank you for joining me. Let me start with a question.

Since your last report, which you put out in June, the Commerce Department came out with some optimistic estimates for real GDP growth, and you also point out that even the Federal Reserve Board economists are increasingly optimistic. Talk about that for a little bit and maybe contrast it with our expectations in maybe a year ago.

BRUCE YANDLE: Yes, good to be with you, Patrick. We are getting news that while it is not strong in terms of economic growth, it's economic growth. It's positive, it feels good. Considering where we've been, we can have a little bit of celebration about it.

Yes, the Commerce Department, their first quarter GDP growth came in at 2%. When they gave the first estimate for the second quarter, they raised it to 2.6%. Then long about a week ago, they brought that down back to 2%. In a sense, we've got a flat 2% growth economy, but I would suggest the prospects for the ending quarter are brighter than 2%.

The drivers, you might say, tend to be all of the above. That is, there isn't a weak sector in the economy. There's some very strong ones, healthcare, tourism, people are back on the road again, retail sales are strong. There's a pretty good shot in the arm, it appears, that is coming from the Inflation Reduction Act and infrastructure expansion, federal monies, large amounts, high levels of commercial construction activity. That's the picture right now.

If you probe into it as you and I and people in our tribe tend to do, you can identify some reasons to think things are going to slow. One of those is a sharp reduction in the hiring of temporary help. Temporary help hires are declining markedly. New job openings are declining sharply, but we still have about 1.7 job openings for every unemployed person. There's some vulnerability out there. Still, for those bloodhounds that are looking for a recession, they've got to keep sniffing. Don't think we'll hear them bark for a while.

MCLAUGHLIN: The recession, should it come, keeps on getting pushed off to some point down the road, and I think you're sticking with the prediction that it'll probably be early next year. I think that's what you wrote in the June report, and I think you're reiterating that now. Then a lot of other economists it seems are thinking the same thing, that it's going to hit at some point. We just keep on pushing it off. As you say, one of the ways in which we're pushing it off is with some federal spending.

Can you talk about how that is related to a recent downgrade to the rating that the US I guess government bonds, if that's the case, is getting from Fitch's? We've got downgraded from AAA to AA+. What does that mean and how does that related to federal spending?

YANDLE: Well, there are three rating agencies who are in the business of assigning numbers, AAA, AA, and worse to debt for the sovereign nations of the world as well as for corporations and other entities that sell bonds and issue debt. Standard and Poors, Moody's, and Fitch's.

Fitch's recently reduced their rating from AAA to AA+, which puts us in the company of Canada and France and Belgium and Finland and a number of other pretty strong countries, but it was shocking when they did this, particularly in the halls of the White House, where when you're saying everything is going well with Bidenomics, as the term has been coined, and then comes a rating agency saying, "We are worried about your debt. Whoa, let's talk about that some."

The point I think that's important to note here is that Fitch's and the other rating agencies, their rating changes are not just based on a short-run picture. Maybe Bidenomics is good, maybe it's not good. That's a question we could explore, but they were not rating Bidenomics. They were looking back two administrations with respected to the runup in debt, deficits, standoffs in Congress as to whether we will allow the government to shut down and default.

In the most recent one, we had a former president saying, "I recommend we default. That may be what it will take for us to get our house in order." It was a longer-run concern, and included in their statement was concern about the January insurrection, questions about America's strength as a democracy. Let's not forget, AA+ is a pretty strong credit rating. That's sort of the story there. Thus far, the other agencies have not reduced their rating from AAA.

MCLAUGHLIN: There's probably some concern about the soundness of monetary policy mixed in there as well, I imagine, since inflation, as everyone knows, is a phenomenon that we're worried about in the US these days, as well as many of these other countries that are in the AA+ category or even AAA, perhaps, category. You have done a wonderful job, in my opinion, of showing what we should really be thinking about when it comes to inflation, which is the supply of money in our economy, in my opinion.

Listeners, if you haven't looked at this latest report, Bruce has yet another wonderful figure in there which shows M2, which I'm going to ask you to talk about here, Bruce. It shows this measure of money supply and then it shows inflation, right? Why don't you go ahead and talk about that figure, Bruce, and what it tells us?

YANDLE: Sure. Let me go back to something you mentioned there as you were opening this topic, Patrick, and Fitch's. There is certainly a concern, I think, that's buried in the Fitch's analysis and anybody else's analysis of our country's financial viability about the deficits and the run-up in interest rates. You mentioned the Fed. The Fed is dedicated to bringing inflation down, whatever it takes. The most recent statement's they're not going to sleep at the switch.

We have seen increases in interest rates. Now we're right at 5.25%. We've seen the mortgage rates pop up to 7%. Incidentally, I think that's going to be driving the slowdown that we will be seeing in our economy on into next year. The relationship between the money supply growth and growth in inflation, whether we are using the CPI or some other measure, is one that's been pretty well established over a long period of time. There's more to the story, but think the bottom line says money matters.

If you get a huge growth in the money supply, then with a lag, sometimes it takes a year, sometimes longer, you will see a response in the economy of more money chasing goods, and the goods production does not get ahead of the money production. Then you see a rise in the price level.

The figure that you referred to in the chart is comparing and mapping two growth rates, the growth rate of M2 money supply in the economy and the growth rate of the CPI. Those two figures look a lot alike with a lag of better than 12 months. The growth in money supply is now negative. The Fed has hit the brakes and they're keeping their foot on the brakes.

We're getting negative growth in money.

CPI-measured inflation has been coming down almost systematically. It stopped in its down movement this last month by a little bit. I would suggest that just looking at that relationship long about January or February, I think we will see the Fed achieving its target of 2% growth in the CPI or one other measure, which they prefer. Nonetheless, I think the relationship is still working. Now, that doesn't say there will be a recession, but it does say things will slow in some sector of the economy. It seems to me it will have to be the most interest-rate-sensitive sector of all, which is housing.

MCLAUGHLIN: To some degree, you would think policymakers would be taking a victory lap. To some degree, right? Now inflation is being wrestled under control. Also, to some degree, you do hear some policymakers taking victory laps, but when they talk about inflation, I don't think we really hear them talking about the money supply, which I agree with you, Bruce. This seems to be a great explanation. Then again, I'm in the tribe, as you call it. I'm an economist.

YANDLE: Right.

MCLAUGHLIN: Policymakers, they talk about things like the war in Ukraine and corporate greed, and they don't emphasize the role of money in the economy. Can you explain that?

YANDLE: Well, you're right on, and the fed itself at each of their press conferences and the reports that they issue after one of the meetings of the Federal Open Market Committee, which sets the interest rates and worries about inflation. In their reports, in their discussion, in their comments to the press coming out of the White House, it's all of the above that you mentioned. It's the war in Ukraine.

Yes, that matters. That does something to the supply side of the economy. It's the runup in energy prices. It's the runup in food prices. It's climate change. It's unusual number of fires around the globe, and we could go on and on with a list, but no one ever suggests that it has to do with our monetary policy because in a sense, it would be pointing the finger back at government itself. This is something that government does.

It just seems to me that everyone should admit that money matters, and it's not everything, but it pays to keep your eyes-- Like saying, keep your eye on the ball, it pays to keep your eye on money and what is happening in the economy, but so far, the other talk is the talk that commands the minute on the evening news.

MCLAUGHLIN: Maybe also in part, it's just more tangible to talk about things like the war in Ukraine or fires when there's smoke coming even to the East Coast occasionally.

YANDLE: That's right.

MCLAUGHLIN: Shift gears a little bit here, Bruce. You devote a fascinating section of your report to the economy under the Truman Administration, which was a while ago. Can you sketch out what America's post-World War II economy looked like and then maybe tell us what we can learn now from President Truman's approach then?

YANDLE: Yes, and it turns out that there's something interesting there, and I stumbled into it. As you can tell by, Patrick, I'm somewhat of a pack rat. I keep a lot of books around and things that catch my eye, and I have a hard time parting with them.

I came across the first economic report of the President, 1947, and I was reading that report and I discovered that it was done every six months. This was President Truman. We got legislation that year setting up the Council of Economic Advisors and legislation saying there shall be a report given to the American people about the economy. Truman says, "Okay, you like that? Well, I'm going to do one every six months." I've got both of those reports. It's the only time we've had an economic report done every six months, the only president who's ever done that.

In addition to that, Mr. Truman did something else interesting. Congress had set up the Joint Economic Committee in Congress, bipartisan, and Truman said, "I want the Joint Economic Committee to review the report and criticize it because our report on the economy should be tested by other economists." Nobody has done that since.

MCLAUGHLIN: Just to clarify, there's no sort of review for the current economic report to their president and there hasn't been since Truman?

YANDLE: That's right.


YANDLE: Now there are hundreds, maybe thousands of people who read every word and test every item of data. It is probably the most reviewed and edited document known to man. It is, I would suggest bulletproof, but we both know that you can look at certain things and choose not to look at others, or you can choose to talk about monetary economics or not choose to. There's always room for review in criticism and that was interesting.

The thing that's more interesting, Truman comes in at the end of World War II, and so we have an economy that is making painful and rapid adjustment to millions of people returning home. We have a flood of people looking for work. We have an unemployment rate there in 1948 just about equal to our unemployment rate today. We are at 3.8% now.

MCLAUGHLIN: Three point-- Okay.

YANDLE: It was 3.4%, 3.5% back then, tight labor market. People had a lot of savings accounts, they were cashing in their war bonds, they were going shopping, and so we had what should be called runaway inflation there in '48. The inflation rates, CPI estimated measure, 19%. Our high point recently is 9%, and our 9% is down to 3% and headed south. Let's be optimistic here.

Truman's looking at an economy with tight labor markets, high inflation, a war has come to an end. We are looking at an economy where the COVID war has come to an end in a similar way. People have a lot of money, chasing goods. Truman did something really-- He's a Democrat, he's dealing with both houses of Congress being Republican, but he says, "I want to have a special session of the United States Congress to focus on how we deal with inflation."

Now, we have not done that in recent times. They have two separate sessions of Congress bringing in, listening, and they make decisions to raise taxes. Let's slow this thing down. Truman wanted to put in price controls, and I would say thank heavens in their better judgment they didn't do that, but they got busy getting the Fed involved in dealing with the problem, the money supply part of the problem. In any case, they brought inflation down to 1.2% in 1950, where it had been 19% back about 1947, '48. They worked on it. That experience left me with the idea, "Well, gee whiz, if this is something we really want to do something about, why hasn't someone called a special session of Congress?" Well, you could say that about a lot of issues that we are dealing with, immigration, and so on and so forth, but I think there's a lesson to be learned from that experience.

MCLAUGHLIN: President Truman either actively embraced a humble stance, right? He accepted that his knowledge on how to deal with the problems at the time wasn't perhaps perfect, or maybe it was just out of political necessity dealing with two Republican chambers. Either way, the outcome was a collaborative process as you describe, and some choices were made that ultimately handled the issues that the president wanted to deal with.

I think that's a nice way to transition to another topic in your report, which is a discussion about the role of knowledge and planning in markets overall. You referenced Friedrich Hayek's work, so let's talk about that a little bit. What did Hayek mean by the fatal conceit and the knowledge problem?

YANDLE: Well, I think you're right to characterize Harry Truman as a "man on the street" president. Used to run a haberdashery shop in his private world, and now he's president. Perhaps he was impressed with his own ignorance, which I think is a very useful thing for a president or a professor or anybody else.

MCLAUGHLIN: Anybody. Right.

YANDLE: Nonetheless, your point about-- Hayek did an article, I think it was published in 1948, long time ago, and the article is titled, The Use of Knowledge in Society. Hayek makes a fundamental point that an economic system is a information system. It's a knowledge system. We're all connected by prices and markets, and prices communicate, scarcities and wages communicate desires for people to be employed and how much I desire you to come to work.

That information is flowing, and so we should guard and keep that information system happy and healthy rather than try to control it because man faces one fundamental problem in Hayek's view, and that is knowledge is inside the brains of every person on this globe. However many it is, all five billion of us.

The brains are not connected directly so knowledge is dispersed, but the decisions we're trying to make are highly localized and highly specialized. It's impossible for any one person to ever be able to gain command of enough knowledge on their own to even do something as simple as I suggested my piece as making a paper clip.

By that, I mean from scratch. That makes it a very different problem. Oh, you say make a paperclip? Well, I'll just pick up a piece of wire and bend it. I'm saying, "No, no, you've got to start with nothing. The iron ore, you got to make the steel. You got to make the-- " on and on.

When we look at something as simple as a paperclip, we realize there is a huge amount of complex knowledge that came together somehow so that we could get a little box of paperclips and pay 25 cents for them. A lot of that knowledge was in other parts of the world, in other locations, people who speak different languages, but markets brought it together.

Getting to the issue that I was talking about, we have a president who, there are people who are expressing concerns about our president and his age. He's 81, and pursuing office, hoping to serve another term, four more years. He was getting some questions about that from the press. Our president turned, and I thought he did a pretty good job of trying to defend himself. He says, "Look, I've got a lot of experience. I've got more experience at doing this job than anyone else who's announced so far. One of us is 77, but hey, I'm 81. so I've got a lot of experience."

Then I think he made the mistake that I criticize him for. "I know more than the average person." That's where I insist took him to task in my newsletter, because the older we are, the more experienced we are. I think it's the case for most people that we realize that are more ignorant relatively than we have ever been because we have encountered countless mysteries along the way. I use that old saying, "I'm not young enough to know everything."

That even if Mr. Biden or any other president could bring in the brightest and best as they all attempt to do and I would say they must do, and they say, "Let's get the best information we can and get it cornered over here on the table, get the economists, the engineers, anybody else, and we will decide what kind of automobiles the American people should have in the next 20 years, and we will subsidize the right choices," that decision will become obsolete the day they make it, is Hayek's point.

Markets are continually re-assessing what are the new technology, something that didn't even exist when the people were in the room the day before shows up. That's the point, that knowledge is dispersed. We need to use it in specific instances. We best be humble about how much we know. It's best for us to talk in broad terms in terms of targets than to talk in specific terms in terms of choosing technologies, for example.

That Hayek referred to our tendencies to act as though we know a lot as a fatal conceit. This is the fatal conceit, which will inevitably cause us to make some costly decisions that we might regret later on. Still, we have to face this is the human struggle after all.

MCLAUGHLIN: That's very, very well put. To add a little bit of concrete policy-making to the end of all that, you talk about subsidies. You just did talk about subsidies and the decision of, say, a blue-ribbon commission supplemented with knowledge of engineers, et cetera, to subsidize a particular technology or industry. Well, we have chip subsidies that are running to the market right now in the US and in other countries.

To your point, Bruce, I think you're saying, "Well, we've made this choice, but it's going to be in a very short amount of time. Probably the market's going to move on or the technology is going to move on and we will be subsidizing something that's not nearly as useful as we thought it was going to be when we made that initial choice, so the benefit won't be nearly as great as what we hope for." Although you do point out there are some beneficiaries and those are the ones that receive the subsidies directly, right? The chip manufacturers.

YANDLE: That's right. That is the process of picking winners. Offering assistance to winners is a politically attractive process, particularly if you're one of the winners in the process.

MCLAUGHLIN: Well, let's wrap up, as we like to do with talking about what's been on your reading stand lately. Tell us why you rate Erik Larson's book The Splendid and The Vile. What a wonderful title and a perfect five out of five gold stars.

YANDLE: Five-star book, I would say. It's the kind of book that I, without any hesitation, urge people to get their hands on, or if you have a friend who loves to read, get them a copy of this book.

First off, Larson is a wonderful writer, highly successful. He's churned out a lot of bestseller books, but this particular book is interesting to me in addition to it's being well written. It's over a short period of time in Winston Churchill's life, a little bit better than one year. The book tells the story of Winston Churchill becoming Prime Minister from the day he became Prime Minister. That's the beginning of the book to Pearl Harbor, which is a little bit better than a year later. You could say roughly it's Churchill's first year in office.

As Churchill is being sworn in, Adolf Hitler's army is invading the low countries. France has already fallen. He's into Belgium. War is going full force, face force, and Hitler has made it very clear that he would like for England to join, or at least not to resist. "Let's talk you into surrendering, and if you don't like what I'm saying, I'm going to show you something about German technology that you haven't experienced before. We'll start bombing open cities in England." The bombs start falling and they're huge. 7,000-pound bombs are falling in London that can destroy a city block.

Now, the thing about the book that makes the description and how that affected people such a powerful story, the author uses diaries. There was a project in England in association with the war and the bombing, where some public service agency encouraged ordinary people to keep diaries and then to share those later. Larson draws on lots of diaries.

There are a lot of direct quotes, and you're reading someone's description about what it was like to stop the birthday party as the bomb started falling and head for the shelters. "I take my children down and we meet some wonderful people down there we've never met before," and you get an insight into what it's like.

In addition to that, Hermann Göring, who was Hitler's air commandant, kept a magnificent diary where he's reporting and ruminating on all kinds of things, and so Larson brings in items out of Göring's diary. We get the reflections, the concerns, the hoopla coming from individual ordinary folks, and big folks, and highfalutin folks, as the story goes on.

Hitler continues to challenge Churchill, "Let's sit down and negotiate a surrender." Hitler hopes that he will get one so that he can focus his attention then on Russia. Meanwhile, Churchill is doing everything he can to entice President Franklin Roosevelt to help. Roosevelt is facing a very reluctant Congress, isolationist, let's don't get involved.

It's a story that is talking about two key people, Roosevelt, Churchill, World War II, the bombing of England in such a terrible way that as you read the book you have to conclude this story cannot have a happy ending, and then comes Pearl Harbor. That changes the mood of Congress, and the United States openly then supports. It's a marvelous story of personalities, ordinary people's insights, and the ability of a very powerful speaker. Radio was the way of communicating. Churchill, the ability of a very powerful speaker to have large impact over an outcome. Hope you'll read it, Patrick.

MCLAUGHLIN: You've definitely sold me on it.

YANDLE: [laughs]

MCLAUGHLIN: I will be picking it up soon. Well, thanks, Bruce, for joining me once again on this podcast and for this latest economic situation report. It's been my pleasure to host you.

YANDLE: Great being with you.

Image credit: mbell via Getty Images

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