Podcast: Making sense of global inflation, looming recession, & economists who disagree

TRANSCRIPT: Making sense of global inflation, looming recession, & economists who disagree

Austan Goolsbee:

There's one gap in the polling data that's bigger than we've ever seen before, which is if you ask people how is the economy, they say awful. Yet, if you ask them individually, "How is your situation? How is your bank account?" They're saying it's pretty good.

Ian Bremmer:

Hello and welcome to the GZERO World Podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremmer, and today we talk all things inflation, from the price of bacon to the cost of housing. Everything but the stock market is heading up. We're all feeling it, and some a lot more than others. At the same time, unemployment is very low, and thanks to months spent at home during the pandemic, many Americans have a bigger savings cushion to fight against high prices. But as inflation hits a 40 year high, 65% of registered voters believe the US economy is heading towards recession. So, why is it happening, and is there anything that can be done to make it stop? This week I speak with economist, Austan Goolsbee. Let's do this.

Announcer:

The GZERO World Podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company, places clients' needs first by providing responsive, relevant, and customized solutions. Visit firstrepublic.com to learn more. In a world upended by disruptive international events, how can we rebuild on season two of Global Reboot, a foreign policy podcast in partnership with the Doha Forum, FP editor-in-chief, Ravi Agrawal, engages with world leaders and policy experts to look at old problems in new ways and identify solutions to our world's greatest challenges. Listen to season two of Global Reboot wherever you get your podcasts.

Ian Bremmer:

Austan, thanks so much for joining us.

Austan Goolsbee:

Yeah, great to see you again.

Ian Bremmer:

I haven't had anyone talking about the global economy in a few months, and it does seem high time. I guess one way I want to get into this is that there's so much that feels unprecedented in these times. I mean, this extraordinary sudden contraction because we had to shut everything down with COVID, and then this extraordinary explosion of demand because we opened up again. What percentage of what we're experiencing right now just can be explained simply by those two facts?

Austan Goolsbee:

Those are both great facts, and I'm tempted to just say a third. A third, a third, and another third. I think it's an unprecedentedly steep downturn and an unprecedentedly rapid comeback. But another thing to graft on it is it looked nothing like a normal recession. Normal recessions are driven by cyclically sensitive parts of the economy, like durable goods, manufacturing and housing and TVs and stuff like that. Normally, the things that don't go down in recessions in rich countries are services. This one looked nothing like a recession. All of the stuff that normally goes down went up. In the United States, in Europe, in the high income countries, they bought more TVs, they wanted to buy more housing, they want to buy more cars, leading to an overloading of the supply chain for physical goods. The thing that led the downturn was a bunch of people not going to the dentist and stuff that's normally recession proof. So, I think I'll say at least two thirds of what we've observed I think is due to the unprecedented nature of this downturn.

Ian Bremmer:

What that means to me is that even if we had very, very different government responses, whether fiscal or monetary, you still were going to have a lot of the big dislocations and the big inflation that we're seeing now.

Austan Goolsbee:

Yeah, 100%. That statement I absolutely agree with. In fact, what kinds of evidence would you point to think that's true? Well, the fact that virtually all the countries that we're observing are facing the highest inflation they've had in more than 40 years, including Japan. The level may be low, but Japan's having the highest inflation in 40 years. If you look at the producer side, producer price index inflation, it's well above consumer inflation, and it's extremely high double digits virtually everywhere. All of those things make me think that it really wasn't that much about the policy response, it was about the nature of what was happening.

Ian Bremmer:

Now, a lot of people were very critical of the policy response the last time we had a massive recession, 2008, 2009, in part because they said we were taking care of the rich people and we didn't really care about the average American. No one can say that about this crisis. I mean, there was an effort to ensure that people of all stripes were able to get through these unprecedented lockdowns. I mean, I'm not asking you to give a grade, but I do want you to talk about how you felt about both under Trump as well as under Biden, the kinds of policy responses that we saw. Now that we have some experience and we have a rear view mirror, what worked well, what didn't work well?

Austan Goolsbee:

I was there for the stimulus in 2009, and the critique of the policy in 2009 and dealing with the financial crisis of course was they wished it were bigger, and coming out of the Bush administration, people wished it wasn't primarily geared toward financial institutions. So, you could almost feel that in the response of the Cares Act under Trump and the Rescue Plan under Biden, that they weren't going to make the mistake of it being too small. They make it as big as it could possibly be, and they'll spread it around so it doesn't just go to banks. There are going to be checks to people, we're going to help the unemployed, we're going to help the airline industry, the cruise ship industry. We're going to help all small business. We're going to have the Fed engage and unlock massive amounts of lending, and then that brings with it a series of other problems.

I still think the fact that you saw very different policy responses in a lot of different countries of the world, and for the most part the basic facts of the economy and the response look pretty similar, makes me think that maybe some of the details weren't as important as they seemed at the moment. I think looking back, for sure given that the recovery was as fast as it was, you would not do as big of rescue amounts as we did. We did 5 trillion in the Cares Act and another 2 trillion in the Rescue Plan, then not to mention there were some others as they go along, and that's the biggest spend that we've ever had, bigger than all the wars except World War II combined.

So, I think the magnitude you would probably do smaller. Several of the things that we did, they didn't work in the sense that they couldn't even get the money out the door. So, we did a bunch of things through the Fed, like a municipal bond lending facility where we're going to channel hundreds of billions if not trillions to municipalities and states because we thought they were going to be in a massive fiscal crisis. They didn't end up being in a fiscal crisis and virtually none of the money was used. So, I kind of think there are a series of programs that looking back you wouldn't do if you know what you know now.

Ian Bremmer:

Now, why do you think today with unemployment as low as it is, I mean, I understand that inflation upsets people, but is that solely the reason why people seem so incredibly negative about their economic estimates going forward, no matter who you talk to?

Austan Goolsbee:

Yeah. No matter who you talk to, and in the polls, and partly you're asking about message to a guy with a PhD in economics, so you're making a big mistake to do that. But I do think that the past polling-

Ian Bremmer:

Well, just for a second, let's pretend you're a human being just for a moment.

Austan Goolsbee:

I'm going to do my best to pretend to be a human being. Look, the thing is the polling data, there's one gap in the polling data that's bigger than we've ever seen before, which is if you ask people how is the economy, they say awful, as bad as they've ever said the economy was, even worse than during the Great Recession. Yet, if you ask them individually, "How is your situation? How is your bank account?" They're saying it's pretty good. That's because, as you highlighted, the unemployment rate is extremely low. They're upset that wages for a lot of people have not kept up with inflation. But overall, the difference between how they say the economy's doing and how they say their personal finances are doing, that has never been bigger. So then we got to try to figure out why is that?

I think part of it is that real incomes have slipped, because for a lot of people, wages did not go up as much as prices. But even there, it's not really sufficient, because if you look at 2021, that was a year in which prices for the average family went up about $2,000, $2,500 more than their wages went up, and the average family got a $3,500 tax cut as part of the Rescue Plan. So, if you look at the actual income situation of the average family, it was dramatically in the black. It was not in the red. So, I don't think that the reality can really explain all of why the polling is as negative as it is.

Ian Bremmer:

What do you think is going to be sticky in terms of changes in how we think about the global economy on the back of the pandemic?

Austan Goolsbee:

That is tremendously important. I recognize I'm a little curmudgeonly, maybe. My view is if something was a trend for 50 or 100 years before COVID and we see a dramatic reversal for two years in an extremely unusual period, I think it's overwhelmingly likely we're going to go back to what it was before because there were some important factors driving at that. One of those is de-globalization. We should be making all of this lower-end stuff at home. In the case of an emergency like this, you want to be able to have your own masks and have your own vaccines and have your own baby formula, have your own socks, whatever it is. I think that will end up being a blip.

Even though that's now an overwhelming trend, I think the fact that forgets how we got to the lean production system and globalized supply chain we had before COVID, and that is they're big economies of scale and it's cheaper. As I say, what's going to happen is two years, four years, sometime from now, somebody's going to wake up and they're going to look out the window and they're going to say, "Why do we have a giant warehouse full of socks that we made here that we could buy on the open market for one third the price and we can just have shipped here when we need them? Why do we have this warehouse?" At that moment, the legacy of the pandemic will be forgotten. So, I think on globalization, the bumpy ride is partly from the trade wars started under Trump and then followed by the complications of the supply chain and the shortages in COVID where there was this massive increase in demand for physical goods. But I think once we're past this COVID era, I think that one's going to probably go back too.

Ian Bremmer:

Okay. Now, speaking of blips, I mean, for decades before the pandemic, labor had less and less influence with capital and in the political system. That obviously is changing now, and everybody wants to work more flexibly, people don't want to be in the office, they can demand a lot more. Is that also a blip?

Austan Goolsbee:

I kind of am afraid that a lot of that is a blip, that right now workers have an almost unprecedented level of bargaining power, where as one CEO described it, the only question is, "Do you want your popcorn buttered or salted?" And they're scrambling to get people.

Ian Bremmer:

There was a CEO that actually said that?

Austan Goolsbee:

Yeah. It was a hedge fund CEO, so-

Ian Bremmer:

Oh, of course. I mean, I want to know how much he's made over the course of the last five years.

Austan Goolsbee:

Yeah, exactly.

Ian Bremmer:

The pitchforks are coming. Yeah.

Austan Goolsbee:

The thing that I think we're going to have to see is if you look in the period from, let's say, 1970 to 2020, over that 50 year period, we had a lot of productivity growth and pay did not match it. So, the theory says that people's pay should track productivity, but we had a lot of productivity growth and that split from wages, and that's a different way of saying corporate profits as a share of national income rose to unprecedented levels as kind of a frontline indicator of what's the bargaining power of workers. Right now, workers are demanding and receiving work from home, flexibility, things like that, but now roll the tape forward to a period where it's more like a normal labor market.

Forget about a recession-like labor market. Let's say we're just in normal times, I think the empire's going to strike back and the employers are basically going to say, "Either, no, we demand you come to work, and if you don't want to come into the office, go work somewhere else," or they're going to say, "Hey, you've got a nice bounty being able to work from home, so we're going to pay you less," or, "We're going to expect you to work more on your own time." All of those things make me think it's not going to be as rosy a scenario as it seems right now.

Ian Bremmer:

Okay. Austan, let's get to inflation for a moment. How troubled are you by the persistence of this inflation clearly longer and louder than the Biden administration had expected? Do you think it is with us for the foreseeable future, and what are the implications of it?

Austan Goolsbee:

It's been longer and louder. I will highlight it's not just government officials who have made the mistake of thinking inflation was going to go away or be smaller. The market absolutely made this the same mistake. Just look at interest rates. They set interest rates below what the inflation rate ended up being, so the real interest rate was negative. If you borrowed money, if you got a mortgage at the rates before, you've been doing great for this year. I have thought that the answer to the question of what we need to do hinges critically on this second question of "did the inflation come from supply or did it come from demand?"

If it came from excess stimulus, excess monetary stimulus, excess fiscal stimulus, which there are a lot of economists think it did, then the correct answer is the Fed needs to tighten monetary policy and raise the interest rate and try to cool off demand, and that's kind of the traditional Fed thing to do. They really only have one tool, which is the screwdriver. We can tighten it, we can loosen it. They look at the interest rate sensitive parts of the economy and that's what they do.

The problem is if the inflation came from supply, if you think war in Ukraine or the labor supply shocks from COVID or a series of things hitting the supply chain are where the inflation came from, well, there's another lesson from the 1970s, which is supply shock inflation doesn't go away from just tightening demand, and that what the Fed would do, in that case, they could raise the unemployment rate, but they're just going to generate a stagflation. That's the religious schism, as I call it, within the economics community over where did the inflation come from. That is why I think the Fed has been slow to act, is they've been sitting and waiting, hoping to figure out, well, was it supply? Is it going to go away on its own? Or is it demand and we're going to have to crank this thing down?

Ian Bremmer:

And it sounds like you're saying it is mostly supply.

Austan Goolsbee:

I thought from the beginning it was mostly supply. I will say that in the last two months, the fact that the non-energy, non-food parts of inflation, the so-called core inflation, which the Fed looks at as the pointer for what's the true state of affairs, the fact that that has not been coming down has led me to revise my view of how much of this was supply. I think if we get a couple, even two more months like the ones we just saw, I think they're going to be consulting the ghost of Paul Volcker and the Fed is really going to-

Ian Bremmer:

And then rates are going way up.

Austan Goolsbee:

Raise rates a lot.

Ian Bremmer:

I have to ask you the one question, Larry Summers says we have to let go a whole bunch of people if you want to fix this inflation story. I take it you do not actually agree with that.

Austan Goolsbee:

I don't. It kind of goes to my thing of you got to answer how much of this inflation do you think came from demand or supply? In Larry's mind, I think is the view that this inflation is overwhelmingly from too much demand. So, in that world, he says, "We got to raise the unemployment rate to 10% for one year," or seven and a half percent for three years, or he gave you a whole schedule of what you could choose.

Fundamentally, that's a story of demand, and I think at least 50% of the inflation is not from demand. What could easily happen if you were going to follow that prescription is you could raise the unemployment rate to 7.5%, millions of people lose their job, and then the inflation's not going away because it's not coming from excess demand, in which case you probably want to be a little circumspect. I mean, what it means for the unemployment rate to go to 7.5% is a lot of pain for millions of people.

Ian Bremmer:

So, the next couple of months are actually pretty critical in this entire equation.

Austan Goolsbee:

I think that's true. I think the next couple of months, how fast the Fed and other central banks raise rates and whether you start to see the core inflation begin to come down and make people feel a little like the heat is a little less on them, it's not going to remove the political heat because it's not on an election timetable. It's not going to be solved by November. But if the new months of inflation started coming in lower because we started to get relief on the supply chain, I think that would be one path. If not, if it just kept accelerating, even the new months keep accelerating, then I think the Fed and the central banks are going to have no choice but to raise rates quite a lot more.

Ian Bremmer:

Last question for you, Austan, in terms of your expectations for the US economy, do the midterms matter at all?

Austan Goolsbee:

Not really. I think for better or worse, often for worse, the US system is one where the presidential term is effectively one year, and you do almost everything you're going to do in that first year, and then we spend either the next three or the next seven years ringing our hands and saying, "Ah, there's dysfunction in Washington. They can't get along. They can't get anything done." But it's worth remembering that all of the longest booms in American history, seven eighths of those booms took place in times where there was gridlock in Washington and they couldn't get anything done.

So, I fully anticipate that it's going to be a tough election for the Democrats. It's always a tough election at the first midterm, and with the economic issues that we're facing, it's going to be even worse, and that will largely bring to a halt legislative progress. It's going to tempt the administration, as it did the Trump administration, the Obama administration, the Bush administration, to move to executive actions. But I don't think that that's going to have that much impact on the private sector, which is 90 plus percent of where the economic growth comes from.

Ian Bremmer:

Austan Goolsbee, thanks for joining us today.

Austan Goolsbee:

Great to see you.

Ian Bremmer:

That's it for today's edition of the GZERO World Podcast. Like what you've heard? Come check us out at gzeromedia.com and sign up for our newsletter, Signal.

Announcer:

The GZERO World podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company, places clients' needs first by providing responsive, relevant, and customized solutions. Visit firstrepublic.com to learn more. In a world upended by disruptive international events, how can we rebuild? On season two of Global Reboot, a foreign policy podcast in partnership with the Doha Forum, FP editor-in-chief, Ravi Agrawal, engages with world leaders and policy experts to look at old problems in new ways and identify solutions to our world's greatest challenges. Listen to season two of Global Reboot wherever you get your podcasts.

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