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The Financial Times named him one of the six “Gurus of the Future”, Jon Stewart described him as “Eliot Ness meets Milton Friedman” and he sat in the President’s cabinet under Present Obama who, of course, became President during the Financial Crisis. It’s fair to say that Austan Goolsbee knows what he’s talking about. In this insightful interview, Austan Goolsbee discusses in detail the difficult dilemma the Fed is in and how he sees the US economy today.
Transcript
Austan Goolsbee: In a way, markets are much more attuned right now to the Fed, to the war in Ukraine, to what’s happening in the supply chain. 95% plus of what happens with economic growth and for markets has nothing to do with Washington.
Jamie McDonald: Austin, thank you very much for joining us.
Austan Goolsbee: Jamie, good to see you.
Jamie McDonald: Right now there’s so many different topics we could cover, but if we could start by talking particularly about inflation, because I know that’s something that you’ve written about in the New York Times and what I’m interested in getting your view on is, central banks were so in control generally of how they affected markets for such a long time. And more recently, fiscal stimulus has been an even bigger, potentially sort of had a higher impact on what markets is doing. So how do you see where we are positioned right now in terms of inflation about the ability of central banks to actually control it?
Austan Goolsbee: Yeah. As I think of it, there’s a danger to have a central-banker-centric view of the universe, where everything that happens on inflation is because of central bankers. And they beat themselves up. “Ah, why didn’t we stop this?” And then they pat each other on the back and say, “Okay, we’ll raise interest rates and inflation will go away.” It’s critically important to figure out how much of this inflation is from supply shocks and how much is from excess demand and stimulus, monetary or fiscal stimulus.
The central banker centric view of the universe, really centers on that it’s demand. And that the central banks, by raising interest rates, can cut the demand to get rid of inflation. But if you think a lot of it’s coming from supply shock, that’s not true. The central bank can raise interest rates and increase unemployment. But if the inflation is not coming from excess demand, that’s kind of the recipe for stagflation. So those are the two big lessons of the seventies in the US experience. I think one is, if you get inflation persistent, it unhinges the expectations and then you have a really hard time getting rid of it. But the other is, if it comes from supply shocks, just the central bank acting alone is not going to fix it.
Jamie McDonald: And is that your view that that’s the current state of play?
Austan Goolsbee: Yeah, that debate and I guess I’d put a little more weight on the supply shock view than some people. Not that it’s a hundred percent. I do think that the Fed was slow to recognize, I fully understand why in March of 2020, when it felt like the world might fall apart, they would take extraordinary unprecedented measures on both expanding the balance sheet and on the interest rate. I do think after about a year, it was clear that COVID would have negative effects, but it wasn’t going to blow up the entire world. And so it probably would’ve made sense to inch ourselves back to something like the conditions that existed before COVID rather than having to move more rapidly right now.
But that said, I don’t really see how you could look at the US experience where inflation ignited when the unemployment rate was around 7%, how you could view, that’s not supposed to happen in the model, if it’s just coming off of demand driven. It should have been like three different times in the last 20 years or so we’ve gotten the unemployment rate down to 4% or below. So if you believe that it’s a hundred percent or predominantly coming from excess demand, you sort of have to explain why inflation would ignite when the unemployment rate is still around 7% or measured of output, there’s still a pretty significant output gap compare where we thought it should be. Inflation really shouldn’t start at that high of a level unless something went dreadfully wrong on the supply side.
So if you get supply shocks and now you add on top of it, old fashioned supply shocks like war, driving up the price of oil, the Fed’s got to be mindful of that. And we still have yet to see that shoe drop. I guess I would say it’s going to be important going over the summer and into the fall to see whether inflation’s cooling down. If not, or if so, the kind of the blowback about Fed action that they should tighten, but if they tighten too much, they’re going to generate stagflation. We still have to have that conversation.
Jamie McDonald: Right. You made an interesting point in a, I think a New York Times article you wrote, that the Fed is going to have to consider how inflation is going to affect different income level families. Now, what exactly did you mean by that? I mean, inflation does hurt people from different economic backgrounds in different ways, but when you said the Fed is going to have to think that through what did you mean?
Austan Goolsbee: The first is just the factual matter. It was a piece I wrote that was drawing on a series of relatively new research by economists, where they got granular, really detailed data on what’s each individual person’s inflation rate, and if you look at that, it depends what you buy. If you’re a person who drives 30 miles to work each day, then when the price of gas goes up, your inflation rate is going to be affected more than somebody rides a bike, or something like that. And by that idea, this research has shown that over the last 15 or 20 years, inflation rates have been systematically higher for low income people than they have been for the middle class or for high income people.
The Fed outlined a framework before COVID, before we saw inflation, in which they were mindful, explicitly were mindful of the way the dual mandate should be applied or could be applied to different groups. So they were cared about full employment, but they were particularly going to be mindful that some groups full employment doesn’t look that great. And so that when they’re setting policy, they were, sounded like, going to try to address some of these issues of income inequality, of differences in standard of living across different parts of the income distribution.
My only point was, you got to think about inflation when you do that too. So everybody’s looking at unemployment and income and wages, but it’s important to think about the inflation across the income distribution as well.
Jamie McDonald: So you mentioned the labor market, which is reasonably tight right now, and I’m interested what you think about immigration rules that have changed over the last five years with a previous administration. And there’s something like 2 million less jobs, I think, coming from foreigners coming to work, and that’s just legal immigrants, what does that kind of dynamic going to do? I mean, how does the labor market-
Austan Goolsbee: It’s awful. I mean, it’s been devastating to the US labor market. If you look in pre-COVID times, pre-Trump times, almost half the growth in the labor force for the US was coming from immigration. And part of that was centered around, the decline of that, part of it came from restrictions on immigration in the Trump administration, especially on the legal side. All the public fighting is about illegal immigration coming over the border from Mexico.
But the gutting of visas, student visas, high tech visas, all different sorts of legal immigration to the United States, that’s been a very significant impact on labor force growth and jobs. And that got magnified, of course, once COVID began. And there were restrictions, nobody could travel, you can’t leave your country, can’t go to another country. I don’t actually think that we can get back to where we were before, unless we also have a reestablishing of that pipeline of immigration, because the demographics of the US native born population look just like the demographics of Europe, of Japan, of China and other rich countries, which is to say bad. The population slowing substantially or even declining. And so the only immigration gives us that growth.
Jamie McDonald: Yeah. And to take that a step further, do you think we’re now in a period of sustained deglobalization? I mean, we had globalization for so many years. Do you feel now that deglobalization is set to be with us for a long time, which is obviously inflationary as well?
Austan Goolsbee: Maybe. It is certainly been felt deglobalizing the last two years. I guess I’m a little skeptical that it’s going to truly go away. But part of that for the US side depends on what happens in the elections. I mean, before COVID, there was clearly a heightened trade war kind of tension from the Trump administration. If Trump were reelected, I think for sure, we would go back to that kind of dynamic. If Trump were not reelected, I still think the there’s big economies of scale. You can see in the problems of the baby formula in the US. In the near term, it’s not like having an ‘America first’ approach, it solves the problems. I mean, in this sense, it created the problems. If you want to secure supply chain, it’s better to diversify even outside of just your own country. So I’m not sure.
Jamie McDonald: You mentioned the elections. I know we’ve got the midterms coming this year. As you look out ahead, if I was to try and draw you on how you think they may go and the sort of impact they could have either way on markets, how do you feel?
Austan Goolsbee: Well, it’s for sure the history says they’re going to go real badly for the incumbent party.
Jamie McDonald: They typically do.
Austan Goolsbee: They typically do. And you add on top of it, there’s a lot of discontent, a lot of partisanship and a lot of discontent about the economy. So look, I think it’s going to go badly for the administration. It is very likely to mean they can’t do much on a legislative basis. That’s not unusual. That’s usually, in a way we have one year terms for president, you come in, almost everything you’re going to do legislatively you do in that first year. So that part, while frustrating for a White House, is not any different than any previous period that we’ve had in the country.
What that means for markets, I don’t think a lot. Kind of joke at a previous midterm, somebody asked me, “What do you think’s the chance that they are able to reach some bipartisan major legislation before the election?” And I said, “0%.” And they said, “Well, does that change in your view if,” at that time one party, but now the other, if the Republicans here win big? And I said, “Yes, I would cut that probability in half.” Nothing will happen. In my view, nothing will happen.
And in a way, markets are much more attuned right now to the Fed, to the war in Ukraine, to what’s happening in the supply chain. 95% plus of what happens with economic growth and for markets has nothing to do with Washington. And seven out of eight years, that’s what this usually is. There’s gridlock in Washington. They don’t do anything. The presidential term’s one year long.
Jamie McDonald: Yeah. Yeah. Well, it’s a tough time to predict markets right now, but Austin, thank you so much for your time. It’s really great to have you.
Austan Goolsbee: Yeah, great talking to you Jamie.
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