0:00

So there's been this conversation

0:03

about the SOM rule, how it was

0:05

triggered. The SOM rule is very

0:07

straightforward. I focus on the unemployment

0:09

rate. The unemployment rate is, I mean, it's

0:12

widely followed. People understand it. And it's

0:14

the reason that we fight recessions.

0:15

People are talking about, are we in

0:17

a recession? You have endless debates about

0:20

the GDP and all that. And what

0:22

you should be talking about in economic conversations

0:24

is, is this good for the middle class? Is

0:27

this good for the economy?

0:33

From the home offices of Civic Ventures

0:35

in downtown Seattle, this is Pitchfork

0:37

Economics with Nick Hanauer. The

0:39

best place to get the truth about who gets what

0:42

and why.

0:49

I'm David Goldstein, senior

0:51

fellow at Civic Ventures. I'm

0:53

Paul Constant, and I'm a writer at Civic

0:55

Ventures.

0:59

Wait, Paul, you're not Nick. I

1:02

am not. And I beat myself

1:04

up over it every day. Well,

1:08

unfortunately, Nick is

1:11

under the weather, so he couldn't make this

1:13

recording. So Paul, we've invited

1:15

you in to be the billionaire today. Yeah,

1:18

feels good. Feels good. I have to say, I

1:20

thought that once you passed, you know, the nine

1:22

figure mark that you didn't get sick anymore.

1:25

So this is really, I'm learning a lot

1:27

today already. Yeah,

1:29

no, they haven't quite

1:31

managed to purchase

1:33

Immortality, but I

1:36

think Elon Musk thinks that's coming.

1:39

So

1:39

we'll find out. But

1:42

we would have delayed this podcast.

1:45

Often Nick can't make it, we'll reschedule.

1:48

But we didn't want to miss today's conversation

1:51

with the economist, Claudia Somme.

1:54

Today is CPI Day.

1:56

This morning, the new

1:59

inflation report.

1:59

came out, so we wanted

2:02

to get her on and talk about

2:04

it. Also, there's been

2:06

an ongoing conversation

2:08

on social media. Do you still do that, Paul,

2:11

social media? I do, yeah. I do

2:13

Blue Sky, which I'm a big

2:15

fan of, and I follow Claudia

2:17

on Blue Sky, and she's a

2:19

great economics follow. She explains things

2:22

clearly. She's also funny, and

2:24

she's super informative.

2:27

Right, and so there's been this conversation

2:29

about the sum rule. There's been some

2:31

headlines and some posts about how

2:34

it was triggered or almost

2:36

triggered when unemployment hit 3.9%.

2:41

So there's been some mansplaining

2:44

to her since she created it. It has

2:46

not been triggered, as she'll explain. But

2:50

we figured it's a great time to

2:52

talk to Claudia about what's happening

2:54

in the American economy and

2:57

what is not happening in

2:59

the economy, which, by the way,

3:01

that's recession I'm

3:04

talking about. So let's talk to

3:06

Claudia. Claudia

3:12

Som, founder of Som Consulting

3:15

and a former Federal Reserve and White House

3:17

economist. Currently an independent

3:19

economist, I have a substack, stay-at-home

3:22

macro Som, like the last name,

3:24

and I write regularly at Bloomberg

3:27

Opinion.

3:28

Well, thanks for joining us. And

3:30

first, I want to wish you a very

3:32

happy CPI Day.

3:34

Yes, we got a good one today. They're

3:36

not all good. Today was a

3:37

good one. Well, tell us what

3:39

it was. Let's start with that since we're

3:41

recording this, by the way, on

3:44

the morning of Tuesday, November

3:47

14th. So the inflation data

3:49

just came out. What was it? What does it mean?

3:51

So month over month, prices

3:53

were flat. So that inflation rate

3:55

was zero. The expectation

3:57

had been a little bit higher than that. So that's...

4:00

are pleasant, surprised this morning

4:02

at 8.30. An important piece

4:04

of that, we knew this was coming, gas prices have

4:06

come down quite a bit and that puts downward pressure

4:09

on overall inflation. We also

4:11

saw on what's referred to

4:13

as core, so inflation taking out

4:15

food and energy, taking them out

4:17

not because they don't matter to people but because

4:20

they tend to move around like the gas prices

4:22

had an effect this month

4:24

and last month it wasn't as good of an effect. And

4:28

so that core inflation also

4:30

came in better than people

4:32

had expected and it was a two-tenths increase

4:36

instead of a three-tenths increase. Now

4:38

if you look over the year as a whole, inflation

4:41

has calmed down substantially

4:43

from where we were the peak in

4:46

last year and yet we're still it's

4:48

still higher than where we were before.

4:51

Total inflation is running right around 3 percent

4:54

and this core inflation

4:58

is around four and that's

5:01

higher than it was before the pandemic but we

5:03

have made an immense amount of progress this

5:05

year towards it. So no,

5:07

you know, throwing a party on

5:09

one month of good data but we've had several

5:11

good months over the course of this year

5:14

and you got to step back and look, you

5:16

know, big picture and yet for

5:18

those individuals or economists,

5:21

market watchers like myself who are

5:23

still in denial about an improvement in

5:25

inflation it's time for them to explain themselves.

5:28

Historically have we seen

5:31

anything like this such a dramatic

5:34

fall in the inflation rate without a

5:36

corresponding spike in unemployment?

5:39

We have been living the impossible

5:41

as possible since the pandemic

5:43

began. Most of what we saw in

5:45

the initial years including last year was

5:48

bad, right? That we had, I mean,

5:50

I don't need to explain how bad the pandemic and the

5:53

economic disruptions have been. This

5:55

year what we've seen this time the impossible

5:57

was good. As you see said,

6:00

we have seen inflation come down

6:02

notably and the unemployment

6:04

rates stay low. We have had the unemployment

6:07

rate below 4% since

6:10

the beginning of last year. That

6:12

is so important, right?

6:14

And wage gains have been high. We finally are seeing

6:16

even with the higher inflation, the higher prices,

6:19

wages have

6:20

caught up for the typical worker.

6:22

You

6:23

know, more is always better.

6:25

But last year, workers families

6:28

were, they were getting behind in terms

6:30

of wages and inflation.

6:33

And this year, we're getting back

6:35

on track. And that's really important. Prices

6:37

are not going to fall in most categories,

6:40

unless we have a very severe recession, and none of

6:42

us should want that. So the way you deal

6:44

with the inflation that we've had, the higher prices

6:47

is where you get those paychecks

6:47

up.

6:49

And then, you know, you can afford

6:51

it, it adjusts, this was very disruptive,

6:53

the inflation came very abruptly. And

6:56

the recovery has been very slow. But the

6:59

recovery is there. And

7:01

yes, what happened this year was not supposed to

7:03

happen. And yet, if you think about all the disruptions

7:05

in the pandemic, to supply, supply chains,

7:07

or labor with workers, it makes

7:10

sense that we had

7:12

this, you know, things have unwound,

7:14

we're rebalancing, we're getting back on track.

7:17

And that you can see that there's a lot of signs of

7:19

that in the economy.

7:21

So if it makes sense,

7:24

why, why are so

7:26

many economists and

7:29

pundits unwilling to accept

7:32

it? Because the headlines are relentlessly

7:35

negative.

7:35

Yeah, if it bleeds, it leads.

7:38

And now we have an amplification

7:40

through a lot of other like social media and other

7:42

news sources. Well, first

7:44

of all, anyone that comes out and says this

7:46

time is different, is really

7:48

going out on a limb. I wrote my last sub stack

7:51

post was talking about this time is different

7:53

in terms of the unemployment rates and

7:56

for the hawks for the people that said in 2021

7:59

when inflation picked up and we keep going. We

8:01

did too much fiscal stimulus and yada,

8:04

yada. Like history was on their side.

8:07

But reality wasn't in

8:09

terms of what was happening in the economy with

8:12

supply and all the disruptions

8:14

of the pandemic. I mean, when economists

8:17

go back and think about what's possible

8:19

or what usually happens in the macro economy,

8:21

there ain't a pandemic in that data

8:24

set. We had disruptions

8:26

that weren't in living

8:28

memory. And that makes it hard.

8:32

And certainly I was wrong about how high inflation

8:34

would go and how persistent it would be. I had no

8:36

idea how hard it was going to be to turn the US

8:39

economy back on,

8:41

the global economy back on with the disruptions, how

8:43

hard it'd be to get COVID under control.

8:46

So last year, really, I mean, the case was there

8:48

for, see, we did too much, we help people too

8:51

much, and there's inflation. And

8:54

what this year is showing is,

8:56

yeah, it took

8:58

longer to get inflation down. It was a real hardship.

9:01

And yet it's coming down. So I mean,

9:03

I don't want to judge anybody. This has been a hard,

9:06

it's hard to know where we are, let alone where we're going.

9:09

But we're going in a good direction now. That's all I

9:11

care about. Okay, so let's talk

9:13

about where we are.

9:14

We are not

9:16

in recession, right?

9:18

So this brings up

9:20

the original reason we invited you on was,

9:23

I saw some of your discussions

9:27

on Blue Sky. I don't do Twitter anymore.

9:29

As Paul knows, I don't do any- Nobody

9:31

does Twitter anymore. It's all X

9:34

now. Oh, I

9:36

won't even say that. But

9:38

I saw you talking about the sum

9:41

rule and making

9:44

a point that it has not triggered

9:46

and that people do not understand

9:49

it. Explain for us,

9:51

since you created it, it's named after

9:53

you, what the sum rule is, why

9:57

it has not triggered and why you

9:59

created

10:00

So the

10:01

SOM role in some ways it's very

10:03

it's very straightforward. I focus on

10:05

the unemployment rate The unemployment rate is

10:08

I mean it's widely followed people understand

10:10

it and it's the reason that we fight

10:12

recessions Like millions of people losing their

10:14

jobs. That's really bad. All right, and

10:16

the reason that I developed the SOM role

10:19

And it wasn't called that when I developed it it

10:21

was just a recession indicator is

10:23

I was I contributed to a

10:25

volume called recession ready that was

10:29

co-sponsored by Brookings

10:31

and Washington Center for equitable growth the

10:34

volume had several chapters that were

10:36

about automatic stabilizers policies

10:40

that in a recession would turn on automatically

10:42

based on economic conditions and not politics

10:45

and Each chapter were things

10:47

that we do in a lot of recessions My

10:50

chapter was on sending out stimulus

10:51

checks or direct

10:53

payments to households I had done a lot

10:55

of research and policy work

10:57

looking at different ways We helped households

10:59

during the Great Recession and the recovery

11:02

stimulus checks were a great way to help people And

11:06

and so the chapter was about putting them on autopilot

11:08

Well to do that you have to have something that says

11:11

send them out and it needs to be accurate

11:13

I mean Congress is going to be displeased if they

11:15

send out hundreds of billions of dollars and

11:17

there is no recession People would probably

11:20

be okay with that. They got an extra check So

11:23

I went and what I needed was not a way

11:25

to forecast Recessions that isn't what

11:27

I'm in the business of here is to

11:29

say with a high degree of certainty

11:32

We are in a recession send out those checks Okay,

11:35

so I mean it is really accurate people

11:37

were excited about it more than I actually

11:39

thought anyone would be so his name The som

11:41

rule it's now a widely

11:43

followed indicator, especially right now The

11:46

rule itself is you look at the national

11:48

unemployment rate. I take the three

11:50

months average Which is

11:53

very important. We don't want to overreact to

11:55

one data point And what I do is

11:57

I compare that most recent reading And

12:00

what we know about October, that three-month

12:03

average is 3.8%. And I compare

12:05

it to the lowest reading in that series

12:07

over the prior 12 months. That's 3.5%.

12:10

So the summer, it's 3

12:13

tenths of a percentage point right

12:15

now. The trigger or the threshold

12:18

for being in a recession is 5 tenths

12:21

percentage point. Right? So we're

12:23

not there yet. We've moved up notably

12:26

since this summer. The unemployment rate is a very

12:29

slow-moving creature. So when

12:31

you start seeing going up a little bit, it

12:33

often will keep going. Not always. The

12:36

reason my phone blew up at 8.30 in

12:38

the morning when the employment report came

12:41

out is the monthly reading was 3.9%. The

12:44

lowest over the prior 12 months of the monthly

12:46

reading is 3.4%.

12:49

So that's 5 tenths. That's the someral trigger.

12:52

No, that is not. But

12:54

it is. Once you

12:56

pay attention to it, I've talked

12:58

a lot about the unemployment rate is

13:00

rising right now in part because of demand.

13:04

People are cutting back, especially relative to where they were,

13:06

and some workers get laid off and some sectors are getting

13:08

hit harder than others. That

13:11

is a very worrisome. That's a dynamic that heads into

13:13

a recession. That's why the someral works. The

13:15

other piece right now that is more

13:18

unusual is that we had

13:20

a burst of workers come back. Workforce

13:23

participation came up. One really good example

13:25

is a backlog of work visas

13:27

for immigrant

13:27

workers were processed this year.

13:30

So that's kind of a temporary boost. They

13:32

catch up and then it gets back to its regular flow.

13:34

At the same time, job creation slowed

13:37

some. I mean, still at really good levels,

13:39

but it slowed some. So right now you have jobs

13:42

catching up with workers. So that

13:44

means there's a period

13:45

of time where there's more unemployment.

13:49

Underlying

13:52

it is a good dynamic. We

13:54

have workers coming back. That's the best way to solve

13:56

a labor shortage is with labor. So

13:59

I don't see it as...

14:00

It's worrisome, but I don't

14:02

see a recession on the horizon. It's still my

14:05

base case we

14:05

avoid a recession. Let's define

14:08

things a bit more because this

14:10

can be a little confusing. What

14:12

exactly is a recession? What

14:15

is the actual definition? Because

14:17

I had thought that a recession

14:20

was two consecutive quarters

14:23

of negative GDP growth,

14:25

but that's not a recession.

14:28

A recession is a broad-based

14:31

contraction

14:31

economic activity.

14:33

That's the concept. GDP

14:37

growth can often wrap that together.

14:40

That is a measure of economic output,

14:43

income. We did

14:45

see last year two consecutive

14:47

quarters of declines in GDP. We

14:51

did not have a recession. I'll get back to

14:53

why that's pretty clear. The

14:57

two declines in GDP

14:59

has never happened outside

15:02

of a recession in the United States going

15:05

all the way back to 1947. It

15:08

doesn't always happen in a recession until

15:10

now. Again, this time

15:12

is different. When I stand out and say it about the SOM

15:15

rule, I got

15:17

some things to point to in recent

15:19

past. In

15:21

the United States, we have a group

15:24

at the National Bureau of Economic Research. It's

15:26

the Recession Dating Committee. Do

15:28

not let them set you up on dates. They

15:31

are a lovely group of individuals,

15:34

but they're a little older. On

15:38

their website, they have an FAQ about what

15:41

they look at. There is no NBER

15:44

rule. They

15:46

do this on a discretionary judgmental basis.

15:48

They've dated, quote-unquote,

15:50

the beginning and end of recessions going back

15:53

generations and generations. This is

15:55

even pre-World War II. This fits

15:58

with the broad base. They look at indicators. indicators

16:00

like GDP, they do look at that, personal

16:03

income, payroll employment,

16:05

industrial production, there's

16:08

other indicators. So

16:10

they look at a wide range, oh, in

16:12

consumer spending, of course, of

16:16

important pieces of activity. That's,

16:19

they do not look at inflation. They

16:21

look at all these figures are inflation adjusted.

16:23

High inflation is not a recession. It's

16:26

a bad time, but it's not a contraction in economic

16:28

activity. And then they

16:30

make a decision. What they're looking for is like,

16:33

what's the month before it all started

16:35

falling apart? That's called the peak

16:38

of the recession. And then you go and find, well, when

16:40

did it turn? Like, what's

16:42

the depth? That's the trough. So

16:45

that by definition is the recession. In the

16:47

United States, we have a group of individuals of experts

16:50

who make that decision. Other countries, some other countries

16:52

don't have that. So they just use the two quarters of

16:54

GDP. I mean, that

16:57

is a contraction. Right.

16:58

So the important point here is

17:01

we had those two quarters and

17:03

didn't have a recession. So

17:06

considering how weird

17:08

the economy has been since

17:11

Covid, is it possible

17:13

that the sum rule

17:15

could trigger and we don't have a

17:18

recession?

17:18

Yes. And it would be very comparable

17:20

to those GDP numbers in the sense that

17:22

if you look under the hood at why the

17:25

GDP declined in those two quarters, one

17:27

was a contraction in net

17:30

exports, like the contribution it was making to

17:32

GDP. And then the other one

17:34

was about

17:35

a

17:36

slower pace of inventory

17:37

build, which is also a

17:39

pulls down GDP. So those two

17:41

things are I mean, we had a global pandemic supply

17:43

chains broke down. Business were having a terrible time trying

17:45

to figure out how much stuff they needed and when

17:47

they needed it. So

17:50

like, there's your supply story on what GDP

17:52

looked like. And if you take out those

17:54

two pieces, consumer spending was growing, inflation

17:57

adjusted, business investment was growing inflation.

17:59

So it was. a very COVID story.

18:02

Now I said my base case is that

18:04

we avoid a recession. My base

18:06

case also is the somberal triggers.

18:09

I have learned, it's been

18:11

painful, but this supply,

18:13

working out supply and demand mismatches

18:16

takes time. So the idea that

18:18

all these extra workers on immigrants

18:21

on work visas are trying to match up are going to,

18:23

like they're all going to get jobs by next, by

18:25

this month. No, I don't

18:28

think that's going to happen. It is entirely

18:30

possible and I expect that the unemployment

18:32

rate is going to drift up to 4%, maybe

18:35

a little bit higher. If it would hang

18:38

at 4% for say three months, the somberal

18:40

triggers. If the unemployment rate

18:42

then, because we're working out these supply disruptions,

18:45

if it gets up to 4%, hangs right around

18:47

it, and maybe that's not a recession. When

18:50

the somberal has triggered in all of these

18:52

prior recessions, in the mildest of recessions,

18:55

which is 2001, it went up

18:57

by 2 percentage points. Because

18:59

remember, the somberal, this is a relatively small increase.

19:01

It keeps going. So 2001, it was more like 2 percentage points.

19:04

A typical recession is more like 4. So

19:07

if we go up like kind

19:10

of 6, 10, 7, like that's not a

19:13

recession. And it's a

19:15

supply story and a pandemic disruption story

19:17

that has some comparable

19:21

to GDP, except with the somberal breaking

19:23

that's in the labor market

19:24

working out disruptions. I

19:26

recall when we had those two quarters

19:29

of GDP contractions that some

19:31

people were arguing that we were in a recession,

19:34

even though employment, that we

19:36

were going to be in a situation with high employment

19:39

and high consumer spending that was still a recession,

19:42

which kind of raises the question, if a recession

19:44

falls on the economy, does it make a sound? So

19:47

I'm curious. I think on this

19:49

podcast, we're very interested in the middle

19:52

class as the beating

19:54

heart of the economy. So I'm curious,

19:57

can the somberal be adapted to

19:59

provide insights? insights into the economic

20:01

well-being of the middle class and are

20:03

there ways that you think it could inform policy decisions

20:06

that prioritize the needs of the middle class

20:08

and promote economic stability that way?

20:11

Oh, I could say so much about this question. The

20:14

first thing I'd say is looking

20:16

at the labor market, looking at unemployment, remember,

20:18

all this came from a proposal to send out

20:21

money to people, right, and very broad

20:23

base. I am a proponent of those

20:25

money to people going up through like 80% of

20:28

households. Right,

20:30

the top 20, they'll be fine. Right, but I do

20:32

think the research shows a broad-based help

20:35

to people in a recession is a good idea. The

20:38

unemployment rate, I mean, at the end of

20:40

the day, many Americans,

20:42

like their paycheck, like that is

20:45

what they need to get by. I

20:47

mean, to some people, they don't have a living wage. It's not even

20:49

enough. But for, I mean, for most families,

20:52

like higher inflation is a hardship and

20:55

no paycheck is a disaster. Right.

20:58

So the fact that unemployment is low, that's really good.

21:00

People are getting the paychecks. The unemployment rate

21:03

being low is a benefit to workers,

21:05

workers who are not at risk of losing their jobs,

21:08

right, because you have generally higher

21:10

wage growth, you have

21:13

more job opportunities to move

21:15

jobs. Workers are

21:18

more flexible in work arrangements.

21:21

We've seen in the last year historic

21:23

gains in some groups that have been left

21:25

on the sidelines or had a harder

21:27

time. Women's employment is at record levels.

21:30

We've seen black men's employment

21:32

move up to historic levels. You have workers

21:34

with disabilities who've come, I mean, like on and

21:37

on and on. And that's because the

21:39

labor market is good. Like workers have

21:41

an upper hand. So the unemployment rate is a good

21:43

way to just kind of proxy

21:46

how well are people doing, like

21:48

regular people that need paychecks. So

21:51

that's important. And again,

21:54

when we think about what are policies to support

21:57

people, middle class, working class,

21:59

those with. the poor, it's finding

22:02

ways to design good policy that are effective

22:05

and have the biggest bang for

22:06

the buck,

22:08

putting things on autopilot, tying

22:10

them to economic conditions, even if Congress

22:12

has to vote up or down on them, just being

22:14

prepared, building the systems.

22:17

What does that relief look like? I

22:19

mean, I am a big proponent of the stimulus check that

22:21

I worked on, CARES and rescue

22:23

plan and had a lot of

22:26

input because that's my research and expertise.

22:29

I would never have put

22:31

the timing, particularly the second and third

22:33

checks when they were. I certainly would not

22:35

have made the biggest check the last one. But

22:38

frankly, a check that came probably

22:40

later than it should have, that's better than zero.

22:45

We saw a lot of benefits to

22:47

households from that

22:49

relief and the extra jobless benefits. We

22:51

absolutely could do it better. Part

22:53

of doing that better is to get prepared and

22:56

work out the details ahead of

22:58

time. It's very hard in the fire

23:01

to do it well.

23:02

Right. That's

23:05

why you want to

23:07

put this on autopilot, just so that these

23:09

things trigger when they're necessary

23:12

to avoid the political fight over it. You

23:15

mentioned, and it's very true, how

23:18

inflation is a hardship, unemployment

23:22

is a disaster, losing your job

23:24

is a disaster. The Fed

23:26

has a dual mandate, allegedly,

23:29

on inflation and employment,

23:32

full employment. Is its priority

23:34

off that it seems to focus

23:37

more on inflation

23:40

than full employment?

23:41

My biggest concern is

23:43

that we focus too much

23:45

on the Fed. They

23:48

have a dual mandate. They're the only institution

23:50

in the country that has an inflation mandate.

23:53

They have a dual mandate, maximum employment and inflation.

23:56

I have been vocal

23:59

and written. about this on my

24:01

substack and other news outlets. If

24:03

we let the Fed, or we expect

24:05

the Fed to go it alone and bringing down inflation,

24:08

and inflation has been too high, right, like inflation

24:10

needs and has needed to come

24:12

down. If we act like

24:14

the Fed can solve all the problems, then

24:17

it is going to be really

24:19

painful. And in any interview

24:22

or any discussion of inflation, I have found

24:25

myself in many, people

24:27

talk about

24:28

food, gas, and housing.

24:31

Those are, and the Fed talks about this too, oh,

24:33

people with less income, they can't afford

24:35

food, gas, housing. Those

24:38

are the three things that the Fed

24:40

cannot bring

24:42

down that inflation without

24:45

causing a recession. These

24:48

are three necessities, and actually they can make housing

24:51

a bigger mess because if they raise interest rates,

24:53

they're not going to, so it's just, it like infuriates

24:55

me that even the Fed buys into this. But

24:58

then Congress does too,

25:00

right? Like they need to be doing,

25:02

and there were things that were done with the Strategic

25:04

Petroleum Reserve and getting up oil production,

25:06

which I know runs counter to long-range

25:09

goals, and yet, I mean, they needed

25:11

to move heaven and earth to get gas prices down,

25:13

or it was going to be just

25:16

out of control, right? I mean, that's one of the

25:18

places I think the Inflation

25:20

Reduction Act earned its name.

25:23

And not just from the prescription drug piece of

25:25

it, which is important, that getting

25:28

us in energy policy for the first

25:30

time ever will be so important

25:32

to fighting future energy

25:35

inflation. We are the largest

25:37

oil producer in the world right now, and we

25:39

still were not protected from those massive

25:42

increases in gas prices. You got

25:44

to get off that stage, you got to have renewable energy.

25:47

So, but this is just where I don't think people have

25:49

their head wrapped around, and I mean, I think these are some,

25:52

you know, people in Congress in the White House don't have their head wrapped

25:54

around this, that they have a responsibility

25:56

and the tools to fight inflation in a way

25:58

that the Fed does not have the... Do

26:00

I think the Fed is doing everything correctly? No.

26:04

But to me, the biggest problem

26:07

we have

26:07

right now is this expectation that the Fed can do

26:09

it alone and

26:11

it can't. And in fact, well,

26:13

its ultimate goal was to bring

26:16

down inflation. Its proximate

26:18

goal by raising interest rates

26:20

was to drive up unemployment, wasn't

26:22

it? Just that,

26:23

I mean, weirdly, to

26:26

trigger, if not a recession, some

26:28

misery in order to bring

26:30

down demand.

26:31

It's not the way they say it. Having worked

26:33

at the Fed, and I can do Fed speak

26:36

if

26:36

I want to. It's boring and no one

26:38

can understand it. When

26:40

they talk about the softening of

26:43

the labor market, it's like, just

26:45

call a spade a spade here. You want people to have

26:47

smaller paychecks. Some are going to lose their jobs.

26:49

There's nothing soft about that. And

26:52

yet the Fed,

26:54

they're so focused right now,

26:56

is to get inflation down. Unemployment

26:59

is low. I mean, you could really look at this and check the box on maximum

27:01

employment. I mean, if they do too

27:03

much, we're going to lose that one. They

27:05

want to get inflation down. If we get inflation down,

27:08

they do not care how it comes down. Right?

27:11

If it's all coming from supply, they will take it. This

27:14

is not, we're not fighting, it's

27:16

not like Volcker, like, oh, there was an inflation mentality

27:19

and we just have to break people. And

27:21

they threw us into a recession. The

27:24

Fed knows how to get inflation down

27:26

to 2% really fast. They

27:28

could have put us into a recession, and they

27:31

didn't. They are being patient on

27:33

this regard up to a point. So

27:35

to them, the tool and the

27:38

aligned with historical experience would

27:40

be that to get inflation down, demand

27:43

has to be reduced. And often that's reflected

27:46

in unemployment going up. I mean, this was,

27:48

we heard this from macro economists

27:50

using this rule of thumb. I mean, that's the

27:53

Fed works through demand. So often what

27:55

I've said is right now, and this was true for

27:58

at least a year or two, we are in a race

28:00

against the Fed in terms of the supply

28:02

disruptions getting worked out. Because

28:05

if they don't get worked out quickly and in a convincing

28:07

way, the Fed will keep pushing and we

28:09

will go into a recession. They don't want

28:11

that, but they want 2% inflation. They're

28:14

going to get

28:14

it come hell or high water. Well, so

28:17

I have my own idea for an automatic

28:19

stabilizer, which is for every

28:22

quarter point increase in the unemployment

28:24

rate, a Fed governor loses their job.

28:26

Yeah. Yeah. No,

28:29

that's the they could soften up the

28:31

Fed or at least take away their speaking privileges.

28:33

So

28:36

much havoc. But this raises

28:39

one more question, which kind of

28:41

baffles me. Why 2%? I mean,

28:43

I know historically it's like this accidental

28:46

number pulled out, but I saw

28:49

a headline even today with the good CPI

28:51

news and it followed

28:54

up with, you know, still far above

28:56

the 2% norm that the normal

28:59

rate is 2%. The normal rate

29:01

was not 2% until what?

29:04

The odds?

29:06

Why is 2% magic? And should

29:08

it be? Might we be better

29:10

off with a 3% inflation rate?

29:13

Right. Well, a couple of things. First, CPI

29:16

runs higher than the Fed

29:18

than the personal consumption expenditure

29:20

prices, which is what the Fed targets. So

29:22

a normal CPI is more like two and a half.

29:25

We are not far from that.

29:27

Right. So but we don't

29:29

have the 2% on the PC. Like, we're not

29:32

at the Fed's target. And, you

29:34

know, I get it. There's all improvement. And

29:36

God forbid we say anything good about the economy.

29:39

Right. So everything comes with a caveat. And

29:41

those me being sarcastic, I think

29:44

I'm good. We should share. OK,

29:46

so this 2%. So it has a few different

29:49

origin stories. But technically,

29:51

the first central bank that

29:54

introduced this 2% target and made an

29:56

explicit target. Right. That

29:58

was the most important piece of it. explicit was

30:00

the Central Bank of New Zealand. Okay,

30:03

this is a country with more sheep than people. So

30:05

that's where we're getting our 2% target

30:07

from. It was adopted widely. The other

30:10

piece of it in the United States, you know, not

30:12

to like be snarky about the

30:14

New Zealand number, is that's

30:16

kind of where inflation had started

30:19

to settle. Right? Like after

30:21

Volcker, it didn't, it went down,

30:23

but it took some time for inflation to

30:26

move its way down. It was like in the 3%, you

30:28

know, but it had like started to

30:30

settle there ahead of New Zealand, or ahead

30:33

of this explicit target. So

30:36

it had been kind of a soft

30:38

target internally at the Fed,

30:40

as I understand it. And so then

30:42

the big change was to make it explicit.

30:46

So it's not that

30:48

it's just a random made up

30:50

number. I mean, it kind of is, but it's where

30:52

the economy looked like it wanted to be. But that

30:54

doesn't mean that that's the right

30:57

place. Like GDP growth, it

30:59

also softened it, like productivity had fallen

31:01

off. So it's not wages

31:04

were flat. Wait, yeah. So

31:06

it's just like I say, with the the sum

31:08

rule, it's an empirical pattern. It's something

31:11

we see out in the world, but it's not a law of

31:13

nature, right? The underlying dynamics can

31:15

change. And thus the, you know, the quote unquote,

31:17

best target would be fine. The

31:20

reason I mean, the Fed is not going to change this target.

31:22

This was a discussion for other reasons

31:24

before the pandemic, even, because

31:27

inflation was low, lower than they

31:29

wanted. It's also you know,

31:31

people have been really, I think, rightly

31:33

so angry about inflation

31:35

being high. You want to go out and say,

31:37

hey, we actually want more inflation

31:40

than before. I think just the

31:42

reaction would

31:45

just be hard to explain why one

31:48

arbitrary number, which happens

31:50

to be bigger is better than one arbitrary

31:53

number that's lower. I'm

31:55

pretty convinced we can get back to 2%. And I

31:58

think we can get there in a healthy economy

32:00

with higher productivity and wage gains. I

32:02

don't think we need to have that conversation

32:05

yet because inflation improvements have not

32:07

stalled out. There's

32:08

a question that we ask everyone,

32:11

the benevolent dictator question. Is there

32:13

anything that you would do to improve

32:16

the economy right now if

32:18

you were in charge, if you were the benevolent dictator

32:21

of the economy and had ultimate power? Yeah,

32:24

no political constraints. You get

32:26

the, some gets to rule.

32:31

Protect this

32:34

labor market. We need, people

32:36

need to be paid a living wage

32:38

and they need to be treated with dignity in

32:41

their work.

32:42

And we have seen in this recovery, because

32:44

the labor market moves so fast. It

32:47

turns out, despite the fact that corporations

32:50

have told us that their workers weren't worth

32:53

paying more. Well, guess what?

32:55

If they need to, they pay them more, right?

32:58

And they are worth it. And we've seen productivity

33:00

higher. And it is extremely important

33:02

that we are bringing people off the sidelines

33:05

and getting them the jobs that they

33:07

want. This is good for the country

33:09

as a whole, let alone the individual workers.

33:12

So to me, we've made a lot of gains in the

33:14

labor market. We have learned a lot of lessons about

33:16

how to do it right. Much

33:19

of it has gotten drowned

33:21

out by the inflation. We were

33:24

going to have inflation anyways. And

33:27

it's just, it's been amazing to see

33:29

how that has happened. The other

33:32

piece we we've learned, and there was

33:34

proof of concept of how many ways that

33:36

we could help those people who really

33:38

needed some extra help. I'm a huge

33:41

advocate for the new child tax credit. And

33:44

I hope that all of the people

33:46

who all of a sudden with high inflation

33:48

care about the poor, I sure hope that they come

33:50

and back that CTC because they weren't,

33:53

you know, a year ago. Nor

33:57

am I waiting for them to do that. relief

34:00

programs that really

34:03

made a difference. And across the board, we've also

34:05

seen a lot of cases they could, they need to be

34:07

better administered, right? Some of these

34:09

programs are a real disaster and how

34:12

they work. And hopefully

34:14

we, I mean, a lot of times it's

34:16

the nuts and bolts that are really boring that

34:19

we need to spend more time

34:21

on. And these are, these are some of the big

34:23

lessons to learn from COVID, but above

34:25

all else, you know, we have to value the American workers

34:27

that's, they're the ones that get the job done.

34:30

Our last question that we ask everyone is

34:33

why do you do this work?

34:34

When I was an undergraduate

34:37

at Denison University, when I

34:39

showed up, I did not know what I wanted to do with

34:42

my, with my life. And I had

34:44

an economics professor who

34:47

convinced me early on

34:49

that economists can do

34:51

good in the world. I have doubted

34:53

that at some point in time.

34:55

And to me, well, and I really,

34:57

that's, that's what I want to do. I want to do good in the world.

35:00

And working in public policy has

35:03

been for me, the most direct

35:05

path to try and do good in the world. So I'm very proud

35:07

of what I've, you know, the opportunities I've had to

35:09

work in that space. And, uh,

35:12

but there are definitely days where I questioned

35:14

whether this was the, the

35:17

way for like my personal

35:19

sanity to, to

35:21

be, you know, being an economist

35:24

isn't always fun, but it's, it's been challenging

35:26

and I've, like I said, I've had a lot of opportunities

35:28

and I'm very thankful

35:30

for that. Thank you for doing the

35:32

work. It's been, uh, it's, it's

35:34

been really fun, uh, following

35:36

you online and now finally

35:38

getting to talk to you in person. And, uh, Nick

35:41

is really apologetic that he couldn't be here

35:43

to talk with you too.

35:44

I'm definitely a fan of the podcast.

35:47

So I have listened before. So it's

35:49

always exciting to, you know, go from listener

35:51

to talker.

35:57

So Goldie, here's a question.

35:59

I think you would ever want an economic

36:02

rule with your name on it because frankly

36:04

it seems like kind of more of a headache

36:06

than it's worth. The

36:10

Goldie rule? Yeah, exactly. I

36:13

can't even imagine what the Goldie rule

36:15

would be. No,

36:17

you know what? If you'd asked me that 10 years

36:19

ago, I would have emphatically said yes.

36:23

But I have grown accustomed

36:26

to being Nick's sidekick. And let's

36:28

be honest, if there was a Goldie rule,

36:29

it would probably be called the Hanhour

36:32

rule because that's the way

36:34

it works. But

36:37

yeah, I agree with you. It is amazing

36:40

actually following Claudia

36:42

on Blue Sky and seeing old

36:45

white men like me mansplaining

36:47

her own rule there. And

36:50

she's had to write multiple sub-stack newsletters

36:53

explaining it and all that. It

36:56

just seems like a hassle. Her sub-stack is amazing.

36:58

I love to follow it, but I really

36:59

was feeling for her last week when everybody came

37:02

out with an opinion about the rule with her own name

37:04

on it. Right. I think the amazing

37:06

thing about this little incident though

37:09

over the Somme rule and whether or not

37:11

it has been triggered is that people

37:14

are entirely missing the point

37:16

of it. The point is

37:18

not to predict recession

37:21

so that we can have doom and gloom headlines

37:23

when unemployment goes

37:26

up a tick. The point is to actually

37:28

do something about it to avoid

37:31

peak misery. That's

37:34

why she created it as

37:36

a trigger for automatic stabilizers.

37:40

And that's not what you're hearing

37:42

people talking about. You're not seeing headlines

37:45

saying, oh, we need to send

37:48

checks out to people. We're seeing headlines

37:50

saying, oh, this is bad for Biden. Right.

37:53

I think a lot of the people who misread

37:56

the rule, they were upset because

37:58

they thought it was a—

37:59

They only

38:02

cared that the rule would trigger something,

38:04

that the rule was a natural law,

38:08

that this happens, then this happens. And

38:10

I think that's been a problem with all of the economic

38:13

discourse over the last two years. It's

38:16

been very frustrating because people are talking

38:18

about, are we in a recession? And then

38:20

you have endless debates about the GDP

38:23

and all that. And

38:25

should inflation be at 2% or whatever? And

38:29

it's kind of a forest for

38:31

the trees situation because what

38:33

you should be talking about in economic conversations

38:36

is, is this good for the middle class? Is

38:38

this good for the economy? But instead,

38:40

it seems like we're just fighting over the

38:42

terms and the numbers again and again.

38:45

And that really doesn't accomplish anything. Well,

38:48

it does accomplish something. It

38:51

lowers expectations. And so

38:53

much of economics is an expectations

38:56

game. I mean, that essentially is

38:58

the consensus

39:01

on what causes inflation is the expectation

39:04

of inflation. And the reason why

39:06

the Fed is so worried about high

39:08

inflation taking hold is

39:11

this idea that once people think

39:13

there's going to be inflation, it makes it harder

39:16

to fight it. So if

39:19

you constantly have all these

39:23

negative headlines about the economy, people

39:25

are going to spend less and employers

39:27

are going to hire

39:29

fewer people and invest less in production.

39:32

And it's going to be a self-fulfilling prophecy.

39:34

I think what's important to point out is that this

39:37

is actually not for everybody,

39:39

but broadly it is a really strong

39:42

economy right now and has been for quite

39:44

some time. And we're not talking

39:46

about on the average. We're talking about

39:49

on the median and particularly

39:51

for people at the lower end of the

39:54

economy. We see there's

39:56

a report that came out, I think just

39:58

yesterday. showing

40:00

that we haven't had this

40:02

much wage compression

40:05

and wealth compression since

40:07

the period following the

40:10

boom following World War II, since

40:12

the 1950s and 60s. We

40:15

see wages rising faster

40:17

than inflation and we see

40:20

economic inequality decreasing,

40:23

particularly with workers

40:26

who have only a high

40:28

school diploma or less. The

40:30

first time in 40 years we've

40:33

seen those types of gains

40:35

for people at the bottom end of the wage scale

40:38

and we see it in the middle as well.

40:40

We see it basically for 80% of workers. It

40:42

is remarkable

40:45

and all of this is since 2020.

40:49

In the broad scheme of things, this

40:52

is a strong economy even if prices

40:55

are higher than they were before

40:57

COVID hit.

40:58

Yeah, it's funny because those were

41:01

the high school diploma workers

41:04

are the exact people who the media was

41:06

so concerned about in the wake of the 2016 election,

41:09

but there seems to be not as much

41:11

attention being paid now that those workers are

41:13

seeing big gains this year. So yeah,

41:17

it's a tricky game with ever

41:19

changing rules and

41:22

we're just trying to make sense of it. So I think that

41:24

if there is a Goldie rule, Paul,

41:27

it's that the Goldie

41:29

rule is

41:30

nobody knows anything about economics

41:34

and if they do, they're not going

41:36

to tell you in the headlines anyway. That's

41:40

a good one. I endorse that rule 100%. It's

41:44

more a rule of thumb than a rule, but I'll

41:46

go with it. Again, if you want to

41:48

read more from Claudia Somme, we

41:50

provide links in the show notes.

41:59

If you like the show, make sure to subscribe,

42:02

rate, and review us wherever you get your podcasts.

42:05

Find us on Twitter and Facebook at Civic Action

42:07

and Nick Hanauer. Follow our writing on

42:09

Medium at Civic Skunk Works and peek behind

42:11

the podcast scenes on Instagram at Pitchfork

42:14

Economics. As always, from our team

42:16

at Civic Ventures, thanks for listening.

42:19

See you next week.