David Goldstein:

Heads up Pitchfork listeners: we recorded this podcast last week before the Senate passed the COVID Relief Bill, and with the House expected to pass the Senate version any day now, it’s all but a done deal. But we think you’ll still find this conversation both entertaining and extremely informative. So enjoy.

There’s a Democrat in the White House, and that means we’re all worried about deficits and inflation again, right?

Austan Goolsbee:

The ever inflation hawks who started in 2009 saying that the stimulus would lead to inflation, the Fed would lead to inflation. Those people overnight changed their tune 100% even on interest rates and inflation the second Donald Trump was elected. It wasn’t about inflation. 

Nick Hanauer:

It’s about politics and power.

Speaker 4:

From the home offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer: the best place to get the truth about who gets what and why.

Nick Hanauer:

I’m Nick Hanauer, founder of Civic Ventures.

David Goldstein:

I’m David Goldstein, senior fellow at Civic Ventures.

So Nick, you can really feel the seasons changing. Spring is around the corner. The days are getting longer.

Nick Hanauer:

They are.

David Goldstein:

There’s a Democrat in the White House, and that means we’re all worried about deficits and inflation again, right?

Nick Hanauer:

Exactly. Yeah. 

David Goldstein:

Like clockwork. As soon as the Democrats are in charge, inflation is just around the corner.

Nick Hanauer:

And the deficit is going to bring down the county. Yes it is. Yes it is. And the depressing part about that, Goldy, is it’s not just the usual heritage foundation clowns who are inflation-mongering. It’s people like Larry Summers who theoretically is a Democrat and on the side of the good. And it’s very, very difficult.

David Goldstein:

We’re picking on Larry Summers here because he did that op-ed in the Wall Street Journal, warning that the 1.9 trillion dollar COVID relief package was too big, that it might be inflationary.

Nick Hanauer:

In a world where 20 million Americans are out of work. Blah blah blah. Yeah. It’s crazy. But the good news is that today on the show we have the anti-Larry Summers, which I’m super excited about, my old friend Austan Goolsbee, who’s currently a professor of economics at the University of Chicago Booth School of Business, but previously was the chairman of the Council of Economic Advisors under President Obama, and was in the thick of it during the last financial crisis.

David Goldstein:

And the debate over the stimulus response.

Nick Hanauer:

And inflation and all this stuff. And I think that the reason that this conversation is so consequential today about inflation is that it’s key to understanding the stimulus gridlock. And it’s super important to understand the legitimate concerns about inflation versus just using inflation as an excuse to prevent the Biden administration from effective governance, which is, in my opinion, what the Republicans basically want. Because they know that if Biden governs effectively then he will continue to be President and they will continue to be in the minority.

David Goldstein:

Right. To be clear, nobody’s saying we can spend an infinite amount of money without causing inflation. Actually, it’s very similar to the debate over the minimum wage. When we said 15 and people come back and go, “Well, at 15, why not 50?” Well, because 50 would probably be crazy.

Nick Hanauer:

Too much! Yeah.

David Goldstein:

But 15 certainly isn’t, so if 1.9 trillion why not 10 trillion? Well, because that’s going to be too much because that’s half the economy. But 1.9, if there isn’t much inflationary pressure from that, why not do it?

Nick Hanauer:

Yep. Exactly. Well, let’s talk to Austan.

Austan Goolsbee:

I’m Austan Goolsbee. I’m a professor of economics at the University of Chicago’s Booth School of Business. I’m the former chairman of the Council of Economic Advisors under President Obama. I write, periodically, economic research, and I write an economics column for the New York Times. 

Nick Hanauer:

What we wanted to center our conversation around is the risk of inflation from the current stimulus plan. And honestly, Austen, there’s not really a better person in America to have that conversation with than you, because you have now sort of lived through two of these cycles, right? You were sort of very involved during the global financial crisis and helping the Obama administration out from under that shitshow, and now here we are in sort of a very similar economic circumstance. 

And obviously, there’s a lot of talk in the press about whether this is inflationary or not. So if you wouldn’t mind sort of describe for listeners what inflation is, where economists think it comes from, and what are the worries today?

Austan Goolsbee:

Now first, Nick, we’re old friends. I know you don’t like economists that much-

Nick Hanauer:

I like you!

Austan Goolsbee:

… but, I mean, I hope you’re going to give me a exception. Yeah, you’re going to give me an exception. So let’s think about inflation. And I consider much of the inflation-mongering to be absurd. There are a couple of places where there are economists who are engaging on the merits and they’re trying to debate through the merits, “Do you think there will be inflation from this bill or not?” But 90% of the inflation-mongering are the same people who were deficit hawking when Democrats are in office, and then absolutely for increasing the deficit when Donald Trump is there, and it has nothing to do with the merits. 

But that said, on the merits: inflation is when the overall price level is drifting upward each year. When that happened in the United States in the 1970s, it came out of a period that economists call the Guns and Butter episode, in which Lyndon John was the president, was fighting the Vietnam War, so you were running hot, let’s call it, on fiscal policy. The government’s running big deficits, but he did not want to raise taxes to pay for that, so he ran it with guns and butter, and that built up some inflationary pressures. You had on top of it oil boycotts and blah blah blah. And we got inflation. 

And once you get substantial inflation, it tends to spiral because everybody says, “Well, if the prices are going up 10%, my wages need to go up at least 10%.” And if the wages go up 10%, then they got to raise prices 10%. And you get these spirals.

Nick Hanauer:

Yeah. And it’s a feedback loop.

Austan Goolsbee:

Yeah. It can be a feedback loop. Right. Now, the only thing I’ll say about that is this is… I don’t know, but my grandparents lived through the Depression, and they were scarred by the Depression in a bunch of ways that would stay with them for their whole lives. So I’m graduating from… I’m getting a PhD and my grandpa, who fought in World War Two, he’s like, “Now Austan, I’m going to tell you this. Never buy a stock.” He’s like, “That’s the one thing is never buy a stock.” He’s like, “Because we had friends who bought stocks, they bought everything. You will lose everything if you ever buy a stock.” So that kind of mentality does carry over from inflation. Basically, people who were alive in the 1970s have a kind of a fear of, “Oh my God, what if we get back on that treadmill?” So fine, I can understand. 

So let’s now fast forward to today. There is a group of people who look at the size of the rescue plan, 1.9 trillion, and they say, “Ooh. 1.9 trillion is a lot. How big is the so-called output gap?” That is the difference between what we think the potential is for the economy and what the actual is. Okay. That’s the gap. And in a normal stimulus environment, you’re trying to fill the output gap to get us back to where we were in unemployment and output and wages and whatever. The people who are afraid of inflation are saying they don’t think the output gap is that big, and this rescue plan is bigger than the output gap, therefore it’s going to overheat the economy, and if you overheat the economy it’ll generate inflation. That’s their argument.

Okay. Fine. That’s the reputable version of their argument. That’s not the political version. So Larry Summers kind of publicly wrote an article saying that, and then it was followed up by a few other economists saying basically that same style. “This is two, three times bigger than the output gap, therefore it’s going to be inflation. It’s going to be just like the Guns and Butter episode and we could be 10 years dealing with inflation.” I’m very skeptical for a couple of reasons.

First, we as societies, as economies, have a lot of tools for fighting inflation, and we have virtually no tools for fighting deflation. So that’s why people usually, at the outset, say, “A little risk of inflation is a lot better than a little risk of deflation, because what are we going to do if the economy tanks?” But that said, just on straight-up grounds, I think the force for inflation is a lot smaller than they say.

Number one: if you acknowledge that this is not stimulus, that’s the wrong word. This isn’t about trying to generate a big multiplier on government spending to raise the GDP, the way normal stimulus is in a business cycle. This is absolutely disaster relief money in which you’re trying to prevent permanent damage, like damage of the form somebody’s going to get evicted from their house, have their credit score ruined for the next seven years, not able to rent another place.

Nick Hanauer:

Or small businesses closing, et cetera.

Austan Goolsbee:

Yeah. Small business. We don’t want them to go bankrupt or shut down.

Nick Hanauer:

Et cetera. Right. Yeah.

Austan Goolsbee:

Okay. So that kind of damage means that, in the terminology of the stimulus crowd, the multiplier from relief spending is very low. So if I give you $1000 that you make your rent payment that otherwise you weren’t going to make the rent payment and you were going to be evicted, that doesn’t show up as an increase in the GDP. It still can be very beneficial, because it would be even worse if you didn’t make the payment, but that doesn’t raise measured GDP, it prevents a decline of measured GDP. And therefore the overheating nature of that, I just don’t think is nearly as big. 

And if you look at the woman who I used to work with at the CEA who went on to become the chief economist at the Congressional Budget Office and now is at the Hamilton Project, she did a calculation of: take that into account, that the multiplier’s not that big, and look at how large the output gap is, and look at how large the Biden program is, and the fact that it’s spread out over kind of two years. It’s not all happening at once. And she shows that by reasonable calculations, you do get over potential output by about 1% for a year.

Nick Hanauer:

Which is nothing. Nothing.

Austan Goolsbee:

Which is nothing. 1% for a year. Let met just emphasize, when Donald Trump cut taxes by two trillion dollars for big corporations at the peak, really, of a boom, we were over potential output for almost 1% for close to two years. And in the mid 2000s, we were over the potential output by about 1% for almost three years. And at the end of the 90s, we were 2% over potential output for four years, peaking in the quarter… I like to tease Larry Summers, peaking in the quarter when he was the Treasury Secretary. Okay. 

So we’ve had three times in the last 30 years where we were, for an extended period, running hotter than what this would run without inflation. And if you go look at the Guns and Butter episode of the 60s, they were literally seven consecutive years higher than potential output, peaking at 5.5 to 6% of GDP. Okay? Over potential output. So nothing like what we’re doing now. So I just think, even on their own terms, it’s unlikely to generate inflation. And if it did, we would know what to do. 

And then the second thing I would say is many of these people have literally been predicting the imminent danger of hyperinflation for 13 consecutive years. I was in the White House in 2009, the same people were saying, “Oh. [inaudible 00:14:22]. There’s going to be a hyperinflation, they’re expanding the monetary base. The stimulus is going to lead to inflation.” The Fed has been predicting they could get the inflation rate to 2% for 13 years, and have not been able to. So if you’re going to say that we are in imminent danger of overheating, then you at least need to be a little circumspect and explain how you got it wrong for 13 years.

David Goldstein:

Oh, okay. So let me just try to to summarize your points here very quickly, and you correct me if I’m wrong, okay?

Austan Goolsbee:

Okay. I can be more succinct, is that what you’re saying?

David Goldstein:

No. No, it’s perfect. Just for the sake of listeners. One: 1.9 trillion in COVID relief does not equal 1.9 trillion in stimulus. 

Austan Goolsbee:

Correct.

David Goldstein:

The amount of stimulus is actually far less than that number.

Austan Goolsbee:

Correct.

David Goldstein:

Two: even if it does take us over potential output for a year or two, it’s a tiny bit over, and the historical experience shows that that doesn’t have much of an impact on inflation. Is that correct?

Austan Goolsbee:

Yes.

David Goldstein:

And three: the deficit hawks have never been right before, so why the hell would we listen to them now? Never! Never!

Austan Goolsbee:

Look, and if this is like… Is it dust? I ask you, is it that miserable families are all miserable in different ways? The hawks, we’ve got all different varieties of hawks: we’ve got deficit hawks, we got gold bugs, we’ve got the ever inflation predictors, we’ve got Fed-haters, we’ve got… And this is a uniting force which, on the political side, I mean, you’ve got to agree with me. Why does Marco Rubio care about inflation now?

Nick Hanauer:

Right.

Austan Goolsbee:

It’s because he believes that he can stop Joe Biden from carrying out his electoral mandate if he comes up with some reason why. “Oh no, we can’t do it because of inflation, because of the deficit, because of something else.” And the ever inflation hawks who started in 2009 saying that the stimulus would lead to inflation, the Fed would lead to inflation, we needed to preemptively raise the interest rate to prevent anyone’s wages from going up too much, those people overnight changed their tune 100% even on interest rates and inflation the second Donald Trump was elected. You remember that?

Nick Hanauer:

Yeah.

Austan Goolsbee:

They wouldn’t testify. He tried to put several of those folks onto the Fed, in which they had condemned the Fed, condemned Obama, said it would be inflationary, were wrong for eight years in a row. And then Trump wins and they go to get on the Fed and they say, “You know what the Fed needs to do? Cut the interest rate.” You remember President Trump saying that the head of the Fed is a dope? And that’s he’s the enemy of the state equal to the head of China? And he wanted interest rates to be negative for him like they were in Europe. So that’s the perfect evidence it had nothing to do with inflation. It wasn’t about inflation. 

Nick Hanauer:

Right. It’s about politics and power.

Austan Goolsbee:

Yes.

Nick Hanauer:

Yeah. It’s so interesting. So Austan, can you remind us how involved you were with the Obama stimulus? Were you there from the beginning days?

Austan Goolsbee:

I was there from the beginning. I had been involved heavily in the campaign the whole time, and so I was definitely there in the transition when they were deciding what would be in the stimulus. But I wasn’t the chair of the CEA at that time, so I wasn’t one of the principals where they were fighting over what should the magnitude be. I was more observer rather than participant in that.

Nick Hanauer:

Yeah. But can you draw some… I mean, as a highly informed sort of quasi-participant and observer, can you draw some conclusions from that experience?

David Goldstein:

Lessons to learn.

Nick Hanauer:

Lessons to learn, yeah.

Austan Goolsbee:

Yeah, yeah. Lessons learnt. Okay. So the first thing I would like to point out is there are some very important ways in which 2009 and today are light years apart and very different. In particular, the COVID recession looks nothing like any previous business cycle in American history. It’s not caused by any economic factor. It’s not concentrated in normally cyclically sensitive industries. 

So if you look at normal business cycle recessions, industries that fluctuate: who goes down in a recession? Consumer durable goods. Autos. Nobody wants to buy a washing machine. Business investment goods. Housing construction. A bunch of stuff that’s interest rate sensitive or sensitive to the business cycle. Those are the most variable parts of the economy, and those are what you’re trying…. When you’re doing stimulus, you’re trying to juice the investment or juice the consumer purchases and that sort of thing. 

This recession, as everybody now knows, is centered on the service sector, and in parts of the economy that we always thought were recession-proof. Okay. Going to the dentist was never a source of recession. People are going to go to the dentist all the time in recessions and booms. Travel and tourism, restaurants, going to the dentist, getting your hair cut, a bunch of personal services collapse because people are afraid to go out and interact in person. 

So now we’re trying to come back. And part of why our forecasting ability is so poor is effectively what everyone’s doing is taking a model that they fit on a dataset of past business cycles, and then just kind of taking the values from 2021 and jamming them into this statistical model that’s based on business cycles that have nothing to do with this. Okay? So you can’t conclude too many lessons. 

That said, there is one super important way in which it’s very similar now to the financial crisis, and that is both of these crises are fundamentally about contagion. And at that time, it was financial contagion that bank A would fail and that would lead bank B to fail, which would leave institution C on the other side of some as the counterparty and lose all their money in some derivatives transaction. And this time it’s physical contagion. But the reaction to contagion is withdrawal. The fear leads to withdrawal. And at that time, it was pull your money out. And at this time, it’s pull your physical person out. 

And the reason why that matters is because what has to happen is you have to make people not afraid any more, and that’s not in the choice set of the government. There is no policy that just automatically fixes that problem. You have to address the fundamentals, and you have to address people’s fear. You have to convince them. 

And if you’ve destroyed your credibility, which is what happened, my perception, at the end of the Bush administration on financial stuff, and by the end, at least, of the Trump administration on anything related to COVID, is once your credibility’s undermined, now your announcements have the opposite effect of what you intend. So if you get up and say, “There’s nothing to be afraid of,” but you’ve destroyed your credibility, that leads people to panic. They’re like, “Oh my God, if they have to assure us that it’s safe, then it must not be safe.” 

And we got into that. We were absolutely in that dynamic coming to the end of 2008, and we were in that dynamic coming in with COVID, for sure. And so change of administration can be a help. And then two: don’t go too small. That was a lesson of 2009. We absolutely believed that we would try everything we could, and then if we still needed more, we would just go back and do more.

David Goldstein:

But you didn’t go back and do more.

Austan Goolsbee:

But the Republicans were not going to allow that.

Nick Hanauer:

Yeah, right.

David Goldstein:

So how much bigger should you have gone in the Obama administration?

Austan Goolsbee:

The main thing when people argue about the size, the biggest problem was not the size. If you had it to do over again, yes, you would go bigger, but the thing that was underneath the surface is there was a battle of three worldviews of what should happen in stimulus. 

One worldview was embodied by people who thought, “This is going to be a V-shaped recovery, so we’re going to have a steep downturn and we’re going to come roaring back, and therefore the whole stimulus should be short-run stuff about trying to move activity from 2010 into 2009.” And, “Timely, targeted and temporary.” They kept saying that.

The second group said, “No, no, it’s a financial crisis, it’s going to be long-lived. We should do infrastructure.” Okay. So group one said, “Don’t do infrastructure, because if that thing takes five years to get out the door, by the time it comes on it’s just going to be inflationary because we’ll already be boom.” So group two said, “Financial crisis, extended, horrible, do something long-lived.”

And group three, which are mostly political people, said, “We have to pass it. It’s going to come down to a very narrow vote, so let’s just make it all tax cuts, because at least Republicans will vote for it. So even if that’s not the best stimulus in the world, we can just make it bigger with more tax cuts and Republicans will vote.” 

So they kind of went back and forth among these three worldviews, and so in the end they kind of did the Washington way. And if you go look at that stimulus of 2009, it’s one third of each of those three things. It’s one third short [crosstalk 00:24:35], one third tax cuts, one third long. And so looking back, it wasn’t a V-shaped recovery. The financial crisis made it extended and painful. 

So I think you wouldn’t do any of that short-run stuff, you would convert it all to longer-tail stuff. And I don’t know if the tax cuts… I don’t know how helpful they were. Probably moderate. A lot of the direct longer-term spending had by far the highest bang for the buck. And you would go bigger, but in a way it’s an academic exercise. And Paul Krugman, who is a friend of mine, I said at the time and I continue to say now, it’s fine to say it should have been bigger. If it was one trillion, it should have been two trillion. If it was two trillion, it should have been three trillion. 

But it came down to one vote. And all of the marginal voters… If you remember, there was like two Democrats from North Dakota, there were two from Arkansas, there was one from Louisiana, there was Ben Nelson in Nebraska. It was a very different Democratic majority than it is now. And all the marginal voters on the Democratic and the Republican side wanted it smaller and wanted there to be less spent. So it actually was kind of a miracle to get what we got in 2009, is my view. It took a lot of heavy lifting on the politics. 

That said, if you could wave a magic wand and have whatever you wanted, you definitely would have made it bigger, and you definitely would have focused on those longer-term things so that you wouldn’t have to go back. Because the thing is, when they went back, it didn’t matter what the facts were. Whether the economy obviously needed it, the Republicans took what I call the East German judge at the Olympics approach, that Obama could come out and do a triple Lutz and land it, and then they’d be like, “I’m giving him a tip.” It was already filled out.

Nick Hanauer:

So one of the things that really struck me about this argument that’s taking place… I think you captured it so brilliantly in this Tweet to Larry Summers. I’m just going to read it. “You fear that a temporary relief payment in excess of the output gap will ignite inflation. Separate from the issue of whether relief equals stimulus, can you explain how the pandemic collapse and an annualized negative 32% did not generate deflation?”

Austan Goolsbee:

Right.

Nick Hanauer:

First of all, super smart.

Austan Goolsbee:

Well, it was a trick question.

Nick Hanauer:

It was a trick question, but it was a really, really smart trick question.

Austan Goolsbee:

[crosstalk 00:27:11]. It was a trick.

Nick Hanauer:

But the reason it struck me and resonated for us is that there has been this pattern throughout the neoliberal era, which is that if it’s good for rich people, it’s an unalloyed good. Right? It’s never a job killer, it never creates inflation, it never increases the deficit. But if it’s good for working class people, there are all these risks. Right?

Austan Goolsbee:

Yeah.

Nick Hanauer:

This massive asymmetry in the world in where we see risk and in where we do not see risk.

Austan Goolsbee:

Look, Nick, you’ve been saying this for a lot of years, and highlighting it on tax policy, highlighting it on all sorts of things. Now, let me say at the outset, I don’t think that’s the mentality that Larry Summers was bringing to it. I don’t think he’s coming at it there. My read on him is he’s quite nervous. He wants there to be a big infrastructure package, and he’s been saying so for a lot of years. And I think he is nervous, like he put the second half of his piece that he wrote, that if we do this… If we do 1.9 trillion on this, then nobody will pass what he wants for infrastructure. And I don’t know. That’s a political judgment. I’m not an expert on that. But it’s worth thinking about.

Nick Hanauer:

Yeah, it’s a fair thing to raise.

Austan Goolsbee:

Now on the neoliberal critique, I think you’re 100% right. Look, like I say, in 2017, these people pushed a 2 trillion dollar tax cut for high income people and large corporations who were, at that moment, having the highest profit rate that they had ever seen in the history of corporations. The tax rate on high income people was as low as it had been in decades, and the economy was already booming. So if inflation is your bugaboo, how… Wait. Wait. Wait a minute. You’d look and you’d be like, “Hold on a second.” 

The reason why it was a trick question when I said, “Look, there was a collapse of output that did not lead to a deflation.” And if you’re kind of in a normal business cycle mindset, a collapse of GDP at those kind of rates, it’s an annualized 32%, or just objectively GDP shrinks something like 7% in a month. That is such an epic collapse, it should lead to huge deflation, which it did not. And so that could be for one of two reasons. 

One: every one understood it to be temporary, and so a temporary thing doesn’t have the same impacts as a unlimited or, “We don’t understand when it’s going to stop,” type of shock. But the second, and if you saw what Larry responded, he kind of fell into the trap, because he said, “No, no. The reason why a collapse of output did not lead to a deflation was because there was harm to the supply side of the economy at the same time as demand fell.” 

So that whole drop in output wasn’t just from a collapse of demand, it was also that people were pulling out of the workforce, and suppliers weren’t making spare parts, and all of this stuff which was driving up prices at the same time demand was driving down prices. But why that’s a trap is because then you have to admit if there were reasons on the supply side that a collapse of output did not lead to deflation, then would not those same factors mean that we can have an increase in output without inflation? 

Because if we spend money on childcare for people whose kids can’t go to school, and those people then are able to go back to work, that’s pulling prices down. It’s not the right way to think of that as an inflationary stimulus that’s increasing demand. And so now it’s like we’ve turned the supply side economics on its head. It’s no longer like, “Ah, let’s give tax cuts to rich people because that will expand the supply side.” This is, “Just go look out the window. There’s millions of people who cannot go to work because of childcare, because they’re afraid of the disease, because of all sorts of stuff.” And if we can address the virus, we could get a beneficial supply shock, and that’s yet another reason not to expect massive inflation from this increase.

David Goldstein:

So let’s say we pass this 1.9 trillion dollar COVID relief package. If it turns out that it is inflationary… If we’re all wrong and it is inflationary, how soon would we expect to see that impact? How would we know? How are we going to judge this over the next couple of years? Is this something we’ll only know looking back on it five years from now?

Austan Goolsbee:

No. I think you would know… That’s a great question that you want to ask about any policy: if we’re wrong, how will we know we’re wrong and how long will it take? And the answer to that is it should start showing up in prices. The only thing is even if it led to… Look, this is a temporary thing, so if it’s 1.9 trillion injected and goes over two years and then it goes away, even if you believe in the overheating theory of inflation, that should increase inflation by a couple of percent temporarily and then it should go away. 

So I think step one, if you just look at the CPI or the GDP deflator, as the Fed looks at the PCE deflator, the Personal Consumption Expenditures deflator, those things should start showing inflation. If you look at the market for TIPS, which are Inflation-Protected Securities, they should imply that the market thinks that there’s going to be inflation. 

Because the other thing is… The other thing that’s funny is a lot of the inflation fear-mongering are from people who say they just believe in the market. Okay? But the market is saying they don’t think there’s going to be inflation.

Nick Hanauer:

Right, exactly.

Austan Goolsbee:

If you just go look at TIPS, the predicted inflation is like 2.1%, so if you think that that’s a big thing, why would the market not fear that? And then that usually moves them into a stage of, “Well, that’s because the Fed is engaged in fantasy money and everything is made up.” So, I think you would see it in the market, you would see it in inflation, and if you saw a sustained bout of inflation, then it would be the appropriate thing for the Fed to start inching up the interest rate. That’s what I mean. We know how you stop inflation. We know the Fed’s tools for stopping inflation, and that’s what you would do. Look, it’s not perfect. We might be wrong. If we’re wrong, then go to plan B, which is stop inflation. 

Nick Hanauer:

There’s a lot of room right now to raise interest rates, because they’re effectively zero.

Austan Goolsbee:

Yes! Yeah! [crosstalk 00:34:42] they’re effectively zero. So the thing is… The thing that I just… The guy who’s the head of the Minneapolis Fed is named Neel Kashkari, and he’s a California guy, and now he’s the head of Minneapolis Fed. And he was a Republican. Though he’s the central banker, he has not been excessively agitated about inflation. 

And I’ve seen him discuss the issue that historically most inflation comes from kind of a wage-price spiral. That you’re going to see wages go up, which would lead costs to be higher and inflation go up, and then when inflation’s higher they demand higher wages. And he said the true unemployment rate is pushing 10%. We’ve got millions of people out of work. We lost 21 million jobs in a single month. And the thought that we’re going to pass a relief package which is going to so overheat the job market that a true unemployment of maybe 9%, 10% will suddenly go away and we’ll see massive increases in wages… I’m just like, “We should be so lucky as to see…”

Nick Hanauer:

Yeah, exactly.

Austan Goolsbee:

We’ve been waiting 10 years to see sustained wage increases, and they haven’t materialized. So I just don’t see why these opponents are not more circumspect in their claims of inflation. Because as you said, they’ve been wrong about inflation. Maybe the model’s totally broken, and we just don’t understand where inflation comes from.

Nick Hanauer:

Yeah, exactly. Let’s say you’re a middle or working class worker, or you’re a capitalist like me with a huge amount of assets, who is inflation, on a relative basis, worse for?

Austan Goolsbee:

It’s hard to say, and the reason it’s hard to say is the last time we went through a bout of inflation, of serious inflation in the 70s, a lot of things were different in the structure of the economy and our policies. So for example, the tax code was not indexed to inflation. So as for what is inflation, you are making whatever, $30,000, then the next year because of inflation, in real terms you didn’t get a raise but your nominal salary went up to 35,000, and then you had to pay a higher tax rate. So that was the time when for sure the middle class was feeling pretty pinched by inflation, and they were pissed off about it. If you go look at the-

Nick Hanauer:

Yeah, yeah, yeah. I remember that now. Yeah.

Austan Goolsbee:

[crosstalk 00:37:21]. It does seem like there’s a lot of pain to go around. The stock market returns were not great during inflationary times. Borrowers usually tend to do well, at least after the fact. If you borrowed at 5% and then inflation goes to 10%, you’re like, “Yes! I’m paying back with inflated dollars, so it’s like they’re paying me to take it out.” But that’s not a general statement because interest rates will rise.

Nick Hanauer:

But if I’ve got a billion dollars in today’s dollars, and in three years those dollars, because of inflation, are worth a third less, have I lost…

Austan Goolsbee:

That’s an extreme case. That’s hyperinflation or something. But that’s okay. Let’s say that. Have you lost-

Nick Hanauer:

Also, having a billion dollars is an extreme case.

Austan Goolsbee:

Yeah. A billion dollars, I like the sound of that as a starting point. But the question is always: where is the billion dollars? Is it under your mattress? If it’s under your mattress then you are going to definitely suffer. If it’s invested in the stock market, then those companies… There are bonds are interest rates that inflation just comes straight out of your return. If you’re at a company that’s selling a product and the price is going up with inflation in a way you have a bit of a hitch, so you still could earn profit from the higher inflation, whereas a person just sitting on their cash would not. So with your billion, it kind of depends what you’re doing with it.

Nick Hanauer:

Yeah. Okay. I was trying to sort out in my head, do you see where I’m going with this?

Austan Goolsbee:

Yeah, yeah.

Nick Hanauer:

Whether there’s a-

Austan Goolsbee:

I see exactly where you’re going.

Nick Hanauer:

… difference-

Austan Goolsbee:

Because it’s like, what’s the distributional implication of inflation?

Nick Hanauer:

Implication of inflation, yeah.

David Goldstein:

I’ve got a related question to that. I know the Fed target has been 2% for quite some time and they have never hit it. Let’s say inflation rose to 3.5%. Having lived through the 70s, that doesn’t seem like a high number to be, historically. What would be so bad about 3.5%?

Austan Goolsbee:

What’s so bad? What goes wrong?

David Goldstein:

Yeah. What would be so bad about 3.5% inflation?

Austan Goolsbee:

In a way, this also goes to the thing we were just talking about before about: is this temporary or is this permanent? What happened in the 70s, and the Guns and Butter episode from the 60s going into the 70s is it went from 2% and then it was 3%, then it was 3% and moved to 4%, so the slippery slope argument has a grain of plausibility when it comes to inflation because it’s a cycle. 

And if you’re the workers and you see prices going up, you want that reflected in your wages. But then, as that’s reflected in your wages, the firm is like, “Oh, jeez. All our costs are going up 5% a year, so we got to raise the prices 5% a year.” And you can get in cycles like that. 

If you could truly guarantee that the 3.5% was only a short-lived thing, then it’s kind of hard, and especially if you sort of pre-announced it so everybody knew what to expect, it’s sort of hard to argue that that would be that bad. It’s just that it would be the harbinger of something spinning out of control. 

And the thing that’s interesting is, if you see the statements of the Fed chair, J. Powell, he doesn’t use a specific number like 3.5% or whatever, but he does say things like, “Instead of looking at the inflation rate at the moment, let’s look at the average inflation rate. And we want the average inflation rate to get to 2%.” Which means we could have short-run inflation higher than 2% for a bit until the average finally gets up to 2%. 

If you say, “What’s the average in inflation over the last year?” When inflation starts, that average is not going to get up high right away. So he’s kind of introduced in his language an idea that agrees with you, that he’s basically saying, “We’re not going to overreact to a little bit of inflation, because we’ve undershot for a long time, so maybe we should overshoot for a little bit.” 

You can see why he says that, but you can also see why that makes the gold bugs and the inflation hounds so mad. They’re like, “No! I don’t want! How dare he say that?”

Nick Hanauer:

Yeah. Right. If there were no political constraints today, how big would you make the stimulus package? Or do you think that that the Biden administration is doing could be improved on? Are there things that you wish they were doing that they’re not?

Austan Goolsbee:

I guess I think a couple of things. First, my own personal bias has been from the very beginning of this pandemic and in writing, that I say that the number one rule of virus economics is you want to help the economy, you got to stop the spread of the virus. That’s what drives the economy, that’s how we went into recession. 

If we get the vaccine as widespread, and if we don’t have the variants spread, and we don’t get resistance, then I think we could be back and off to the races. And then maybe going as big as this would be inflationary and we’d have to use those tools. And would that we get to that circumstance. So would that we run the economy as hot as it was running through the mid to late 90s when ordinary people’s wages were going up at a very fast [inaudible 00:43:11] for an extended period. But that would be great. 

That said, because I think the virus is the boss, and we’re not out of the woods, I thought they needed to do more last summer and they didn’t. They adopted a strategy of, “Let’s wait and see if it’s needed.” And anything that’s a pandemic, “Wait and see,” is the absolutely worst thing you can do. Because by the time you see it, it’s too late! It’s like your sunburn theory of the economy. And by the time you see that, “Oh God, I guess the virus is back raging out of control, we should have ponied up as an insurance policy.” And that’s still how I feel. 

Look, it’s very optimistic, but we haven’t beaten this virus. And if the South Africa variant, or God forbid something that’s impervious to the vaccine starts spreading, we will go into a double-dip recession. So I like sooner better than later, and I like bigger better than smaller. That said, at such time as you wave a magic wand and the pandemic is done, then I do think we want to phase back out of such a forward position on relief spending, because then the virus will no longer be the boss.

Nick Hanauer:

Yeah. I love it. I love it. Well Austan, this has been a spectacularly interesting conversation and super informative.

Austan Goolsbee:

Any time. I’m a big fan of you guys, even though I take it personally what you say about economists, I still love you and I still like to listen to you.

David Goldstein:

I was going to say, it’s always good to have a Chicago School economist on our podcast.

Austan Goolsbee:

That’s right.

Nick Hanauer:

Why did you become an economist? Why do you do this work?

Austan Goolsbee:

Well, I’ve actually wanted to do this for a long time. I was in high school and I liked math and science, and I liked debate and politics. And as I say it, there was a time when I wanted to either be a country music singer or an astrophysicist. And I spent surprisingly large amount of time trying to figure out how those could be combined. And the closest I could get was economics.

Nick Hanauer:

Economics PhD. Perfect. That makes perfect sense.

Austan Goolsbee:

And that’s kind of… [crosstalk 00:45:37] it wasn’t wrong to like policy and to like math, and economics is kind of like math plus policy, so it’s worked out pretty good.

David Goldstein:

It’s always good to have a backup plan in case your country music career doesn’t take off.

Austan Goolsbee:

Yeah, that’s right.

Nick Hanauer:

You never know.

Austan Goolsbee:

[crosstalk 00:45:51] play the guitar, but that country music singer, that’s no barrier.

Nick Hanauer:

I love it. All right. Austan, thank you so much for doing this.

Austan Goolsbee:

Yeah. Great talking to you.

Nick Hanauer:

This has been really spectacular.

Austan is such an amazing economist, and I’ve never taken one of his classes but I bet you it’d be a lot of fun and really entertaining and informative. And I don’t have a lot to add, I think that conversation really captured the big issues.

David Goldstein:

Yeah. The big takeaway is that the bigger risk right now is doing too little. And if we do too much and you get a little bit of inflation, well, we’ll deal with it.

Nick Hanauer:

Yeah. Absolutely.

David Goldstein:

Right? There’s things you can do. You can raise interest rates. The Fed can stop with all their quantitative easing. So do what we need to do now in the moment, and stop worrying about this inflation bogeyman that never ever ever seems to happen.

Nick Hanauer:

Yep. Absolutely.

On the upcoming episode of Pitchfork Economics, we get to talk to our old friend, Congressman Ro Khanna from basically the district of Silicon Valley about the GameStop debacle and what’s happening on progressive economic policy in Congress.

Speaker 4:

Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook @civicaction and @nickhanauer. Follow our writing on Medium at Civic Skunk Works and peak behind the podcast scenes on Instagram @pitchforkeconomics. As always, from our team at Civic Ventures, thanks for listening. See you next week.