Mainstream economists have been predicting a recession on the horizon for over a year, with some doomsayers even making up something called “a non-recession recession” to characterize the state of the economy. There’s no better person to cut through all this bluster and nonsense than the creator of one of the most reliable economic indicators created in the last few decades: the Sahm Rule, which aims to predict and track recessions in real time. Former Federal Reserve economist Claudia Sahm joins the podcast to walk us through the Sahm Rule’s methodology and explains how it utilizes timely data to provide early warnings of economic downturns, offering policymakers, businesses, and individuals a valuable tool for proactive decision-making.
Claudia Sahm is an esteemed economist and policy expert who has served as director of macroeconomic policy at the Washington Center for Equitable Growth, Senior Economist at the Federal Reserve, and economist for the White House Council of Economic Advisers under President Obama. She’s known for her contributions to macroeconomics and the development of the Sahm Rule, her research on monetary policy, labor markets, and macroeconomic stabilization has made her a trusted advisor and consultant to policymakers and organizations seeking evidence-based insights.
Twitter: @Claudia_Sahm
Claudia Sahm Substack: https://stayathomemacro.substack.com/
‘We do not need a recession, but we may get one’: https://www.ft.com/content/3213f700-26a7-4d84-aca0-d7cc5bf11484
Website: https://pitchforkeconomics.com
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
David Goldstein:
There’s been this conversation about the Sahm rule, how it was triggered.
Claudia Sahm:
The Sahm rule is very straightforward. I focus on the unemployment rate. The unemployment rate is, I mean, it’s widely followed. People understand it, and it’s the reason that we fight recessions.
David Goldstein:
People are talking about, are we in a recession? You have endless debates about the GDP and all that. What you should be talking about in economic conversations is, is this good for the middle class? Is this good for the economy?
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.
David Goldstein:
I’m David Goldstein, senior fellow at Civic Ventures.
Paul Constant:
I’m Paul Constant, and I’m a writer at Civic Ventures.
David Goldstein:
Wait, Paul, you’re not Nick.
Paul Constant:
I am not, and I beat myself up over it every day.
David Goldstein:
Well, unfortunately, Nick is under the weather, so he couldn’t make this recording. Paul, we’ve invited you in to be the billionaire today.
Paul Constant:
Yeah. Feels good. Feels good. I have to say, I thought that once you passed the nine-figure mark that you didn’t get sick anymore. This is really, I’m learning a lot today already.
David Goldstein:
Yeah, no, they haven’t quite managed to purchase immortality, but I think Elon Musk thinks that’s coming. We’ll find out, but we would have delayed this podcast. Often if Nick can’t make it, we’ll reschedule, but we didn’t want to miss today’s conversation with the economist, Claudia Sahm. Today is CPI day. This morning the new inflation report came out, so we wanted to get her on and talk about it. Also, there’s been an ongoing conversation on social media. Do you still do that, Paul? Social media?
Paul Constant:
I do, yeah, I do. Blue Sky, which I’m a big fan of, and I follow Claudia on Blue Sky. She’s a great economics follow. She explains things clearly. She’s also funny, and she’s super informative.
David Goldstein:
Right, so there’s been this conversation about the Sahm rule. There’s been some headlines and some posts about how it was triggered or almost triggered when unemployment hit 3.9%. There’s been some mansplaining to her, since she created it. It has not been triggered, as she’ll explain, but we figured that it’s a great time to talk to Claudia about what’s happening in the American economy and what is not happening in the economy, which by the way, that’s recession I’m talking about. Let’s talk to Claudia.
Claudia Sahm:
Claudia Sahm, founder of Sahm Consulting and a former Federal Reserve and White House economist. I’m currently an independent economist. I have a Substack, stay-at-home macro, Sahm, like the last name, and I write regularly at Bloomberg Opinion.
David Goldstein:
Well, thanks for joining us. First I want to wish you a very happy CPI day.
Claudia Sahm:
Yes, we got a good one today. They’re not all good, and today was a good one.
David Goldstein:
Tell us what it was. Let’s start with that, since we’re recording this, by the way, on the morning of Tuesday, November 14th. The inflation data just came out. What was it? What does it mean?
Claudia Sahm:
Month over month, prices were flat, so that inflation read was zero. The expectation had been a little bit higher than that. That’s our pleasant surprise this morning at 8:30. An important piece of that, and we knew this was coming, gas prices have come down quite a bit and that puts downward pressure on overall inflation. We also saw on what’s referred to as core, so inflation, taking out food and energy, taking them out, not because they don’t matter to people, but because they tend to move around. Like the gas prices had an effect this month, and last month it wasn’t as good of an effect. That core inflation also came in better than people had expected, and it was a two-tenths increase instead of a three-tenths increase. Now, if you look over the year as a whole, inflation has come down substantially from where we were at the peak in last year, and yet we’re still higher than where we were before.
Total inflation is running right around 3%, and this core inflation is around four. That’s higher than it was before the pandemic, but we have made an immense amount of progress this year towards it. So no throwing a party on one month of good data, but we’ve had several good months over the course of this year. You got to step back and look big picture. Yet for those individuals or economists, market watchers like myself who are still in denial about an improvement in inflation, it’s time for them to explain themselves.
David Goldstein:
Historically, have we seen anything like this, such a dramatic fall in the inflation rate without a corresponding spike in unemployment?
Claudia Sahm:
We have been living “the impossible is possible” since the pandemic began. Most of what we saw in the initial years, including last year, was bad. That we had … I don’t need to explain how bad the pandemic and the economic disruptions have been. This year what we’ve seen, this time the impossible was good. As you said, we have seen inflation come down notably, and the unemployment rates stay low. We have had the unemployment rate below 4% since the beginning of last year. That is so important, and wage gains have been high. We finally are seeing, even with the higher inflation, the higher prices, wages have caught up for the typical worker. More is always better, but last year, workers’ families, they were getting behind in terms of wages and inflation, and this year we’re getting back on track. That’s really important.
Prices are not going to fall in most categories unless we have a very severe recession, and none of us should want that. The way you deal with the inflation that we’ve had, the higher prices, is you get those paychecks up. Then you can afford it. It adjusts. This was very disruptive. The inflation came very abruptly, and the recovery has been very slow, but the recovery is there. Yes, what happened this year was not supposed to happen. Yet if you think about all the disruptions in the pandemic, to supply with supply chains or labor with workers, it makes sense that we had this. Things have unwound, we’re rebalancing, we’re getting back on track. You can see that there’s a lot of signs of that in the economy.
David Goldstein:
If it makes sense, why are so many economists and pundits unwilling to accept it? Because the headlines are relentlessly negative.
Claudia Sahm:
If it bleeds, it leads. Now we have an amplification through a lot of other social media and other news sources. Well, first of all, anyone that comes out and says, “This time is different,” is really going out on a limb. I wrote, my last Substack post was talking about, “This time is different in terms of the unemployment rates.” For the hawks, for the people that said in 2021 when inflation picked up that we keep going, we did too much fiscal stimulus and yada yada, history was on their side, but reality wasn’t, in terms of what was happening in the economy with supply and all the disruptions of the pandemic. I mean, when economists go back and think about what’s possible or what usually happens in the macro economy, there ain’t a pandemic in that dataset, right? We had disruptions that weren’t in living memory, and that makes it hard.
Certainly I was wrong about how high inflation would go and how persistent it would be. I had no idea how hard it was going to be to turn the U.S. economy back on, the global economy back on, with the disruptions, how hard it’d be to get COVID under control. Last year, really, the case was there for, “See, we did too much. We helped people too much, and there’s inflation.” What this year is showing is, yeah, it took longer to get inflation down. It was a real hardship, and yet it’s coming down. I don’t want to judge anybody. This has been a hard, it’s hard to know where we are, let alone where we’re going, but we’re going in a good direction now. That’s all I care about.
David Goldstein:
Okay, so let’s talk about where we are. We are not in recession, right? This brings up, the original reason we invited you on was I saw some of your discussions on Blue Sky. I don’t do Twitter anymore, as Paul knows. I don’t do any …
Paul Constant:
Nobody does Twitter anymore. It’s all X now.
Claudia Sahm:
Oh, yes.
David Goldstein:
I won’t even say that. But I saw you talking about the Sahm rule and making a point that it has not triggered and that people do not understand it. Explain for us, since you created, it’s named after you, what the Sahm rule is, why it has not triggered, and why you created it.
Claudia Sahm:
The Sahm rule, in some ways it’s very straightforward. I focus on the unemployment rate. The unemployment rate is, it’s widely followed. People understand it, and it’s the reason that we fight recessions. Millions of people losing their jobs is really bad. The reason that I developed the Sahm rule, and it wasn’t called that when I developed it, it was just a recession indicator, is I contributed to a volume called Recession Ready that was co-sponsored by Brookings and Washington Center for Equitable Growth. The volume had several chapters that were about automatic stabilizers, policies that in a recession would turn on automatically based on economic conditions and not politics. Each chapter were things that we do in a lot of recessions. My chapter was on sending out stimulus checks or direct payments to households. I had done a lot of research and policy work looking at different ways we helped households during the great recession and the recovery. Stimulus checks were a great way to help people.
The chapter was about putting them on autopilot. Well, to do that, you have to have something that says, “Send them out.” It needs to be accurate. Congress is going to be displeased if they send out hundreds of billions of dollars and there is no recession. People would probably be okay with that. They got an extra check. So I went, and what I needed was not a way to forecast recessions. That isn’t what I’m in the business of here. It’s to say, “With a high degree of certainty, we are in a recession. Send out those checks.” It is really accurate. People were excited about it more than I actually thought anyone would be. It was named the Sahm rule. It’s now a widely followed indicator, especially right now.
The rule itself is you look at the national unemployment rate, I take the three-month average, which is very important. We don’t want to overreact to one data point. What I do is I compare that most recent reading and what we know about October, that three-month average is 3.8%. I compare it to the lowest reading in that series over the prior 12 months. That’s 3.5%. The Sahm rule, it’s three-tenths of a percentage point right now. The trigger or the threshold for being in a recession is five-tenths percentage point. We’re not there yet. We’ve moved up notably since this summer. The unemployment rate is a very slow-moving creature. When you started seeing it going up a little bit, it often will keep going, not always.
The reason my phone blew up at 8:30 in the morning when the employment report came out is the monthly reading was 3.9%. The lowest over the prior 12 months of the monthly reading is 3.4%. That’s five-tenths. That’s the Sahm rule trigger. No, it is not. But once you pay attention to it, I’ve talked a lot about that the unemployment rate is rising right now in part because of demand. People are cutting back some, especially relative to where they were, and some workers get laid off and some sectors are getting hit harder than others. That is very worrisome, that’s a dynamic that heads into a recession. That’s why the Sahm rule works. The other piece right now that is more unusual is that we had a burst of workers come back. Labor force participation came up.
One really good example is a backlog of work visas for immigrant workers were processed this year. That’s kind of a temporary boost because then they catch up and then it gets back to its regular flow. At the same time, job creation slowed some, still at really good levels, but it slowed some. Right now you have jobs catching up with workers, so that means there’s a period of time where there’s more unemployment. But underlying it is a good dynamic. We have workers coming back. That’s the best way to solve a labor shortage is with labor. I don’t see it as, it’s worrisome, but I don’t see a recession on the horizon. It’s still my base case. We avoid a recession.
David Goldstein:
Let’s define things a bit more, because this can be a little confusing. What exactly is a recession? What is the actual definition? Because I had thought that a recession was two consecutive quarters of negative GDP growth, but that’s not a recession?
Claudia Sahm:
A recession is a broad-based contraction economic activity. That’s the concept. GDP growth can often wrap that together. That is a measure of economic output income. We did see last year two consecutive quarters of declines in GDP. Now that has only, and we did not have a recession, and I’ll get back to why that’s pretty clear. The two declines in GDP has never happened outside of a recession in the United States going all the way back to 1947.
David Goldstein:
Until now.
Claudia Sahm:
It doesn’t always happen in a recession. Until now. Right, yeah. Again, this time is different. When I stand out and say it about the Sahm rule, I got some things to point to in recent past. In the United States, we have a group at the National Bureau of Economic Research, it’s the Recession Dating Committee. Do not let them set you up on dates. They’re a lovely group of individuals, but yeah, they’re a little older. Anyway, on their website they have an FAQ about what they look at. There is no MBR rule, right? They do this on a discretionary, judgmental basis. They’ve dated “recession,” the beginning and end of recessions going back generations and generations. This is even pre-World War II. This fits with the broad base. They look at indicators like GDP, they do look at that. Personal income, payroll employment, industrial production. There’s other indicators. They look at a wide range … And consumer spending, of course. Of important pieces of activity. They do not look at inflation. They look at, all these figures are inflation-adjusted. High inflation is not a recession. It’s a bad time, but it’s not a contraction economic activity.
Then they make a decision. What they’re looking for is, what’s the month before it all started falling apart? That’s called the peak of the recession. Then you go and find, well, when did it turn? What’s the depth? That’s the trough. That by definition is the recession. In the United States, we have a group of individuals, of experts who make that decision. Other countries, some other countries don’t have that. They just use the two quarters of GDP. That is a contraction.
David Goldstein:
Right. The important point here is we had those two quarters and didn’t have a recession. Considering how weird the economy has been since COVID, is it possible that the Sahm rule could trigger and we don’t have a recession?
Claudia Sahm:
Yes. It would be very comparable to those GDP numbers in the sense that if you look under the hood at why the GDP declined in those two quarters, one was a contraction in net exports, like the contribution it was making to GDP. Then the other one was about a slower pace of inventory build, which also pulls down GDP. Those two things, I mean, we had a global pandemic, supply chains broke down, businesses were having a terrible time trying to figure out how much stuff they needed and when they needed it. There’s your supply story on what GDP looked like. If you take out those two pieces, consumer spending was growing, inflation-adjusted business investment was growing, it was a very COVID story. Now I said, my base case is that we avoid a recession. My base case also is the Sahm rule triggers.
I have learned, it’s been painful, but this supply, working out supply and demand mismatches takes time. The idea that all these extra workers, immigrants on work visas are trying to match up, they’re all going to get jobs next by this month. No, I don’t think that’s going to happen. It is entirely possible, and I expect that the unemployment rate is going to drift up to 4%, maybe a little bit higher. If it would hang at 4% for say three months, the Sahm rule triggers. If the unemployment rate then, because we’re working out these supply disruptions, if it gets up to 4%, hangs right around it, and maybe … That’s not a recession.
When the Sahm rule has triggered in all of these prior recessions, in the mildest of recessions, which is 2001, it went up by two percentage points. Because remember the Sahm rule, this is a relatively small increase. It keeps going. So 2001, it was more like two percentage points. A typical recession is more like four. If we go up six-tenths, seven, that’s not a recession. It’s a supply story and a pandemic disruption story that has some comparable to GDP, except with the Sahm rule breaking, that’s in the labor market working out disruptions.
David Goldstein:
I recall when we had those two quarters of GDP contraction that some people were arguing that we were in a recession even though employment, that we were going to be in a situation with high employment and high consumer spending that was still a recession. Which raises the question, if a recession falls on the economy, does it make a sound? I’m curious, I think on this podcast, we’re very interested in the middle class as the beating heart of the economy. I’m curious, can the Sahm rule be adapted to provide insights into the economic wellbeing of the middle class? Are there ways that you think it could inform policy decisions that prioritize the needs of the middle class and promote economic stability that way?
Claudia Sahm:
I could say so much about this question. The first thing I’d say is looking at the labor market, looking at unemployment, remember all this came from a proposal to send out money to people. Right? And very broad based. I am a proponent of money to people going up through 80% of households. The top 20, they’ll be fine. But I do think the research shows a broad-based help to people in a recession is a good idea. The unemployment rate, at the end of the day, many Americans, their paycheck, that is what they need to get by. To some people that don’t have a living wage, it’s not even enough. But for most families, higher inflation is a hardship, and no paycheck is a disaster. The fact that unemployment is low, that’s really good. People are getting the paychecks.
The unemployment rate being low is a benefit to workers, workers who are not at risk of losing their jobs, right? Because you have generally higher wage growth, you have more job opportunities to move jobs. Employers are more flexible in work arrangements. We’ve seen in the last year historic gains in some groups that have been left on the sidelines or had a harder time. Women’s employment is at record levels. We’ve seen black men’s employment move up to historic levels. You have workers with disabilities who’ve come, I mean, on and on and on. That’s because the labor market is good. Workers have an upper hand. The unemployment rate is a good way to just proxy, how well are people doing? Regular people that need paychecks.
That’s important. Again, when we think about what are policies to support people, middle class, working class, the poor, it’s finding ways to design good policy that are effective and have the biggest bang for the buck. Putting things on autopilot, tying them to economic conditions, even if Congress has to vote up or down on them, just being prepared, building the systems. What does that relief look like? I’m a big proponent of the stimulus checks. I worked on CARES and Rescue Plan and had a lot of input, because that’s my research and expertise. I would never have put the timing, particularly of the second and third checks, when they were. I certainly would not have made the biggest check the last one. But frankly, a check that came probably later than it should have, that’s better than zero.
We saw a lot of benefits to households from that relief and the extra jobless benefits. We absolutely could do it better. Part of doing that better is to get prepared and work out the details ahead of time. It’s very hard in the fire to do it well.
David Goldstein:
Right, and that’s why you want to put this on autopilot, just so that these things trigger when they’re necessary to avoid the political fight over it. You mentioned, and it’s very true, how inflation is a hardship. Unemployment is a disaster. Losing your job is a disaster. The Fed has a dual mandate allegedly on inflation and employment, full employment. Is its priority off that it seems to focus more on inflation than full employment?
Claudia Sahm:
My biggest concern is that we focus too much on the Fed. The Fed, they have a dual mandate. They’re the only institution in the country that has an inflation mandate. They have a dual mandate, maximum employment and inflation. I have been vocal and written endlessly about this on my Substack and other news outlets. If we let the Fed or we expect the Fed to go it alone in bringing down inflation … Inflation has been too high, right? Inflation needs and has needed to come down. If we act like the Fed can solve all the problems, then it is going to be really painful. In any interview or any discussion of inflation, I have found myself in many, people talk about food, gas, and housing. The Fed talks about those, too. “Oh, people with less income, they can’t afford food, gas, housing.” Those are the three things that the Fed cannot bring down that inflation without causing a recession, a pretty severe … These are three necessities, and actually they can make housing a bigger mess because if they raise interest rates, they’re not going to …
David Goldstein:
Right.
Claudia Sahm:
It just infuriates me that even the Fed buys into this, but then Congress does, too. They need to be doing, and there were things that were done with the strategic petroleum reserve and getting up oil production, which I know runs counter to long-range goals, and yet they needed to move heaven and earth to get gas prices down or it was going to be just out of control. That’s one of the places … I think the Inflation Reduction Act earned its name and not just from the prescription drug piece of it, which is important. Getting us an energy policy for the first time ever will be so important to fighting future energy inflation. We are the largest oil producer in the world right now, and we still were not protected from those massive increases in gas prices. You got to get off that stage. You got to have renewable energy.
But this is just where I don’t think people have their head wrapped around. I think these are some people in Congress and the White House don’t have their head wrapped around this, that they have a responsibility and the tools to fight inflation in a way that the Fed does not have the tools. Do I think the Fed is doing everything correctly? No, but to me the biggest problem we have right now is this expectation that the Fed can do it alone. And they can’t.
David Goldstein:
In fact, while its ultimate goal was to bring down inflation, its proximate goal by raising interest rates was to drive up unemployment, wasn’t it? I mean, weirdly, to trigger if not a recession, some misery in order to bring down demand.
Claudia Sahm:
It’s not the way they say it. Having worked at the Fed, and I can do Fed speak if I want to, it’s boring and no one can understand it. When they talk about the softening of the labor market, it’s like just call a spade a spade here. You want people to have smaller paychecks. Some are going to lose their jobs. There’s nothing soft about that. Yet the Fed, their sole focus right now is to get inflation down. Unemployment is low. I mean, you could really look at this and check the box on maximum employment. If they do too much, we’re going to lose that one. They want to get inflation down. If we get inflation down, they do not care how it comes down. If it’s all coming from supply, they will take it. We’re not fighting, it’s not like Volcker, “Oh, there was an inflation mentality and we just have to break people,” and they threw us into a recession.
The Fed knows how to get inflation down to 2% really fast. They could have put us into a recession, and they didn’t. They are being patient on this regard up to a point. To them, the tool and the aligned with historical experience would be that to get inflation down, demand has to be reduced. Often that’s reflected in unemployment going up. We heard this from macro economists using this rule of thumb. The Fed works through demand. So often what I’ve said is, “Right now,” and this was true for at least a year or two, “we are in a race against the Fed in terms of the supply disruptions getting worked out because if they don’t get worked out quickly and in a convincing way, the Fed will keep pushing and we will go into a recession.” They don’t want that, but they want 2% inflation. They’re going to get it, come hell or high water.
David Goldstein:
Well, I have my own idea for an automatic stabilizer, which is for every quarter point increase in the unemployment rate, a Fed governor loses their job.
Claudia Sahm:
Yeah. They could soften up the Fed or at least take away their speaking privileges. They cause so much havoc.
David Goldstein:
But this race is, well, one more question, which baffles me. Why 2%? I know historically it’s like this accidental number pulled out, but I saw a headline even today with the good CPI news, and it followed up with, “still far above the 2% norm,” that the normal rate is 2%. The normal rate was not 2% until, what, the aughts? Why is 2% magic, and should it be? Might we be better off with a 3% inflation rate?
Claudia Sahm:
Right. Well, a couple of things. First, CPI runs higher than the personal consumption expenditure prices, which is what the Fed targets.
David Goldstein:
Right.
Claudia Sahm:
A normal CPI is more like two and a half. We are not far from that, right? But we don’t have the 2% on the, we’re not at the Fed’s target. I get it, there’s all improvement. God forbid we say anything good about the economy. Everything comes with a caveat. That was me being sarcastic. I think some good we should share. Okay, so this 2%, so it has a few different origin stories. Technically the first central bank that introduced this 2% target, and made an explicit target. That was the most important piece of it, they made it explicit, was the Central Bank of New Zealand. This is a country with more sheep than people. That’s where we’re getting our 2% target from. It was adopted widely.
The other piece of it in the United States … Not to be snarky about the New Zealand number, is that’s kind where inflation had started to settle. Where after Volcker, it went down, but it took some time for inflation to move its way down. It was in the 3%, but it had started to settle there ahead of New Zealand or ahead of this explicit target. It had been a soft target internally at the Fed, as I understand it. Then the big change was to make it explicit. It’s not that it’s just a random made-up number. I mean, it kind of is, but it’s where the economy looked like it wanted to be. But that doesn’t mean that that’s the right place. GDP growth had also softened, productivity had fallen off. So it’s not-
David Goldstein:
Wages were flat.
Claudia Sahm:
Yeah, it’s just like I say with the Sahm rule, it’s an empirical pattern. It’s something we see out in the world, but it’s not a law of nature. The underlying dynamics can change, and thus the “best” target would be fine. The reason, I mean, the Fed is not going to change this target. This was a discussion for other reasons before the pandemic even, because inflation was low, lower than they wanted. It’s also people have been really, I think rightly so, angry about inflation being high. You want to go out and say, “Hey, we actually want more inflation than before”? I think just the reaction, it just would be hard to explain why one arbitrary number, which happens to be bigger, is better than one arbitrary number that’s lower. I’m pretty convinced we can get back to 2%, and I think we can get there in a healthy economy with higher productivity and wage gains. I don’t think we need to have that conversation yet because inflation improvements have not stalled out.
David Goldstein:
There’s a question that we ask everyone, the benevolent dictator question. Is there anything that you would do to improve the economy right now if you were in charge, if you were the benevolent dictator of the economy and had ultimate power?
Paul Constant:
Yeah, no political constraints. You get to, Sahm gets to rule.
Claudia Sahm:
Protect this labor market. People need to be paid a living wage, and they need to be treated with dignity in their work. We have seen in this recovery … Because the labor market moves so fast, it turns out, despite the fact that corporations have told us that their workers weren’t worth paying more, well, guess what? If they need to, they pay them more, and they are worth it. We’ve seen productivity higher. It is extremely important that we are bringing people off the sidelines and getting them the jobs that they want. That’s just good for the country as a whole, let alone the individual workers. To me, we’ve made a lot of gains in the labor market. We have learned a lot of lessons about how to do it right. Much of it has gotten drowned out by the inflation. We were going to have inflation anyways, and it’s been amazing to see how that has happened.
The other piece we’ve learned, and there was proof of concept of how many ways that we could help those people who really needed some extra help. I’m a huge advocate for the new child tax credit, and I hope that all of the people who all of a sudden with high inflation care about the poor, I sure hope that they come and back that CTC because they weren’t a year ago. Nor am I waiting for them to do that. But we’ve just seen all kinds of relief programs that really made a difference. Across the board, we’ve also seen a lot of cases, they need to be better administered. Some of these programs are a real disaster in how they work. Hopefully, a lot of times it’s the nuts and bolts that are really boring that we need to spend more time on. These are some of the big lessons to learn from COVID. Above all else, we have to value the American workers. They’re the ones that get the job done.
Paul Constant:
Our last question that we ask everyone is, why do you do this work?
Claudia Sahm:
When I was an undergraduate, at Dennison University, when I showed up, I did not know what I wanted to do with my life. I had an economics professor who convinced me early on that economists can do good in the world. I have doubted that at some point in time. To me, I really, that’s what I want to do. I want to do good in the world. Working in public policy has been, for me, the most direct path to try and do good in the world. I’m very proud of the opportunities I’ve had to work in that space. But there are definitely days where I questioned whether this was the way for my personal sanity to be. Being an economist isn’t always fun, but it’s been challenging and like I said, I’ve had a lot of opportunities, and I’m very thankful for that.
David Goldstein:
Thank you for doing the work. It’s been really fun following you online, and now finally getting to talk to you in person. Nick is really apologetic that he couldn’t be here to talk with you too.
Claudia Sahm:
That’s okay. I’m definitely a fan of the podcast, so I have listened before.
David Goldstein:
Well, thank you.
Claudia Sahm:
It’s always exciting to go from listener to talker.
Paul Constant:
Goldie, here’s a question. Do you think you would ever want an economic rule with your name on it? Because frankly it seems like more of a headache than it’s worth.
David Goldstein:
The Goldie rule?
Paul Constant:
Yeah, exactly.
David Goldstein:
I can’t even imagine what the Goldie rule would be. No. You know what? If you’d asked me that 10 years ago, I would’ve emphatically said yes, but I have grown accustomed to being Nick’s sidekick, and let’s be honest, if there was a Goldie rule, it would probably be called the Hanauer rule because that’s the way it works. Yeah, I agree with you. It is amazing actually following Claudia on Blue Sky and seeing old white men like me mansplaining her own rule there.
Paul Constant:
She’s had to write multiple Substack newsletters explaining it and all that. It just seems like a hassle. Her Substack is amazing. I love to follow it, but I really was feeling for her last week when everybody came out with an opinion about the rule with her own name on it.
David Goldstein:
Right. I think the amazing thing about this little incident though, over the Sahm rule, and whether or not it has been triggered, is that people are entirely missing the point of it. The point is not to predict recession so that we can have doom-and-gloom headlines when unemployment goes up a tick. The point is to actually do something about it to avoid peak misery. That’s why she created it as a trigger for automatic stabilizers. That’s not what you’re hearing people talking about. You’re not seeing headlines saying, “Oh, we need to send checks out to people.” We’re seeing headlines saying, “Oh, this is bad for Biden.” Right?
Paul Constant:
Yeah. I think a lot of the people who misread the rule, they were upset because they thought it predictive. They only cared that the rule would trigger something, that the rule was a natural law that this happens, then this happens. I think that’s been a problem with all of the economic discourse over the last two years. It’s been very frustrating because people are talking about, “Are we in a recession?” Then you have endless debates about the GDP and all that, and should inflation be at 2%? Or whatever. It’s kind of a forest for the trees situation because what you should be talking about in economic conversations is, is this good for the middle class? Is this good for the economy? But instead, it seems like we’re just fighting over the terms and the numbers again and again, and that really doesn’t accomplish anything.
David Goldstein:
Well, it does accomplish something. It lowers expectations, and so much of economics is an expectations game. I mean, that essentially is the consensus on what causes inflation, is the expectation of inflation. The reason why the Fed is so worried about high inflation taking hold is this idea that once people think there’s going to be inflation, it makes it harder to fight it. If you constantly have all these negative headlines about the economy, people are going to spend less and employers are going to hire fewer people and invest less in production, and it’s going to be a self-fulfilling prophecy. I think what’s important to point out is that this is actually not for everybody, but broadly, it is a really strong economy right now and has been for quite some time. We’re not talking about on the average. We’re talking about on the median, and particularly for people at the lower end of the economy.
We see there’s a report that came out I think just yesterday, showing that we haven’t had this much wage compression and wealth compression since the period, the boom following World War II, since the 1950s and sixties. We see wages rising faster than inflation, and we see economic inequality decreasing, particularly with workers who have only a high school diploma or less. This is the first time in 40 years we’ve seen those types of gains for people at the bottom end of the wage scale, and we see it in the middle as well. We see it basically for 80% of workers. It is remarkable, and all of this is since 2020. In the broad scheme of things, this is a strong economy, even if prices are higher than they were before COVID hit.
Paul Constant:
Yeah, it’s funny because those were, the high school diploma workers are the exact people who the media was so concerned about in the wake of the 2016 election. There seems to be not as much attention being paid, now that those workers are seeing big gains this year. Yeah, it’s a tricky game with ever-changing rules, and we’re just trying to make sense of it.
David Goldstein:
I think that if there is a Goldie rule, Paul, it’s that the Goldie rule is nobody knows anything about economics, and if they do, they’re not going to tell you in the headlines anyway.
Paul Constant:
That’s a good one. I endorse that rule a hundred percent.
David Goldstein:
It’s more a rule of thumb than a rule, but I’ll go with it. Again, if you want to read more from Claudia Sahm, we provide links in the show notes.
Speaker 4:
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