Please note this automated transcription may contain errors.

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richardgreen: it is a

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richardgreen: real treat to have our guest for this week. Diane

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richardgreen: Swamp

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richardgreen: Diane is currently chief economist of Grant Thornton. She's been chief economist and a number of places.

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richardgreen: We first got to know each other when we were on advisory board Chicago fed and that's where she is joining us from today.

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Chicago

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richardgreen: And the thing about Diane is while many of us are really good at our silos Diane is one of the few people I know we can put all the pieces together. Come up with a coherent narrative about

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richardgreen: What's going on in the economy, thinking about the individual pieces and so she's had a remarkable track record for seeing what was going to happen to the macro economy and us today and it's great to have you with us. Thanks for being here.

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Diane Swonk: Good to be here. Richard

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richardgreen: So I want to start with.

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richardgreen: A question that I asked everybody who comes on.

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richardgreen: To our class which is just if you could, in two or three minutes.

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richardgreen: Talk about how you got to where you are.

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richardgreen: Today,

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richardgreen: A little bit about your

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Diane Swonk: Well, given my career's real long now it's hard to put it into two to three minutes.

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Diane Swonk: I actually started out, I took an economics class as a fluke at University of Michigan as an undergraduate.

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Diane Swonk: And right before I took the class. I got a call from my then boyfriend over the winter break that someone had burned down the oldest building on campus, which was the economics department and then hey, was an eye taking economics and I took economics and

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Diane Swonk: The professor was absolutely horrible.

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richardgreen: It was, it was one of these

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Diane Swonk: Big 300 room lecture halls, but the TA was fabulous and

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Diane Swonk: I was the only woman in the class and didn't know that that was an issue until later.

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Diane Swonk: And my career, but it was the easiest thing I ever did. I mean I got there, and all of a sudden, I'm like, wow, this is what my brain was wired to do I'm you know I'm dyslexic, Richard. So you know I can't

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Diane Swonk: Do get numbers flipped. I can't dial a phone number, but I can do calculus in my head. So the math part was easy, but also it was so much a combination of everything that I had grown up with

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Diane Swonk: I grew up in the Detroit area during the train wreck of the 1970s. Yes, I am. That old but I'm still younger than you, Richard.

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richardgreen: I always will be.

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Diane Swonk: I know I remember you were telling me that you were upset when you met me because you were no longer the youngest person in the room. But I think, neither of us.

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richardgreen: Wanted. I was

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richardgreen: I was teasing when I said that. But it was mostly a true

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richardgreen: But it was actually a true statement at the time.

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Diane Swonk: I know. And I was, I was in my 20s. So we've known each other a long time but anyways.

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Diane Swonk: So that love of economics, the intuitive nature of it that it explained that we didn't. I didn't have to grow up in the train wreck. I did, or my bathroom went into poverty.

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Diane Swonk: And my dad was getting a new car every 60 days in the auto industry and we lived in the same neighborhood and she was having to dig up her backyard to plant food for family and had to go to work.

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Diane Swonk: At a minimum wage job. The time to try to supplement our family income at 16 years of age. So growing up in that train wreck and realizing it didn't have to be that way.

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Diane Swonk: I mean, this was like the world is fell in my lap that then I started out working for the chairman's office at 23 years old, but I did an accelerated program masters and undergraduate

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Diane Swonk: And they said they would pay for a PhD and then they didn't sense that they paid for an MBA. So I did that. Instead, I always got my education paid for but

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Diane Swonk: It was. And that's when I went to Chicago was working as well but starting out and working 19 years in finance in a large

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Diane Swonk: Money center bank was really quite an extraordinary experience but also it was, you know, always working for the, the CEO. I mean, starting at 23 and working for the CEO and you know what set my career was

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Diane Swonk: One of the easiest forecasts I've ever made. And that was, at the time I was

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Diane Swonk: Had a specialty in the auto industry because they said you're from Michigan and, of course, my father worked in the auto industry and I haven't worked in print walking production plan, since I was a toddler so

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Diane Swonk: I had an intimate knowledge that I didn't realize I had, but I also then became a regional economist

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Diane Swonk: And I did an analysis that said the Midwest at the time would rise like a phoenix out of its own ashes of the rust belt, and it did and that set me on a career that I'm still doing today. And part of the reason that it put me on this career track was at a mentor who told me

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Diane Swonk: I want you to be the most famous economists, you know in in your area in the country.

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Diane Swonk: And I want you to be in the process so that we can move strategy that we were doing internal analysis because we're using the process as a mechanism to change the views of our senior management and

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Diane Swonk: That was why I started doing so much media and then of course we also got the brand equity from that media stuff but

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Diane Swonk: He never he's once said to me, it wasn't altruistic when I mentored you you made me look good and so that helped my career, but he also

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Diane Swonk: You know what I learned along the way was one, your job is always to make the person above you look better and to there was

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Diane Swonk: I might not have been the sharpest knife in the drawer of economists and I didn't do the same kind of research, but my gift is to translate what the economy means to a lot of people and connect the dots in ways that

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Diane Swonk: Resonate with them and make it real. And I think that's what my career is about

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richardgreen: Yeah, I think the connecting the dots part is critically important. And that's why I said it.

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richardgreen: It's, it's more than translation. It's your ability to see the big

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richardgreen: Picture and put it together. That's always been so impressive about you. So

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Diane Swonk: Let's my dyslexia to, you know, we tend to see the world. We see the endgame. And we see it all. And it's a gift. And it's also occurs because when you can see things. It's a hard sometimes you don't like the picture you see

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richardgreen: So let's now put that talent of yours to use and let's go back. If you don't mind to January of this year, so we know we knew Kobe was happening in China we hadn't recorded our first case yet.

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richardgreen: In the US, and I know this are really hardly could go do because nine months ago now seems like nine years. Nine decades, I don't know, it's

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There.

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richardgreen: But, but, but if you could try to put yourself.

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richardgreen: Back in that place.

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richardgreen: And tell us what you were seeing them and then I want to

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richardgreen: Of course, follow up and talk about what we have seen since

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Diane Swonk: Well, we were coming off of the year of the trade wars and we're trying to cut a deal with China.

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Diane Swonk: The phase one deal with China, the trade wars had already taken a toll on investment.

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Diane Swonk: And there is concerned about that. But, you know, as long as we had called a ceasefire of sorts, on the trade wars, we thought we'd make it through and have another good year in 2020

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Diane Swonk: Because we had significant employment momentum. And finally, the economy was finally delivering to lowest wage workers and we were seeing those wages finally accelerate in a way that it hadn't during until the very latter

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Diane Swonk: Stages of the expansion. And so that was something that was to embrace it was hard, knowing that at three and a half percent unemployment rates. We're still seeing homelessness rise, which you see in your own backyard. But that was the economy was still doing fine.

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richardgreen: So I think what you said is

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richardgreen: That was so striking is

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richardgreen: Seeing wages. Finally, at the bottom.

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richardgreen: Of the distribution increased. One of the things here in California is, of course, we now have a

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richardgreen: $15 an hour minimum wage and people were very worried about the employment effect of that.

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richardgreen: But in coastal California. It's pretty much irrelevant. Now if you go to mit.or I shouldn't say now, but it was

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richardgreen: Irrelevant back in

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richardgreen: January, February.

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richardgreen: If you would go to it in and out or McDonalds and see what they were hiring for something bucks an hour plus benefits so that $15

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Diane Swonk: An hour West even finding the time

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richardgreen: So I think that's a really important

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richardgreen: Point. I'm sorry. Go ahead.

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Diane Swonk: Well, yeah, to add on to that. I mean we tracked really closely the changes so effectively the minimum wage across the country, even though it hasn't been raised at the federal level, the

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Diane Swonk: Really started in 2014 elections changes at the local level and state level on and we've seen it in 2016 and 2018 elections that the shifts were happening at the minimum wage pushing up the minimum wage and stages and

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Diane Swonk: In fact, the research on it has showed it had very little impact no impact on employment at the time because

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Diane Swonk: labor markets, we're tightening and it was raising wages into a tightening labor market also I think it really made a difference that many of those minimum wage hikes that were occurring were crying.

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Diane Swonk: Based on local cost, rather than just one minimum wage across the country, because of course $15 an hour means something different in you know in some place like

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Diane Swonk: Me or Mississippi to be very pointed than it does in New York or Los Angeles.

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richardgreen: So okay, so now let's move forward a little bit and tell us. So when did you start saying to yourself, oh my god, this is going to be

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Bad

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Diane Swonk: Well,

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richardgreen: Can you

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Diane Swonk: Yeah, I have. There's one when they started to close down move on.

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Diane Swonk: I have a very close friend who has adopted two children from China and her son has moved back to China and had his family there.

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Diane Swonk: And he went to Denison and universe Chicago and

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Diane Swonk: He was having to go into lockdown. And she was trying to get him back. So I was very aware of that and right away I started worrying. The minute that whoo. HON. I saw

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Diane Swonk: Whoo, hun shutting down. I knew there would be a supply chain effect on our manufacturers.

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Diane Swonk: And you know, we had gotten a little bit of a cushion because it was the Chinese New Year, and that our manufacturers had prepared for it. But as we got into February that clearly wasn't the case anymore. And then, of course,

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Diane Swonk: I had actually a meeting with my colleagues, we listened to a former Deputy Director of the CDC in the first week of February.

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Diane Swonk: And it was terrifying. And that really listening to this epidemiologist go through what is likely to happen and then seeing it spread around the world.

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Diane Swonk: By the by February we were already by latter part of February coin and and economic pandemic.

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Diane Swonk: And I was really stunned by, you know, people I know very well I advise the Federal Reserve.

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Diane Swonk: And how much they were discounting it right through the latter part of February, even as we were seeing, you know, Silicon Valley started out being the first ones to cancel in person meetings and

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Diane Swonk: You know, you could go into a restaurant, no one was there. I mean it was you could feel it and

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Diane Swonk: That even in the latter part of February, but that moment of watching it and then talking to a friend that was trying to get her son out of China with this family thinking you be safer here.

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Diane Swonk: And he lives in Shanghai not will home, but they also went into lockdown. And he was in lockdown with those two small children, very small children, one a newborn

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Diane Swonk: A friend that got trapped with them and his peasant in laws that are from that are from farm area.

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Diane Swonk: At all in a very small space for a very long period of time and she was worried about him. Now he has more freedoms to move around. No other freedoms.

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Diane Swonk: But he's living in very different kind of life than we are. And so, you know, all that anxiety that I went through with her on the phone and thinking about

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Diane Swonk: Immediately what did that mean to our production supply chain. And how would that affect us because as much as people talk about reassuring and bringing manufacturing back all the tariffs that we saw with China.

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Diane Swonk: One, they were born by consumers and by the producers in the US, we paid the price not China.

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Diane Swonk: And it didn't change the manufacturing equation we. It was very hard for companies to decouple from China and in fact they stayed and so

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Diane Swonk: That was going to be a direct effect we knew on our own background our own backyard economy and for me thinking about we deal with a lot of middle market manufacturers that was going to be a big issue for a firm as well.

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richardgreen: So there there was. There's so much there to talk about. So

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richardgreen: Let me try to keep track of.

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richardgreen: A number of things you said let's start with the fact that I think you should underline really important point is for for governments were shutting us down.

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richardgreen: We were shutting ourselves. Yeah.

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Diane Swonk: So, yeah.

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Diane Swonk: And I want to jump on that because that's

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Diane Swonk: The most important point, I know you understand it, Richard, but

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Diane Swonk: The course of the virus determines the course of the economy. Full stop. This is not something you can decouple and say, you know what will not have lockdowns

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Diane Swonk: You know, Austin goals be who I know you know did a really good study all the real time studies on this have been amazing, but by county looking at lockdowns and number of covert cases.

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Diane Swonk: And actual visits to establishment and areas that did not enforce lockdowns and did not enact lockdowns had the same kind of

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Diane Swonk: Loss and economic activity. Once you add it in case loads and hospitalizations and those local county caseload and occupied hospitalizations.

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Diane Swonk: Got particularly baby boomers, which are a third of consumer spending.

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Diane Swonk: They pull back and they stopped showing up at restaurants they stopped showing up at places that had public venues. They stopped showing up.

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Diane Swonk: Where you would exactly expect them to for fear of contagion. And we know from Ebola and SARS and mers that to be behavioral effects are the largest ones.

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Diane Swonk: And you know, I go back to that period where I was seeing an economic pandemic before it was a full global pandemic. But what's really important is between February 16 and march 14 march 19 is when the state of California went into their shutdown.

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Diane Swonk: Before that occurred before one state went into full lockdown. We lost 1.4 million jobs.

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Diane Swonk: In the latter part of February early March because of behavior firm institution canceling of conferences stop going to restaurants stop when the doctors talking to Dennis.

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Diane Swonk: And the loss in health, it was, it was a tremendous loss and the last in health care, which was once considered a recession proof part of the economy was extraordinary. Because people were afraid to go to the doctor.

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richardgreen: So along those lines is, as you know, my wife's a physician and

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richardgreen: One of the things she's finding now is her patients are

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richardgreen: Very, very sick.

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richardgreen: And it's not because of covert it's because they had to come in when they really should have come in.

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richardgreen: Right earlier and they've they've waited to the point where it's

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richardgreen: A harder to do something, then it would have been earlier on. So yeah the the impact of this and so many dimensions is so

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richardgreen: Extraordinary um I do. And the other thing is I want to just tell the class, right. One of my favorite of many favorite

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richardgreen: Data sources is Open Table reservation. It's you can look at how well the restaurant business is doing. And again, not all reservations get made to Open Table, but it's probably not a

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richardgreen: Bad representation of what's going on in the business and you can see

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richardgreen: How far we are behind not as bad as things were a couple of months ago beach restaurants have done a pretty good job of adjusting by

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richardgreen: Doing outdoor dining and so on, but still nowhere near back to where we were before.

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richardgreen: I want to come back to your point about the supply chain. So as I said that your the statement before the last one you had like four things I wanted pursuit. So let's talk about supply chain a little bit

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Diane Swonk: And

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richardgreen: You know, one of the problems with efficiency is it creates

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richardgreen: Fragility so um I don't know if you know Torsten slok

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richardgreen: But he was at

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richardgreen: Deutsche Bank for

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richardgreen: A number of years has just moved

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On

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richardgreen: And he had one of my favorite statistics which is the share of American manufacturing products that have

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richardgreen: A Chinese part of them one or more Chinese ports.

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richardgreen: And it's something like 60%

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richardgreen: So now, in some cases, it's one part. So if you look from a value added standpoint, you kind of look at the Chinese inputs from evaluation standpoint, you could go kind of we can deal with that. But of course, if that one part is missing from the manufacturing

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richardgreen: Process, you have to shut down your factory. You need to find another source.

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richardgreen: Of that park which reflects both reliance on China, but also just the leanness of the supply chain, which is something

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richardgreen: That people were trying to get to.

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richardgreen: That was the goal of management right just in time inventory

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Etc.

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richardgreen: Do you see a transition now.

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richardgreen: Where our managers thinking more about long run as opposed to short run costs, build a little bit of redundancy into the supply chain. So if one part of it goes down there is, in fact, another

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richardgreen: Place that they can go or you think we're going to go back to the way we were, you know, let's say, three years post Copa, something like that.

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richardgreen: And we're going to have these lean production processes that are very fragile.

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Diane Swonk: To these sorts of events. Well, this isn't the first time, climate change is a big issue for supply chains as well. And you think of the tsunami that hit Japan, many years ago.

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Diane Swonk: And earthquakes that they've had there. There is one key part that literally almost shut down all of the auto industry.

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Diane Swonk: Because it came out of Japan. It was electronic part and, you know, these are these are things that have been with us for a while.

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Diane Swonk: It's interesting for me I smile because, you know, my background is in the auto industry. My dad worked in the auto industry and my dad was a

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Diane Swonk: He actually dealt with inventories and he was in charge of getting having 90 day inventories in the 1970s to Justin time inventories. And one of the interesting

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Diane Swonk: There's two stories that were very telling to me yet. We didn't stop the trends. So that's also telling in the 1980s. My father, they still they wanted to shut down his fax machine.

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Diane Swonk: And he was an international supply chain manager and they want to shut down this fax machine because it didn't understand it was expensive, and he's like,

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Diane Swonk: I need accountants are running GM at the time and at some Roger Smith was that

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richardgreen: A lot of FGS

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richardgreen: Absolute. Yes.

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Diane Swonk: I mean, here he had, you know, suppliers, all over the world. But London places they were, they had a supplier was South Korea and they were that's when South Korea was just beginning, it sort of industrial

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Diane Swonk: Revolution and becoming a major manufacturing player on the National Front in the 1980s.

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Diane Swonk: And at one point in time. The South Korean workers went on strike and shut down the plant and there wasn't one windshield.

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Diane Swonk: What was called the minds of vehicle in the United States In the United States to go into the car, not one in the country. And so my dad had to hire

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Diane Swonk: A group of people to go rob the factory in the middle of night, and then a 747 to fly a bunch of windshields to the United States. So they could be put into cars, instead of kind of undermines your costs.

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Diane Swonk: Of just in time to arm the inventories when you're doing that. Another thing that happened was,

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Diane Swonk: You know my dad worked to get down to inventories that were just in time like within hours right and

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Diane Swonk: Kind of ironic. The Lord's town Ohio plant in the 1990s. Today it's been shut down the alerts time Ohio GM plant was a key plant.

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Diane Swonk: And when the UAW wanted to strike GM they figured out, they could shut down all of GM by striking only one plant.

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Diane Swonk: And then Jim would have to pay all their other workers and that was the Lord's town plant and within a few hours, all of GM was shut down. So the fragility was both internal and external and just in time inventories.

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Diane Swonk: That said it's costly to have a cushion. And so what many companies are talking about his regionalisation not reassuring per se, but

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Diane Swonk: You know, playing off of the US MCA now instead of NAFTA and using Mexico as a platform, frankly, a lot of stuff that was to try to avoid terrace was shipped through Mexico into the US, that's another thing that occurred.

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Diane Swonk: As we saw the tariffs go on with China, but I think there's an important moral of the story as much as you try to do that. It doesn't really matter even if you did store inventories or not.

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Diane Swonk: It didn't matter if you were producing in one state versus another state in the United States. You still got shut down.

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Diane Swonk: You still had a supply chain problem. So if your supplier in, you know, California shut down and you were producing in Iowa. You couldn't you couldn't do anything.

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Diane Swonk: So I think, you know, my view is that the cost aspect of it is going to still dominate and we're going to have to deal with the reality of fragilities what

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Diane Swonk: We spent a lot of time on with our clients is logistics and one, you know, as they do this, what are the alternatives. So instead of, you know, not just another supplier. But how do you get it out. Another way as well.

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Diane Swonk: So it's not clear to me that we're going to see a lot more inventory is being held at the end of the day.

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richardgreen: Yeah, so, so

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richardgreen: Again, is that you don't see a large behavioral change as a result of

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Diane Swonk: YC lot more. Yeah, I see a lot larger changes in the broader economy that are both scarring and could be very, very detrimental to

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Diane Swonk: Our ability introductory on growth and composition and growth going forward. That's where I think the biggest effects of code that will be we're seeing a code recession that have risks metastasizing into a regular recession. It's longer lasting.

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richardgreen: And so then, so you segue into my next question here, which is

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richardgreen: What do you see as the law. And then I want to talk about policy, but what do you see are the long term impacts of this

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richardgreen: What will we not go back to

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Diane Swonk: Well you know a lot depends on us. I mean, right now, what we're risking by not having more aid from Congress. The Fed can only lend it cannot spend

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Diane Swonk: Is something. Jay, Paul has been days in congress sort of trying to clean to get more aid.

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Diane Swonk: The aid we had was extraordinary. In March of this year as the crisis unfolded, but now they think they're done. And the reality is that we're seeing.

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Diane Swonk: A real lost momentum you talked about Open Table. You know, we've looked at every all of those kind of high frequency data job postings of those kinds of things.

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Diane Swonk: After sharp bought bounce back we saw we lost momentum in late June, early on July as coda cases surged in the Sun Belt.

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Diane Swonk: But then we've also seen a resurgence of cases again and we're not seeing a pickup in momentum and the number Yelp.

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Diane Swonk: Has the number of small businesses that are permanently closed. Now that's accelerating. So the things I worry about is that we're going to have a more consolidated economy with a smaller base to rebuild from

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Diane Swonk: That is more concentrated in large firms that means less innovation less shared technology less

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Diane Swonk: Shared patents and things like that that spread to the overall economy more to just boost internal operations, rather than the overall economy.

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Diane Swonk: Less job generating ability going forward. That's one of the biggest issues on the supply side that I worry about that you're getting a supply shot.

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Diane Swonk: That firms, through no fault of their own, to quote. Jay, Paul, or the chairman of the Fed Jay is right that through no fault of their own, all of a sudden had an 80 year trend towards discretionary services turned on its ear by Kobe.

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Diane Swonk: So there's that aspect of it. Then there's the behavioral aspect of reaction, but also the scarring of the labor market, you've got, you know,

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Diane Swonk: We're gaining will probably gain about a million or less jobs in September. That seems like a lot, but when you're 11.6 million in the whole 25% more than the great recession.

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Diane Swonk: You whites are getting hired back at twice the pace of blacks the unemployment rate for 25 and over college grads, is that it's high is higher than it was a half percent higher than it was during the Great Recession.

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Diane Swonk: There is a bubble, we get in from work from home where we don't see the visceral damage, we're doing, you think about Millennials were hit by the Great Recession and now they're hit again.

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Diane Swonk: You think about Gen Z being hit is a graduate and it could compromise their earnings are talking about women being disproportionately hit when they have children and can't afford childcare and can't work from home.

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Diane Swonk: Those issues not able to feed their family food insecurity rising young children losing as much of a year of in person schooling.

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Diane Swonk: These are all really scarring effects that Hank have generational issues and exacerbate a coven revealed and magnified and equalities in an extraordinary way.

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Diane Swonk: And to not acknowledge that and also not learn from the mistakes we made in the wake of the 2008 2009 crisis by not doing enough aid in stimulus and by cutting it off too soon.

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Diane Swonk: We're making that same mistake now and it's really important. I often refer to code as the iceberg. And if we don't want to be the Titanic.

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Diane Swonk: We need to get lifeboats in the water with supplies true diverse coven tainted waters and that message seems to have gotten lost in translation on Capitol Hill.

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richardgreen: It will just to come to my silo for a moment. We

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richardgreen: We did a

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richardgreen: Three guys that UCLA, and I did a study over the summer where we surveyed how people were paying their rent and what we found. And this was in Los Angeles County.

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richardgreen: We surveyed 1000 people

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richardgreen: And the first thing we found is everyone who either didn't have lost their job or didn't have Kobe was paid their rent at the same rate that they were before.

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richardgreen: This despite the fact that we had an eviction moratorium and there was the story of about moral hazard and we saw no evidence that people who didn't face a

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richardgreen: Shock cease to pay their rent but but the other thing that was striking is among those that employed. Those who actually collected their unemployment were 60% less likely to miss a rent.

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richardgreen: Payment that those that have not yet.

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richardgreen: Had an employment.

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richardgreen: So the impact is not just on the recipients

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richardgreen: Of the age

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richardgreen: Of course, that's the most important

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richardgreen: Impact but you think about those landlords

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richardgreen: They have mortgages to pay. And so if you if they can't collect rent, then they can't pay their mortgage and you know there's been some forbearance done the multifamily Side But Not, not a whole lot

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richardgreen: And so it works through this chain that ultimately affects everybody

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richardgreen: And that's just

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richardgreen: one segment of the economy. And so I share your frustration that we haven't gotten money out to people.

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Diane Swonk: Well, and I mean you're the real estate expert in you know what strikes me is how the housing market sort of embodies the good, the bad, and the ugly of where we're at, because you got home sales and new home building surging

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Diane Swonk: Right now, you know, and at the highest level since 2006 which is, you know, was not the peak of the bubble, but still highest in 14 years

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Diane Swonk: We've waited for a long time to unleash this demand a lot of its second homes to their people who can are remodeling repairing upgrading

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Diane Swonk: You know, and buying second homes and people who are first time buyers, it can get out of urban areas are actually moving out of urban areas for the moment they're going to move. Anyway, so I think you know the

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Diane Swonk: We'll see what happens to urban cores, although I am concerned about some of the urban cores.

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Diane Swonk: But I think, you know, you see that going on and everyone says, oh, everything's great. But at the same time, the issues you're talking about the ability to pay rent.

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Diane Swonk: The impact on landlords, you know, and so many of those landlords, you know, or the smaller landlords that you know those can fall through the cracks so quickly. And a lot of them tend to a false disproportionate again on former immigrants.

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richardgreen: And minority communities, your left. You know, when black landlords or having worse collections and

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richardgreen: Waving yes or

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Diane Swonk: And so, you know, this is another. Do you see that any quality issue again on your, sort of, you know, in the housing market, which is being hailed as the silver lining and what is otherwise I

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Diane Swonk: clouded outlook clouded in uncertainty, at the very least, if we could, I mean think of what we can do in terms of reopening the economy, if we had rapid testing if we had, you know, coordinated, you know,

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Diane Swonk: Isolation and tracking efforts to be able to contain outbreaks, you know, Asia has done this, even in Vietnam quite more effectively than we have.

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Diane Swonk: wearing masks. It's not hard to do, you know, but to reopen the economy.

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Diane Swonk: We need to manage the virus and putting money federal money behind that is important. It's also important. Another issue of the aid that you know

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Diane Swonk: Including covering landlords, being able to pay the rent having these people being able to pay their rents to their landlords

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Diane Swonk: Is the issue of state and local governments. I mean, every State in the country has been hit by shortfall real on retail sales taxes shortfall in income taxes.

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Diane Swonk: And all of the you know cursory taxes they get from travel and tourism, it's gone.

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Diane Swonk: And that whole is a gap in whole that has nothing to do with which are blue states or red states or which states are better at managing their finances or not it's going to have a major

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Diane Swonk: headwind unemployment in state local employment one eight people in the country are employed by state local governments. It's down 1.1 million from February.

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Diane Swonk: Still today and on top of it. We're talking about compounding those headwinds by not doing transfers to the states.

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Diane Swonk: That was a major problem of the great recessions subpar employment recovery part it was housing couldn't come back after a housing bust and the subprime crisis.

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Diane Swonk: But a large part of it was the shortfall and tax revenues that real estate tax revenues that we saw the state and local level and the inability cuts in education, in particular, the inability to move forward.

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Diane Swonk: In employment in a way we usually did and we got set back again another leg headwind hit us in the expansion of the 2000 out of the recession of 2008 2009

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Diane Swonk: That's the lesson. That's another lesson that we can take and we say that was wrong. Let's not repeat it again. And that's exactly what we're doing right now.

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Diane Swonk: Okay.

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richardgreen: Our friend Claudia.

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richardgreen: Sam talks about this being some talks about this being aka shaped recovery, which I think is a really good metaphor, which is again explains why the housing market is doing well. But if you're a renter, you're, you're in pretty bad shape on other things I

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richardgreen: Think you made a comment that I want to follow up on because it was against so intriguing about basically just creating a more concentrated economy.

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richardgreen: As well, which means it will be less dynamic less competitive.

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richardgreen: And I think about this when I see the stock market. So the s&p 500 is worth

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richardgreen: About $27 trillion and people

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richardgreen: Are making a big deal out of, you know,

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richardgreen: Stock prices.

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richardgreen: Coming down some

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richardgreen: The last week, but of that 27,000,000,000,007 trillion of

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richardgreen: It is

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richardgreen: Apple, Amazon, Microsoft and Google so

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richardgreen: The brook the breadth of that it doesn't reflect a breadth of health that reflects that.

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richardgreen: A fairly small group of companies that

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richardgreen: Are specializing and things

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richardgreen: That people are really using

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Diane Swonk: Right now.

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richardgreen: As you know, I talked to over my

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richardgreen: Apple machine with

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richardgreen: I'm trying to think.

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richardgreen: Right. And I'm sure I've used Google about 53 times today and you get

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richardgreen: Get the idea

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Um,

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richardgreen: And I hadn't thought before though about that when you do think about

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richardgreen: Google being as big as it is, it's a problem and and it is, but it is also a dilemma because the reason. Google is so good.

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richardgreen: And if you go to China where Google isn't and you have to use

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richardgreen: Like bang you think

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richardgreen: This really sucks because if

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richardgreen: It does compared to Google. The reason Google so good is because they have our browsing habits for a zillion people

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richardgreen: So it's that sort of an enormous position they have it makes the product, good, but that almost certainly leads to other kinds of bad outcomes. And so how we

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richardgreen: Deal with both how we

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richardgreen: Keep the benefits of a Google

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richardgreen: Without compromising the dynamism, the economy. I think that's a

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richardgreen: Big time.

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Diane Swonk: Dilemma going forward. It's a huge dilemma came up in the Jackson Hole, Wyoming fed reserve meetings this year too and

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Diane Swonk: The consolidation. First of all, the dissonance between Wall Street Main Street. It was almost at times, as if Wall Street was whistling by the

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Diane Swonk: Graveyard literally in New York. I mean, it was stunning to see the dissonance and you know that, first of all, you touched on.

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Diane Swonk: The key issue of why that dissonance is there. First of all, the, the stock market indices brought industries are less reflective of the overall economy today than ever.

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Diane Swonk: The s&p 500 only covers about 20% employment in the US economy and it's long tech, the US economy is not long tech

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Diane Swonk: Market so long tech and so those few companies that have seen a lot of consolidation have an end.

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Diane Swonk: gobbled up some competitors have actually, you know, dominated the market.

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Diane Swonk: And that is part of the dissonance. The other part of the distances. Much of the pain. We're feeling is in small and middle market companies that are not listed on those indices

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Diane Swonk: trigger a small businesses where you see the pain that is not listed on those indices and if you sort of De de compact what's in the indices, you know, the factors that are driving it certainly isn't you know

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Diane Swonk: The airline producer or producers or the airlines right now on the travel and leisure industries been hard hit. And that's reflected in many of the stock prices, but also the Federal Reserve, the meltdown, we saw in the stock market and in the credit market, most notably

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Diane Swonk: In March was more rapid and worse than during the global financial crisis. I mean, I often say, like, you know, standing working in a financial firm during the global financial crisis was like standing on faultline

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Diane Swonk: Working this crisis was like standing on quicksand. I mean, the pace at which everything was deteriorating was just sort of unbelievable. And I also think that stock market volatility is what prompted Congress to come up with a bipartisan solution so quickly.

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Diane Swonk: Which is sad because Wall Street is not mean Street, the stock market is not the economy, but it does is a

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Diane Swonk: You know, lead indicator of consolidation and what could be a much less dynamic economy and what we're already seeing has been for all the technological innovation, we've had, which is amazing.

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Diane Swonk: We've seen very little productivity growth in the US economy. And it's not just a measurement problem.

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richardgreen: We've learned after about

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Diane Swonk: That yeah

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richardgreen: Measurement issue.

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Diane Swonk: Right. And, you know, some, but it just can't explain the slowdown. We've seen and we know that technology.

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Diane Swonk: Companies that embrace technology actually add jobs, they don't lose jobs. It's other companies that then lose jobs that can't embrace the new technology, but it also is

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Diane Swonk: Technology is best us not to replace workers per se, but to leverage bridge the skills gap. And that's often something that gets lost in translation because

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Diane Swonk: Companies too often. I've seen companies embrace the technology before they know how to use it.

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Diane Swonk: And do it with the sole goal of reducing their workforce when they realize they need more support people to support the technology or they don't know how to use it. I mean, it's really kind of ridiculous what happens

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Diane Swonk: So those are really important things as well. And I think, you know, when I, when I think about this one of the largest issues is

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Diane Swonk: What kind of economy will we have to return from on the other side of this and

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Diane Swonk: You don't want to have the scarring on our complexion through the labor market. You don't want to lose so much dynamism that you not only affect the composition of what we're spending on but you lower the trajectory of growth.

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Diane Swonk: That's what I'm worried about. It's not just regaining what we lost. We have to get back on a trajectory that wasn't terrific before

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richardgreen: Well, and this is particularly important in real estate because if you look at how real estate is valued. It's not just the current return. It's the

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richardgreen: Growth.

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richardgreen: Of red and in the current environment where cap rates are four to 5% of 1% reduction in growth. That doesn't mean

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richardgreen: Negative growth just means a 1% reduction in growth means your values fall by like

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20 25%

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richardgreen: And I think that that flows through did any kind of company you're

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richardgreen: Going to think about. So we're coming up on 40 minutes and I probably get you out of your 40 minutes, but I would like to ask you two more questions. If you have time

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richardgreen: Okay with us for a little bit longer.

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richardgreen: And and for whatever your, your audience. Oh, no, no, no, no, no, this is good. This is going by very quickly.

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richardgreen: The first is, is a more specific question. The second, I'm going to finish with a broad question, but but the specific get the financial sector in general.

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richardgreen: On the one hand, you look at banks they look like they're really well capitalized. I had reason to look at JP Morgan's balance sheet. The other day for a not really important reason. But they have like 12% capital, which is, you know, somebody would say is a really well capitalized bag and

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richardgreen: The other big banks aren't quite as good but they're they're quite good.

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richardgreen: But we also have

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richardgreen: Trivia returned to the shadow banking sector.

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richardgreen: Lots of finance being done.

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richardgreen: Through non bank institutions non deposit based

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richardgreen: Institutions so

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richardgreen: You know, how do you look at the health of the financial sector.

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richardgreen: Broadly, and this is an

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richardgreen: Issue, that's pretty important to the students in

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richardgreen: This class because it's it's what financial information about mortgages. It's basically what we study. So your views on that would be very helpful.

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Diane Swonk: Yeah. You know, it's interesting because first of all, yes, we, you know, the stress test the Fed went through in June for us to banks to raise their capital ratios and some banks do not give dividends as well.

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Diane Swonk: And the Fed is very concerned about future losses from this consolidation. The other side of those

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Diane Swonk: Which disproportionately hits community banks and some of the shadow banking sector, of course, more than it hits some of the larger banks, which are much more willing to the larger companies that can get access to funds in a different way. So,

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Diane Swonk: One. Yes, the banks are well capitalized, but I am worried about the losses, the legacy losses associated with this one through real estate.

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Diane Swonk: You know, we've seen Corbett is an accelerant on bankruptcies in retail also in shale industry. So you're going to see regional bank stress from those things as well, but also many of the non bank.

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Diane Swonk: The collateral damage.

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Diane Swonk: Of these down to non banks of people being unemployed with a lower I mean people consolidated their credit and pay down their credit cards, when they had even even

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Diane Swonk: You don't have as much subprime as they once did that they consolidated they're dead as the payments were higher on the supplemental to unemployment insurance.

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Diane Swonk: Now that that's gone. They can't do that. They did have some saving it actually increased they're saving and their cushion, which helped to get them through August

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Diane Swonk: But that's gone as we get into September and you really fall off a cliff. Once the money that

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Diane Swonk: The Executive Order tap the FEMA funds to get some people $300 a week. It's only last about three to four weeks.

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Diane Swonk: And then it's over. And it's dated back to August, you get one lump sum check. Once you get it, and that's it.

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Diane Swonk: But it really is important because it means we're adding more and more stress, particularly to the shadow banking system or whatever you want to call it fintech at this point in time in a way that

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Diane Swonk: We really, it's not in a way, we've known before because we could have very long term unemployment.

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Diane Swonk: The people transitioning to permanent employment from temporary is actually gone up, even as the unemployment rate has fallen in the

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Diane Swonk: As the economy tried to recover and that kind of scarring to people's financial records means they're going to lose access to, you know, mortgage markets and other kinds of credits so

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Diane Swonk: I do think that there is going to be some fairly large repercussions of this, but it's, you know, like a year, kind of a delay, maybe a year from the start. So, March of next year we'll start to see some of the carnage of those

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Diane Swonk: But it really is a huge. I think it is the it's something the Fed is very concerned about because they it's happening again in the part that they don't know proceed.

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Diane Swonk: And it's hard to get visibility. They're trying to get visibility as much as possible, friend of yours, a friend of mine, Raphael Bostic and Atlanta fed

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Diane Swonk: First thing he did is fintech has a big you know operations. They have a group in Atlanta. He said, I want to be on your group because I want to know what's going on because it's that important.

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Diane Swonk: And getting a lens into fintech and you know all the ways that it can affect us is really important to the Federal Reserve because it's even more.

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Diane Swonk: One, I think it's even more obscure than shadow banking was. And it's also has different ways of affecting us because many fintech things like applications were a bank gives you the ability to

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Diane Swonk: As opposed to demo, but a bank, you know, takes an application from an outside party. That gives another way to hack into a bank and that's another thing we didn't even talk about but cyber security. I mean, the hacks of sword. I can tell you, well, you know, as

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richardgreen: Nothing else to do. So they're

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Diane Swonk: They're doing

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Diane Swonk: Nothing else to do. And there's other governments also attack. You know, so you take the domestics that have nothing else to do, and have more time at home in front of their computers to hack us and my son is a computer science major and he's quite

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Diane Swonk: I mean, he's telling me all the different ways that he can hack me and he has actually

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Diane Swonk: He's also a stand up comedian. But that's not going so well at the moment, giving you can't stand up and

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richardgreen: Do the murder fund. I am so he can't get

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Diane Swonk: That yeah I yeah yeah exactly. He has done things to me. It's been all in just but it's scary.

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richardgreen: No, no, yeah, there is a lot that's that scary out there. I do want to, you know, I think.

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richardgreen: Again, if I want to underscore this issue of access to credit in the aftermath. In fact, currently, and one of the things I find frustrating.

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richardgreen: Is if you look at the black white homeownership gap.

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richardgreen: It can be explained in part from treatment that goes back to the 1930s, with the homeowners well

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richardgreen: Corporation when white people got to keep their houses black people didn't because white people got the relief.

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richardgreen: Of black people didn't

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richardgreen: We are now in a period that is a remarkable period for buying a house is with mortgage rates at 3% invest

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richardgreen: Lots of the country.

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richardgreen: On a cash flow basis, it is cheaper.

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richardgreen: To buy than it is to rent.

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richardgreen: And then you have upside as well. The problem, of course, this unless you have a job right now. And in particular, a salary job but W two job.

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richardgreen: You're not getting access to this credit. So it's like we're doing Lather, rinse.

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richardgreen: Repeat the same problem just comes back over and over and over again. And we can't seem to figure that

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Diane Swonk: It's the any quality on homeownership is going to get so much worse as a result of this crisis, we know

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Diane Swonk: Actually, I just saw Redfin had their economist come out and talk about the gap between white and black homebuyers right now and it has widened quite dramatically. And that's because

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Diane Swonk: Black households have been hit much harder by this crisis and, of course, white households, even in low age are getting higher back faster. I mean, this is we we've measured this and economics. We know it's systemic

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Diane Swonk: And you've seen it, you've looked at it in real estate. We know where all of these things come from it. We need to. This is where I'll try to be a little more positive to end, end up on

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Diane Swonk: This moment in time has crystallized what's wrong and what ails us, which is much more than coded and if we can use it as a catalyst to fix the things that Alice to create more inclusive growth instead of exacerbating even worse, the problems that were already there.

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Diane Swonk: Which is exacerbated by coven to take this as a moment to address those issues is better for the overall economy, as well as for the individuals that have been so marginalized.

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Diane Swonk: And Citibank just did a study where they estimated just since 2000 the last 20 years that the US economy has fallen 16 trillion sure where it would be because of inequality.

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richardgreen: Blacks and Whites.

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Diane Swonk: That stunning and I don't think that's probably

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Diane Swonk: an underestimate.

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Diane Swonk: We know that more inclusive growth is better for potential overall and i know i mean as economist we've struggled to try to

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Diane Swonk: put a number on how this is costing us because that's seems to be the only thing that people realize. But it's not hard to see how much it's costing us and that's where I have

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richardgreen: Some hope.

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Diane Swonk: That this is a catalyst for change. But that means we know it means this is my my

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Diane Swonk: My talk of get out the vote, you know, we know that representation that's more representative

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Diane Swonk: When it's occurred has been economic studies done when it's occurred it shown that when people are elected that more reflect the overall population, you get more egalitarian.

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Diane Swonk: Kinds of laws and then when there's a backlash to that and you throw those people out. You go back to where you were on the red lining and all the things that you know you know about

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Diane Swonk: Particularly in real estate and what's recently come out in hosing appreciation, you know, an in home appraisals where you know if you have

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Diane Swonk: Pictures of your family on the walls, you get a lower appraisal. I mean, it's a stunning stuff so you know this. These are really. I hope this is a catalyst and

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Diane Swonk: I hope we have people that vote to vote. People that resemble them more into office in this election in that's I guess the best note to end on, given where we're at.

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richardgreen: Yeah, so on that sober yet somewhat hopeful note, thank you for taking some time with us today. Diane always great to have a conversation with you.

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richardgreen: You

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richardgreen: I always wind up smarter at the end of it and

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richardgreen: I hope

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richardgreen: We can have you again. Sometime

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Thanks.