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May 4, 2021

A Sea Change in Economic Policy

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Claudia Sahm
Claudia Sahm | Senior Fellow, Jain Family Institute

Claudia Sahm joins Richard K. Green to outline the changes in economic policy as the Federal Reserve and Congress have reacted to the COVID-19 pandemic. Sahm, who was inside the Federal Reserve during the Great Recession and recovery, has since devised the Sahm Rule Recession Indicator to help policymakers and economists determine the start of a recession based on unemployment rates.

Sahm points out that economic policy has new goals, new tools are being considered, and change will come with growing pains. As for new goals, Sahm sees interest in concepts like full employment, reducing inequality, and acknowledging racism as harbingers of a new school of thought, and one that is less skittish about inflation as the Fed works to build momentum in economic downturns. The new tools and approaches like the child benefit cash transfers in the latest stimulus package display a shift towards providing direct aid, rather than commonly used tax incentives or other targeted programs. Sahm also acknowledges that change means pain while data catches up to policy for the simple reason that some benefits or programs have never before been attempted in the US.

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- Good afternoon, everybody. My name is Richard Green. I'm Director of the USC Lust Center for Real Estate. Thanks for joining Lusk Perspectives. And I'm very pleased to welcome our guests today Claudia Sahm. I've had the pleasure of knowing Claudia for about it's gonna be six years actually it's hard to imagine. As I got to work with her when I was a senior advisor to Secretary Castro at HUD we had a standing meeting every couple of weeks called housing deputies, where I would see her and as insightful as I found her then I find her even more insightful now because the problems that I hear her grappling with are even more serious problems than the ones we were dealing with five and six years ago. So Claudia has a distinguished resume a PhD in economics from the University of Michigan a long time staffer at the Federal Reserve board of governors and has very piquant and I think, well founded views about the state of the macro economy and what we should be doing about it which of course is something everybody in the real estate business cares quite a lot about. So with that, Claudia, thanks again for being with us. It's been almost exactly a year since last time you were with us. Take it away.

- All right. Thank you. Yeah, no and it's been quite a year, so no and actually the talk that I gave a year ago was talking about like where, I mean, the economy was in free fall. Some relief had come out from Congress the Fed was moving, but we had not started to see the recovery that was taking shape late last spring early in the summer, we made a lot of progress out of a very deep hole and we went sideways and there was a lot of uncertainty. And then again, at the beginning of this year there was a big push from Congress. All of these fiscal responses all of the Federal Reserve responses. I have been a big proponent of because I knew we were in a very serious situation as the COVID crisis began and we still are. So the talk that I'm giving today is a really different one. It's me reflecting on both my experiences at the Federal Reserve during the great recession and the very slow recovery I showed up right before it all went South. And in my first forecast at the Fed covering consumer spending was in January of 2008. So I thought a lot about what the Fed missed both before the crisis, before I got there. And importantly, what I saw as time went on both of the Federal Reserve and knowing what fiscal policy was doing. That's been a big focus of my research for now, well a decade on how Congress and the administration try to help families during recessions. So that put me in a good place as I was out had left the Federal Reserve and was working on economic policy advising members of Congress as COVID struck. And so this past year has been a whirlwind. I mean, it's been a real privilege to get to work on these policies. And what I'm gonna share with you today are the changes, the sea change in economic policy that we are living right now. And you know, I'm going to, this is urgent, right? It's now or never. So I think there's a lot of encouraging developments and I think there's some worrisome or, you know just things we really have to think hard about. Okay. So just while I got your attention right at the beginning I'm gonna share the high level, the takeaways and then we're gonna walk through each of these in turn. Now you're gonna if the first glance of the slide and this is totally intentional is you will see the word new all over the place. So most encouragingly we are starting to have a new awareness about problems that have been with us in the economy long before COVID but we're definitely exacerbated in COVID and that has led and also the experience as after the great recession has led policy makers to think about new goals. Like you know, we just need to, the goal lines need to be set in such a way that we really do solve the problems the disparities in our economy. Now, once you got goals set, you know these are many of them we'll talk about them are much harder than the goals policymakers had set before. So you got to try some new tools. You got to try new frameworks. We've been living this over the past year and continue to, as you know President Biden has put through, put two more big proposals on the table, the jobs plan, and now the family's plan. There's a lot of experimentation in there and that's really exciting. Now the last point is new is hard, right? Especially brand new programs. There were some stood up in the COVID crisis. Some of them worked really well and some of them didn't and new creates a lot of uncertainty. We don't know I mean, the entire COVID crisis has been plagued with uncertainty and in terms of the economy, the virus and then when we start using new tools that adds another layer. And the last point, and this is what I feel like I have been living rather intensely since the beginning of the year is new, has enemies. And I don't mean this in the sense that like they just hate change though change is hard. And when it pushes us into uncharted territory there are plenty of people who will jump up and down and tell us why it's too risky. So, you know, it's good to have a debate but at some point it gets a little old. Okay so the first thing that I wanna talk about in terms of new awareness, and I wanna be clear this is awareness among a very broad swath of the economy like racism, systemic, not just at the individual level but at our institutional level, our labor markets our government policies has been with us since before the founding of this country. But we are getting to a point where white Americans, white policymakers are finally really grappling with this. And, you know, COVID, I mean this was absolutely obvious before COVID. And yet in this crisis, both with the pandemic that the health effects and the economic effects have been felt disproportionately by black, Hispanic workers. This is also true for some Asian workers, native Americans, right? So there was a really tragic impact on many dimensions. And then we saw a lot of social upheaval and violence against black people. I mean, so like all of this really came to a head in the last year. So we're aware of it. This is the first step. This is not enough to solve it, but we are talking about it. The one example I'm showing you here are the unemployment rates for black workers, Hispanic workers and white workers over the entire history. Black workers, unemployment rate is about twice white workers and Hispanic is about one and a half percent. You can look there at the end of the where we're at with the COVID crisis. I mean, it's just the peaks and those lines are just incredible particularly for workers of color. And you can see that even after all this recovery, all this like progress we've made the black unemployment rate is well over 9% the Hispanic unemployment rate is close to 8%. So like we are nowhere near done. And these gaps look just like they do historically in terms of about twice in one half. Okay so another place that we've seen in this recession and actually this one was so unique to the way the recession happened. It was referred to often as a woman recession because the industries, the service sector those were hit very hard by the need to social distance. And those are industries that women tend to work in. And then layered on top of that we saw increased burdens on parents as especially ones with small children who had daycares clothes, school clothes, and not only did many of them lose jobs but many millions left the labor market, right? So they're not working and they're not looking for a job because they have a job at home making sure that their, you know, kids and other family members are safe and life goes on. And what you can see is early in the crisis a lot of people dropped out, right? And this was true women, men, mothers, fathers, right? Like what has really happened as the recovery has gone on are the disparities have widened. And in particular, even those schools are reopening and daycare's like this isn't across the board. It's not, I mean my children are only in school two days a week. That's true for a lot. And some parents don't feel comfortable having their children in school at all. And so what you've seen is that mothers are still, you know, that decline in the labor force participation is still there. I mean that can have very long-term effects on their careers. And it also emphasizes that, what parents need the support they need is different than the rest of the population. So, I mean, these are not new problems we know about this but it has again, COVID has made us so aware. And then the last thing and this is a little wonky here, but this matters. And I was talking with Richard about how important this is like broadly in policy is we have a better understanding that delivery matters, right? It doesn't in theory like you can have great legislation on the books. You can have, you know economic policy that is the best policy according to theoretical economic models. But if the money doesn't get to people if those eligible are barred from getting the benefits, well you might as well have stayed home when it was time to write and pass the legislation. Right and what we, a really good example of very tragic example of this was the breakdown in our unemployment insurance system. It is the bedrock of the safety net for workers in recessions. And we've known for decades that the system has a lot of holes in it. There are some parts of the country where it's under active attack and like watered down and making it difficult for workers. But even in States that really, you know try to give benefits to the unemployed millions and millions of people were applying for jobless benefits every week, last spring. And we still have about a million apply applying each week now, nationally. And that was an immense strain on the system. People spent hours, if not days trying to get their claims, even just registered. It took long to approve them. Workers were waiting weeks and weeks sometimes months to get their first benefits. That's really hard families to do anything without a paycheck. So, but a lot of times it did get there for those who are eligible and who were able to make their claim. What I'm showing you in this chart is that missed a lot of people, right? About half of Americans, according to the Census Bureau lost income from employment last year due to in the COVID crisis. And only about 20% of Americans got some kind of jobless benefit. And there's a lot of reasons for that. A lot of people aren't eligible for them. And then a lot of people just don't get access. And, you can see here in this chart like this goes well up into the middle-class these gaps. And so where unemployment insurance is a well-targeted it's exactly the kind of thing. We get it to the unemployed where something like stimulus checks, go out broadly. Some people get it, aren't going to need it. But those actually got to people. So if we want to have these like first best kind of programs, we have to make sure they actually work and that's gonna be true as we create new programs too, got to make sure the delivery is like actually happening. Okay. So those were some of the awareness. Now, when we think about goals. And these are really important, this is really exciting. Right 'cause you need to know there are problems but then you've got to think about, okay, well what would problem solved look like? Okay so in a really important one, and in particular the Federal Reserve has picked this one up is full employment. And while they don't have a definition of this, I really go back to the, this was a long, long time ago thinking about full employment after the with the new deal and the Civil Rights Movement continued this. I mean this was how the Fed got its maximum employment mandate. And really, I think, you know a pretty straightforward definition is everybody who wants to work has a job. And it's a job with a living wage, right? So this is, I mean, it's gotta be a good job. And so, you know what the Federal Reserve, and this is a graphic or in particular, this adjustment of the current unemployment rate is something the Federal Reserve has put forward. And what you can see here is we don't have a good track record of full employment right after a recession. So each of these is a different recession. And what I do is the lines are the unemployment rate quarter after quarter from the start of the recession relative to their pre-recession level. Right? So, you know, in this recession you can see that the official unemployment rate jumped almost 10 percentage points and an unemployment rate where we take into account these millions of workers who left the labor force and wouldn't be counted as unemployed. If you rejigger that and say, well, they were working they'd want to be working or not. So they're like unemployed. Then you see that the unemployment rate jumped almost 16 percentage points. So this is massive relative to other recessions. But the thing that we have to pay attention to is getting back at least where we started. And you can see in particular after the great recession that just did not happen at all. And over time, like we've, you know we can't do that again. That was extremely, extremely disruptive. Okay so another goal that we've talked a lot about but I think we're starting to see it operationalized a little bit more is reducing inequality. And I think we all know at this point that there are big gaps in the pay of workers versus the CEOs. There are big gaps in income, especially like market income before you start having transfers and tax policy. And, there's a lot of like wealth inequality is massive because it is the over time adding up of these income inequalities that we see what is making it more possible to set goals and like goals, need numbers attached to them is that we have more and more data that instead of just being the aggregates for the country as a whole allow us to look at groups of families. So what I'm showing you here in this chart is a compensation of US employees. This is a number that was reported today with GDP, the aggregate, right? And there's a lot of discussion about aggregate GDP, aggregate income is almost back on track. Now, a couple months ago, heard this kind of talked about like oh compensation's almost there. We don't need to give more relief out to be a waste of money. And at that point we still had about 10 million workers who were like jobs, less jobs than before. And I was like, how can compensation be back on track? And these individual like and we've got 10 million jobs missing. I was like, do these people make no money? I dug out this data from the Bureau of Economic Analysis. It's relatively new data. This is actually for 2018. It takes them a while to update it. And lo and behold, a lot of income people basically when you think about aggregates, make no money, right? And this is a massive indictment of the economy as a whole, you hear a lot of talk about, oh, work disincentives. People are getting an $300 a week. If they're on unemployment benefits there, many of the low wage workers are making more money on unemployment than they would have on if they were on the job. And I mean, first of all, we have a lot of research that shows when the jobs so that people do go back. I mean, working has a lot of benefits beyond just like the weekly paychecks. And it also says something deeply disturbing about our economy that you have to lose your job and be lucky enough that the Federal government has topped off unemployment benefits. And that's how you got a raise, right? Like I think this is much more about low wage workers aren't paid enough as opposed to we're being too generous with unemployment benefits. And I think something like this shows that there's this massive difference across families. And I like to point out that many of the policy makers, many of us who have advanced degrees are getting those degrees. We tend to show up in one decile here. And it's the one all the way to the end that has a disproportionate share of income. And I think this is where we have to be very careful as policymakers and advisors to introspect on our situation because it is not the situation of the people who fiscal policy monetary policy will actually serve. Especially if you have a full employment reduce inequality goal. So I just think data like these are really important and striking and they also give us an opportunity to set goalposts and to judge our progress. Okay so the last one is, and this is a shift that's particularly happening at the Fed. If you listen to economic news you'll hear a lot of discussion about inflation, overheating. Overheating is just when inflation gets out of control and starts spiraling up. You'll hear the Fed saying, no we're not as worried about it. You will hear people like Larry Summers and Olivia Blond Shard and other inflation hawks say this is irresponsible what the Fed is doing what the federal government's doing, the Fed after its failure to reach its stable prices mandate ever since the great recession rethought its framework. And basically now they wanna see prices average 2%. And what I'm showing you here is to get there. So the gray line or these are the 12 month changes in inflation, that's kind of what the Fed focuses on. And it got really low last year. 'Cause like in some months, prices were falling. That's bad, right? That was probably, that was about the time I was here last year. And we did start to see a recovery but that recovery was like 1% inflation nowhere near 2% and month after month after month last year we had this very low inflation that so the average inflation really got below 2%. So that's the blue line, kind of the average starting at the beginning of 2020 and what the Fed needs to get its target is to have inflation well above 2% probably even above 3%. And we needed above two all year. And that is why the inflation hogs are just like going to squawk themselves. I mean, they're gonna get so loud. It's going to be really, even worse, more insufferable than now because we've never seen these kinds of numbers. And you know, I think there are risks and we should be concerned about it but the Fed has been very clear and they thought about it for years. What was a way to get themselves back on track at the economy, back on track after a recession, last thing writing prices are not a bad thing right now there were price declines last year that are like businesses can't continue to operate--

- Excuse me. Just the clarification is this core CPI or all CPI.

- Yeah what I'm showing you here is the personal consumption expenditure prices. So this is the total, the reason the Fed talks about core their target isn't total, right? Like we got to pay for food and energy, right? That's what's excluded from core. And like the Fed gets that that's, that's the whole thing. They care about the whole basket. Like what consumers have to pay. The reason they talk about core is it gives us a better sense of where the total is going like food and energy, do this a lot. And so really core. And it that's just a statistical term core. It just the part of the total forecast, the total best. That's all that. It's just like a tool but the target isn't the total is that, I mean, this is a fine point that even like macro economist it should know better, get it wrong. Actually there's Fed officials that get this wrong. Yeah.

- So I'm just curious because so I'm curious about the forecast and I should know this but I don't at the moment, but given that we have had a rise in energy prices in the last year if we looked at core, what would these data look like? Would it be much different or would it be higher? Would it be lower?

- Well, so this first here, we're gonna get tomorrow. So this was kind of new forecasting off of the CPI that we'd already had the numbers tomorrow we'll show that total because of gas prices rising and some food price increases are going to be higher than the core. Right but I think we have a pretty good sense that you know, gas prices will probably fall back some so that pushes down on inflation food. 'Cause these tend to be temporary but I think legitimately like we're going see totals both core and total PC that go pretty high. And so my forecast here is just to kind of like mentally prepare us for they're gonna be some big numbers. And even with these big numbers, that blue line the average, it doesn't even get back to two, right. So this is totally uncharted territory and it's really causing a lot of like Fed versus market versus macro people discussions. So yeah, it's gonna be an exciting year for the Fed. Okay so I want to make sure I'm talking a lot here. Okay so new approaches. So we've seen some of these have been implemented. Some of them have just gotten into the discourse in a way that frankly I am surprised and heartened because remember I watched after the great recession, I was just falling so far short on monetary policy and fiscal policy. This time there's a lot more going on a lot more experimentation. So just as some big categories we've seen cash transfers become like a real thing. We had three big stimulus payments, which I you know have worked on research showing that like this is a really good way to help households in recessions. Even I would not have believed like if you'd told my 2008 self when the rebates were going out, then, oh, you know this next recession, we're gonna have twice as big. And they're going to be three times. I mean, I was just like, wow. And then what we've seen in this last package is they put this regular child benefit which is just a cash transfer. It only goes, you know, for like per children and a family. And it's for everybody except like very high income, just like the stimulus checks that is essentially basic income for kids. Right so we have moved into this like just giving people money and letting them do what they wanna do as opposed to like you know, taxes and things to incentivize certain spending. So that's a big change. We've had a really big change on like how much deficit spending is appropriate how much federal debt. And while we haven't seen like modern monetary theory, just like universal basic income is kind of into the continuum of more like how much do deficits matter or not matter. And that is a discussion just like universal, basic income. That was well outside of the mainstream, even just like less than five years ago and is now totally in the discussion. That's pretty exciting. And we're making a big push. This isn't necessarily new, but in terms of getting more education and filling in the gaps both at like post-secondary training and college, you know free community colleges and the family's plan as well as at the very beginning. So the pre-K, the daycare making that accessible affordable for everyone. Like, so that's a big deal that also isn't family's plan. And then we've had discussions, there's been a lot of discussions about student loan forgiveness. And just in general how we fix this very broken financing of higher education as I'm sure all of you who have student loans understand and are watching that debate carefully. And then the Fed I've actually talked a lot about the first two pieces. So the Fed is trying to elevate its maximum employment mandate so that it's on par with its stable prices mandate to do that and to make sure that they actually achieve the stable prices mandate. This is where they are rethinking how they want to approach inflation, the biggest change. And this comes from the average but it's a little wonky how to trace the pull the thread through. But what they've said is now we're only gonna react after we've seen inflation in always in the past they have reacted when they expected inflation. So you can imagine how the Hawks get very problematic because they are all about it's coming, it's coming, it's coming. And the Fed used to have that like approach. And there are Fed officials who still like, you know in their heart of hearts, that's how they feel. So now they're saying, we're not gonna do that. We're gonna wait until we see inflation and then we'll react. So this is a huge change. And this, again, creating a lot of discussion the last thing the Fed has done, and we talked about racial injustice as part of the awareness. I mean, you obviously see this in the fiscal policy the Fed is very new to this game, not game but new to this awareness of racial equity and the role they play both in improving it and making it worse, which they definitely had a role in that after the great recession. And so they're really grappling with how their mandates can be applied or how they can think about marginal groups as the goals. And then, I mean they're just trying to diversify their leadership not doing super great on that but at least they're trying. Okay, so we talked a lot about new, right? Like we got new awareness, new policies, new tools. One thing that's important in all of this is some of the new is like old, but we're bringing it back. Right and it's important as we do this to bring back things that work. I think last night if you were listening to President Biden's address he talked about how it was supply side economics trickle-down economics, in his opinion. I think a lot of other people's opinions didn't work. So we're like trying to set that aside. So what do you bring into its place? So I think what we're seeing right now is a shift to very activist fiscal policy. And this is about spending, not just cutting taxes or in this, like, what they're going to do right now is proposing to raise taxes, to help pay for more spending. And you have to go back in time to really see big activist fiscal policy regardless I mean, since the 70s, regardless of if it was a Republican or a Democratic administration the activism on the fiscal like on spending was pretty pretty, not that much. So if you look back though, we do have periods in our history, the new deal, which, you know followed the great depression post World War II. We had a lot of programs to help support veterans and families. And then in the great society, we had a lot of measures to try and begin to address the systemic racism in a lot of ways on the economy and the society. So like you have to go back to these times to really find the government trying to do like big like what they're doing right now. So, but that's tricky. Like we don't live in the 1930s anymore. Right? So the solutions then won't necessarily be solutions now. And it's not like all that was old was really that great. A lot of programs that were put in place like the unemployment insurance were discriminatory from the very start. They excluded domestic workers, agricultural workers which in sectors, in which black and brown people disproportionately worked. So like we got some even when the government was trying to do something good they weren't doing good for everyone. So, but you know, take the good, leave the bad. One of the things that I've worked a lot on and I'm very encouraged to see part of this made it into a family's plan or at least the proposal is automatic stabilizers. So this is where you take safety net programs like the unemployment insurance. You could also do these with stimulus checks and you tie them to economic conditions. So ahead of the recession, Congress says if the unemployment rate starts to rise we're gonna send out the checks. We're gonna bump up the unemployment insurance benefits. Like there's a plan to fight the recession. And then as the unemployment rate gets close to where it was before the recession those benefits taper off and then they stop. And those are Congress has to you know they have to pass that legislation. The idea is you pass it ahead of the recession and then you don't have to rely on Congress coming together and passing these packages. Now, every recession has things that are different. Congress will still have a lot of work to do. You could imagine the relief packages that we have been that Congress has, you know the three packages over the past year instead of arguing about who gets a stimulus check how is it 600 is a $300 a week for the job list. Well, all that could be figured out and then they could have spent a lot more time on COVID maybe some of the housing crisis issue like very specific things that were happening. The great recession would have been the same thing finding solutions for underwater borrowers. So, but you can take the stuff that we always do and put it on autopilot and then people know it's coming and we can set up the administrative systems ahead of time. So they work. So that would be good. And when, as I mentioned before we are getting into this safety net is more about providing cash and less about tax incentives. This is important, like over time and again this was across different administrations when welfare reform happened, we kept moving towards we'll give families benefits if they work right. And so it was a very like we're going to kind of Zoom a little, I mean, not a little, this is a form of control from policy makers into family's lives about how they should be working or not working and if you don't work, we're not giving you money. We're into a space of a lot more cash transfers that obviously you just give people money, you empower them to do it. You got to deal with the fact that some of them are going to do what you think is the best use of that money. One benefit of it is that that money can go out very broadly. We saw this with the stimulus checks. It can reach people that just aren't working or like in that system. So it has the ability to address some of the very deep poverty problems in the country. But I mean, this is a big change from how we've done economic policy over the past several decades. So but we have, I mean these safety nets and cash transfers and welfare like this we have a history of doing it this way. Okay so here's my dismal slide. I've only got a couple more I promise the last one is not quite this bad. You know, I think like I'm very encouraged by this moment. Again, having seen policy go completely off the rails after the great recession and really it was the recovery that was so heartbreaking because it wasn't much of a recovery for many people until years and years into it. And then having watched the COVID crisis which was just, you know, tragic on so many dimensions to see the conversation changing is really heartening. Now I am a macro economist and given this life experience as a macro economist I like to say, I have become now pathologically pessimistic. And so when I look at all of this that's happening all this opportunity for change. I and I would encourage you not to hold your breath. Right? Like there is a big, you know we could have a sea change in economic policy but it doesn't have to happen. Right okay so as I said in the beginning, change has enemies, right? So the old guard and you see it particular in economics. And I mentioned some of this with the inflation hogs are fighting. I mean, not in you know, in terms of words and data and research and largely experiences from the 70s and 80s are fighting to retain their power and their power in terms of economic policy frameworks and thinking. And so this is about inflation let it get out of control, targeting, like have these really pinpointed programs and small government. And even, you know what I would consider maybe left of center economists have for a long time felt keep Congress out of it. They're too political. They're gonna make the bad choices, let the Fed do it. Right so this also has a small government aspect and that really just felt totally on its face in the great recession, but you know, like it changes hard and there are people that don't want change. And okay, so there's them gotta deal with them then to do these changes, like changes and opportunity but it's also a risk. For example, if I mean this child benefit these regular cash transfers, that would be a big change in how we support families with children. We have no idea when those first benefits are going out, right? Like the administration of those benefits is, well, frankly I don't think it was very well thought out, right? And they're asking the internal revenue service to administer those. They do not have the setup or the bandwidth to do it. So if that, you know, this has passed legislation has been promised to people there are a lot of families would like to get that money. If it doesn't get out, like that's there's going to be disappointment and backlash. And it'd be that just so you have a really good intended policy and it's on the books, but it's not in people's pockets. And, we don't even have good research and data to give us a sense of what those kinds of benefits will do because we've never done them, especially on a large scale. So it's exciting to see us moving ahead, full speed ahead. It is as someone who is a big proponent of evidence-based policymaking, policymaking that policies that actually work in the real world and not just in paper and not just in theory, this also makes me a little nervous 'cause like policy's moving really fast. And the thinking and the evidence behind it is kind of catching up right now. So we'll see about that. And then the last thing, and this is the piece I have some like I have the hardest time with some of the messaging out of the administration and Congress. I'm always concerned about raising expectations beyond what we can deliver false hopes. And I think we saw that a lot with COVID last year where we were told COVID was just going to go away and it'd be all better. And it wasn't. And what we're seeing now is administration has put some really big goals in their sites fighting systemic racism, climate change, deep poverty you know, addressing gender inequities in the economy. Like, you know, they proposed to $2 trillion bills. So another $4 trillion is not going to end any of these. Right? All we can hope is we get some momentum going that the money is well spent. But yeah these are gonna be hard but they're, you know, they're fights worth fighting. Like these need to be addressed, which leads me to the last slide and setting all these difficulties aside setting all the details that are still up in the air. Like this change has to happen, right? Like this is a moral imperative. We have, the awareness has been raised if we don't act on it is an even greater indictment of policymakers, just Americans in general like this just should not be happening. This last photograph that I'm leaving you with is a tent encampment. That is like the Federal Reserve building is just kind of back through those trees. I walked by these tents every single day on my way from the Metro back and forth. When I worked at the Fed, there are many more tents in this small kind of public park space than there were when I left the Fed in 2019 Jay Powell has mentioned this group of individuals in this community of individuals living homeless. And they, I mean, this has been held up as an example of, you know, we can't afford to fail because we're going to be failing people that deserve so much more than what they have right now. So, okay. So that is the prepared remarks I have let me see if I can stop sharing. Oh, there we go. Sorry I need my glasses.

- Thank you very much for that you said that this was kind a dress rehearsal, but really well prepared and well organized and thought provoking presentation. I'm gonna take my prerogative and ask you two questions. I see Maisha has a question. There may be some others too, and I'm going to divide it into a wonky question and distinctly not wonky. So the wonky question is, as you were talking I was thinking about my favorite address to the American Economic Association by a president which was by Mr. Janet Yellen, also known as George Akerlof where he talked about the five totems of macroeconomics that just didn't work. So he said again, audience, forgive me for what I'm about to say, but rational expectations, doesn't work. Ricardian doctrine, doesn't work, permanent ink, you know Modigliani-Miller doesn't work. And that was, I think, just before the global financial crisis that he gave that address. I think it was in 2006, 2007, something like that. So I thought it's precious was quite remarkable after the fact but I remember when I read it, I thought, yes, this is sort of what I've been waiting for my whole life on macro but that said, and it could just reflect that I don't have an internalized it well but modern macro theory doesn't really float my boat either as an analytical framework for thinking about doing things. Now, one of the things I have admired about you all these years is you are a really good forecaster, which means that, and as I said I should have given us shout out to the Sam rule at the introduction. I did it a year ago, which is so Claudia has come up with the metric for telling us that we are in fact in a recession, which was something that was very elusive for decades, you know, go back, go back to the time of Arthur coziness when we first really started doing these things formally. And so you clearly have an analytical framework in your head when you think about the impact of policy X on outcome Y can you describe a little bit what I know I'm putting a little on the spot here but how do you think about these things? How do you come to the answers that you've come to?

- Yeah why would say I am very fortunate in the training that I've had throughout my career as an economist, right? So at the Federal Reserve I learned to do macro forecasting from the best. And I learned at a time where I needed to learn really fast. Like I learned, you know probably a decade of forecasting within three years, right? Just because so much was happening in the economy at the Federal Reserve, the economist are also given time and resources to do research while I am a macro forecaster, all of my research. Well for a very long time all of my research was applied micro. So I did survey studies of the 2008 tax rebates, two, nine 10 making work, pay credit. So all of these different policies to households I've done research on. We ran our survey for the 2020 checks, the first checks and we have one in the field right now for the $1,400 checks. And so I think, and having focused on consumers like I've always been very in tune with not just aggregate spending but spending at different household levels. My last two years of the board I was in a division that focused on low and moderate income consumers and communities. I think one of the things that distinguishes me from a lot of macro economists, a lot of the academics can't forecast. I mean, that does distinguish me too from them. It very real-world data is that I get it that the aggregates tell us something but they often don't tell us enough. And sometimes like right now they can be misleading as to what's really happening in the economy. Now I'm not the only one that's pushing this. They're in academic macro in enacted in macro research. There is a really exciting area what's called distributional macro. It sounds totally sleep inducing but what it is it's taking macro economic models and being able to look both at aggregates and how the economy adjust and look at different groups of households. And so I think, you know we're getting the tools and the data to really change. And there's a lot of people that relax your rational expectations assumptions, and you know, these things make a difference.

- Not mine I mean, as I said--

- I know you address, your concern, like you said, you don't like that right?

- Yeah.

- And I do, you know none of these theories are perfect. Like George Akerlof is one of the most creative economists we have. He's been very quiet recently. We could use some backup here, but he probably can't talk because his wife kind of--

- I was gonna say rather political he's quiet.

- But we need more people like him pushing because I think Paul Krugman has a book out. I think it came out last year and he talks about the zombies of macro and there are certain macroeconomic models or certain frameworks and thinking that just like they have been disproven for decades and they will not go away. So we got to figure out a way to like crowd them out with good stuff.

- I mean, and I forgot the most important of the five that he debunked was the represent invasion theory. And again, you go back to Angus Deaton stuff he showed that micro foundation models for macro don't work unless you have assumptions that are so strong that they can't possibly be true like now I'm really going to get in trouble helmets that to city of preferences, stuff like that. So, no your point about, you know being thinking about the economy on let's shall we say household by household basis instead of an aggregates is incredibly important and it explains why your stuff turns out as well as it does. The more practical question it gets to the issue of inequities. And as you know, one of my frustrations is how housing has contributed to this. And it's not just that it contributed to it a long time ago as it did with the FHA program and with which had red lining and the way we did an exclusionary zoning and continue to do it and so on. But even recently you go back 2009 was the best time to buy a house in the last 35 years in the US and who couldn't get access to mortgage credit, African-Americans and Latinos because they were disproportionately harmed by the subprime crisis. So here was an opportunity to buy a house at a reasonable price, even in California. And you couldn't because you didn't if you were black, if you were Latino, disproportionally cause you couldn't get access to credit. And now this is like the been the best time ever to refinance a mortgage and an important channel of economic stimulus Roddy Rem Charn has done great here at USU used to be at the Fed has done great work on this. And, but if you were African-American and Latino you were more likely to have lost your job. And the thing you needed in order to get a refinance was to have a job. So how can we I'm afraid I'm putting you on the spot here but how can we change policy so that we stop repeating these things that can continue to compound the inequities that have happened over the years? Is there a way to do that?

- Yeah I mean, you have to have policies that goes straight at the inequities, right? So you can't have race blind policies, right? Like I mean there is some like getting a full employment economy getting a recovery as fast as possible that is going to benefit marginalized workers, right? Like you got to get us back as quickly as possible wealth building primarily comes from income. Right but especially when we think about wealth the disparities have built over decades and generations. And so you really have to think about I mean reparations is one proposal that someone, you know people like Sandy Dirty have talked about that even if you don't go that far it's like thinking about corrective measures. And there was one that I thought was really interesting that was in the relief plan. It was a small program, but I think this is an example of the kind of policy discussions. And I think there'll be a lot of pushback too. Is there was a program specifically for black farmers in getting agricultural credit because it'd been well-documented that there were discriminatory practices even up until recently. So a little different than housing. And they said, this money is for black farmers. Now you can imagine that, that cause even though it's a small program a lot of pushback from other people, right? But those are the kinds of programs that we have to be able to figure out a way to push them through and this is only going to be levered on a real awareness of systemic economic injustice, but like we have never pulled that off. Right because then there'll be pushback and backlash. So they're tough and I mean, national policies, like what the Fed does. Like they can't target the black unemployment rate. They can pay a lot of attention to it and they can push really hard. But that's where, especially in wealth space, like how's it like, that's just, I don't know I'll be very interested to hear your ideas, but you do see the administration trying, like there are programs like extending broadband internet access. I mean, that has a big rural benefit, but it also to a lot of inner cities is a benefit or making sure we have safe drinking water and no lead pipes like those benefits will go disproportionately to black and brown people in communities. It's just, how much can they really push that? And can they really get that stuff passed is a big question mark.

- So Chase, Maisha has a question. I think I'd like her to ask you can we make her a participant because I think Claudia largely answered the question that you typed in the chat, but I wanted to make sure that if there was a nuance, I missed that you expressed it.

- [Maisha] Yeah thanks so much Dr. Green and this is a wonderful just discussion just to reiterate what you said earlier, you know, as a Sahm rule it makes sense to me and to I think a lot of people who kind of look at our current system is being completely unequal and the disparities that have been kind of, you know light has been shed on just for COVID-19 and our unrest just recently. So it makes sense to me, but you know, I'm not an economist. So when you're introducing these new things, these kind of revolutionary things, things that actually would benefit largest society, as well as the groups suffering these disparities you're gonna get a lot of pushback. And I think I've been in the post or in the chat that I watched the man in the white suit which is kind of an interesting movie about change makers. So how do you kind of, I mean it's such a huge issue, changing our policy. How do you kind of, how do you, you know do I guess that's my question is how do you get started? How would an average person an economist and an average person kind of go about starting to make those changes starting to actually steer our economy and our country in the right direction?

- Yeah so I think, I mean, obviously this is hard. I mean, these goals are really lofty, really important goals. I think the biggest thing that policymakers can hope for right now is getting some momentum going, right? The federal government can not bring this to the finish line. It really does require communities and families and the private sector to all pitch in. And we all got to get the incentives. We all got to want this and work towards it. And that's gonna be hard. I think for the federal government getting the ball rolling. And I am very big on well-designed well administered policies, right? We sometimes get like the signing party is really exciting and we got great talking points but like the details matter. And I think that's one where I think as a government we fall short on and definitely policy advisers we don't spend enough time thinking about that in terms of people, one of it's, this goes on both sides. Policymakers have to get people at the table. They have to listen to people who are outside of Washington DC and people have to trust that it is worth raising their voices. Right we have a long history of not paying attention to people, what they actually need. So I think there's a lot of really exciting activism that is going on, on a lot of spectrums. I mean, they're even, you know, Fed up as a activist group pushing on the Federal reserve to do better, right? So there's all these different spaces where people can step up and really explain what they need what they're seeing, but like, you know that also takes time and it's not like the payoffs have been huge in the past. So I think there's kind of these relationships are important to build, but, you know with measured expectations.

- So we have one last question from Brian Jones and he's just asking are there other countries that we can look at that have used direct payments and how well to a group of people with incomes below some threshold and how well does it work if so?

- So we do on the direct payments, we have a lot of evidence even from the United States. So if you think about the stimulus checks particular and recessions, we have, I mean there's research, I've done this. Others have the effectiveness. If you get into a space of the more like the child credits I was talking about or basic income basic like the guaranteed income, okay. Then we are moving out of like us as an example for child benefit. Like most of Europe does this. I mean, this is the United States is an outlier in the way that we support families and children. So we have a lot of evidence that that is an important it means a lot to those families in more like broad in like more universal type income support programs as a way to deal with deep poverty or just to, you know kind of support people and kind of, you know living their daily lives or investing in their future. There, we see their experiments happening right now and both in the United States in some communities there's been private funding for payments and they do you know tests of like some people get them. Some people don't, there are countries I think Brazil is one that's been experimenting with that. So this is one where I feel like the policy conversation is running ahead of the evidence, but the evidence is catching up. Right? So we do have and I agree we need to look at other countries it's tricky, right? Because the United States is special in many ways relative to the rest of the world. And even as I mentioned, some of the historical examples do United States in 2021 is very different than the United States in 1935. Right so, but we need to like, I mean I love every scrap of data, every piece of research every experiment we can find, it's just you have to be able to filter it. And at the end of the day, it's applying some degree of judgment as an analyst to what applies. And then it's absolutely there comes judgment from people like, is this what we need and then you got to actually do it do it, you know, properly. But yeah, there's a lot of examples and there are a lot of really good examples of how to fight recession. Like the automatic stabilizers, a lot of other countries and especially in Europe have much better ways where they start fighting recessions right away. They keep workers attached to their employers. So there's a lot of lessons we could learn, but frankly we could have learned them a long time ago. So the United States is kind of a go our own way kind of country. But we can, we absolutely have others to learn from. And the United States has led on policies too. So, you know, it goes both ways.

- So we're at the top of the hour. Claudia Sahm thank you so much for coming back and sharing some of your wisdom with us. I hope we can persuade you into joining us again.

- Yeah of course. Again, Claudia, thanks so much for being here. Great seeing you, audience thank you for joining us and we'll see you next time on Lusk Perspectives.

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