Transcript: Is this a winning US economy for the Democrats? With Jared Bernstein

This is an audio transcript of the Economics Show with Soumaya Keynes podcast episode: ‘Is this a winning US economy for the Democrats? With Jared Bernstein’

Soumaya Keynes
With the US election looming, four in five registered voters say that the economy is going to be very important to their vote. That makes the economy the top issue above healthcare, foreign policy and immigration. And for a lot of this year, that seemed like bad news for the Democrats. Even though the data on how the US economy was doing seemed pretty good, the vibes were bad.

This week, we are going to ask one of the president’s key economic advisers where we are now. Are the vibes catching up with the data? This is The Economics Show with Soumaya Keynes. This week I’m joined by a very well-informed guest, Jared Bernstein, chair of the Council of Economic Advisers. Jared, hello!

Jared Bernstein
Hello, thanks for inviting me on!

Soumaya Keynes
OK. So before we begin, I feel like there is something that you need to get off your chest. Would you like to share any comments on the title of my podcast?

Jared Bernstein
Oh, yes! Yes. No, I wanted to praise you for the creative sessions it must have taken to come up with the title, The Economic Show, and just that note that I suggested a subhead, which is The Economic Show: a Show About Economics. And I just wondered if you’re thinking along those lines.

Soumaya Keynes
Yeah, I could suggest that to my editor, Roula. I won’t. But thank you for the advice. (Laughter) OK, well, now we’ve got that very important question out of the way, time for a sillier question. OK, so on a scale of one to 10, where one is the US economy is in the depths of the great recession and ten is the best it could possibly be. Where is the US economy right now?

Jared Bernstein
I think if you look at the indicators and where they are relative to, say, the capacity variables that economists think about, you know, you’re in eight, nine territory. Inflation has almost completed a round trip back to pre-pandemic levels. GDP has been growing solidly above trend. And the unemployment rate — while it has ticked up in recent months — still remains historically very low. And so I think if you look at the top line indicators and I’m sure we’ll have a chance to talk about vibes because they’re super important, you’d score somewhere, you know, eight or north of eight.

Soumaya Keynes
OK, so I do want to ask about the vibes. Where are the vibes on a scale of one to 10? Where do you think perceptions of where the US economy is, are?

Jared Bernstein
It’s an easier question to ask than it is to answer, in part because when people are talking about economic vibes, they’re not just talking about the economy. Research has found that there’s political partisanship that gets picked up by that question. We’ve seen an increase in negative reporting on the economy by the press, and I think that’s reflected as well. But there’s no question that the score on your one to 10 scale of economic vibes is below the score, which I put it around an eight or nine on the economy itself. And I think that part of the reason for that has to do with the price level. We’ve written a lot about that here at CEA. People still remember what a lot of things used to cost pre-pandemic, and it takes a while to get used to a higher price level. Even if your wages and incomes are beating prices as they have been for a while now, such that you can go to the store and buy a bag of groceries for the same hours of work that you could before the pandemic. But it takes a while for that to sink in.

Soumaya Keynes
But wait, could I just butt in and press you for a number because we’re still in the silly section here. So between one and 10, if, you know, the US economy is an eight or nine, where are the perceptions, do you think?

Jared Bernstein
Let’s say five.

Soumaya Keynes
OK, all right. Five. You know, bang down the middle. OK. Well, look, let’s get into some of the more concrete data then. So how do you look at people’s perceptions of the economy? What’s your kind of favourite indicator of the vibes?

Jared Bernstein
There is no one single indicator. We look at all the sentiment indices. And interestingly, I think importantly, this gets overlooked. We also look at, you know, not just what people say, but what they do. And both are important. A lot of economists say, forget about what people say. Just look at what they do. I cannot afford to do that in this job. I have to focus on both. And I think both are important.

Just this morning, the University of Michigan sentiment index was reported, and that came in above expectations. So we’re seeing some positive movement in where that and some of the other confidence or sentiment indicators are pushing. But we’re also seeing things like we had a great Labor Day in terms of travel. TSA are the folks that track how many people are moving through airports. We’re hitting record highs, literal record highs. We have strong consumer spending. But I still think that a lot of people are still dealing with prices that are too high, even if inflation has come back down to where we need to see it. Price levels are still elevated and that’s another part of the problem.

Soumaya Keynes
Just on that, you mentioned the price level, maybe people feeling aggrieved that prices haven’t fallen back to where they remember, but what are the other factors behind that slow improvement in sentiment?

Jared Bernstein
So I think there’s . . . I’ll say three factors of which I think the third is probably the most important. First, when you ask people about their economic vibes, you’re not just getting feedback on the economy. We have a very partisan politics these days, and that sometimes gets served up in answer to that question. Second, there’s really pretty compelling research showing that economic reporting from the media has increasingly become negative. I mean, it’s always if it bleeds, it bleeds. But I think that that’s become exacerbated on the economy if not so much. I think there’s good evidence of that.

But I think the most important is what we at CEA talk about as the PPV problem, the personal price vector. And this is an idea that people walk around with a set of prices in their head. Of course, the most salient prices are always on everybody’s PPV — gasoline, groceries. But, you know, my wife is a gardener, so she knows what that stuff cost. She has in her mind what a bag of fertiliser should cost. And when you have a kind of a shock to prices through the pandemic, that’s a shock to everybody’s PPV. Now, look, inflation is always going up and price levels are always ticking up a bit. But when it’s slow and gradual, your PPV is in shock, it’s just acclimating to these inertial changes.

But in the current climate, we’ve seen much more of a shock to PPVs, and it takes people a while to acclimate to the new price level. Two things have to happen for that to occur. One is enough time has to pass so that that acclimation can occur. But two, and economically more important, is that wages and incomes have to catch up and surpass prices. And the good news is both have been happening because time passes. That’s just what time does. But, B, we’ve had really pretty strong real growth of wages and incomes. So put that all together, we should see improvement in vibes and sentiment. And true to form, we’re starting to see that.

Soumaya Keynes
I guess there is though, the result that people tend to think that cash wage gains are because of their own hard work. And when prices rise to kind of eat that up, that’s not someone else’s fault, right? I mean, are people still going to be annoyed because prices have increased so much?

Jared Bernstein
Not forever, because if that were the case, I would be walking around in a permanent bad mood because when I started driving, gas was $0.60 a gallon. And, you know, I’m not in that mood. So the answer to your question, Soumaya, is that this is where lower inflation comes in. Sometimes lower inflation gets sidetracked in this story. I don’t care about lower inflation. I want prices to come down. Well, the way people can acclimate to a shock to their PPV is for that shock to stop occurring. And the way that shock stops occurring is inflation gets back down to normal levels, which is just about where we are. The most recent reading of the year-over-year CPI, 2.5 per cent, is just about back to where it was pre-pandemic. I gave a long speech on this a few weeks ago called “Inflation’s (Almost) Roundtrip” that I commend to folks if they want to get into it. But the point is that if you can get inflation back down to normal levels while maintaining and sustaining the strong growth results that I scored as an eight or nine in my first answer, that is a recipe for people to get past the kind of negative vibes we’ve been talking about.

Soumaya Keynes
OK, so basically higher real incomes and time are what it’s gonna take for people to feel better about inflation?

Jared Bernstein
That’s the recipe.

Soumaya Keynes
OK. I have a question about the election, right? Which I don’t know if you’ve heard, but it’s quite soon. Do you think any of this actually matters for the election outcomes? I mean, you mentioned partisanship in responses to people’s views on the economy. A while ago, we had my colleague, John Burn-Murdoch on the show and he was basically saying that the US is just so polarised that the voting intention affects perceptions of the economy. It’s not the other way around. Does any of this economic stuff really matter?

Jared Bernstein
Definitely. I mean, any election model, at least that I’m aware of, still finds key economic variables loading significantly. It’s just that there’s a lot of other noise going on, and I’m sure that’s true to the extent that the economy might have dominated in the past. No question that the partisanship you just cited is very much in play. I mean, we see this again in the confidence or sentiment indicators. When the person or party you support gets elected, you know, your sentiment goes up and vice versa, even though the economy doesn’t change that much from week to week. You know, I think the political scientists have a term called overdetermined, which is when there’s too many variables to explain something. That’s probably the case with election outcomes. But there’s no doubt in my mind that the economy plays a role.

Soumaya Keynes
OK, well look. Let’s talk about the real economy then a bit more. You mentioned inflation, but I want to ask about a recent blog that was on the CEA website that looked into housing, right? Because housing is one of the sources of actually kind of persistently, slightly above-target inflation. Why do you think that housing inflation is so stubborn right now?

Jared Bernstein
That’s pretty straightforward. We have a decade-long shortage in this country of housing supply in general and affordable housing supply in particular. I would call this one of the biggest pieces of unfinished business of our administration. We have policies that we believe would significantly reduce the gap between the housing supply we have and the supply we need. Policies that we think would deliver between 2 and 3mn affordable homes, both rental units and owned housing. But Congress needs to work with us on that.

But the simple answer to your question is yes, you’re gonna get monthly bits and bobs in the price index. But here I’m talking about, as we said in our blog, a structural issue. This is not a cyclical issue. This is a long-term structural shortfall. There is a deep and profound market failure when it comes to building affordable housing in this country. It doesn’t pencil out for developers to do so. And I think there’s a strong contrast here between policies that we’ve tried to promote and those of our opponents.

Soumaya Keynes
Can I just, I guess, try and push back slightly on this idea because, you know, don’t get me wrong, if there’s a way of building more houses, sign me up. I’m on board. But as you say, that is a structural problem, right? It’s a long-term problem. And I guess the more recent inflation dynamics, the supply constraints didn’t only just emerge, right? And so if you were trying to explain, you know, recently high house price inflation, really don’t you have to reach for demand to do that?

Jared Bernstein
I think it is reasonable to push back, especially since a lot of people keep expecting housing in the CPI to come in lower. And that’s kind of a mechanical dynamic that has a lot of people scratching their heads. We’ve seen the pace of rental inflation roll over from very high rates of rental inflation to ones that are more familiar. And we think that that should enter the CPI with something like the seven to nine or 10-month lag. And yet, you know, it hasn’t shown up. But where I would push back on your pushback is that the gap between housing supply and housing demand isn’t a constant factor. It’s actually been getting larger. Again, pandemic and economics are in play.

During the pandemic, people wanted some larger homes. People certainly invested in improving their homes. And of course, as interest rates have gone up, the gap between mortgages that people hold and mortgages they can get in the mortgage market is the largest it’s been on record. And that locks people who’d like to move into their homes. We have a lock-in effect that’s in play as well. And that sometimes doesn’t get picked up here. But I think the lock-in effect, what that really does is it kind of diminishes. I was gonna say housing supply, it’s a little tricky and it really diminishes more churn in the housing market. I mean, you’ve got people who want to move. I’ve heard stories about divorced couples who are stuck living in the same house because they’ve locked in a 3 per cent mortgage and the only thing out there is, you know, north of six.

And so the problem you’re having in the market, it’s not like unlocking that effect builds a bunch of new housing, but it does, again, create more churn so that people maybe move out of that starter home and a family just starting out can get on the first rung of the ownership ladder, which has been really tough for them these days. So I do think that closing that spread between existing mortgages and the rate in the open market will be helpful.

Soumaya Keynes
That’s interesting, you just raised the point about how the lock-in effect because of higher interest rates maybe actually contributing to higher house prices, right? And so I suppose that what you have is this kind of connection going from high interest rates back to higher inflation, right? Which isn’t you know, normally you think of high interest rates lowering inflation. So what do you make of that?

Jared Bernstein
I think there is an interesting paradox here, Soumaya, which is something that Mark Zandi and Jim Parrott wrote about in a recent article wherein when high interest rates actually can hurt the supply side of the housing market, that, you know, sort of goes the wrong way in the context of housing inflation. And so one of the numbers we put in our blog I thought was really striking.

If you look at core CPI inflation over the last year, 3.2 per cent. If you take out shelter, half that, 1.6 per cent, that is a huge difference and in fact, in our blog, we showed the spread between core with and without shelter. And that spread is as wide as it’s been. It’s come down a bit, but it’s wide as it’s been in history. So, yeah, there is a tricky dynamic in there. But look, sometimes tools are a little more blunt than we’d like, but they’re still useful tools.

Soumaya Keynes
OK. Well, look, I want to move on now to talk about the broader economy and in particular the labour market. So now you said at the beginning that obviously, the economy is at an eight or a nine and there’s a kind of structural component to the labour market and then the kind of much more recent performance of it. Could you, I guess, talk to me about, you know, where you think that structural component is briefly and then tell us about how worried you are about some of the recent signs of softening?

Jared Bernstein
When President Biden took office, his first big economic speech focused on the importance and urgency of getting back to full employment. He said those words five times and yes, I’ve counted in that speech. So I’ll bet you with some kind of record. And implemented policies, particularly through the rescue plan, to achieve that and the benefits of full employment, which always disproportionately redound to those who are least advantaged, have been just so important and so evident in this labour market. We’ve seen racial gaps at historic lows. We’ve seen stronger wage and income gains at the bottom and at the middle. So I definitely want to emphasise because it’s been such an important economic goal of this administration to achieve full employment because of the bargaining power that it delivers.

Now, to the more kind of up-to-date cyclical story, what’s happening in the job market right now? I think the bathtub model is actually a very helpful way to look at this, so let’s take a bath here. And the idea here is that if you picture a bathtub and the water in the bathtub is the unemployed. That’s the stock of the people who are unemployed. The water coming into the tub is not growing any faster. It hasn’t accelerated. And so that’s just another way of saying we really haven’t seen much of an increase at all in permanent lay-offs. But the water going out of the tub from the drain, that has slowed. Hiring rates have slowed, and it’s taking a bit longer for people to find jobs. And that’s why we’ve seen the deceleration in payroll growth even as some tick up in the unemployment rate. But it’s still quite historically low.

In total, we see permanent lay-offs. You can’t really can’t have a labour market recession without that. We shouldn’t be too worried about that deceleration in the hiring rate, especially since, you know, that was a breakneck pace before. So I think the labour market is in a good place and a solid place. I can say a little bit more why if that would be helpful. But those are the dynamics as I see them.

Soumaya Keynes
OK. Well, just bouncing off that then, why do you think the labour market is doing so well?

Jared Bernstein
I answer that question by taking a close shave of Occam’s razor. When consumers are doing well because they have the tailwind of rising incomes, rising real wages, they’ve a persistently strong labour market on their back. In a 70-per cent consumer spending economy, which the US is . . . you know, Europe, that’s 55 per cent. In China it’s closer to 40 per cent. When our consumers are doing well, that propels the economy forward. And that’s one of the things that we see. Demand for labour — Econ 101 — is derived demand, derived from consumer spending, from consumer demand, but also from investment. And we’ve had great investment results also, really this probably get somewhat less play. We’ve seen record construction of manufacturing facilities on US soil very much coming out of Biden-Harris policy on clean energy, on batteries, on chips. And that too is helping to fuel this virtuous cycle. So as long as we’re thinking about derived demand and strong overall growth in consumer spending and investment, the labour market should remain solid.

Soumaya Keynes
I know that you’ve written a bit about male labour force participation. Could you tell us a bit about that?

Jared Bernstein
Yeah, I’m glad you asked about that. We . . . again, we have a blog, and here’s another structural cyclical kind of story. Anyone who’s tracked the US labour market knows that labour force rates for men, prime-aged men, again 25 to 54. So taking the younger and the older folks out of the mix has had a long-term structural deceleration. Some of that is related to the loss of manufacturing jobs, some of the downsides of globalisation hollowing out some of the communities where these folks lived. We’ve seen that turn around in recent months and quarters and years, and that’s been really great to see. Now that’s been such a decades-long trend that I am not saying that we have bent the trend in a meaningful way yet. You know what I mean, they didn’t see that.

But look, I mean, we have added on our watch, we’ve added 740,000 manufacturing jobs. I just told you about record construction of manufacturing facilities. I mean, under the previous administration, when they left, manufacturing employment was down by 170,000. Under us, it’s up by 740,000. And as we see prime-aged men coming up. You know, and that’s been good to see. I’m not gonna call it a reversal of the old trend yet, but it’s really important and an under-appreciated metric.

Soumaya Keynes
OK, well, look, let us throw to a break now, but when we get back, I’m gonna put you in what I’m gonna call The Economics Show hot seat and ask what policies you would argue for in the coming years.

Jared Bernstein
Sounds fun.

Soumaya Keynes
Yeah, it’s gonna be a grilling, let me tell you.

[MUSIC PLAYING]

We are back from the break. OK, so now we have The Economics Show hot seat. Imagine I’m the president and I know that must be easy because I sound extraordinarily like him. So I’m asking you about various different policies and what your views are on them.

Jared Bernstein
I like the sound of President Keynes, by the way. That is a nice . . . 

Soumaya Keynes
Yeah, I mean, it just rolls off the tongue and there are no obstacles to me becoming US president. So that’s coming along soon. OK, so I’m gonna throw out a policy and, you know, it may be controversial and I want you to defend it in roughly 30 seconds. OK?

Jared Bernstein
OK, I’ll try.

Soumaya Keynes
So the first one, tax-free tips.

Jared Bernstein
I think you have to be careful in how you structure that idea because if you’re not, you can end up with a lot of really rich people, you know, investment bankers who insist that they’re paid in tips which they can then write off. And we don’t want to see that. So you need to have two things, you need to have an income cap so you avoid the gaining of that idea. And you also need to present it along with a higher minimum wage to ensure that you reach a lot more low-wage workers, because there are a lot of tipped workers who don’t have a federal tax liability. So you put those two together, an income tax and a higher minimum wage, and it can be a helpful policy. But without those, I think it’s ripe for abuse.

Soumaya Keynes
OK, next policy: downpayment help for first-time buyers.

Jared Bernstein
I think that can be very useful because a lot of first-time buyers never make it to the settlement table just because their income is too damn low and you know, you got to make 20 per cent down payment or something like that. It’s just gonna break the bank for people. It’s sort of another dimension of the market failure that we talked about earlier in affordable or low-income housing. The issue is sequencing. You have to have the supply in place first before you go to the credit or you risk the credit being capitalised into the price.

Soumaya Keynes
Right. You can’t just puff up demand without expanding supply. Otherwise, you’re just gonna pile up prices. OK, next policy: capital gains tax on unrealised income. So the value of your business goes up. Should you pay capital gains tax on that?

Jared Bernstein
Our policy, which we think is important, is to have a pre-payment tax on gains that will eventually have to be realised. Whether that’s when those assets are sold or whether that’s a death when the assets are transferred, at some point, those gains get realised and a pre-payment tax would be credited against those eventual realisations. Now this only hits folks above $100mn. So there’s, the hair’s awful thin up there. It’s a very rarefied group, but it’s a good way to add some fairness to the tax code because we see effective tax rates up there that are well below 10 per cent. So we need to do something like this in order to inject, again, more fairness.

Soumaya Keynes
OK, next policy: reducing the deficit.

Jared Bernstein
So there are times when you want your deficit to come down and times when you want it to go up. Certainly in a cyclical downturn, reducing the deficit is a bad idea. But when the economy’s firing on all cylinders at full power, you’d like to see the deficit come in some. And if it doesn’t, you have a structural imbalance. And we’ve certainly seen that in recent years. And so that’s why in our budget we try to correct that. And a good way to think of it in the context of your question is to think about reconnecting the flows of revenues into the Treasury and the overall economy. When the overall economy is as strong as this economy has been, you want those revenue flows to be elevated and vice versa when you’re in a downturn. And because of decade after decade of Republican-motivated tax cuts, that chain, that linkage has been broken and we need to prepare that, not by raising taxes on anybody under $400,000, but by, again, reference to my last question, adding a lot more fairness, the high end of the tax system.

Soumaya Keynes
OK, final policy: federal rent control.

Jared Bernstein
I think federal rent control would be problematic, but that’s not what we’re proposing. We’re proposing a cap on existing rentals held by large landlords with an exemption from the cap from any new construction. Numerous cities throughout the country have done this and found it to be complementary with expanding supply of rentals. So this should help renters but not dampen the supply impulse.

Soumaya Keynes
Yeah. OK. So imagine I’m the president here. So I suppose the critique of rent controls is they do impede the supply response, right? So why would this targeted policy not do that? Whereas the broader policy wouldn’t be a good idea.

Jared Bernstein
Because it exempts new construction. That is a critical component that’s often been overlooked. The areas where this has been tried throughout the country have found that it doesn’t impinge on the supply of new building. So it’s designed to help existing renters, particularly in buildings with large landlords, where we have seen some really problematic increases in rents that have been very difficult for people.

Soumaya Keynes
OK, I have a pushback to that, but my producer and editor are gonna be sad if I make it. So, I see the flaws in this presidential hot seat, which is that we need more than 30 seconds on each topic. But we’re gonna have to leave that there for this week. Thank you so much for joining me.

Jared Bernstein
It’s been a great pleasure.

Soumaya Keynes
That is all for this week. You have been listening to The Economics Show with Soumaya Keynes: a show about economics. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen.

This episode was produced by Tamara Kormornick with original music from Breen Turner. It is edited by Bryant Urstadt. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Soumaya Keynes. Thanks for listening.