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Chapter 1: What is the main topic discussed in this episode?
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Anna Wong has been definitive at Bloomberg Intelligence and Market Economics. She is in conversation with Kevin Hassett of Greenfield, Massachusetts, and of the University of Pennsylvania, now at the White House. Let's listen.
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Chapter 2: What insights does Kevin Hassett provide about the current state of the U.S. economy?
But I think one of the things we're seeing is a massive onshoring of activity unlike anything I've ever seen. So I think that it's really been a very net positive policy, despite what sort of conventional economics has been teaching us since we went back to the textbooks when I was in grad school.
Okay. So, you know, I think in Wall Street, most of the firms, many of the firms have come up with this cost burden of tariff composition of around 5%. exporters cuts at discounts 70 percent 60 to 70 percent absorbed by domestic firms and the rest you know 20 to 30 percent with the tariff showing up and consumer prices do you disagree with with that sort of breakdown or
Well, I think it will depend on... It's a product-by-product kind of analysis, and I think that it's still work in progress to figure out what the final story is. But again, we've got high growth and no pickup in inflation.
I think that the Wall Street folks, or a lot of Wall Street folks who I respect and read in the spring, were saying that we're going to have stagflation, that we're going to have 4% or 5% inflation because of the tariffs and no growth. And so I think that...
allocating like the current state of the economy and the impact of tariffs on it from people who told us that we'd have a recession with high inflation with those models is probably not the best thing to do.
Yes, certainly Wall Street have been caught wrong on their forecast of an inflation surge, which did not happen. In fact, I remember, I think, the consensus upon Liberation Day, everybody revised up the core of PC inflation to well over 3 percent, even some closer to 4 percent. And now we are on track to hit 2.9 or 3 percent at the end of this year.
For sure, the consensus has been wrong on that. So recently, there is a viral San Francisco Fed paper that looked at 100 years of history of tariffs, and they found the net effect of tariffs tend to be deflationary.
However, they also found that because it's deflationary, because it adds an aggregate demand shock more so than a supply shock, and hence, ultimately, it raised the unemployment rate. And so far this year, when we began the year, the consensus on Wall Street is 4.1% unemployment rate. It looks as if we are heading to 4.3 to 4.4 at the end of this year.
How much do you think of this slower hiring and increase in unemployment rate as attributable to trade policy or what other policies?
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Chapter 3: How do tariffs influence trade and economic stability?
lots of growth. It was a big positive supply shock. And so then when the unemployment rate actually kind of went down, we had no evidence of the productivity. Remember, Robert Gordon was saying it's everywhere but in the data. But Greenspan decided not to hike rates. because he believed that we were in the midst of a positive supply shock that was perhaps unprecedented.
And we had a kind of five-year run that's one of the best five-year runs we've ever seen, even all the way to the point where the U.S. fiscal situation was in surplus. And so I think that it's one of the great moves of Federal Reserve history that Greenspan saw that it was a positive supply shock that would be both pro-growth and deflationary.
Yes, I have a- You have more stuff about that down there? Yes. But I say that to reference today, it's really interesting that there's evidence in peer reviewed papers, or not quite peer reviewed yet, but at NBER, which is kind of-
A lot of my friends at NBR, by the way, it's a secret of NBR authors like myself, is that you'll very often take a paper and submit it to a journal and get the referee reports before you put it into the NBR working paper series. Because if you got some stupid mistake, the referees will catch it. You don't want to embarrass yourself in front of everybody by just throwing it out there.
And so actually, NBR is kind of almost peer reviewed. But there's a lot of stuff showing big AEI gains. And the thing is that we also see it in productivity. And so if you think about the difference between, say, 1996 and today, is that we've got this revolutionary new thing that probably is going to be a big positive for productivity.
And Steve Ulner and Dan Sickle, your former colleagues at the Fed, had a famous paper that you only see productivity booms after the benchmark revision. So you never actually experience it while it's happening in the data. And this AI boom is significant enough that we're already seeing it in the data. Probably the benchmark revision is going to revise it up.
And against that backdrop, I think that the open question is, how do we have high growth and then less growth in employment than we expected? And I think that the tariff could be part of the story, but I think that that probably is a very small part of the story.
Yeah, I mean, when we looked at the earning transcripts from this third quarter and where so far the earnings have been surprisingly positive.
In fact, it was like the best quarter ever.
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Chapter 4: What role do tariffs play in the U.S. trade deficit?
And it turns out that there were a lot of, there was at that point a lot of communications equipment produced in the US for developing countries that were kind of like really old fashioned analog things where you got like Josephine moving the wires and stuff to connect the phone calls. And since we had this really old equipment that we were exporting,
to developing countries, they were using the price of that to deflate communications equipment. It sounds like a very tactical matter, but then Chairman Greenspan said, well, Kevin, what if we deflate communications equipment with a computer deflator instead? Like, how much more would GDP be going up? And it was like about 1.5%. because of that.
And so he was kind of like, yeah, we're really growing way more than we think. We've got a serious measurement problem. And then if you extrapolate from that, then if you're hedonically adjusting everything that gets like a computer to make it better, then you're putting like a deflationary force into the economy that's not being measured.
And so I think that it could be that the communications story was a key moment where, you know, everybody at the board had a, aha, yeah, I can understand why Alan is so convinced about this.
So I was going to ask you, so what your, it's interesting, you were in the price and wages section?
No, I was the business fixed investment person.
Oh, that, okay.
Economic activity.
Oh, I see. And what other sections were you or have you?
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Chapter 5: How is the current administration's trade policy shaping the economy?
So, I mean, he's a chairman who's really in the weeds in the data and very creative as well. But... But let's not underestimate the challenges he faced on the committee, where half of the committee was against this. How did you, did you have any insight then on how he was able to, well, first of all, how was he able to win over the Fed staff, which is, Fed staff is very influential.
Back then, you have the green book and the blue book.
Now, they have the- I used to write the green book twice a year.
Yes, and do you know what color is the book now?
Is it the teal book? Why did they do that?
To mix the green and the blue together. That gives you teal.
That's probably where all their problems began.
So it was true in 1995, 1996, whenever the staff presents the data, because at the Fed, the bar to argue that something is a structural change is very high, because you will agree that the quality of the Fed staff is very high, and some of the smartest people I know. And so for two years, even up to 1997, in the transcript they were talking about no evidence of productivity increase.
Only once they have the revisions did it show that in fact in 1995 productivity was running at 2.5 or three as opposed to one point something. But how did the interaction between the chairman and the Fed staff, how did the chairman convince the Fed staff to go? What was it like? Was the chairman directing the research and statistics division, here, look for these signs of productivity?
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Chapter 6: What impact do tariffs have on inflation and consumer prices?
And then that's about 0.3 times that. So that gets you up to three before you do something to labor. And so you're looking at pretty good growth accounting right now that easily could be looking at a sequence of years that are from three to even four because of the productivity, if the productivity stays where it is, which I think it will.
Okay. So now I'm switching to the hardball questions. Oh, okay. Fed independence.
Okay.
That's an easy question.
Are you aware you're the leading candidate for the Fed chair position? Would it be fair to say that you are working a lot of hours right now? Are you working 60 to 80 hours?
How is that related to Fed independence?
No, sorry, sorry. I just wonder whether- If I look tired, there's a reason. I mean, a Fed chair position would certainly be an improvement in work-life balance for you, probably. But on the Fed independence issue, so let's face it. If you were confirmed, when you go in, you'll be facing a lot of skeptics.
You will have a lot of colleagues who you will have to convince to win over to your side of the argument. Would you say so?
Sure.
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