Surveillance: U.S. Midterms Eve With Jared Bernstein

trade happy talk ending as quickly as it started. How do you get any clarity on the direction of travel gun into the G twenty this month? No, we don't, and has been a constant feature of US China trade negotiations that we usually we frequently had positive news that we're being shot down a few days later, a few hours later by another member of the administration. So I mean, really it was not too surprising that this happens. I mean,

it's always the timing that you never know. And the market still seems to be gotten on the wrong foot of that. So but but again, the the only the only announcement that we could believe. Then if we see the two presidents showing up in front of the camera was with as signed piece of of of of a contract.

Is this back and forth, this apparent contradiction a feature of the negotiations or a buck well, it has been a constant feature, and I think it is the bark even so, I mean, on the you can say it is one of these negotiation tactics of the art of the deal, you know, as I said, good cop, bad cop type of thing, so that the end of the day, but the president can eventually be the good cup when he talks to the Chinese. But you cannot help that.

There is also the lack of communication within the administration itself, so that there's not quite an agreement within the senior officials of how to interpret the latest moves and developments. The backgroupd to all of this is global deceleration for the global economy. The United State doesn't appear to be a feature of that thing. Will it be? Yes, it will be. And I mean it's pretty easy to explain why the US has not been a feature of that deceleration.

I've been just trying to calculate a cyclically adjusted measure of the fiscal deficit. So if you look at the output gap and you look at the unemployment gap in his his historical correlations would have suggested that we should have a balanced budget at this point. Instead, we're almost

running a four percent four percent of GDP deficit. This gap, which is a four percentage point deficit, is the largest that we see since the mid sixties when we had that Kennedy text Cards to Vietnam War, also when the unemployment rate was three point seven percent. So it's it's very easy to explain. It's just a question when the stimulus fates the impact of a similar fate. I think it's we've seen peak grows right now heading into slower

grows next year. Were the huge news flow over the weekend, I read a number of things, John. One of the things I read was the chancel of the chequer, Hammond and austerity, and there's a whole different twist on that in Europe and particularly in the United Kingdom. Of harm is that the surprise of this election and into the presidential campaign is we'll have a discussion of austerity into two thousand twenty and far more into two thousand twenty

one and two thousand. I can't believe I'm saying two thousand twenty two, John, I didn't. That's a long ways away coming around. It's coming around, coming around. Are we going to have an American austerity discussion? No, No, I think we should have, and I mean austerity sounds sounds harsh, but but again, we we are having a economy running at at full capacity. Um. And as he said that the deficit should be much better, maybe you should even run a surplus. But really the talk right now is, um,

if Republicans should keep the majority in Congress in both chambers. Um, there maybe talk about another tax cut, right, I mean, maybe there was just an election campaign, but they're they're talking about more tax cuts. And then there is a talk about if if, if Democrats win the House, about an infrastructure project. I mean, I honestly think that neither of that will happen, but the debate is going in

the direction of even more stimulus. I want to continue the conversation on the midterms of just a moment, let's talk about the budget deficit just quickly. You mentioned this comparison to the nineteen sixties at four percent GDP. Just looking at the budget deficit over the last ten years, it's pretty clear that we have hit that level before and multiple times. And stay there. What's the nineteen sixties comparison really about harm. Just explain that a little bit more.

The comparison is about is cyclically adjusted deficits, So where the deficit should be given the state of the economy, and where the deficit actually is right, So that is the stimulus over and above what is needed by the economy, if you want, right and this is right now the biggest that we have seen since the Thank you. It's not it's not the absolute deficit, to be clear, It's just important to clarify that point. Harm, Thank you, And let's talk about the mid terms. Then what is your

base case. Where the base case has to be that that we see a split Congress, that the Democrats take the House. But I would like to emphasize, and I wouldn't be surprised if Tom talks about Monte Carlo stimulations a bit later, um that there is a strong um or non non negligible chance that Republicans actually do keep the House, because simply if you just look at jerrymandering and all this, I do think that the Democrats need to win the popular vote in the House elections by

more than five percentage points. And right now, if you look at the latest polls, the advantage is somewhere between seven and eight. So we are once again in the surrounding area area where where there is a chance that Republicans keep the House. But again, if I have to pick a side, I would not bet against the polls that Democrats win it. But again we should also not underestimate the chance that Republicans keep everything. Well, a lot of people tom are worried about the scenario that the

political surprise materialize. It. Two things surprised people, not just the outcome, but the outcome of the outcome. And it wasn't just the President Trump was just the President Trump one. It was that what people expected to happen if President Trump one did not happen. The economy didn't roll over, markets didn't roll over something the York Times. So let's talk about the expected outcome and the outcome of the outcome.

Can we just challenge the idea of what happens if the base case materials can't And you're the German here is he younger can't he's on, So we should forecast our forecast. My teacher and psychology said, you can't get a CE and I got a quality D when I studied car'd the outcome of the outcome go Yeah, and again we should forecast or forecast mistake, right, is that basically what you're asking. Um. My view is that the economy ultimately takes over, and and that is as we

talked earlier, that we see a grow slow down. I think that is the dominating topic of two thousand nineteen. Yes, there will be noise, maybe mentioned in all days, but by the economy is stronger than political John's good question. Let me give you the outcome of the outcome of the outcome, which is, if we get a bondle slowdown, does it take the gains of the outcome outcome from the guilded of the guilded age? Is the new slowdown

really going to affect the broad middle class? Like when things go up, the guilded age makes it, but when things go down the outcome of the outcomes I'm going to the fourth power here now, the outcome of the outcome is a middle class gets hammered. Yes, that's usually the case, just enough that he answered ham fun helps do I guess from any credit? What a week ahead we got coming up? It's exciting, I said, I said

to afterthoughts. She's so excited about the elections. I said, yeah, I'll get the elections and FED meeting, and it's just it's one of those magical weeks where it's just crazy. Is it fancy saying that this isn't your normal midterm election and it's got a kind of middle prominential vibe to it. I have the clearest memory of the evening in and the only media that was on when we figured it out with CBS and Dan Rather. Everybody else had gone back to programming, and it came out of

essentially came out of nowhere. Is it like ninety four? You know, you don't know till Wednesday? But the answers, Yes, it's just and with all the cultural events and the two president's campaigning, it's really John, it's really exciting. Do you think this is because the president has just generated a whole lot more interested in politics? Yes? I think, you know, whatever anybody's politics. Yes, it is centered uh, uniquely around this unique president, There's no question about that.

But just it was fun. This weekend reading, Harm mentioned the Monte Carlo that was Nate Silver INVE eight with a brilliant mathematical dissertation in English about independence. Each district does not independent statistically, there's some correlations which leads to should we go to the fifth power and outcome of the outcome of the outcome of you. Welcome. Luckily we've run out of time. Great to have harm hat and

holds of any credit with us. This Monday morning, as we kick off a great week for you, We're in the Bloomberg Interactive Broker studios in New York and now joining us from Tehran. And this is incredibly timely with headlines a bit ago the United States Treasury says the US fully reimposes sanctions on Iran. The Treasury says, over seven persons under Iranian sanctions and joining us someone who has given us incredible service in Tehran, Golner Mountivolity, joins

us right now. What will be the immediate reaction, Goldner in your Tehran to this new round of U S sanctions. I think people have known obviously since May that this was coming, and the timings and the wind down periods were announced in advance. So I think it's just been kind of this sort of creeping the sense that you know, this is something that was just going to happen, that they couldn't do. The Iranians themselves or the government couldn't

do very much about um. You know, it's the sense of inevitability about the fact that these sanctions came into effect overnight. But of course people are very worried, they're fearful. There's a sense of resignation and exhaustion as well, because they've been here before and they thought they had a nuclear deal that had resolved the situation, and clearly it's it's you know, it's kind of gone backwards again for them. So many people have images or stereotypes of Persia and

then around and then the newer around as well. Tehran is over fourteen million people. What does it actually do to business? Well, you know, here I speak to a lot of people in the private sector and people running small businesses, small to medium sized businesses, and something like this, does you know, tremendous or tremendous damished psychologically? You know, we know that the economy hates uncertainty and hates a sense of having no idea what's what's happening, what's going

to happen from one day to the next. And when the currency here fluctuates as it has been doing over the past six months, in these kind of huge moves. Then from literally from one day to the next day, you don't know what you can do. You don't know whether you're combine and seeing. You don't know whether your supply is going to be able to sell you anything. You don't know whether you can keep your employees on

for the next month. You know, there are small businesses here who haven't paid employees for months, or at least for the past three months. I know of at least

one or two like that. These are small businesses. And the other thing is here the SMI community actually really needed the nuclear deal because in Europe a lot of the businesses that can work where they are are also s mmes because they don't need those huge levels of capital that the big you know, upper tier big international banks can't you know, still still can't get involved with in Iran. So that area is really going to be hurt.

And you know, that sector is really important for graduates here. You know, Iran produces a huge amount of university graduate most of the women. So you know, it's it's a sad story, particularly for the middle class here. There is the stereotype of Tehran and Iran that doesn't quite meet the reality, specifically the education of the society, and got up, you talk up and bring up the issue of opportunities.

Let's just talk about the Joint Comprehensive Plan of Action because it was a multilateral accord and the President and this Treasury has reimposed sanctions on Iran unilaterally. Does that make it different this time around? Or is the reality still the same on the ground. I actually think it

makes I think it makes a big difference. I think if there's one area that many Iranians have taken comfort in, it's the fact that this is something that the United States has made an independence This is an independent decision, he said, You mean the latterly that's been made by the United States. They haven't had the Europeans on their side. Quite the opposite, the unit the the Europeans we know are still scrambling to try and get this special purpose

vehicle fixed for Iran. And also China and Russia have spoken out and criticized the sanctions that we've had. These countries managed to get waivers out of the US Treasury, and I think that actually has a huge effect um to you know, psychologically, to some extent on on people. But the fact is in practical terms, the US dollar here is a man is a major gauge of confidence

of people spending power. UM and and you know, the price of the dollar here has has skyrocketed over the past six months and that has a real tangible impact on people's day to day lives. It really cuts their

spending power. And it's happened, you know, with speed. But you know, there is this sense that the United States is isolated in this decision that it's made and that you know, even Rahaney capitalized on this this morning when he said, we've managed to bring the European Europeans on that side on our side, and that's a huge him over. Thank you so much from Tehran? Did I you green with us as we consider the American economy and other things global as well? Megan, Uh, when do you get

a better framework of what Q four is? You have to wait till the end of the quarter. Can you begin to really tell here? Well, you can start to see signals in the data early on, UM. I would ignore all the kind of now casts at this stage

though it's just you early in the quarter. But for example, things like you know, new foreign orders are coming through much weaker in the I s m th redata, and that's just maybe trade it's starting to bay, so that's giving us some indie ocation things like slightly stronger wage growth, though partly you know, a base effect issue that's suggesting we're going to continue to get kind of incremental wage growth and and therefore an incremental acceleration of inflation. That

helps give us a picture. But to really have a sense of kind of what the number is going to come in at for Q four, you've got to wait until a bit later in the quarter, like and what's the danger that the US economy stants to run hot? So I think it's actually pretty low. Um. You know, normally at this late stage in the business cycle, if you had the kind of fiscal stimulus that we've had in the US, you would expect the economy to overheat.

But if you're looking at the data, the soft data all absolutely upork, so that suggests maybe the economy is overheating. If you look at the hard data, however, it's pretty decidedly lackluster. So things like retail sales, new bank loans, um, real wage growth even there, they're all looking pretty weak, and so that suggests there aren't actually any indicators in

the hard data that we're about to overheat. So I think this business cycle is a bit different, just because it's a lot longer, because we've had so much central bank intervention. Um. So, you know, I would agree we're in the late stage as a business cycle, but we're not going to see the late stage surge in inflation or the overheating um for a while. I don't think so any reason to believe that the Federal Reserve is going to change course in terms of pace of right

hikes anytime soon. Magan, No, I don't think so. Um. You know, I think a lot of investors of the teament the set turned a bit more hawkish when J. Pale came out that he thought we were still pretty far away from the neutral rate, and that's suggested we could hike a lot more. I think that's already baked into the assumptions. Um. I do think that the set is constrained, however, no matter what happens with the ten

year yields. So if the yield curve flattens, which I expect, actually, then the set's gonna feel really constrained in its hikes because it doesn't want to invert the yield curve. If the yield deepens and the tenure pops up as some people expect, then that actually has the tenure is a heavyweighting and most fine anential conditions in the season. I think that's wrong. I think we should learn how to

construct them better. But in the meantime, the FED will see that financial conditions are tightening significant quently and they'll be constrained then too. So either way, the FED has a pretty gradual path seek in and I think that you know, this suggests they're going to continue along that well, Mega Green, what is the the future of investment that you see? One of the themes last week was really beginning to analyze use of cash share buybacks, cash versus

actually spending it on tangible things. I don't even know how that works in the service sector. But are we seeing investment? We're not really. We started to see some investment and it came through and capex spending at the turn of the year off the back of the tax bill, so some firms were incentivized spring forward some of their capex spending um and then we saw that stop. And you know, when I speak to FED regional presidents who spend all their time going out and talking to firms

and their regions. Um, they'll say that companies are telling them that they were thinking about investing, but actually all of this uncertainty around trade is made them decide, but they're just going to delay and differ. So I think unfortunately trade it kind of offset the benefits of the tax bill in terms of investment. So we're not seeing much indication that we're getting this kind of surgeon investment that lots of people were hoping for. Yeah, John, I

think this is just critical. It's really like new administration new thing. The administration is very bullish on a supplied side response to the fiscal stimulus. They believe that you can get really strong output growth without the accompanying inflation that some people might expect to come with it. And they expect that because they think that a lot of this fiscal stimulus is going to go into investment, and if it doesn't happen, Tom, they're going to get a

very different economy than the one day they expect. It's just there and it's it's that moving. Megan, do you have a statistic for Q four and Q one GDP? Yeah, so, I you know Q three US three point five. I think three percent growth and Q four would be fantastic. I think it might come in a bit lower than that, and I think similar So the best is behind us.

I think UM close to the physical stimulus that we've had coming down the line hit in the first three quarters of this year, and we'll peter out until the end of next year. And then the real question is what is going to happen in terms of physical stimulus UM from then on? Are we going to hit thecial cliff or will the government re up? And that would depend entirely on the midterm election. Meggie Green with this thrill,

she's with this with manual life. Jared Bernstein, who was Economic councilor to Vice President Biden, but far more than that, the liberal in Washington that conservatives were forced to read at gunpoint over decades, on our job dynamics, Jared, I wanted to ask you a question I asked earlier this morning, which is, if we have a make America Great against surge, and we all understand that those gains went to the guilded of the Gilded Age, if we get a slow down,

do the disadvantages of a slowdown come from those that are gilded or is it asymmetric where they come from the broad middle class? Which is it? At least over the last few decades, it's been pretty asymmetric, and that the folks at the very top of the scale, in part because their fortunes don't rise and fall as much on the job market, have been pretty insulated from the

upsidegrounds of the business cycle. Middle and lower income folks have benefited disproportionately from the very low unemployment rates we've had, So if that reverted will take the hit. What would Vice President Biden do? You worked with a gentleman, he would be there in twenty four hours to go to a campaign. He's being quiet for all the Biden reasons. I get that, But what would he say right now in terms of the final message democrats need. I think he would say is that, you really know, one of

his themes has always been Who's got your back? And he's really looked at that from the perspective of the middle class, from the perspective of working people from union and I really think I believe he feels that today's government, particularly the Conservative majority, simply doesn't have the backs of middle and lower class, working class folks. And he'd think about policies that would steer more of the growth their way.

Jared Burns Bernstein, just to broaden the conversation, maybe just taken the economies of Asia if you don't mind, Do you have any thoughts as to who's got the back of the major economies of Asia, and I'm thinking Australia, Singapore, Malaysia, Indonesia. Did they still feel that the United States has their back? I would suspect that they don't, or at least that the American administration, the Trump administration to than have their back.

I mean, this is not exactly breaking news, but this is one of the most protectionist administrations we've seem I think what they would probably look at it, and it is the fact that global trade flows remain strong, and in fact, if anything, the US trade deficit has gotten worse because our dollars strong on a relative growth rates are much stronger than there, so we're pulling in more

exports and exporting less. In that sense, Trump's trade war is back prying so on the on the macroeconomic international trade flow level. Uh, you know, they're doing pretty much as they've done, but in terms of trade policy, they've got to be quite nervous. Well, the reason I asked this is because it seems as though the attitude towards China and the economic relationship with China seems to be

consistent on Democrat and Republican voices. So I'm trying to understand if you have been to be a country that is caught in the middle and have to choose between the United States and China, how are you gonna make that decision? You know, I think it's a great point, and in fact, one of the things that I've commented on when people have asked me about the outcomes of

the mid terms. Suppose the Democrats take the House. Now, from my perspective, that would be a positive thing, so simply because of so much of the bad domestic policy that's been coming down. I think they'd help in that regard. But there's no suggestion that House Democrats would be say, more friendly to international trade than than the current majority. In fact, that it could flip the other way. Well, I mean the flip in the flop and we'll know

on Wednesday. I guess where that's going as well, Jared. In terms of legislative input within your economics, but just within your political economics as well. How critical is a barely democratic House from a more dominant Democratic House. Does

that really matter? I don't know that that matters. You have, given that the Senate is if the Senate remains Republican, um, I think that the House is going to be putting if the House flips, they're just going to be putting up a ton of legislation that will be more of a signal to their voters than something they expect to get through. Is that an effective program? Well, you know when the Republicans were doing that with the House. Republicans

were doing that with Obamacare. They sent up sixty bills to repeal Obamacare that never went anywhere. I was sitting there saying this is an extremely ineffective program. What I should have realized, very naive of me, especially an old timer like myself, is that this wasn't a legislative program. It was a signal to the electorate. And in that sense, I think it may have been somewhat effective. And I think the Democrats want to send a kind of a

very different station about a similar strategic one. Where's the investment of asked all day as green as to every harm bundles everybody else. Jared Burnstein, I know your thunderstruck. That thought I heard was you falling off your chair on K Street where you work. What was the idea that there'd be a tax bill and there'd be investment involved. I'm hearing from other people there doesn't seem to be all that investment. Let me guess. Dr Bernstein is not shocked,

not a shock. I didn't look before the tax building. As you folks know better than anyone, the price of capital, the price of investment was extremely low. Corporations were already sitting on large chranches of cash, retained earnings, strong profits, so if they wanted to engage in a deep investment push, you know they would have done. So. It's true that the after tax cost of capital is lower now, but we're just not seeing the investment push. And frankly, and

this is where your sarcasma definitely lands with me. This has been the case every time we've tried to supply, so I trickle down stuff that just doesn't work. I'm not saying that has no impact on the economy, but the idea that it's going to markedly change growth rates

or pay for itself, that's just ludicrous. But at the same time, in addition to campaigns and elections for House and Senate seats and governor's seats, there are lots of ballot initiatives out there to raise financing for municipal bonds to do just the kind of infrastructure that has been talked about at the federal level. States and municipalities are going ahead and doing it anyway. Well, good for them. I mean, and you know what Tom was asking me

about private investment. I think where we've dropped the ball is clearly on public investment. And by the way, that's not a liberal or conservative view. I know lots of conservatives Republicans would love us to do much more infrastructure investment, particularly in the public goods that enhanced national productivity. And so I think it would be a great uh endeavor if if public sector or sub national level did more investment. I think one of the challenges there is it infest

rates to rising. I mean, it's still a good time to do this, but it was a better time I'm a couple of years ago. Jared, thank you so much. Jared Burns just thrilled to have you with us here. The day before the election, Jared Burstein with his thoughts on economics both left and right, and Jared Burstein with his public service and assisting the vice former vice president.

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