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We're going to stay tim on the US economy. We're going to broaden out as well, especially when it comes to geopolitics and the global economy, something we talked about with our Stu Paul yesterday.
We got a great voice to do this, Doctor Adam Posen joins US, President of the Peterson Institute for International Economics, joining us this afternoon from Washington, DC. Before we broaden out, doctor Posen, want to talk about the US economy coming off of that inflation print that we just talked about with Mike McKee. Where do you see the US economy heading?
Well, thank you for having me back.
The main thing I think your investor listeners should be thinking about is that if your plus or minus zero point one, zero point two from expectation on any given months print, it's not worth real information. I mean, nobody has their expectations that precise. So you have to look
at the bigger stories. And to me, the bigger stories in the are that we have a labor market that isn't cratering as people used to worry about, that has solid retention of employment, not huge employment growth, but solid retention. We have potentially some very stimulative fiscal policies coming down the pike, in that the Republican majorities in the Congress may give President Trump checks to hand out ahead of
the midterm elections in November. They may, I hope they will restore some of the funding for Obamacare insurance subsidies that we're taken out in last year's bill.
And we've got in the end.
A bunch of things on the Tara front and even more so on the anti migration front, that are percolating through the economy. And people were premature to say, oh, it all must have happened by now, or it won't happen. That's not right. It takes time for businesses and households and migrants to make decisions. So I with Mike, I'm with a lot of people. I think the pricing of three FED cuts this year is much too many.
So this explains, or I'm assuming this kind of explains, doctor Posen, that you and Lazard CEO Peter or Zag of course, formerly Director of the Office of Management and Budget and director of the CBO. You guys put out a column in January that the FEDS two percent inflation target could be totally left in the dust. You think inflation could quote surprise to the upside, potentially exceeding four percent by the end of twenty twenty six. Is it because of what you just laid out in terms of,
you know, tax cuts, federal government spending. These are things that are going to be stimulative.
Stimulation Carols exactly and Peter and I. And I was glad the co author with Peter because he knows the fiscal stuff. So if he and I agree that these are real likely risks to more stimulus out of fiscal I'm willing to buy it or willing to sell it.
Actually.
But I think the other things that we're talking about is the lagged effect of tariffs and anti migration. I wrote about this in a column for Business Week magazine earlier this month. I think we're talking about in Peter points too from his Purchaselizard various corporate CEOs I got Amazon and or the Beije books from the FED that say companies are only just now passing through some of
these adjustments. I think there's also just the bottom line that the labor market is more solid, and so if we get any inflation, it's in a more tidy economy. And then finally whether or not we get into the new leadership at the FED. After all the attacks on the FED over the last year since President Trump came back into office, you have to be a little more worried that the FED will not react quickly if there is inflation, and that to some degree becomes self fulfilling.
So I think there's a lot of things going on. Could be a recession. It could be that the migrants really haven't left yet. They could be that the government breaks down and doesn't pass these stimulus, in which case inflation won't be that high. But I think each of these is pretty darn likely, and cumulatively they get you up to high inflation by end of the year.
You mentioned the FED, so I want to go there, and then I want to do some demographic stuff because there's a lot of questions about what the economy looks like in the next few years with the decline and immigration. On the FED, you said if the FED is less reactive moving forward. Is that a result you think of Kevin Walsh being nominated as chair of the FED.
I think it's a result of the desires expressed so strongly by President Trump and by Secretary bessent and by not just Kevin Warsh to the nominee, but all the shortlisted people who would be fed chair in favor of loosening policy quite a bit, and doing so in the face of data which the vast majority of the Federal Open Market Committee has publicly said leads them to want to pause. I think should give people pause. So I think there is a real issue there. I think there's
also genuine debate to be had. Nominee Warsh, Governor Waller and others have said that some of these tariff and other effects are one time shocks. They're not going to be passed on We'll see. That would be very unusual. But maybe they've also said or started to say that productivity growth will bail us out, will be able to have more growth with less inflation. That's more plausible to me, But even there that's by no means for sure. There was a nice piece by Jason Furman and the Wall
Street Journal discussing this. The angle I would take is, just as Governor Waller or Kevin worsh says, with the tariffs, you get a real income shock, in this case positive from AI. It's indeterminate ahead of time to use a fancy word. How much of that shows up as income and how much of that shows up as price disinflation.
And my reading of the historical evidence is when you get a new technology, most of the disinflation stuff comes with a lag, because that only comes when companies start restructuring, changing their workforces, figure out how to use this stuff, whereas some of the income growth, the productivity growth you get upfront just because we've all got a new toy. So, yeah, I think there's room for me to be plenty wrong, but I think we're going to end up pretty high inflation that's behind the curve.
So is that the biggest realistic risk to the US economy? I wanted to insert that word realistic because I think we talk about risks all the time, and there's a list, you know, as long as my arm and then some. But I'm just curious. Is it higher inflation, is a higher interest rates? Is it demographics and older population folks not having babies. Is it less immigration? Is it rising debt? Is it China? US tech?
Like?
What do you think is the biggest realistic risk to the US economy? Maybe to the global economy?
Yeah, well, thank you for putting it that with Carol, I would sort the risks by two categories, the realistic and unrealistic, as you said, But then at what time frame they hit. I think the realistic risk for the US in the next three to twelve months is probably inflation is the biggest risk. I'm not that worried about a downside unemployment. I'm not that worried about trade wars turning it to hot wars with China. I mean, I'm worried about it. It'd be terrible, but I'm not that
worried it's likely. But if we start looking out one two years, then to me, the realistic risk starts to get into some of those demographic issues you and Tim just mentioned, because we are cutting off a lot of people from the workforce by excluding or deporting migrants, and there's a lot of things that happen, for example, the
female labor force participation in prime age women. If you don't have cheap available healthcare and cheap available childcare, and the budget doesn't support that out of the federal government, and healthcare is cut back if they don't pass the subsidies for Obamacare, and even if they do, it's still cut back. So those are the things in the next
couple of years. But then when we think beyond that, then you've got a tug of war between the positive impact of AI and the potential for large scale unemployment as people adjust to AI. And there I got to say, not only I, but the economics profession has no clear idea. There are a few people out there are very strong opinions, but there's no consensus and we're still working on that.
What's your best bet there? What's there's no cons We don't know what's going to happen. We can't see the future. But what's realistic.
What's realistic is productivity growth stays up as high as it's now starting the trend, maybe even goes a little higher, and unemployment shoots up in a couple of years, but doesn't shoot up enormously, and it is disproportionately on younger people. And that you get some decline in labor force participation because people figure out different ways of living their lives. And so the unemployment number are under states how many people feel displaced?
Yeah, gosh, a million questions. I want to ask you, when do we are we seeing kind of the fruits of the gaps in wealth playing out globally and is it kind of where we are? It's amazing to me where people point to stock market highs. We've talked about the K shaped economy a lot, but how many conversations I have on a regular basis with so many Americans that just find it difficult and ones that I wouldn't even think so, that are probably in a decent income bracket,
but it's just doesn't feel so good. No.
I think as economists, you all are anchors. You cover everything, but as economists have got to be a little bit modest that sometimes when people don't feel so good, it's not about the economic numbers. They may say it's about that, but it's about their relative position in life. It's about uncertainty. It's about through an ideological lens, is their party in power, not in power?
Are their kids?
So it's not that people's feelings are unimportant, but obviously not. They can vote, they can choose. But the connection, and there's very clear data on this, the connection between surveys of how good people feel or how confident people feel has become much more tenuous in terms of linking it to actual economic outcomes than it used to be. That's interesting what I what I would say, Carol.
We have to run though, yeah quickly.
Yeah no, no, no, sorry, Just to say that the global situation.
Is similar to the US. There's a lot of youth.
Unemployment in China and in Europe, and that we got to think about.
Just means you want to have you come back real soon, doctor Pos, and be well. Have a great weekend.