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Anna Wong has.
Been definitive at Bloomberg Intelligence in 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 of its sales in the US.
We're the only customer for them, and they have like one percent of the US market, and there are lots of other firms selling the same product into the US. Well, then if we put a tariff on that guy, then it's really going to cause some harm to that firm. And so what we did is we actually went through all the different tariff classes. I guess what are the called h We went through the ball and then figured out like the relative elasticities and then maximized the sort
of or minimized the potential harm on this one. One of the things that we've learned is that one of the reasons why the US has a really persistent trade deficit is that we have a few trading partners that are like have basically a policy in their country to create jobs and dump product into the US in order
to produce political stability at home for them. And so our intuition early on as we're thinking about what's the next step given the presence intuition about how tariffs can be an important part of optimal revenue policy is that if we put tariffs on, say China, then their supply is really an elastic because and by definition it is the most at elastic thing of the world, because they've been just throwing stuff at US year after year after year, that then they would have to cut their prices to
continue to sell enough stuff so that they could create enough jobs they have the political stability that they wanted. And I think if you look at the record, that's more or less been the case since the tariffs came on for the countries that have big persistent trade deficits with US, that they've ended up having to cut their import prices by so much that there's very little effect visible effect on inflation here in the US.
So, which is so when I look at the schedule of tariffs right now, China is at thirty one percent, in Brazil and India are at thirty five percent, which is higher than China.
And is this a transition phase?
Is there where the endpoint of the trade policy in this administration say by twenty twenty eight, the tariff schedule and the relative tariffs are around the country will be different than what we have served now. And what's the endgame.
President Trump, you know, will decide what the endgame is. He'll look at the deals that are being presented to us and decide if the deal is good enough. You saw, for example, that we just had a big reduction in the teriff for Switzerland after a very acrimonious phone call between the President and the Swiss that led to the very high teriff rate. And so I think that you know, there's a negotiation underway. I think for many countries the
negotiation has finished. In some countries, there's still work to be done.
Do you think after all the negotiations, the trade deals and adjustment in a tariff schedule, we might be converging to your algorithm in the first Trump administration, No.
I think that what we'll be converging to is something like a border adjusted business cast flow tax. Because we in the Big Beautiful Bill, one of the things we did is we expanded the various experts subsidies for multinationals. And so if you have a this is inside baseball math, but if you have an export subsidy plus a tariff plus a payroll tax, then you basically have a border
adjusted business cash flow tax. So I think that in equilibrium, what we're seeing is that we're getting lots of revenue. It's a few hundred billion already this year, and it's not causing a lot of harm.
GDP nows at four percent.
Inflation has been trending slightly down, and so I think that it's working the way it would if it were a border adjusted business cost blow tax.
And what have you learned about optimal how tariff fits in this opt optimal tariff as well as optimal fiscal policy.
I think that there's a race to produce in the US to avoid tariffs that is very beneficial for US workers.
And if you look at capital spending ye over year, we're having one of the best years ever and that's even before we go through the trillions of promises that we've and the trade deals, and so there's that, which is the sort of capital spending effect That was somewhat of a surprise to be how big it was, because I again thought what you might see is like price adjustments and so on, to by the elastic suppliers and then the consumers wouldn't really see much of a price increase.
But I think one of the things we're seeing is a massive on shoring of activity like 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 on in Wall Street, most of the firms, many of the firms have come up with this costs bird and of tariff composition of around five percent exporters, cots, it discounts seventy percent, sixty to seventy percent absorbed by domestic firms and the rest, you know, twenty to thirty percent with the tier of showing up and consumer prices. Do you disagree 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 pick up at inflation. I think that the Wall Street folks are a lot of Wall Street folks who I respect and read in the Spring we're saying that we're going to have stagflation, that we're going to have four or five percent 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 happened. In fact, I remember, I think the consensus upon Liberation Day, everybody revised up the core of PC inflation to well over three percent, even some closer to four percent, and now we are on track to hit two point nine or three percent at the end of this year. So for sure the consensus has.
Been wrong on that.
So recently, there's a viral San Francisco FED paper that looked at one hundred years of history of tariffs and they found the net effect of tariff tend to be deflationary.
However, they also found that.
Because it's deflationary because it as an aggregate demand shock more so than a supply shock, and hance, ultimately it raised the unemployment rate, and so far this year, when we begin the year, the consensus on Wall Street is four point one percent unemployment rate. Currently it looks as if we are heading to four point three to four point four 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 Well, I think it's actually, you know, quite a mistake to look at one hundred years of history to learn about today's situation. To do that, you're making an underlying assumption of what a conrometricians call ergaticity, the idea that the data generating process is the same over time, so that you can identify it in this period and then use your knowledge to think about the next period.
I think that, you know, one hundred years ago, if you wanted to move production from one place to another, it was like almost impossible. You'd have to like get it on the Queen Mary or something and move it around. And now it's really really easy. If you know, a hundred years ago, I guess we didn't have a telephone, or maybe we just started to have a telephone. But now we've got the Internet and we've got Ai helping
us decide how to move stuff around. We've got a capital spending boom that would have been impossible one hundred years ago. And so I don't think that, Yeah, I don't think that history in this case is going to be that useful because it's clearly a point where the assumption of erganicity is not going to apply. And so we're seeing massive movements you've seen in the big drug companies, every movements of production to the US that will benefit
US consumers and especially US workers. We're seeing real wages already this year going up, recovering and maybe about a third of the ground that we lost under Joe Biden with the high inflation. And I think that those real wages are going up because we're getting a lot of onshoing. It's not just because of the big beautiful bills tax cuts, but also because of the onshooring from the tariffs.
And well, that conclusion is not just from that paper based on one hundred years of history. Actually, back in twenty eighteen, when we look at the historical FMC presentations, there was a staff presentation that used the internal Workhorse model, the FED Sigma model.
I don't know if you're familiar with that.
To run us to evaluate your tariff algorithm back in twenty eighteen, Suppose there's fifteen percent tariff on intermediate goods only and fifteen percent on consumption goods only, and that model found that if you impose tariffs on intermediate goods, it is also over time deflationary, and it boosts the unemployment rate by.
A little bit. In which case, how would you explain.
Then, the unemployment rate increasing from earlier this year four point one to four three or four point four percent later this year?
What are the drivers?
Yeah, I mean, it's such a small movement that it's hard to say exactly. But I would say that one of the interesting puzzles is that, you know, first, we're having a productivity boom that is really unprecedented in the following sense that when I worked with Alan Greenspan back in the nineties, it was just at the dawn of the computer age, really, and they didn't even have Netscape Navigator when I first started working at the FED, and
so you had to use something called Gopher. I don't know if you're old enough to remember this, which really wasn't that good. And Greenspan had an intuition that the computer was going to revolutionize the economy and give us 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. Member Robert Cordon was saying, it's everywhere but of 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.
US 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, you have more stuff about that done. Yeah, but I say that to reference today. It's really interesting that there's like evidence in peer reviewed papers or not quite pure reviewed debt, but at NBER, which is kind
of a lot of my friends at MBR. 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've 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. Actually, the NBR is kind of almost pure reviewed, but there's a lot of stuff
showing big AI gains. And the thing is that we also see it in productivity. And so if you think about the difference between say nineteen ninety six and today, is that we've got this revolutionary new thing that probably
is going to be a big positive for productivity. And you know, Steve Olner and Dan Sickle, your former colleagues at the FED, had a famous paper that you only see productivity booms after the benchmark revision, right, 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 benchmarker vision 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.
And employment than we expected?
And you know, I think that the tariff could be part of the story, but I think that that probably a very small part of the story.
Yeah.
I mean when we looked at the earning transcripts from this third quarter and where the so far the earnings have been surprisingly positive.
In fact, it was like the best quarter ever.
So we use surprises, we use AI to extract some of the themes, and we did find that one of the dominant theme is that there are other stuff happening outside the trade policy that's helping offset a lot of this tariff bill.
But focus.
Yeah, I don't mean to cut you off, but I just want to highlight how important what you just said is. And the way to think about it is that trade is about fifteen percent of the economy, and the economies the rest of it's like eighty five percent of the economy, and so you could do a lot of stuff in trade that has effects on the trade space that is completely overwhelmed by the eighty five percent.
And eighty five percent.
Of the economy is getting this massive productivity change, and it'd be hard for you know, a large change to eighty five percent to not overwhelm something you did to the fifteen percent.
Yeah, at the same time, sixty six percent of the economy is labor share, and a lot of academic studies are also looking into whether AI is already causing low hiring rate among young graduates. Whoever is graduating from college
this year is probably in for a bad deal. So I think there is a puzzle out there, which is if you have GDP growing at three or four percent at the same time you have a lot of the sense of job insecurity in this labor market, and the labor market is lagging these other you know, the GDP growth indicators, and the question is can this GDP growth be sustained at this three or four percent while the labor market is so going sideways basically with labor share
probably going down pro UH probably because of productivity is in the future.
It could be that.
I also don't forget that there's been a big reduction in illegal immigration and employment from that aspect, and so the UH population growth is pretty low compared to what it was when we had tens of millions of people crossing the border.
And so the break even.
Job's number for the payroll survey is people think is down like quite a bit and to maybe around forty or fifty.
Yeah, between thirty to sixty sounds wight.
Well, I was forty fifty or thirty sixty. I think we kind of we're about the same rate. And so that's like another thing that we could have big increases in productivity, of big increases in output and a healthy labor market with job numbers like the one that you forecasted, and we'll see whether you're a right or not.
So fifty four sounds good too. I'm saying that it's not one hundred.
That's enough to sort of keep up with population. You'd want stronger growth of that in unemployment to go down. But the outmployment rates a little higher than what's probably the equilibrium unemployment rate and full employment economy, but not a whole lot.
So Kevin, going back to this productivity boom, I recently tweeted a couple of pictures that seems to suggest some emergent micro evidence of how AI is boosting business formations, and Saint Louis fed also has a piece out showing how AI adoption is correlated to rise in sector specific unemployment. So, you know, just evidence that AI is working through at
the micro level. But then the response I got made me realize that it is actually a really polarizing topic with half of the If you survey a lot of people, half of them probably say AI is a bubble. Half of them say that there's no evidence that there's a productivity boom, yet that productivity is still on trend and the improvement reflect more of a cyclical thing that happened post pandemic as opposed to this sustained AI driven productivity.
So, if you know, we are going.
To touch on you being the one of the leading candidates for FETCH here and going back to that nineteen ninety five nineteen ninety six, those two critical years at the FED, you mentioned that Alan Greenspan was really the only one, one of the few who saw evidence of
productivity boom. And I've read the historical transcripts in December nineteen ninety five that particular Fobascy meeting where half or more of the FORBASC we're agitating for holding rates constant, and in nineteen ninety six most many of them wanted rate hikes, and somehow Greenspan was able to convince all this these skeptics that something is afoot without the data to support.
Let me talk about this because there's an interesting anecdote that I don't think is ever made public about this that so, because computers were improving so quickly, then it was decided by the Bureau of Economic and Analysis a lot of great professionals over there that they needed to what we call hedonically adjust the computer price, which meant that if you had a computer chip that was twice as fast as the one from last year and it costs the same, then that's like a big reduction of
the price of computing. And so that in a typical year, right around when we were starting to have to make the judgment on this, the computer price was dropping at about like sixteen to twenty percent at an annual rate, and there was so much computer investment that real GDP he was getting a real big kick from the fact that the deflator for computers.
Was dropping so much.
Yes, so I was in charge of that part of the world for the staff. I spoke a lot to Greenspan and he said to me once, how do they deflate a communications equipment cause communications equipment is basically like computers now And went back and looked and communications equipment rather than dropping fifteen or twenty percent a year was going up like two or three percent a year, And so then I called over cause they're actually very open about like the technical people at PA right, and I
talked to them about, well, why why is that? And they say, well, that we use when we're making our deflators, we use something called a match model approach. Yes, and so if something we sold it yesterday and we're selling it today, then that's like we look at the price change for that, and that's where we get our deflator, and we don't change the bundle of things that we
use the match bottel approach for very often. And it turns out that there were a lot 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 moveing.
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 technical batter. But then Charmy Greenspan said, well, Kevin, what if we deflate communications equipment with the computer deflator instead? Like,
how much more would GDP be going up? And it was like about one and a half percent 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 were 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 ah, yeah, I can understand why Alan is so convinced about this.
So I was going to ask you, so what you're 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 and what where? What other sections were you.
Or have you?
That's that's the only one.
Wow, that was You're very well placed for for that.
Well, that was my area rights, capital spending, and taxes. And he did investment.
He didn't mention in the in the transcripts, the rapid deceleration in the prices of high tech prices but I mean Greenspan is the pioneer of alternative data. He talked, he used in amends underwear sales for respecial remember that, yes, yes, lipsticks.
People had to calculate the way to GDP.
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 in the 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 FET staff, which is fetstaff is very influential back then you have the Green book and the Blue book now twice a year, yes, and do you know what color is the book? Now?
Is it?
They do that to mix the green and the blue together, that gets you teal. So I mean that's.
Probably where all their problems began.
So so you know, you.
Know it was true in nineteen ninety five, ninety ninety six 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 you will agree that the quality of the feed staff is very high and you know, one of some of the smartest people I know, and and so for two years, even up to nineteen ninety seven. In the transcript they were talking about no evidence of
productivity increase, only ones they have the revisions? Did it show that in fact nineteen ninety five productivity was running at two point five or three as opposed to one point something? But but how did how did how did the interaction between the chairman and the FET staff? How did how did the chairman convince the FED staff to to go what what was it like? I was the chairman directing the Research and Statistics division here look for these uh signs of productivity?
No, I think that that there was just a du excellent so.
Uh.
The people who were there working with me at that time, Uh, the person who was doing consumption, uh, there were two of them. It was Karen Dinan who's now a Harvard professor and Chris Carroll who's now at Johns Hopkins, two of the top uh consumption analysts like over the last forty years. Uh. The people doing business fix investment were me and Steve Olner and uh let's see uh prices wa that was uh, wh what's his name. Uh, actually I forget the guy's name. There was to be prices.
But then we had Steve Bronn, who's now at the CBAK, who was putting GDP together. But I think that the really big thing that was happening was that the data were actually telling us that there's a capital spending boom
really early on. And then, Uh, the way the the FED worked then and I probably still does now, is that we take people are assigned to be like the consumption person, the investment person, the government person, the net export person, and then they forecast that with very complicated bottles, and then those forecasts get sent to the GDP coordinator, and the GDP coordinator aggregates the models the forecasts from each of the segments of GDP and then thinks about
what that means for interest rates and discussion back then with Mike Prell, who was the research director, and with Chairman Greenspan, and then Charman Greenspan might say well what if we move rates this way or that way, and that everybody would change their forecast. And so most of the stuff that really influenced decisions by Greenspan was coming out of that section of the FED, not the section that was using at that point an updated version of what used to be called the MPs model that was
developed by Albertando and Franco me Diguiani. That was a sort of big kind of general Legallebrium model, ad hoc Kainesy and general Legal Room model without a whole lot of expectations. That was the model that we use it back then, and so I think it was very much
data dependent. Lots of work brought up up the I don't know if you worked in the Economic Activity section, but we wrote a fellow named Greg Brown, who is now a professor at North Carolina, was my research assistant at the time, and we wrote a computer code to do the business sector. And I think back then at the FED, the research assistant who wrote the code you would name. You would name the code for that part of the program by the research assistant.
So there was like the GDP code that aggregates all the.
Forecasts was named RUTH because there was a ra A named Ruth. And so when we finished the capital spending program, Greg Brown did a lot of the programming. So we called it Trout. And people say they're still running trout that are doing capital spending, but The point is that we really because we we're the first ones to have computers, really and we had the data and we were studying computers with computers. I don't think it was a top down thing.
I see. That's great.
So since you start on the topic of the FED in the nineteen nineties, you know, spotting a productivity boom is tricky.
But if one think there's.
A productivitytivity boom but there actually isn't one, or you overestimate productivity, you could be in a pretty bad situations in the nineteen nineties nineteen sixties is one.
Of that example.
And also spotting whether inflation and expectations are anchored is another skill that Greenspan has. He pioneered the term rational in attention.
Right about prices. Do you think right.
Now inflation expectations are anchored?
No, I don't think that they.
I know that the FED wants them to be appropriately so, but I think that we lost control of inflation in recent memory, and it's more under control now, maybe not all the way there, and so, uh, you know, I think that people would be right to worry. Well, we'll suppose that the policy mix that we saw, you know, post COVID uh, in the US economy were the policy
mix that came back. I don't think President Trump would do that, but say, in the next administration, then wouldn't inflation go back up around nine or ten percent?
Again? You know? I why was it?
If if you're a person forming expectations over the next five ten years, which is you know, very often.
A planning horizon for buying a house.
Or something like that, that you could legitimately worry that, uh, that inflation's gonna come back up. And it's very important, uh to think about why, uh, the FED was unable to control inflation for so long and it got out of control, and what the FED can do to signal that that's not going.
To happen again.
I can tell you that what green Span did when he saw like really reckless spending is that he testified and said, you guys can't do this, that it's going to make it impossible for me to run the FED and keep inflation out of control. And what this set of folks did is they said, oh, it's transitory.
If you were confirmed as Fetchhair, would you do that.
I wouldn't say oh it's transitory if it wasn't.
And so speaking about inflation. So recently Trump said, President Trump said that he would like to give out these two thousand dollars checks to low income individuals by mid twenty twenty six.
I thought the administration agreed.
That at the stimulus checks during the Biden administration was responsible for some of that inflation we have seen.
How do you.
Assess this trade off of trying to improve the affordability of these low income, medium, middle income household or are struggling with these affordability issues, versus giving more checks out and perhaps stoking inflation.
Well, obviously the best way to address affordability is to increase real incomes real wages that right before the COVID emergency, we had promised. It's kind of like the ranges you and I just talked about. I had promised based on our modeling, and the President promised it all the speeches, that we'd get about four thousand dollars of an increase in real wages. And I had actually told him, based on our modeling, it was between four and eight. If
it was you, you would have said six. But he wanted to, you know, under promise and overdeliver, and then we got the six increase in real wages and so therefore.
Things were affordable.
And then for the Biden four years, the real wage decline is like, depending on which measure you use, twenty five hundred to three thousand or a little bit more.
And so real wages went down, which meant that wages went up slower than prices, which is kind of typically a key feature of most Keynesian models is that wages are kind of stickier the prices, and so that real wage decline means that things people are right to say that there's been a problem with affordability, and you know, real wages are up this year in part because of
the things that were doing. But if you were to be as fiscally irresponsible as the previous congress was, then you would for sure see inflation go up at affordability jump back into being like as you know, the change in affordability as bad as it was before. Or the thing is though that we've you know, basically so far this year reduced the deficit for just this year by I think it's three hundred and ninety billion.
Now it's a calendar year, calendar year, yea.
It's actually like a weird thing that she's right about the calendar year, the fiscal year. The previous fiscal year numbers don't look as good, but it was because in the first quarter of the previous fiscal year, Joe Biden was shoveling money out the window. And so about forty percent of the deficit came from that first quarter because they were.
Shoveling money out the window.
So if you wonder how are we doing, we prefer to talk about calendar year rather than fiscal year because then we don't get blamed for the quarter where there are shoveling money out the window. And if you look at that, then year over year calendar year, we're down three hundred and ninety billion and it extrapolates to maybe six for the year, and about a third of it is higher revenues tax revenues because of higher growth, a third of it is tariff revenue, and about a third
of it is reduced government spending. But if you know, if we stay on path and cut the deficit by six hundred billion, that's you know, with a little bit of growth, you're looking at seven or eight TRILLIONT over ten.
That's like a very significant event that reduces inflation. With a big macroeconomic punch to inflation, and so against that backdrop when it was July, we hadn't seen all this positive development yet, and so when we were negotiating with Congress with a big, beautiful bill, then it was the position to the President that the tariff revenue should just
buy down the national debt. But we're making so much progress and reducing the national debt that I think it's fair to think about what other policies we might pursue in like a reconciliation next year, and with all the tariff revenue that's coming in without causing a stag, I think it would definitely be on the table to think about how that might be rebated to.
On the table, but not necessarily a sealed deal. What would require legislation right speaking about that, So we did try to, you know, see how my team we did try to see what paths there, what requirement we would need in the economy to get fiscal deficit to the three percent that Treasury secretaries got bestened had to propose the three three three three percent real GDP growth, which we look look like we're getting in a third quarter
three percent fiscal deficit in three additional barrels per day of oil and.
There's a grillion barrels millionaires.
So so you know, there's a bunch of fiscal experts who calculate that to stabilize the debt to GDP ratio, which is hitting one hundred percent of GDP this year, you do need an annual fiscal deficit of three percent.
So I do I do agree with you that in the.
Fiscal year, even the fiscal year twenty twenty five, you can see a lot of encouraging developments, but still we are at four point nine percent of GDP in terms of fiscal deficit this year, and tariff revenues is probably about one percent of GDP per year. But still it seems really hard to get to a three percent deficit.
And I will note that in the fiscal year twenty twenty five, the net interest payment on the debt has breached one trillion for the first time, and the increase was on par of the Medicare spending increase, which is a mandatory spending. What's your plan for bringing down interest payment?
Well, I mean, what we've done so far this year, is you concede, is we've made an enormous amount of progress, but there's still you know, let's say that if the progress that we see, you know, were to persist next year, that we'd still have only made up about half the ground that we need to make up to get to three.
But given that we've made so much progress this year, I think I'm highly confident that we have a team that has a well identified goal from Scott and from the President, and we'll work it out, but it will have to be worked out with Congress and future spending restraint. And you know, I think that the teriff revenue will continue, and that if we get the kind of growth effects from the capital spending that we expect, then then I think we could hit three percent even next year.
Perhaps, Well that's as it's your forecast that we could forecast.
I'm saying that we could possible, we.
Really could hit it.
Next is the necessary piece of this a productivity boom.
The productivity boom is a real necessary piece of it that I think that if productivity it actually kind of wonder what your guess a bit of what the rate of productivity growth is, but let's say it's between two and three right now?
Is that?
Yeah?
Yeah, I think it's just the FETs practice is to average over two years because it's very noisy.
And if you do that, it's about two point two right now.
Yeah, So let's just say it's two point two, and then we've got you know, investment divided by capital minusin appreciation rate is the capital stock growth and investment is skyrocketing. So let's just say capital stock growth gives you like three percent four percent because capital stuck's big, and then that's about point three 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, you know, from three to even four because of the productive if the productivity stays where it is, which I think it will.
Okay, So now I'm switching to the hardball questions fed independence.
That's an easy question.
Are you where you're the leading candidate for the FET chair position?
Is it is? It?
Would it be fair to say that you are working a lot of hours right now? Are you working sixty to eighty hours?
How is that related to independence?
You know, I just wonder whether if I look tired a reason, I mean, a FET chair position would certainly be an improvement and work life balance for you probably, but on the FED independence issue. So so, so let's face it, you are going, if you were confirmed, when you go, and 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.
Which would you say?
So, First of all, I think the idea that government service you know, makes it less likely that you'll pursue an independent FED like basically rejects the evidence of what is it the five Console of Economic Advisor chairs that went on to be independent FED people, And so I think it's a very common path for people who have worked in the White House to go on and to work well at the FED and to do so independently.
I have been critical of the policies of the current FED because I think they haven't been data driven enough.
And I think that the way you can venture colleagues is that you make sure that you're using models that make sense and forecasts that make sense, and that you have a strong argument for say, productivity producing growth that doesn't cause inflation, and then you really have to be convincing with the economics and the thing about independitts that I just want to tell a little story about it
that shows how much UH the it's really important. And there's a big literature that says that if the FED loses it it's independence, then inflation expectations become on board.
And so you can't.
Let the FED lose UH it's independents. And UH the story is one that goes back to the nineties that you and I were talking about with being chairman Greenspan that one of the first papers that I wrote when I was on leave from Columbia and working at the FED was with my UH colleague, UH gim Metcalf who was at Prince at the time, and we UH President Clinton had run on UH having a BTU tax so the people who are old enough to go, and the BTU tax was one of his main things that he
and al gore cause they were way ahead of the curve on climate and so give and I are public finance ecadomist, so we wanted to go, well, what does a BTU tax do, how does it work?
How did model it and stuff?
And we wrote a paper UH on the be I the economic impact of the BTU tax, and it was really I think the first paper of the economic literature. That also we said, what we're doing with a b TW tax, we should do a carbon tax too. So we had the economic effects of a carbon tax at a BTU tax. And so we had this paper, really good paper, I thought. And then but you had to go through the review process at the FED, and Chairman
Greenspan ordered us not to publish the paper. He said that right now President Clinton has said that there's going to be a BTU tax, and we can have the FED looking like it's put in its finger on a scale, what's a political debate about the BTU tax. And so sure it's a great paper, but the Fed's not going to publish it until debate has finished on this topic. And then like maybe nine months later, the BTU tax failed in Congress, and then he said, well, it's okay,
you can publish your paper now. And we subsequently got it published at a top peer reviewed journals but cited a million times. But I think very fondly of that story because I think that that's what it means, that's how much you have to pay attention to independence. And so if you're thinking about things that could improve with the current FED, it feels like, you know, first, there's way more communication than there was when green Sped was there.
It seems like everybody's out giving a talk every day, but they're giving talks about things that are relevant for what Congress is deciding today in ways that you know basically are not necessarily relevant for monetary policy. And I think the Greenspan's approach is a superior one meeting.
I think he has term for it.
If you understood what I'm talking, then I'm not talking there.
No, that was something else. He very often would want to communicate things and you understood what he was saying. It just sometimes he didn't want to answer questions directly because like people very often will say, hey, so what are you going to do with interest rates next week or something like that. That's when he would be hard to understand.
So maybe that won't be a problem with you of them. So you know, former Chairman Berninki was actually whether the person who pushed for all this FED communication and transparency, and the FED is in the process of framework review and one proposal that seems to be on the table is for the FED to publish FED staff scenarios to increase the public understanding of how the fed's forecasts actually have a various risk and uncertainty band around, and just support that type of transparency.
I think that you should have transparency about the things that matter to you. If you're a decision maker, where did you come up with now's a good time to do this or that? What do you think like if you think that we're in a boom?
How come?
And I think that one of the negative long run effects, probably the only one of Chairman Greenspan's presence, is that he because he was always looking at every data item and then sorting it in his head, and he was doing it in a really miraculous way, which made him a legend before there word computers and so on. He was always kind of suspicious of time series models, which are really conditional expectations that are getting better and better in the Stock and Watson world at helping us think
about the path of the near term economy. And I think the one thing I can say is that in terms of at least looking at the research papers, it feels like the bias against that type of work, which I think could be very useful for policy analysis, in which we used a lot when we were at CEA to think about what the forecast would look like if we passed the Tax Cuts of Jobs Act and we got the number right within a tenth or two out
a couple of years, right with those models. I think that those time series models probably need to be invested more in in the FED. And then if there's a bigger staff that's doing that, then I think that there'll be a lot of product that'll be useful for markets to digest about.
Like, look, if we do it this way, if we.
Do it that way, no model is the right model, but you need to look at it bunch of models when you decide what you're thinking. I think the FED hasn't done a good job of helping people do that.
So that's the area you would want to invest more in these model building exercise alt.
Just like if you look at the ecadomic report of the President, if you look at the analysis that we did in the first Trump term, we had model we like put on the table the bottles we were using. We ran horse races with bottels and figured out what's the best model for modeling this type of figure, that type of thing, and then would publish tables where we said, well, you know, here's all eight models that help you do this, and here's like the central tendency or this is the
one that we believe. And so I think that that level of detail is available to it now because the economic science, macroeconomic science forecasting has advanced dramatically since Allen was talking to you know, the CEO of GE and using that to decide what GDP next quarter was going to be.
How about alternative data and machine learning and you know bottom up style of forecasting.
Yeah, everything everything, Look at everything that and see what works.
Okay, well, we only have a couple of minutes less pastime. I oh really, I'll just ask you one one last question then, So, if you were confirmed to be fet SHARE, will you commit to preserving independence in the way that you just understand in the conduct of monitor one hundred percent independence?
Is anyone There are a lot of really good candidates that the president's talking with and about, but I think that everybody I know that's a candidate one hundred percent understands the importance of it dependence. And yeah, I think that that it is important and that that commitment will be made whoever the President chooses. Over and over again during Senate confirmation.
Okay, thank you, Kevin Hasset, Thank
You, I was any CE Director Kevin Hassett speaking fireside chat with Bloomberg Economics and a wog