How To Use Fiscal Stimulus To Stave Off The Next Recession

So the spiel that you've been hearing a lot is that monetary policy has failed in various ways to lift inflation and to boost economic growth in a significant way, and so it is now up to the government side to actually enact fiscal stimulus and do it that way. Right. I think there's like a couple of things going on. I mean, I think a there's the fact that people have been pretty disappointed with the pace of growth in

the wake of the financial crisis. There's the fact that in uh much of the developed world, there may literally, according to some people, being no further scope for monetary policy as rates are more or less pinned a zero. So even if things are okay now there's this expectation that central banks don't have a lot of Jews. And you know something that we have talked about, just this idea that um, you know, in the wake of the financial crisis, growth aside, that all of the sort of

old rules and old frameworks are being questioned once again. Yeah, I think that's right, But of course I guess the key thing in all of this is that it's not central banks you are going to be responsible for the next phase. It's governments, right, And with governments you tend to get a hecky dose of politics and often disagreement. Right.

That's the tricky part because one in theory nice thing, and it's debatable whether it's nice, but one in theory nice thing about relying on monetary policy is it can be conducted by ostensibly independent institutions that don't have to go so much by political whims or worry about getting re elected. Whereas when you rely on fiscal policy, you rely on elected officials, often who have who have counter goals to each other. Maybe politicians don't want to boost

the economy when their opposition is in power. Things like that. Uh, Fiscal policy arguably reacts much slower, so although it sounds nice to have a handoff, so to speak, it's a it's a lot trickier than just saying we need to rely more on fiscal policy. Yeah, which is why it's

what is it now? And we're still talking about the possibility of a big round of fiscal stimulus in a lot of places, even though it feels like we've been talking about it for a long time, right, and even in places which every economist almost in the entire world would say, yes, please spend more money. A good example of that would say be Germany. It just doesn't matter. It's so much more arbitrary and unpredictable when you're going to get the fiscal response than uh than say monetary policy,

which can be adjusted extremely quickly. And this is something that I remember we spoke about with Lord Robert Skidelski. He was talking about the need for a sort of automatic fiscal stabilizer that could kick in when the economy was in trouble and sort of bypass whatever political gridlock might otherwise stop it from happening. Well, that is a perfect way to introduce our guest, because our guest has

been doing work on exactly this question. So how do you get fiscal policy to work in a timely manner, in a predictable manner, in a matter that's not as much about the um the political cycles, in a manner that's actually well targeted and time to avoid or mitigate the effects of recession. And that is going to be our discussion today. Great, I can't wait, all right, So, without further ado, I want to bring in Claudia Psam. She is the director of macroeconomic Policy at the Washington

Center for Equitable Growth. And Uh, Claudia, thank you very much for joining us. Yeah, thank you for having me on the show. I'm really excited. Awesome. Well, before we get into your work, and uh, we've we've talked about this work you've been doing in terms of improving the speed and efficacy, UM and predictability of fiscal policy, just tell us a little bit about your background. You were at the Federal Reserve for a long time, right, Yes, so I was at the Federal Reserve Board of Governors

in d C until last November. So I'm very new being on the outside. And I think my education as a macro economist at the FED so very much in the monetary policy space was unique because I started in the summer of two thousand and seven. My first forecast as a consumption expert at the Board was in January of two thousand eight. My first year learning how to do macro forecasting was a birth by fire. As one of my colleagues, did you get it right? No one

got it right. And I think for me it was interesting because in my first year, just like a lot of people out of grad school, I had an immense amount of impostor syndrome. But at some point I realized every single macro economist at that point in time should be having impostor syndrome, because that first year I learned how to do macro forecasting when none of the forecast models worked. I mean, they never work in a recession.

It's just it's such a severe contraction. That's not no one would ever forecast a recession like it happened next year because we just we don't have a way to

predict that. They're very unpredictable by nature. So I, like I said, I had a very different education in macro forecasting, and frankly it has damaged me in terms of believing that the economy always recovers and that we should trust our models, our expertise, even among a really strong, hard working group of economists, I think strongly we've missed it before the recession, in the financial crisis, but frankly the recession, how slow it was, how much we didn't understand that.

That was really my hardest time as a forecaster at the board. Can I just say I had a really similar experience because I got into really financial financial journalism in September of two thousand eight, and I remember even financial journalists that have been doing this for ten years were really confused about everything that was happening, and I was just writing about it, and I felt a little

bit uncomfortable. But then I realized that actually no one had any idea what was going on at that time, so everyone was pretty much starting from ground zero. So I kind of wanted to ask you when you saw the health of the consumer actually start to deteriorate before the Great Recession, But obviously, since you made your first forecast in January two eight, that doesn't really apply. So let me ask instead, when did you see the health of the consumer start to really pick up after that recession.

So I think as background to this my research, my dissertation, I used household survey data, responses from household to major surveys like the Michigan Survey, Healthy Retirement Survey, Healthy Retirement Study. This is an unusual background. I am a macro economist, I was trained to be a macro economist, but my research has primarily been applied microeconomics. So studying household behavior by looking at household behavior is opposed to just it

all aggregated up. And I remember late in two thousand and seven because I started to go to briefings and get a sense of where I had landed, and there was a discussion about consumer sentiment from the Michigan Survey and how it had really started to deteriorate. And it was puzzling given all the other macroeconomic data that was coming in, like consumer spending personally, it just didn't quite connect.

And I can remember being in a boardroom briefing. There was an exchange between the governors and the staff saying, well, what's up with consumers? And you know our best well, we don't know, and then it went into oh, this is fusehold. We should call him up and see what's going on. And no one shut down this conversation, And I was just about ready to crawl under my chair because those five household and having worked on a lot of household surveys, they are chosen to be representative of

all adults, all households in the United States. So the idea that we were brushing it off is some inconvenient data point that didn't set in with the rest. That really caused some alarm bells. But I was really knew. I wasn't, you know, in a place to jump up in the boardroom and correct governor and you know, staff that were senior to me. But in hindsight, and this was a project I worked on when I was at the Council of Economic Advisors and and sixteen I did

a retrospective for the senior staff there. Jason Furman was the chair, and it was about how we can look back on the consumer sentiment data the both the expectations and then the recovery. I paid a lot of attention to the income expectations and you can see how households were they got it and not because they're excellent forecast they were living this right. And so I spent a lot of time with the Michigan Survey thinking hard. I mean, these data are hard to work with. There are there

is some noise, you know it. You know, the people answer questions and it's not clear what they intend by what they're saying. But you put it all together, there's a lot there to learn. So I feel like they were telling us early on, which makes sense. It was a consumption lead recession. The housing markets started to turn south before it was showing up in the whole economy clearly, and frankly you saw early in two thousand eleven two

tents we broke them. The income expectations series moved in a way from Americans are by nature optimistic, they had a discreete shift in becoming much more pessimistic about their

income ex expectations. I talked with Richard Kurtin at the time, who has run the Michigan Survey since year I was born, so back, you know, forty plus years, and he agreed with me, there's basically only other two series, the interest rate expectations around the time of vulcre In, these income expectations after the Great Recession, those are the only two series you can point to, and just there is a level shift, very abrupt, and that that meant something, and

that was something I spent a lot of time repeatedly in forecast meetings among staff pointing to you know, and it was one of many things that were considered. There was a lot to learn from households. Now when we look back, we can see they were they were right.

That was a big part of my life as a forecaster over a decade at the FED, and it was where I was bringing my research, expertise, my passions about the fact that economists really need to listen to people and we need to be creative about a way to take what people are telling us one by one or community by community, and figure out how to roll it up in a way that the Federal Reserve, who really does need to make policy for the country as a whole,

how they can integrate those voices and when they're especially when they're puzzling, into our frameworks and use that to guide monetary policy. I already feel like we could do a massive to our discussion on just what that's like being a staffer at the FED, and I I hope you write a book on it, because now I just

have a million more questions on that alone. But in the interest of time and everything, I want to skip ahead a little bit, and I feel like when we get to discussing the structure of how to do fiscal stimulus, your work on household consumption is going to be very relevant to that. But before we get to that, this idea now today that okay, we need some sort of handoff, that we need to put more emphasis on fiscal policy, that we can't just have this central bank be the

economic stabilizer of last resort. Where do you think that's mostly coming from. Do you think it's coming from the slow pace of recovery? Is that the fact that rates are zero and there's there's perception that central banks are out of AMMO? Or is it kind of what you're saying in terms of the soul searching among economists that just the models, the basic models that have been used for so long, just don't work as as people thought.

So I would point to a number of factors. I'll keep it brief in terms of sticking to what I think are the three main ones, and starting with the idea of economist soul searching, which was your last point. I do think that's a piece of it. I have been discouraged by how limited the soul searching among economists

macroeconomists has been over the last decade. I don't, Well, I have reasons for that, but we'll set those aside, and I think where the soul searching has begun and I'll take whatever we can get is in terms of monetary policy. So the zero lower bound has complicated to how economists, how the Federals Reserve approaches their mandate from Congress. So and right now the Federal Reserve is undergoing a

framework review. I do not have high hopes for those outcomes this summer, but I am so happy that we are having that discussion in a very serious, model based way. So I think that is great. So that's one piece, because it be hard not to have a rethink. I think the rethink is coming from monetary policy itself. Now, a second factor that I personally think is why we are having this debate is fiscal policy did not show

up in the way it has in previous recessions. In the beginnings, you had Bush passing the tax cuts, you had the American Recovery and Reinvestment Act, as you know, Obama's first big economic policy in two thousand nine. So on the front end, we saw some aggressive fiscal policy responses completely on target. Now, what we didn't see is that as the recovery went on, Congress pulled back on fiscal policy support to the economy in a way that

was markedly different than past recessions. So and again I studied consumer behavior. I followed very closely because of my job as a consumption forecaster, each of these stimulus packages that went out broadly to households. So what we saw at the end of twenty twelve, the payroll tax cut, which was the last of these big stimulus two households. It ended the unemployment rate was still notably elevated, and

they just they pulled back for for reasons. There were discussions about debt that to me is a big problem. And then because they did that, and this was an important part of the automatic stabilization direct payments to households that I'm sure we'll get to talking about in a few minutes. The reason that I had the automatic piece, and it wasn't just about when it turns on. It was a commitment to keep doing the payments until the

unemployment rate came down. That is very specifically a reaction from the fact that when Congress had to get together and do it in a discretionary way, like they had to vote on it in real time. They didn't do it. They pulled back on the economic support. So I think that's the second one. The third one is the economy told us we are not We did not approach this in a way that was sufficient. The tools that we had going into recession and the recovery just didn't didn't

do it. This was a slow and long recovery. The unemployment rate stayed high for way too long. Both of these are destructive. They hurt people, they hurt businesses, they hurt the economy, I mean productivity ground, They're just there are so many bad consequences that we have seen in the economy that this has forced a discussion about, Okay, what more can we do? What are the tools that we haven't put on the table that we have to

think hard about right now? So just before we get to the automatic stabilizer bit, I just want to dig in a little bit more, but like, why the focus on fiscal policy specifically as a way of um of boosting the economy. And I know that sounds I know that sounds like a weird question, but I just remember after the financial crisis, there was so much emphasis on

monetary policies. So why did you, as a researcher decide to look more at the fiscal side of things instead of talking about, you know, how the fet should be calibrating its rates, or maybe if we went to negative interest rates that would help, or maybe we should do more QWI or a different form of kuwi. How did

you settle on fiscal So it was my job. So as one of the experts at the board, and keep in mind there are five hundred economists at the Federal Reserve Board who are working on supporting the board in in many different dimensions, my job was to understand consumers, their behavior, how they were reacting to many things in the economy, income changing, their wealth being decimated. Uh So I had to think about a lot of dimensions, but

an important dimension was how is the government supporting these households. Now, it may seem counterintuitive, Federal Reserve officials do not go to the Hill, or at least the very rare occasion, do not go to the Hill and tell Congress how

to do their job. You can point to episodes where Bernanky as the chair went and in some sense, in a very macro button down way, begged Congress to do more, but that isn't the federal and they certainly won't comment on exactly what do we think that whatever fiscal program is doing to the economy, what you know, what are the effects? They will never say that in public, but in private we have to know that because monetary policy

needs to work around the edges, so to speak. So my research program right my first forecast in two thousand eight was when we put the Bush stimulus payments into the forecast, so right out of the gate, I was

working on research. I was fortunate that my adviser, Matthew Shapiro at Michigan and his colleague Joel Slimrod had a research program already going on measuring household responses the spending response to fiscal stimulus, and the board was more than happy to put the financial resources into continuing to run these household surveys. And again they were done on the Michigan Survey, and uh, Matthew and Joel were generous to let me join in on the project and that measuring

fiscal stimulus. We worked on the stimulus payments in two thousand eight, we worked on making work pay in two thousand nine and ten the payroll tax cut in two thousands, eleven and twelve. So this was a huge part of my research program, and at every stage I was presenting in the boardroom the results from those findings those surveys. In addition to this thing about the board, we don't march in there and just say well, this is my

view and my research. As a staff member, I was doing very serious study of the other papers that were being written at the time. Jonathan Parker and Nick Alaylis, with very different co authors at different points in time, did the research that economists, they can't deny it was a gold standard research. Ben Bernankee was clear to let me know that their work was gold standard. In my mind was not that's okay, but they had for various reasons.

I won't get into the wonky economist details, but they were able to run a study that was everything economists want to see in terms of evidence, and they showed very clearly that households, when you send them the money, they spend it. Now, to normal non economist people, this

will seem obvious to economists. They believe that you give people money and then they calculate the annuity value and they like spend it out in five dollar increments over the rest of their life, and so that if that is the truth, then fiscal stimulus giving money to households is not going to be effective. Monetary policy is the only game in town according to a lot of the models we went into before the Great Recession, and frankly, they is they couldn't not send out money. And Congress

has done this often. This is a way for Congress to show the American people like we're doing something to help you. After the stimulus payments that Bush sent out, after we've been able to study and see it. Economists understand the vast majority of them except the fact that this works. People spent. So that's a big reason why we can have this conversation now, because there's a view

that there's efficacy behind these policies. I I you know, I don't want to do too much economist bashing, but at some point we should just do a serious tracy of things that are obvious to literally everyone else accept economists, such as the fact that if you give people cash that's a good thing, that they'll spend it and that that will help them. Whereas if you look at it through a model, somehow it doesn't happen, but that's a that's an aside. So we have these different models for

how to give households money directly. There's the form that bushed it a couple of times, like just cut everyone to check. There's payroll tax cuts so that suddenly after the tax cut, each paycheck you get a little more than you had before. There is there's an employment or unemployment insurance so that people lose their job they get some sort of money from the government to keep them going. So various programs, and we'll get to um the best

way to design that in a second. But before we do that, I want to get to something that has made our guest semi famous, I would say, and that is helping to answer the question of when, Because it's one thing to say, okay, government should give households money, but we all know the political problems and uh so then you have to arise. So if it's going to be done automatically in a downturn or before a downturn, you need some sort of trigger so that the payments

start and they don't and too soon. Claudia, you have done work directly on this to the point that there now exists the some rule which is now this thing out there in the world, which is a rule that exists for guiding the government for when to start uh spending money to support household So talk to us about that part first, this sort of framework that you've developed or indicator that you've developed to tell to design a

program for when the checks start to go out. Yes, so that what's been referred to as the SOM rule. I have been blown away by the response. I but I understand why. So when you spoke with Lord Robert Skodowski in the in the conversation mentioned the importance of having fiscal rules. So this is not an area that

economists have had a robust discussion. There has been a robust discussion about there being monetary policy rules of various kinds that would guide the Fed in some cases central banks being held ac ounable to following a rule or

at least explaining when they deviate from it. So the idea that we'd have a fiscal rule, and this is absolutely essential for doing anything that's an automatic stabilizer, because you have to know when to hit go in a responsible way, so you're not blowing a hundred billion dollars when there's no reason to so. First to describe the SO rule. So what it is is, I look at the monthly unemployment rate. This is the statistic on the

economy that we want. I know several economists that if you ask them, if you were stuck on a desert island, you could only have one data series to understand the economy. That's it. They want the unemployment rate. Totally makes sense. I agree. So what I do is I take the monthly unemployment rate. I take this three month moving average. Is important. Monthly data bumps around, and you don't want to overreact to some wiggle in the data, so we

smooth it out, look at three month moving averages. And then what I do is in every month, and keep in mind the unemployment rate comes out very soon after the month ends, so this is a very quick read on the economy. I compare my figure the three month average in a month has just come out, and I look back over the prior twelve months. And what I do is I compare the current month to that low

over the prior twelve months. I calculate the change. When that change is a half a percentage point or more, this is a small increase. It's a half a percentage point or more. We are in a recession. So I look back at recessions in the past, specifically from nineteen seventy on. The some rule turns on in every single recession two to four months in and there are no false positives, so it doesn't turn on outside of a recession. And that's a big deal when you're when you need

a rule to turn on fiscal policy. Now, there there are some alternative measures that people have turned to. Economists and market watchers look at for a recession, and they you can't use them for fiscal rules or they would be very substandard. So one that the there is a recession dating committee. Their job is to look at a whole host of data and they are the ones who

call the recession. They will specify the quarter, the month in which the economy peaked, so that's its highest point downhill from there, so they call the peak, which that's the beginning of the recession. That announcement comes from them often a year after the recession is begun, okay, So we can't wait a year to send the checks out, okay, because that's just you've lost an opportunity to move quickly in a recession. Okay, so that's not going to work.

The next rule of thumb that's often talked about is two quarters of a negative a decline in GDP. Okay, this is also not going to work because GDP, unlike the unemployment rate, comes out with more of a lag. You have to get past the end of the quarter about a month afterwards you get a read on GDP growth. You'd have to get you know, more than six months into a recession to see this, and GDP growth revises

a lot. There's a lot of source data that comes in later that if you look at the GDP growth data through the recession, if you look at the annual revisions, which is a forecaster. I did look at those very carefully. According to that data, our first read was not negative enough. Right, So there's both a delay and not as clear of a picture as you would want to do stimulus. So the rule that I developed could be used, like you

could use is this to kick on fiscal stimulus. And I think even to myself, it was a surprise at the response because and I mean I have many FED colleagues and former FED even officials who have no They are not impressed. They were like, well, we knew this a small increase in the unemployment rate, it's bad news.

After the Sum rule became big, I checked with my former boss, Andrew Figura, and I'm like, please tell me I did not scoop our internal rule, and he said no. But we use as a rule of thumb as a three tense increase an unemployment rate. And that's for the FED. Remember, the Fed can move faster. If the Fed cuts a quarter point, it's not like the deficit blows up. So they actually use something a little faster. It has false positives.

Remember I was really looking for something accurate. So but it's in the spirit small rising the unemployment rate or bad news. What was shocking to me. And this is one of my complaints with the Fed. We bring in a lot of information, we think hard about it. We know a lot of stuff about the economy, and we often don't share it. And so I knew a small increase in the unemployee rate was bad news. I frankly knew the Sam rule, which I did not name it

the Sam rule. It was a recession indicator in my chapter. I knew it was going to work. I mean I spent a lot of Saturday afternoons with the spreadsheet, and in the end I pulled all the real time data, which is a little extra wonky flourish at the end, so I was looking at the unemployment rate as we would have seen it in the that actual time. The unemployee rate does revise a little bit um, but this was important for my approach. It worked. I was blown

away by the response. My series with my name attached to the variable is in Haveor and Bloomberg and then it's in FRED. They gave me a FRED T shirt. It's like my favorite piece of clothing for those For those who don't know, the FRED is the St. Louis Federal Reserve Database website charting tool. And if you're like, if you don't have a Bloomberg, of course the Bloomberg is the best thing in the world. But if you don't have a Bloomberg, it is the best website in

the world for playing around with analyzing economic data. And the fact that your indicator got in there is extremely cool and I just want to say that. But yeah, and an important piece of FRED again, Bloomberg is great. The terminals is that it's free. Anybody can get on FRED and download the series take a look at it, understand what it is. I've been contacted by individuals in state governments who are thinking about how could we integrate this into It's time to bump up our food stamps.

It's time to do something at the state level. It was then clear to me, and actually I had reactions from people who work follow economic policy in d C, not monitor terry policy, who told me, they said, Claudie, I can't believe this works. And so I realized that while at the FED we got this and frankly, like financial people who uh do economic forecasting on Wall Street, a lot of them have come from the FED and training. They knew this. To their clients, knew this, this has

been a newsletters. But the people in state governments, the people doing fiscal policy in d C, they didn't know. So that really opens up a whole avenue for policy, especially policy rules, fiscal policy rules to be put in place, and that could be huge. So I'm proud of this. I have a teenage daughter. She about a month ago, looked at me in the car and she's like, Mom, are you afraid that you've peaked with the somb rule? And I was like, oh my gosh, teenagers are the

best to keep your ego and check UM. But I told her, I said, you know, if I'm going to be a one trick Onny, this is the trick I want like this. This is big and can help people. So your idea, though, basically solves two big problems when it comes to physical stimulus. So it allows people to recognize that a recession is coming. And your idea about direct stimulus payments to individuals that allows everyone to pre

agree on a method too combat that recession. And you mentioned some state governments talking about ways that they might incorporate it. How hopeful are you that your idea gets sort of integrated on UM an official level or maybe even a federal level in the US. So I think it's really important, right because what I've developed right now and what's gotten a lot of attention, is how to say we're in a recession. Okay, if that's not paired with a policy response that is swift and vigorous, I

worry about negative responses from consumers, businesses, and markets. Right. So I had a friend joke with me the other day. It wasn't funny, but joked with me that, oh, the next recession, it could be the PSALM recession, and I was like, oh, don't, don't do this to me. Because there is an aspect of recessions, and again having studied consumer expectations, is often referred to as animal spirits. There's a part of recessions that get into a very negative

downward spiral. So if you think there's a recession coming, or frankly, households look around and they see people in their family, their friends losing their jobs. That can create a lot of anxiety up and down the income distribution because the vast majority of Americans are one paycheck sometimes cut in overtime hours away from having serious financial distress. So even if they don't end up losing their job, there's a chance they could someone in their family could.

And so often if they're able to, they will cut back in their spending. You know, maybe they're thinking about buying a car and they're like, oh, yeah, let's let's wait on that because I don't want to commit to these payments. Then if I lose my job, it'll just be really painful. So if that happens, that's really bad. And that's that you see that in recessions, this happens so I'm hopeful that we put policies in places in place,

like the direct payments to households. The it lead households know ahead of time, and this could be a positive mitigating factor. They would know ahead of time the government has their back, the government is going to send them checks. This is really straightforward. I think monetary policy is so important. Monetary policy is not straightforward. We are never going to get the communications clear enough that households will understand the Feds got our back. I think it's really important in

that regard, we'd commit to it. People would know ahead of time. It's not just they'd get the money, they know that the government is really trying hard to short circuit the recession, make it shorter, make it less severe. That could have really positive effects on consumers. You could have positive effects on employers. They might not be as apt to lay people off because they're like, Okay, this is we're just gonna ride this out. This isn't gonna

last long. So there could be huge positive effects. But I really worry that if the some rule, this great session indicator isn't paired with a commitment to have a policy response, it might not turn out well. So I'm very motivated right now to work with people on the hill to get this figured out. So I'm I'm curious if if we got a big enough policy response because the Psalm rule, the recession indicator actually flashed up, would you then start getting false positives in the recession indicator.

I guess what I'm asking is is the goal to make the effects of the recession less worse than they would otherwise be, or is the goal to completely stave off the recession that's coming. So remember my indicator says we're in a recession. The early stages of a recession, it's clear when it starts moving up. So when you get to a three tense increase, I mean this, this will cause consternation, and maybe in a discretionary way, Congress gets ahead of it. I mean the Fed, I said,

three tents gets them worried. Like there they are likely to be moving and at this point they're gonna be likely getting real creative about how to deal with the zero lower bound. As a macroeconomist, I no longer have enough optimism to really say this. But if in some way this was enough, and I think there's a lot of other automatic stabilizers the Congress ought to be thinking

very seriously about. But say Congress went big early in a recession, there is a possibility that the economic data would turn around in such a way that when the recession dating Committee at the NBR looks back, they're like, yeah, I'm not so sure there's really something there, because remember it's not a done deal until they say a recession started.

I mean, frankly, if if there was that scenario and people said the thumberil didn't work, we gave we supported all these households, we supported unemployed people, I mean, my goodness, I'll take that one. You know, the some non recession will just fine with me. That's what I was gonna say. So like the question of false positives. Of course, like in financial markets, people look at the inverted yield curve.

But just you know, going back to your point, if the worst thing that happens is that households got some support and we never really had a declared recession, uh, that doesn't seem like a particular disaster in any respects. There's one more component to this that I really want to make sure we don't miss, and that is the right way to structure these household payments, and you talked about your work sort of doing the microeconomics of households.

What is the best way to do it? I mean, we have the Bush we we really had it twice under Bush, right, I believe we had it in a two thousand one or two thousand two they cut a check to everyone. Then we had the one in two thousand seven. Then we had the payroll tax cuts under Obama, which kind of does this accepted only goes to people who have payrolls. Based on your research, what is the best way to get the most bang for the economic

buck of sending people cash? So my proposal is to send out checks, big checks like five thousand dollars, calibrated off how large the economy is, how much spending there was going into the recession, So everybody gets a check, and frankly, I want those checks to go to everybody. That there were some limits on who got the tax rebates the fiscal payments in two thousand one and two thousand eight. So I want us to go go broad. So that's a big piece of it. We already talked

about this SOM rule. They need to go out as soon as possible. The only way to guarantee, that is, to get the logistics in place. I in developing my proposal, You're right, I drew on my research the other research that went on about all these household payments. Sadly, our research program we had a lot of different policy responses to study because they kept going. So my read of that research is direct payments checks really clear, tell people

they're coming, and do it fast. Now a peace that maybe people will think as a sidebar, but I think it is important for making all this happen. Is if Congress pre commits to doing these payments, then that will give the Internal Revenue Service the time to put logistics in place. I read for my research for my policy proposal. I read the Inspector General reports from the Treasury looking back on the two eight stimulus payments. These are fascinating reads.

I learned a lot looking at them. And essentially everyone who worked at the Internal Revenue Service and Social Security Administration who worked on this ought to get a gold medal for it because they hustled in a way that is almost impossible to believe. So they were a old to work together because an important piece of the two thousand eight stimulus payments, and I am fully on board

with this. Is they wanted to get it to people who did not even have a tax liability two thousand one, when entirely through the tax system, have more thoughts on that, but setting that aside, when entirely through internal Revenue Service, the only people that got it were once who had

filed a tax return. Many recipients of Social Security benefits do not file tax returns, So in two thousand and eight, the Social Security Administration did a huge push to tell Social Security recipients that they needed to file tax returns. They helped get that going, so you had that was not a perfect take up, but I mean they really they really moved the Internal Revenue Service, got all the

pieces in place. What's a little bit fascinating is it the government they don't have all of our bank account numbers or are mailing addresses to send checks. My brother, who is has been in agriculture, he never files his taxes electronically because he doesn't want the government to know his bank account number. So he is not alone and in any case, so that actually creates a challenge to

get the money out. If you know that this these checks that we want to get them out, it would give you an opportunity to make sure that that infrastructure is always in place. It would give you a chance to work to try and get people outside of Social Security administration who do not receive benefits. So think about individuals who received food stamps. They have cards that they used to do payments. Those are run at the state level. That is an even bigger logistical lift. But there's no

reason that we can't do that. So if you put all of that infrastructure in place, and of course that something Congress would have to fund if they were to create an automatic, stabilized like direct payments. But wow, that's huge and is another little wonky detail. Stimulus payments at this point cannot go out during act season, no matter how amazing the internal revenue services they are fully on it.

During tax season. Recessions can happen in tax season, right, So if you had a parallel structure that was in place, we could do it any time and we could get it to everybody. So I think that would be important. And this is not just my personal opinion, this is my read of the research that this was the most effective way in terms of the spending response. I think it was the most effective in terms of the political economy.

Again having worked on these household survey data, so my research is very much ask household, what did you do with the check or what did you do with the extra bump you've got in your your payrolls from making work pay or the payroll tax credit. When we worked on the Making Work Pay, it was amazing to us how many individuals did not even know what making work pay was. There was one woman that had some very choice comments about what it meant to her to get

another thirty bucks a month in her paycheck. I mean these not only was it completely missed. That was the most common era when people fired their tax returns that they didn't claim the making work tax credit. Now the i R S fixed all of that and people, you know, it showed up in their tax returns, but that just shows you people did not know. I have many reservations about us doing stealth stimulus right because I think that the way that households react, how much anxiety they have

about what's happening in the economy. That's a real thing. So why in the world would you want to send the money and they don't know it? Now being a little strong here, because there is some research. Dick Saylor and other behavioral economists had said before this that if people don't know they're going to put it in a mental account, it's just kind of in their bank and they're like, oh, I've got an extra hundred dollars and

they go spend it. I don't think that's policy. And we have data now that really contradicts that, And we have the fact that households were clueless and just didn't help in terms of they're thinking the government had their back. And then finally, and I talked about this and my policy proposal. What you want to do is short circuit the recession. You want to get it out fast. I think it's much better to do it in one fell swoop,

one check. Any of these things that go through payrolls, they are spread out across a year, spread out across two years. Well that that does support households in a regular way, smaller dollars at each paycheck. But why do that, Like you want to do you want to move fast if you have any chance of shortening the recession, it's right at the beginning. So I think there's a lot And as you can tell, I've thought a lot about

the different policies. I've thought about them both in terms of the research, and I watched it in real time in the consumer spending data, and it hurt, like it hurt to see that, like the household spending wasn't coming back and households were really becoming pessimistic. How is the health of the US consumer now? I see a lot of positive but I again I want to frame that

positive in in a shadow to some extent. So we are now past the tenth year of this expansion that in any other time would be Wow, this is a big deal. I look at that ten years of expansion and I see a lot that isn't good. The recovery took way too long. The unemployment rate and these are like people not with jobs, right, this is bad. It stayed up way longer than it should have. There is a lot of research and you can talk to people this is not It's not hard to figure out being

out of a job long term. Unemployment was really elevated. So being out of a job for a long time these have consequences, negative consequences for careers. I really feel for those students who came out onto the job market in two thousand nine. You don't have to look too hard at like the student loan data, the wages they entered with. I mean, they got slammed. And this this is not the kind of thing that, oh, we're in the tenth year of the expansion, all is good. It's

never going to be all good for them. When I look at the consumer spending data now, and while I haven't been a forecaster for the last two years, I still follow the data more than this probably a reasonable person would. Uh So I look at the consumer spending data. Consumption is seventy pc of GDP. Those numbers are good. Income is good on aggregate on average, right, I can the last two years I managed to survey at the were to governors, the survey of household economics and decision making.

There are and always have been groups of individuals and communities. So if you think of people of color, rural areas, areas that have been hit hard by trade, less educated, I mean, I can point to several groups that have been on the margins of the economy have not shared in what we see in the aggregates, the averages they deserve more in terms of the economic policy and support they are benefiting from the expansion. Going longer. I find

that incredibly encouraging. It's like way overdue, but there there's so much upside and potential by bringing them into the economy, So I see a lot of good things. I firmly disagreed earlier this year when the yield curve inverted, the Yoeld curve is a very wonky thing, or not wonky. The Yeld curve is a very unpredictable, i'd almost say unreliable at this point, signal of a recession down the road. It's a forecasting device. It is not a recession indicator

like I was using. There's a lot of research that says with these massive balance sheets that the Federal Reserve has, that it is not going to behave financial markets are not behaving the way they have in the past. Setting that outside. When that came out, I was like, I don't think, I'm not real worried, and there was a

lot of discussion about a recession is coming now. Frankly, that's been very good for our recession ready volume, and people have been thinking about a recession more than I would have ever thought when I was working on my chapter early last year. But what there was a lot of discussion about OH investment manufacturing, their contracting. Actually, when I came back from the White House, I worked on business investment because to be a generalist at the board,

you have to be a specialist in multiple areas. It's a lot of fun. So I came back and I worked on business investment. And that was actually a period for the first time ever we had seen the business sector business investment contract and we did not have a recession. So the fact that we were seeing a contraction business investment is temper cent of the economy. Consumers look just fine. I'm like this, this is hard hitting these industries. It's

hard hitting people who work in these industries. A recession is broad based, it's across industries, it's across the country. And to me, this did not look like something that was going to spread to the entire economy. And the numbers really aren't there unless it starts kicking around. I mean, there are orange lights flashing, and financial sectors they feel like they're always are. So I'm not saying that I completely write it off, but I personally looking at the

data and not just my recession indicator. Forecasters should never just look at one series. I see nearly no way that we are in a recession by the end of this year, and frankly, I don't unless we find some really big unforced policy errors to pull out of the cabinet. I see no reason why we have to be in a recession anytime soon. So I worry this is one more piece to put in here. I worry a lot

about the discussion saying the FED has no ammunition. I worry a lot about the discussions where Congress just could never agree on this. Even if we got in a recession right now, there's no way they'd even agree to do any stimulus. I find those very worrying because they do not calm They do the opposite of calming consumers and businesses and financial markets, and I don't think those are really necessary discussions to have. The FED is incredibly creative.

I mean, they did stuff that was totally out of the playbook, and they got more I mean having been there, like there's more in the playbook, and they were like one European disaster away from doing some other things. So like I'm not I'm not as worried about the FED. I don't think they're going to be as effective fiscal policy we need it. I think, you know, everybody's a Kinesian in the foxhole, like Congress will get it together.

They always have so like I don't. So I really I find those discussions like the doom and gloom in forecasting discussions and market watching. I think we should stop, Like I think it's bad. Claudia, that was awesome. It's so great to have you on. I think that's a great place to leave it there. And I'm confident just based on listening to this that that you didn't peak with the sumb role. But either way, it was really it was awesome, really great. Appreciate you joining us. Yeah, no,

thank you both. I really appreciate a lot of fun. Thanks so much, Claudia. That was great. Thanks Claudia, Tracy. I really think that conversation helps move the ball forward. Maybe not this particular episode of the podcast having a big effect per se, but in terms of like wrapping our heads around what it means for the handoff or

what it means for fiscal stimulus to kick in. I really feel like a lot of the ideas that Claudia expressed are really important for this discussion that everyone is having. I have so many thoughts Joe. So number one is we need to have Claudia back on to do an episode on what it was like in the FED and just give us all the gossip about everything that's going on and tell us how to decode all the FED

statements and all of that. The other thing is she's got some great quotes like monetary very policy needs to work around the edge, Like that's a really good description of it um and I think that's sort of starting to become a not consensus theory, but you can see people sort of moving towards it, right. Yeah, No, absolutely,

I totally agree. There were so many like different individual insights observations that you had that we could have, like each one of those could have been probably a separate conversation. So we should definitely have her back. But you know, right now it's still generality. As you'll have like some sort of like uh, you know, very big name and economics say o, time for fiscal fiscal policy makers to work, but with no idea of when that is or why that is, or what are the thresholds for when they

should kick in. It feels kind of arbitrary. What do you spend the money on? All kinds of things. And I really feel like this was very helpful in sort of saying, Okay, yes, we get it, we need fiscal stimulus to stave off for sessions, but what does that actually mean? And it feels like this is very fruitful avenue.

It's a concrete proposal, that's for sure. And more than that, it also comes with the PM role, which is the recession indicator, so it can actually give you that exact trigger point for when the checks you're going to get mailed out. And I thought the point that you and she also made, which is like who cares if you get a false positive? The okay, so the recession doesn't actually get declared. So then you ended up spending a little bit of money for a few months to help

households that had gone into unemployment and everyone else. It's not a big deal. And whatever sort of cost there is to doing that, it is far less than allowing a sustained recession to take place, just given the lifetime hits that that has to people's entire income and so forth. I think your last point is probably valid, but I'm sure there are some people out there who will think that sending a bunch of money at a time when there isn't a recession adds up to something. This is

your innate m m tier from within speaking. Now someone will pick up on it and probably complain, And that's going back to the beginning of the conversation. Like that is the difficulty with all of this. There is politics running through all of it. When when you're trying to make it as objective as possible, right, and that's its own separate thing, because there is still this element of like, look,

this is public money, the idea of public money. Can you do it in a democratically accountable manner fiscal policy and have it be automatic and just sort of set a rule and have Congress go on vacation or does not need to vote there it raises sort of thorny issues. There's always this tension of how do you do things in an efficient way and in a democratic way? And I think that's another whole area that needs to be discussed.

But at least this sort of provides some framework for sort of bridging the gap between the automatic aspect of monetary policy and the democratic aspect of fiscal policy. Yeah, it's it's definitely an interesting one. It's a framework, yes, all right, Uh, this has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisn't Thal.

You can follow me on Twitter at the Stalwart. And you should definitely follow Claudia on Twitter, who has definitely not piqud great insights. Her handle is at Claudia Underscore Some That's s a h M. And you should follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy at Francesca Today, and check out the whole family of Bloomberg podcasts under the handle at podcasts. Thanks for listening to the