Goldman's Jan Hatzius on the Lessons Learned in 2020

lot of people did. I think there were The big debate that was going on at the time was whether or not two thousand eight or two thousand twenty was going to be like the defining financial crisis for a particular group of people. And um, I think that debate is still going on. But for sure, we've never seen

anything quite like this. And in March we had of financial crisis alongside a real economy crisis with lots of businesses going into lockdown and things like that, and I think that was probably the major difference with what we saw in two right, And I think now in December and looking at the aftermath, we could say safely that so far, anyway, the aftermath of what we experienced in March and April has really been nothing like the financial crisis.

Of course, we have stocks not just at all time highs, but um well above the pre crisis highs. Already, home prices, there's a housing boom happening, which probably not a lot of people would have guessed. You know, the unemployment rate, it's still quite elevated, but it's come down a lot faster than a lot of people anticipated. So that another sort of difference from two thousand, two thousand nine, where the recovery and unemployment was extremely slow. Yeah. I think

that's right. And certainly if you talk to a lot of people in March, no one would have expected to see their maybound in risk assets that we've seen, and no one would have expected that everyone would be buying, you know, houses, or those people that can afford them

would be buying the houses. Um. I do think the big difference this time around has probably been how quickly uh the Federal Reserve reacted, and also how quickly Washington rolled out that stimulus package, which kind of begs the question about what comes next, because as we're recording this, the next round of stimulus is stuck in political gridlock. Right.

We are recording this h December Wednesday, December sixt or some headlines this morning that they might be UM close to a deal, so by the time people are listening, we'll probably know. Also there is an fo of C decision today, So again we're having this conversation prior air to that, you know, in the context of the sort of surprising recovery and how it's not like the GFC aftermath. I think one of the first clues or one of the first people who helped me really understand the difference

was our guest. Today. We're gonna be speaking with h Jan Hats Here's the chief economist at Goldman Sachs or role he's occupied since and it was a note of his I think sometime in April making what at the time was I thought a pretty extraordinary call, which is that he thought, um, thanks to the Cares Act and fiscal stimulus, that household income would actually be up in which is not what you expect to see when the

unemployment rate is spiking. And to me that was like one of the first times I saw someone like really crystallized this idea that this is going to be a different year that the two thousand and eight two thousand nine playbook cannot really apply to this kind of a crisis. Yeah, I agree, and a lot of people follow hatsis work, and I do think some of what he's written about recently kind of gets to the heart of the big question going into which is how is the consumer going

to react? What's consumer confidence going to look like? Are we going to get this pent up demands scenario where once we get a vaccine and the lockdown gets rolled back, everyone goes out and spends and makes up for lost time by going to bars and restaurants and things like that. Or are we going to see sub sort of permanent damage to consumer confidence after the events of Absolutely well, I'm I can't think of a better guest to talk about to finish up this extraordinary year in the economy

and look ahead to next year. Then, So, Jan, thank you very much for joining us. Thank you for having me. You guys are being too kind, So so tell us about the crash the crisis from your perspective. Hey, did you also get some of those two thousand eight, two thousand nine flashbacks and how quickly did you realize that that playbook would not apply to Well, we certainly got some flashbacks in in March. Given the sort of lack of normal functioning and a number of of financial markets,

especially the bond markets. I mean, there was a there were a lot of comparisons, and there were a lot of people that thought, actually, if anything, this looks worse than than than two thousand and eight, and all that may have been in the in the heat of the moment. While you're going through it, of course, it always looks worse. But there were definitely some very very unsettled weeks when there was a lot of concern about about market functioning.

I don't think there was ever the same kind of concern about the financial system, So I think that was a difference. Even even going through I think there was a generally greater degree of confidence that financial institutions were, you know, in much better shape, partly because of the regulatory response that we saw after the two thousand and eight crisis. But but in terms of market functioning, I

think there were there were clearly some some flashbacks. I think it was also clear, you know, taking a somewhat broader view and not just looking at what happened in the bond markets, that the economic backdrop was quite different

the down turn. It became clear, you know, very quickly in in early March was probably going to be significantly bigger than what you had in two thousand and eight, just in terms of the decline in GDP in the second quarter and the you know, the drop was driven by very different fact It wasn't driven by financial factors, you know, ability to pay or or or asset values, but it was really driven by a physical constraint on

on economic activity. So, I mean, there there were some similarities, but I also think that it became pretty clear that the economic environment was you know, it was just a very very different shock, and I had to be really analyzed I think, in its in its own right, and not not really through the lens not too much through the lens of two thousand and eight. MM. So Joe mentioned your April note where you sort of identified some of the differences between the crisis versus the two thousand

eight crisis. Uh More recently, I believe you have a pretty out of consensus call on economic growth for versus the rest of the street. What are you seeing that other people aren't seeing at the moment? And also back in April, I think it goes back to the previous question. I do think that it's A, it's a very different cycle. So that's that's really the main answer. I think it's a it's a very different cycle. It was really driven by a health emergency that forced us to shut down

parts of the economy. Uh And it wasn't driven by you know, a bursting asset bubble and a credit crisis that that you know, might have taken and did take years to unwind after the two thousand eight prices and through a degree to a much milder degree, even after the two thousand and one recession and after recession, those were all driven by really financial factors and financial imbalances that that to a long time to unwind. This was driven by uh A, you know, just very very different factors.

You know. I think policy plays a very important role as well. As we discussed the policy response by both monetary and fiscal policy was so much more aggressive this time. And my favorite statistic in in terms of how that sort of looks in the economic data is the fact that the second quarter of two thousand twenty saw the biggest decline ever in GDP and the biggest increase ever in real disposible income. And most of these things are correlated. When one is down the other style as well, and

vice versa. In this case they were they not only went in opposite directions, but but in both cases to a to a record degree. And I think that really speaks to the enormously aggressive h policy response that we saw in the US and in a number of other countries as well. So, as mentioned in the intro, when we're recording this, we don't actually know, um, what's going to happen with whether there be an additional round of

fiscal stimulus or not. But you know, one thing that we do know is that at least on the aggregate basis right now, household balance sheets, um, they look very healthy. People have a lot of cash, they have a lot of savings, um, and so forth. So look ahead, you know, let's say like we're having this conversation again in December, and presumably by then we've had a successful rollout of

the vaccine and the economy is fully reopened. Knock on wood, How significant is the prospect of fiscal stimulus or how different does the economy look in December, whether we get this extra jolt of fiscal stimulus in the meantime to get us through from now until reopening. I think From that perspective, it's not clear how how big the difference is going to be between a situation where we get

near term stimulus and a situation where we don't. I do think that in the shorter term, as far as you know, the remainder of two thousand and twenty and first quarter and maybe second quarter of two thousand and twenty one is concerned, it's going to make a significant difference.

There is a still a strong case, I think, for providing additional support to the economy because in the in the short term, despite the fact that the vaccine is likely to help a lot and bring the economy back to normal um to a large extent in two thousand twenty one, in the short term, virus cases continue to be extremely high, and the economy is still, you know, far away from from full employment despite the progress that

that we've made. So I think there is temporary weakness that I think it's very amenable to to to policy support, and there's a there's a strong case, especially if it's you know, temporary amount of weakness, is a strong case for using both monetary and especially fiscal policy to relieve the hardship that is being h that's being caused by

by this, by this neotrom neotrom Don John. Of course, monitory and fiscal policy aren't aren't the right tools to address the health emergency itself, but they can maically reduce the fallout in terms of jobs and incomes and knock on effects to other sectors of the economy. M so. On that note, I have a related question, but how much I mean, we've seen financial conditions loosen quite significantly

in the aftermath of everything that's happened in March. How much to easier financial conditions offset the damage to the real economy. Well, easier financial conditions certainly help in supporting accurate demand. I mean the point of our financial Conditions Index, which is currently at its easiest level on record, and

we have this back to the early nineties. The point of the financial conditions index is to measure how the channels of monetary transmission, you know, on the yields, equity prices, credit spreads, currency, how they are affecting the real economy. And if you're at a very easy level and you've seen a sizeable easing in terms of rates of change, then you're you're getting a positive impulse to uh to do the economy from that um and so that's certainly helping.

But at the same time we are well below for employment and inflation is well below the FEDS target, so you know, more supportive the economy is. Still that's still helpful. And I would say also that on the fiscal side, of course, if you provide income support to those people in the economy are most aren't hit by the weakness.

I mean that they generally don't benefit from easy financial conditions, that they might get an indirect benefit, but directly if financial conditions are easy, that doesn't replace income directly, so that's still a job for fiscal policy. Were you surprised

speaking of not replacing income directly? I mean, we're having this debate now about stimulus, but we've had a long gap and the expanded unemployment insurance that was established under the Cares Act in late March that ran out I think at the end of July, so we've had this long gap of sort of a bit of a removal of fiscal support. Have you been Were you surprised in a sort of late summer the fall that there was not a more pronounced ramification from the end of that

extra expanded aid to the unemployed. Yeah, we were a little surprised by that. We would have thought that we'd get a clearer signal or clearer signs of deterioration when we look at some of the micro data on spending

by unemployed and employed people we did. We do find some very clear effects of the expiration of the of the six hundred dollar check checks, and then we see a sort of temporary increase in spending by the by the unemployed, again on the back of the executive orders that that partially replaced this um the six hundred dollars, but only for a temporary period, So that that shows

up pretty clearly in the in the data. But it uh the levels are generally higher than you might have then you might have expected the potals of spending by by the unemployed. So I think it's it probably only shows you that the initial amount of income support, both from the unemployment benefits and from the tax rebates was large enough to provide a bit of a cushion and you know, boost spending. Who's the level of spending for a period of time. So it's probably still being boosted

to some degree by the by the earlier stimulus. But that's obviously not going to last forever, and there are some signs, including in the in the November retail sales report released this morning, that that was maybe maybe running out at this point. Mm hmm. So this is something that I'm really curious about. But how much did stimulus sort of muddy the outlook the future outlook for for

consumers and consumer confidence? And also how are you thinking about the consumer going into because as I mentioned, there is this debate at the moment. Are the unusual events of this year going to encourage people to, you know, permanently cut back on spending and raise their savings because they're more uncertain and they're worried that an unexpected event like a global pandemic could come out of nowhere and

they might use their jobs and things like that. Or are we going to see this big rebound in consumer spending the pent up demand theory as the vaccine gets ruled out and lockdown gets ruled back. I think you've laid out well the two sort of extremes in that in that discussion. I'm more on the on the side

of the second rather than the first. I don't think that there's going to be a permanent impact I think, you know, people are going to go My expectation would be people are going to go back to spending money on on on similar types of service activities and service experiences that they will spending money on before. You obviously always subject to their own economic situation and a bunch

of other factors. But I don't think that there's going to be a large amount of behavior or scarring h if you get into an environment where the risk of getting infected is much lower or the consequences of being in fact that are much lower, and I think there could be some degree of pent up demand for services. I think that's more uncertain whether whether you are going to see say demand for travel and and and entertainment actually move above the previous day in the pre pandemic

baseline for a while. I think it's harder to know. It wouldn't be, you know, behaviorally, it wouldn't be true surprising that if you haven't been able to do any of these things, you might do, uh, you know, you might go to an extra concert or do a do

an extra trip. But for me, the main thing would be that these are still sectors of the economy that that operating far below normal and I think when we have a vaccine, and when the vaccine has led to you know, effectively heard immunity, you know, whenever that is sometimes in two thousand and twenty one, I think we'll we'll see a return to normal levels for these parts of the economy, and that that is going to give you a boost to the level of GDP by you know,

maybe two percent or so if you take it an aggregate. Obviously much bigger increases in all specific sectors. So I wanna shift the conversation a little bit because besides the sort of immediate what we're seeing in the economy, you know, Tracy and I always like to talk about economic ideas and how those evolved. You have been a long time.

I don't know. You just sort of take you look at the economy through what's known as a sectoral balances framework, which is associated with the economist Wind Godly, who has been an influence on your work. Um, I'm curious if you can sort of give us our listeners, like a brief description of what this is and how that helps you look at the economy, and then like how that's

helped you understand the economy in and looking ahead. What the framework talks about because I do think it's sort of a it's a different way of thinking about the economy than certainly I would say most Wall Street economists. Yeah, it's it's basically a focus on especially the private sector financial balance, which is just the difference between the total

income and total spending of all households and businesses. And you could disaggregate households and businesses, but I often find it more useful to look at together because in some cases there it's difficult to distinguish between where the household sector ends and where the business sector begins. If you think,

for example, of of small businesses and an entrepreneurs. So if you if you aggregate up the the entire private sector, and private sector runs a financial deficit that happens, you know, often on the back of large asset price increases or asset price bubbles, for example in the late stock market bubble or the two thousand's housing market bubble. That means

that the private sector is quite vulnerable too. You know that that developments in asset markets or other shocks, because they are already spending beyond the current level of income and having to finance the difference with net debt accumulation and can continue as long as asset markets are are performing well. But if asset markets start to turn down, households and farms need to cut their spending relative to the income. That generates a negative impulse to aggreate demand

and often results in a in a recession. And we saw this pretty clearly in the US in not only the two thousand eight prices but also in the two thousand and one recession, and frankly, we've seen it time and time again in in in other advanced economies in the last two or three decades, in you know, Europe, in the in the run up to the to the two thousand eight crisis, Spain as an extreme example. We've seen similar things in in the UK in the early

ninety nineties and a bunch of other economies. So this is something that I'm quite focused on as a warning sign of financial imbalances and vulnerability of the of the

real economy. And basically, households and firms living beyond their means, or at least beyond the short term means is is a dangerous sign and one of the things in two thousand and twenty and especially in the two thousand in the in the spring lockdowns in the second quarter that was very, very different from those past episodes was that the private sector was actually running a huge financial surplus, and much of a surplus than you'd ever seen before

in in post war history. And you know, well, that's not the only thing that matters for the for the economic artwork was certainly one thing that gave us confidence in calling for a pretty rapid recovery from the sort of margin April lows. So I do think it had a big impact on our on our thinking in two thousand and twenty, And of course it was very related to the policy decisions that we just talked about, the decision to provide substantial amounts of transfers to the alsalts

that should up in the private financial as well. Right, So, I mean, on a related note, since we're talking about financial imbalances. On the one hand, the policy response did help enormously in stabilizing markets and in providing a cushion for consumers, as we've been discussing. But now with stocks sort of all time highs and with you know, the corporate bond market booming, and lots of other weird things happening in capital markets like SPACs and and big I

p O booms and things like that. Do you see an issue of financial instability looming or do you worry about moral hazard at all? I don't see I would say imminent signs of financial imbalances that are that that are relevant for for monitor that they need to be addressed, let's say, by by monetary policy. I don't. I don't see that. UM. I mean, of course you should never say never. It's always something that that I think central

banks and policymakers have monitor. But again, if I go back to the private sector of financial balanced as you know, one metric of financial imbalances, the private sector is still

running a very large surplus. Past kind of asset price bus that that that have had really negative effects on the on the real economy have typically been preceded by large private sector UH deficits where you know, households and farms were effectively spending too much relative to the income flaw on the back of very rapid debt accumulation, and so these increases and asset prices had much more tangible effects on you know, people's borrowing spending behavior. I'm not

seeing that. UM. You know, that doesn't mean of course that there there couldn't be any any imbalances, and there certainly doesn't mean that they couldn't be price the clients in in different markets. But I do think that it tells you probably that the vulnerability of the real economy to these kinds of adjustments is probably lower than it

would have been in many of these other episodes. That's that's where that would be my starting point, and it's I think similar in spirit at least two the reviews that the Federal Reserve undertakes kind of regularly where they look at valuations, and you know, valuations of different types

of assets. That's one important input. And then they also look at economic behavior and spending and borrowing behavior uh and and leverage in the in the economy and in the financial system, and both of those are important for whether they I think the risks are elevated right now. You could probably make an argument in a number of areas that valuations are becoming more ambitious or maybe you you ratchet up your level of concern and somewhat there.

But if you if you look at the behavior of the borrowing, leverage in the in the system, and you're talking about the private sector here, I don't think there are really any signs of that would make you really worried. So Tracy always used to make fun of me, but she hasn't lately, and now I feel kind of bad. But she always used to make fun of me for always asking a modern monetary theory question on our interviews. But I'm not going to do that yet. But I

might get to that in a second. But but I have kind of got a hint at that, which is what's interesting to me listening to you describe this framework, is that the vulnerabilities are really on the private sector balance sheets. And so you look back at two thousand, everybody he thought, oh, there's this amazing boom, the economy is great, the federal government is even running a surplus.

But your framework identified warning signs because the private sector was actually um running into deficit at the time, and then we did indeed have a crash not long thereafter. Do you see more and more people appreciating this, I mean, we're still in the media people always like to talk about the size of the national debt and the deficit, But do you see a greater appreciation of this sort of inversion of that, or the concern is really on the private sector's debt and deficit as opposed to the

public sector. One do. Yeah, I think there has been has been a shift in emphasis, and certainly the experience of the you know, both the two thousand and eight crisis and the aftermath of that and this this year,

I think it's contributed to that. It's been it's become a thing pretty clear that large government deficits, especially if they occur in response to temporary, uh, you know, temporary downturns, large contemporary downturns in in in aggregate demand, that those are typically not not nearly as dangerous as I think many people would have said before the two thousand and eight crisis. And I think this year has made that even clearer because the policy response was that much more

more aggressive. You know. I think on the on the private sector side, I think you will find a reasonable number of people who have been concerned about private sector and balances for a long time and has surprise and balances for for a long time. And yeah, we're trying to persuade people that that the private sector financial balance

is a is a useful metric of that. You know, I would say there hasn't been a break school on that particular on that particular metric, But we'll certainly continue to talk about it because I think it's a it's a nice summary of, you know, imbalances that that people might otherwise look at in a more kind of piece of neal fashion. But I think that's the big continuous So I'm going to leave the MMT question to Joe,

because I know he does want to ask them. But I want to ask a different sort of big picture economics question, which is you wrote quite a lot about the productivity puzzle, where the productivity mystery over um the past ten years or so, this is the idea that productivity growth has been really surprisingly sluggish, and there are

lots of different theories about why that might be. I'm curious whether the experience of and the experience of having different parts of the economy effectively shut off has informed your opinion on on what's driving that product activity puzzle at all. Have you learned anything about productivity this year we have I have a lot of questions about productivity.

I'm not sure that we've had full answers yet in you know, in terms of what we've seen in two thousand and twenty, what's certainly striking is that productivity has done really well in two thousand and twenty. So if you just look at the numbers, you know, we've seen

very strong productivity growth through the through the year. Now, part of that is because the sectors of the economy that are still very disrupted are generally low productivity sectors like restaurants and UH and and you know personal services that where productivity value added for work of our work tends to be lower. So there's a composition effect in

the in these data. But it seems like even if you just for that composition effect, or you look at the numbers on a on on an industry by industry basis, you you've still seen a pretty significant increase in productivity. And the question I think is is that temporary or permanent it might hint at a better period for measured productivity growth than what we what we've had in the kind of three two thousand and twenty, you know, ten or fifteen years. So that's a that's a very intriguing question.

But you know whether perhaps in this in this terrible pandemic, we we actually have found some ways of increasing productivity UH that you know, will will prove to be a permanent benefit. You know, for example, if you if you think about the changes in in retail from breaking mortar stores to online retail, that certainly be something that boosts productivity over the longer term. Obviously there are disruptions associated with that, but it is something that I am I

am very interested in. It doesn't the two thousand twenty prices doesn't really tell you anything about the key thing that I was focused on for the last several years, which was how much of the weakness and measure productivity growth reflects measurement era as opposed to a true slowt on. I do think that there is a very good case we made that we have gotten worse at measuring productivity growth.

There's a big debate about this, but but it does seem to me that the economy is becoming harder and harder to measure as we move away from producing homogeneous goods like that that are easily countered in terms of tons tons of steel and and bushels of wheat towards you know, services and virtual goods that are that are very difficult to measure and where it's very difficult to estimate prices, and where it's therefore hard to follow the

sort of national income accounting playbook of counting up receipts and then applying a price index in order to get a real output measure, and then dividing that by hours work to get a productivity measure. You know, there there are a number of areas or steps in that calculation where you end up having having great difficulty measuring. So I don't think two thousand twenties has really shed any additional light on that, but I still think it's an

important issue. Well, speaking of productivity, I mean, I know one theory I've heard people put forward is that low productivity is in part of function of low overall demand under employment, companies not feeling a big urge to invest when overall demand is strong, companies not feel in a big urge to invest in new technology when labor is plentiful.

How much, in your view, could just sort of pure demand side aspects of the economy play in productivity and then beyond that, you know, one of the lessons learned I think from is that simply giving checks two unemployed people or lower income people as an incredibly powerful form

of stimulus. So I'm curious, like what your view is on just sort of pure demand side policies overall as both the key to the productivity puzzle, but also just going forward in terms of a focus of how that can sort of make the economy more robust and get

us out of downturns quicker. Yeah, I mean, I totally agree on the on the last, the second part of that question that if you're in a slump, finding direct ways of boosting area of demand is is a very sensible kind of policy endeavor, and I think we we took a very direct and policymakers took a very direct approach in in two thousand and in twenty and it has worked very well. You know, obviously was still going through it, but I would say the early returns are

quite positive. Now, this was a particularly particularly obvious policy in this downturn, because he had this huge shock to economic activity. But at the same time, it was pretty clear that it was temporary. Obviously, back in March and April you didn't know how quickly we would have a vaccine, and it now looks even more clearly temporary than it did back then. But even back then it was very clear that it was temporary. So in that sort of environment,

the case for stabilization policies. You know, aggressive demand side stabilization policies is very very strong, and I think, um, you know, well, it is a good lesson to to take away, even though not every downturn that will have in the future it's going to be quite as clear cut as as this one. On the on the impact on productivity, I'm less sure. I mean, I think there are certainly some cyclical effects on productivity through labor utilization and you know, labor hoarding or or or shake out

of employment. So I do think you always want to try to adjust your productivity measures for utilization, and there are some estimates that that that do that. San Francisco FED provides some some of that adjustment. For example, typically the once you average over somewhat longer bread though that you always have to do with productivity numbers you never

really want to look at quarterly. I think once you do that, typically you find that the the cyclical effects are not enormous, and they can go on both directions. It's not always the case that a stronger economy also

means higher productivity of a faster productivity growth. In fact, you know often you find that late in a business cycle when you're already very close to full employment firms basically after resort to hiring the molest productivity workers and you know, which is good good in terms of employment outcomes, but may not be so great for measure of pordativity growth.

Um So, so I think the case for you know, demand side policies to stabilize the economy in the slump is strong, but doesn't primarily rest on the productivities board.

So you mentioned the vaccine briefly then, and of course the successful rollout of the vaccine factors into your v shaped economic forecast for but I'm curious how that actually impacts your outlook more inflation, and we haven't touched on that specifically, But if we were to see economic growth come rowing back, and if we were to see an uptick in spending, would you expect that to translate into

price increases of one sort or another. Yeah, Over over time, I think you will see higher inflation in a in a stronger activity environment. So if you're you put more pressure on on on the labor market, you feel what's still quite a large gap in the labor utilization, I think you're going to see upward pressure on wages and you know, ultimately also upward pressure on price inflation. I mean these effects, you know, Philip Phillips curve effects. You

you can stroll them in the in the data. You see it for for wages, you see it for prices, and statistically they're they're definitely there. They're just not very strong and uh, the size of the impact is not not very large. And so you need quite a lot of strength in real activity and quite a lot of pressure on labor markets to get these kinds of increases

in which which growth and price inflation. So by our estimates, and you know, we have an optimistic view on growth where at five point three percent for for US GDP in two thousand and twenty one, But even with that, we only get to two for pc inflation on the sustained basis in two thousand and twenty four, and then not also shortly thereafter we have to first hike in the in the fund's rate. And so that's that's all

working working assumption. So obviously, I mean, over the last forty years, we've just seen this incredible um you know, disinflation. Even when we get an up cycle in prices, the pace of inflation tends to be lower than the previous peak.

You don't see it picking up any time soon. Do you have in your mind a cogent theory for why we've seen this multi decade disinflation and what policy shifts or what any kind of shifts might actually reverse that on a sustained basis, I would I would disagree with you slightly on the down trend, at least in the US. I mean, I think what we've had is basically a low inflation environment since the mid nineties, where you've had a kind of one and a half to two percent

for the for the most part. If you take the core PC index and the peak inflation rate at the end of the cycle was you know, about two percent little uh, you know, a little of then it was a bit higher than that at the end of the subsequent cycle. This time again we only got to do about two percent. But it's it's basically been in that in that sort of range. Now, why has it been Why has it been so low relative to prior cycles?

I think basically because the Vulker and early Greenspan bed were, you know, very adamant that they wanted to bring down inflation. From the nineteen seventies and early nineteen eighties levels, and they they wanted to stabilize inflation expectations at a at a low level of you know, maybe two percent, but they want particular really concerned if it ended up being

somewhat lower than two percent. You know, they used to be the so called comfort zone that beneficials talked about, which was one to two percent for the PC and next, so you know, effectively, I think they got what they what they wanted, and then over time in recent years, I think the FED and any macroeconomists have thought, well, what we wanted at the time is probably a little bit low because the neutral interest rate is the real

interest rate is significantly lower than it was before. And if we only have average inflation of one to two percent, but we we may have two little room to respond to cut rates and ease policy in response to the slump. So we want to make sure that you know, we at least average two percent rather than average one and a half percent, to give ourselves a little bit more room. And I think that's that's the thinking behind the framework

review that we got from the FED. This uh, this summer was full of surprises, and I don't think a lot of people had a global pandemic necessarily on on their their list of major risks to their economic outlooks going into the year. But I'm curious for you what was the biggest surprise of the year other than the pandemic itself. Yes, like in terms of in terms of the economy, the way it reacted to the pandemic, or

in terms of lessons learned. Well, we we saw a pandemic that initially maybe didn't look so different from some of the other scares about pandemics and and other pandemics that we've seen in previous years, you know, h one h one n one um. And I think the fact that we had seen a number of scares like this with out really large economic effects, at least in the in the US, that that added to the surprise of just how devastating this pandemic was in terms of the

impact on the on the economy. Back in January, some of the early reports certainly looked scary, and I think they looked looked concerning to a lot of a lot of economists. But we also all remember that we've we've heard some of these warnings before, and in the end, at least the economic impact it didn't turn out to be that large. So, you know, I do think that's a that is a large surprise. I think the other

thing that that's been remarkable. We've talked a lot about the demand side of the economy, but I think on the supply side of the economy is you know, how adaptable the many structures in the economy really are. If you look at, for example, the shift from you know, brick and more the retail to online retail. You look at the level of US retail sales that we very quickly got back to the pre crisis level, even though the mode of delivering the goods have have changed dramatically.

I think the fact that working from home, you know, for all its problems and all its disruption in terms of individual lives, ultimately you know, worked quite well in terms of maintaining output and maintaining productivity and a lot of a lot of sectors. I think that's been impressive. So so yeah, I mean, I think there there are quite a number of surprises, but the but the biggest one I think continues to be the pandemic itself. Just going back a second, I wanted to clarify one thing

on inflation. Do you see the FEDS new framework, the average Inflation Targeting framework, as being a meaningful change going forward. Is this is this regime change or is it a slight technical tweak that ultimately won't matter much? And do you think what are these sort of knock on effects if they adear by this approach of essentially not snuffing out inflation too soon and actually trying to get into average around two percent rather than a two ceiling. It's

a good question. I mean, I think you could say it's a very significant change because you apply the same framework to the prior cycle and you probably would have gotten quite a bit less interest rate UH increases. Then then then you ended up getting probably UH wouldn't have gotten a hike in in two thousand and fifteen, and only a much smaller number of hikes than just nine hikes. But subsequently, so I do think that there was a UH,

there's been a signific can change from that perspective. On the other hand, I don't think that they're going to be willing to tolerate much higher inflation than than they did in the previous regime. I mean, I do think it's a it's sort of a fifty basis point kind of shift, and you you had one and a half percent on average from one point six percent on average in the twenty years before the regime shift. I think

we'll be at two percent or so. I don't think the average is going to drift higher to two and a half percent or or two or three percent UM. So from that perspective, I don't think the implications are so at allmos So. I guess the short run impact on any individual cycle, especially any backcast of an individual cycle, for for monetary policy, those changes could look pretty significant.

But in the long term, I don't think the massive reteam You know, you are a sort of adherent of the work of Win Godly, whose sectoral balances framework which we talked about, is sort of one of the pillars I guess you could say, of the MMT view of the economy. And sometimes there are articles about m m T and you're often cited as a sympathist, one of

the sympathists on Wall Street. So I'm curious like your take on this sort of framework and whether you think it sort of pushes us in the right direction in terms of understanding the economy and um policy responses, Like what your view on it is Yeah. I try to be sort of eclectic in terms of what, you know,

what we find useful. And I do think that when you're in a slump, you know, often aggressive stimulus too, you know, in order to combat that slump, both from the monetary and the and the fiscal side, and less worry about government deficits in the in the short term. I think that's that's often the right policy response. And I think that is uh, you know, from that perspective,

maybe maybe related to the m m T prescriptions. I also think though that when you're you know, when you're in a strong economy, back to full employment and in the center banks inflation target, that the policy prescription has changed pretty pretty significantly. While I certainly agree that a government can't you know, technically go go bankrupt, you know, the central bank buys buys the debt, I think the right policy prescriptions in in the full employment economy are

going to look quite different from the MMT prescription. So in my view, it really depends on the on the situation you're in, and then I would say on the private sector financial balance and the sector of balance as approach, I do find that quite useful in a number of respects, but I wouldn't necessarily put any particular label on all go. I'm always very happy to give wind godly credit for pushing the strength so much and directing our attention to it in the in the past. All right, well, yeah,

thank you so much for joining us. A real treat and pleasure to get so much of your time and looking forward to uh reading further your work and see what store. Thank you so much, Joan, Thank you, Tracy. That was great. Yeah, and thank you so much, Tracy. I always like talking to Jan. I was like reading Jan and like I said, it really was him more than anyone else who're back in the spring. His identification of the power of sort of filth replacing lost income

and how big of a deal that would be. That sort of helped me see that's like this is not exactly going to be like two thousand and eight. Two yeah. Um, And let me just add I'm so glad that we can round out the year with talking about sectoral balances and the wind Gollic framework. Excellent to do that. That's that's that's facetious. Now. I'm very happy for you, Joe that you made that happen. Um, But just going back

to the hatsies his framework of the crisis. Like, I do think he's absolutely right that this crisis is incredibly unusual and we haven't really seen anything like it in Uh well, I guess all of sort of financial market history. Um. But in many ways it's this government induced crisis because the lockdowns are being mandated by public health authorities, and in many ways it's also a government solved crisis, possibly

precisely because of that. So we've seen the FED come in and politicians in d C come in and offer either monetary easing or some sort of fiscal stimulus, and so far it has had a fairly enormous effect. And that's had I guess that's had the consequence of compressing the entire recession into a much shorter cycle than it would be otherwise, and certainly a much shorter cycle than what we saw in two thousand eight. It's very controversiary.

You said this was a government induced crisis. I mean, I'm sure the lockdowns have had a significant effect, but also the sort of inclination to just avoid getting the virus uh also pretty big. Yeah. I mean I think you could debate that there, but I would look, I'm in Hong Kong, and I'm close to the mainland, and I'm close to China, and so maybe that colors some of my perspective, But I would say like authorities kind of chose to shut down vast suites of the economy,

certainly in the US. And anyway, let's not get into that. Let's talk about the economy and m m T. You know what, No, I know. I I do think like this sort of question of when are we particularly vulnerable is like a huge thing to think about now and also the future of being. It is probably the peak optimism about just the economy and prosperity and everything seemed really good in a way that I don't think we've

felt um in since then. But that was when the private sector started running this deficit and people spending more than they earned, in part due to the wealth effect. Per ups of the dot com bubble also saw that again in two thousand five, two six, I think two thousand seven, um at the peak of the housing crash. And then you look now and you see, okay, how household balance sheets and aggregate were in good shape going

into the crisis. In aggregate, they actually look better today than they did at the start of the year due to all the savings and so you know, there is a good reason to think that, um, we do have this potential cushion of stability that could prove to be a real benefit in the coming years. Yeah. And also just the idea that household balance sheets look better now than they did at the start of I don't think

anyone would have expected that in March of this year. Um. And it just goes to show you how unexpected certain economic developments have actually been. Yeah. Absolutely, I mean I don't think for all the sort of modeling you can do about Okay, if you spend this much money, then that replaces this last income and so forth. I don't think anyone could really, um, really have it predicted that

we this is where we'd be in mid December. No, and we should definitely have you on back on at the end of next year and see how everything panned out. I think that would be an interesting conversation. But for now, shall we leave it there. Yeah, I like that idea. That's an annual December end of year Christmas conversation at Christmas time conversation with sounds good. But yeah, let's leave it there. Okay, 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 wi Isn't though. You could follow me on Twitter at the Stalwart. Follow our producer Laura Carlson. She's at Laura and Carlson. Followed the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts under the handle at podcasts. Thanks for listening.