Inflation Frustration as Fed Cuts Rates
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Hey, everybody. Welcome to the weekly show. My name is Jon Stewart. I'm here with our small producers, Lauren Walker, Brittany Mimatovic. And we are, I'm talking quickly because news right now is happening at a speed in which we can't even begin to catch up to any of it. I feel like we're in that Maxell commercial where the news is just

blowing past us. There's so much happening. Oh, yeah. I have a little list I was putting together just yesterday thinking about just what whiplash has occurred since Sunday. So 10 AM, Trump declares, I hate Taylor Swift. Later that afternoon, Trump's second assassination attempt.

On Monday, we're hit with the TikTok hearings begin, the Murdoch hearings begin. Then the next day, we have the ongoing bomb threats and evacuations in Springfield. Hezbollah's pagers explode simultaneously across multiple countries. The UN General Assembly is meeting. The Federal Reserve today is expected to cut interest rates. God, what are we doing?

We're in an arms race apparently now with lunatics in this country where every fucking crazy person that is gets a larger and larger weapon. Pretty soon these, how does the Secret Service protect anybody anymore with the power of these weapons? One of these fucking crazy people is going to get his own like fighter jet and then we're all done.

But I'm sorry. I'm shot out of a cannon, guys, and I apologize for that. It's impossible to keep up. But I do want to get to this question of inflation, this question of how we describe inflation, the way we talk about it, what are the driving factors of it. And so I'm excited about that. And, guys, we'll flip back on the backside and talk about it some more. All right.

Ladies and gentlemen, our guests today, we're very excited to have them. Kitty Richards, Senior Fellow, Groundwork Collaborative and former Treasury official, and Jason Furman, Aetna Professor of the Practice of Economic Policy, Harvard University. You know, that's the thing about economic policy. You have to practice it.

I think that's most important. Jason and Kitty, thank you so much for joining us. Obviously, we're talking about inflation, the big news, which we are ahead of. It hasn't happened yet, although by the time this podcast airs, it probably has happened. The Fed is expected to cut basis points, and we're very excited about that because they haven't done that

In many years, since the pandemic, yes. When was the last time the Fed cut their rates? Yeah, they cut their rate all the way down to zero in 2020. And since then, they've either kept it the same or increased it. Boom, boom, boom. Well, let's very quickly for the audience, because this is, it's something that I think is a little bit obscure for a lot of people. The Fed sets these rates and that is the cost of borrowing money.

Generally, is that would that be considered accurate that that's a good way to think about it the Fed sets rates that really affect banks and then banks

Lend money out based on the rates that they can borrow at and so when the Fed cuts rates It brings things like mortgage interest down student loan floating student loan credit card interest all of those things Follow after the Fed and it's and it's generally done they're trying to either stimulate activity in the economy or slow it down when they raise the rates the idea is the economy will

We'll slow down a bit. That's what they do to battle inflation when they raise the rates. And then when they lower the rates, they try and stimulate it. Jason, are you excited about a rate cut as well?

I'm excited about a rate cut. I think just about everyone is excited about a rate cut with possibly one person as an exception who we might get to in the conversation later. So a rate cut is like the Eras Tour. Everybody is excited. There's only like one person who wouldn't be excited. I think that person also doesn't like Taylor Swift, but I don't know if these are related. It's the same person. Yeah.

But yeah, look, I mean, the inflation rate had been in the fives in the way I like to look at it. There's lots of different ways to look at it. It's now in the twos. It's higher than the Fed would like it to be. And we can debate whether or not the Fed is right or wrong. They like to hold it at 2%. Yes, that's the traditional. Yeah, that's what they aim for. They aim for two. It's around two and a half right now. And so they're almost there in terms of what they want.

But there have been some cracks forming in the economy. The unemployment rate has been rising. I don't think the cracks are hugely panic-worthy right now. The economy grew at 3% last quarter, which is amazing. It looks like it might grow at 3% again this quarter. So it's growing quite strongly. But the Fed is balancing risks. And the risk of inflation is way down. And the risk of recession, I don't think it's

you know, huge, but it is higher than it was. Right. I think I'd like to get into the complexities of inflation because it's very frustrating to hear inflation talked about on the news and, you know, and we can get into what are the many factors that contribute to inflation, but everybody just to talk about, oh, where the rates are going to raise or the rates are going to slow down, but we don't really talk about

The fact that I think the Fed raising rates and lowering rates doesn't have that much control over the complexities of why inflation happens. So let's get into, you know, there's kind of a discrepancy between

Is it corporate greed? Is it supply chains? Is it simply a rise in demand? Is it a monetary policy issue? Are we flooding it with too much money? Would you mind both talking a little bit about what are the complexities of inflation? And Kitty, I'd like to start with you because you get the sense with the Fed sometimes that they really can just turn the dial up and down and that's what controls inflation. But it's a lot more complex than that.

Yeah, I think it's really important to look under the hood when we're talking about inflation. Inflation isn't just one thing. Inflation is rises in prices in lots of different things that are often driven by lots of different causes. And I think that's one of the reasons that a lot of us are not so sure that the Fed's rate hiking campaign was necessary to bring down inflation, at least

at the degree to which they, you know, rates shot up to a level they haven't been in a very long time. Um, and you know, if you think about where we saw costs rising, uh,

Housing is a huge, huge part of this. And the Fed's high rates actually make housing more expensive for people. You need a mortgage to buy a house. So the mortgage rates go up to rates that we had seen in quite some time. Mortgage rates go up. That's right. And so when the Fed's turning that dial, trying to reduce the amount of money in people's pockets,

to bring down prices by bringing down demand, what they're actually doing is increasing mortgage rates, which is locking up the housing market and making housing more expensive in the long term because you can't afford to build a house. So thinking about all of the different pieces, I think, is really important when you're thinking about what's driving inflation. And on the corporate profit side, you know,

There's really good evidence at this point, usually in a kind of hot demand-driven market, corporate profits don't spike the way that they have in the current world and corporations

are supposed to pay workers higher wages in order to attract them to increase supply. Corporations did see really big supply-driven cost increases, you know, things like lumber and- Labor and supply, yeah, yeah, yeah. Yeah, but also just like inputs and shipping.

because of the pandemic. But then they also had a lot of market power and were able to jack up prices well above their costs and not pass a lot of that on to workers and instead pass it on to shareholders with corporate stock buybacks. And a lot of that has to do with, I guess, consolidation in a lot of industries.

That's right. And also the kind of temporary consolidation created by the pandemic. You had a lot of places where all of a sudden there was sort of temporary monopolies and folks filled their wallets. Hey, big diaper was killing it. Oh my gosh. You know, when you're talking about the profits in the diaper market, which is true, by the way, I know it sounds ridiculous. Now, Jason, you know, when we talk about supply pressures and things like that and driving costs, I think you have a slightly different view about the role of

corporate profit taking in this. And the reason why we bring it up is, you know, the Fed, when, you know, when they do those rate increases or their rate decreases, that really doesn't address other complexities within what drives inflation. It really is about cooling or heating up the market. It doesn't have a whole lot to do with

profits and things like that. What do you think the role of profits is and do you think it's significant? So a few different things. One, there is a vast amount of empirical evidence about what happens when you raise interest rates. And when you raise interest rates, inflation goes down and job growth and economic growth goes down. Whether that's a good thing or a bad thing depends on the circumstances you're in. But the Fed's interest rate increases

lowered inflation. There is very, very little doubt about it. They increased pain in some places in terms of mortgage rates, student loans, but they did that. That's the first thing. The question though, Jason, is so what percentage of inflation is based on purely like that economic activity? So it's a choice, right? So in the pandemic, let's go from 2008 and then let's talk about the pandemic. 2008,

we had the terrible financial crisis, right? And the government injects a lot of money into the economy, but they do it at the kind of supply level. They bail out the banks. And we have a huge recession and a ton of people lose their houses and a ton of people lose their jobs, right? In the pandemic, the government chose a different path. The government injected money more on the demand side. They were giving the stimulus money. They were doing it

at the level of consumers and we saw economic activity, the efficiency of injecting that money seemed to be very effective. We didn't have a huge recession. People stayed in their houses, but you did get inflation. Is the choice we either get a huge recession

Or we get inflation and was that what happened during the pandemic? Right. So broadly, I think we did too little in response to the financial crisis. I think we did too much in response to this one.

And they also were two different crises, financial crises. We have centuries and centuries of experience, and rarely do countries get back, even after a decade, to where they were at the beginning of it. Part of that is because financial crises just rip everything apart in a way that is hard to put back together. Part of it, I think, is for centuries, people have done too little in response to them. And that's a lesson we should learn, and we should do better in the future. This time around...

A big part of why the economy recovered was just that lockdowns ended. People felt comfortable going out. And so you can look at countries in Europe that didn't spend nearly as much money and they recovered almost as quickly as the United States. But the money absolutely helped. It absolutely was necessary. My worry, though, is that the last trillion dollars is precisely what's causing the profits that Kitty has been lamenting.

which is, you know, if you give a family of four more than $10,000 at a time when they had more money in their checking account than normal, they're going to be willing to go out and pay more for things and profits are going to go up. So it was really naive. If anyone thought you can send this much money out so quickly,

You're not going to have demand increase more than supply. Then every economic model predicts that when that happens, profits go up. It's not really the consolidation. It's not really the greed. You know this in part because you see big increases in prices and also profits in very non-consolidated competitive parts of the economy as well. In fact, there's no relationship between consolidation and prices. Yes, profits went up, but that happened

largely because of the money we gave people. But let me ask Kitty, because I think she disagrees. Well, then if that was the case, why was inflation so rampant in other countries that did not do the kinds of stimulus in the last trillion? Is

Do you agree that that's what was-- and by the way, again, we're talking about the main drivers. I think the main driver was the supply chain disruptions and the difficulties we had getting that back. Yeah, go ahead. Can I just say something? Inflation in some ways is a million different stories. There's a story for eggs. There's a story for cars. There's a story for houses.

But in another sense, it's one story, which is if you don't have enough money and your egg prices go up, you're going to have to buy less meat. If car prices go way up, you're not going to spend as much in restaurants, and then restaurant prices won't grow as much. So there is a certain way in which inflation is the aggregate of

of all of those individual stories and how they aggregate up, whether the price increases in one sector lead to decreases in another might have happened without people having money. But because they have money, the price increases in one sector didn't lead to decreases in others. So there is an aggregate way to think about inflation too. But I think in some ways, Jason, though, that makes the point.

Because it's a thousand different stories or it's a million different stories. And we have one blunt tool to deal with it, which is raising interest rates or lowering interest rates. Oh, okay, okay. We're going to take a break.

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Custom window coverings in the world. Blinds.com is the GOAT. Shop Blinds.com right now and get up to 45% off select styles. Rules and restrictions may apply. All right, we're back. So why don't we consider, and Kitty, I'll ask you this, why don't we fight inflation in a more complex way that addresses, because you can suggest that a little bit more money being injected into consumers just drives inflation, but why

We inject money into corporations all the time.

And the efficiency of that injection goes into buybacks. It doesn't trickle down to consumers. But any time we give consumers more buying power or we give workers higher wages, everybody freaks out that that's exactly the wrong move. So Kitty, I want to ask you about that. Yeah, I think you're exactly right. And I do want to get back for a second to the causes of inflation because I do think, Jason, that you actually make the point that

When we look at all of the individual drivers of inflation, yes, we can think about it in the aggregate. But the individual stories do not match the broad story of people just having too much money in their pocket. And I think that's really important when you look at the big drivers. And I know that we like to take things like food and energy out of

of our aggregates, but those were big drivers of the inflation that people actually felt and big drivers of things that people were worried about. And, you know, the war in Ukraine had a huge effect on energy prices. And then that ripples through the economy and food prices

also were affected by pandemic supply shortages, et cetera. But we've got lots of evidence of price fixing and corporate collusion. And you brought up eggs, John. There was just a big finding against a major egg supplier that they were artificially keeping supply low in a whole bunch of ways that I don't really understand because they're about like flock maintenance in the egg production pipeline. Big egg is vicious. Big egg is a problem.

Absolutely. Well, there was also avian flu and some other things. That's right. And you see that all over the place. And similarly, housing was a really, really big driver. And if we're going to talk about the stimulus, we're talking about things like emergency rental assistance that prevented people from being evicted, which we know is a huge, huge

huge determinant of their future economic success, including their productivity. Eviction is really, really bad for people and families. And I'm really proud that we managed to avoid potentially millions of evictions. That was a huge chunk of money in

I don't think that if we had withheld that money, we would be in a different place with respect to inflation. I do think that we would have a lot of people whose long-term ability to participate in the economy had been really, really damaged. And on tools, we do have other tools.

and we should use them. And primarily, I want to talk about taxes on the wealthy and corporations, especially taxes on corporations. And this is something that's very near and dear to my heart. But there were a lot of economists calling

during the kind of inflationary period for excess profits taxes. But we have a profits tax, and it is the corporate income tax. And the Trump administration and Republicans in Congress cut the top corporate tax rate by 14 percentage points, from 35% to 21%. In 2017- And they're looking to bring it down to 15%.

And that really supercharges the motive and opportunity to extract those profits. And to talk about the corporate profiteering piece, I really think that we need to move beyond the Econ 101 version. When my kid is asking me for French toast on Saturday morning, I do not go to a commodities market and

bid in an auction for eggs. I go to the corner store or one of a very small number of accessible grocery stores and I pay what the eggs cost. And the grocery stores understand that and the grocery executives understand that. And we have CEOs on earnings calls saying, look, inflation's happening.

People expect it. We're going to wring as much out of them as we can, and we're going to give it back to you, our shareholders, in higher profits. And that's a policy choice. You know, first of all, can you imagine if there was a French toast commodities market? That would be... Oh, my God. Can you imagine the action in the French toast commodities market? There would be... You'd have the Saudis drilling for maple syrup. This whole thing could spin out of control.

Jason, do you want to address that a little bit? Because I do think it speaks to, I think, the position that corporate greed is baked in, right? So let's talk about capital distribution. When a corporation is more flush, like you talked about when consumers were more flush, they got that trillion dollar and they had money in their pocket and they started to buy it and it ripped through inflation. But I want to get back to

Like this idea of corporations, like we had supply chain issues, right?

Well, you can actually look to that as actually a function of corporate greed as well, because we wouldn't have outsourced to China and Vietnam and back. We wouldn't have had the supply chain issues that we had in the pandemic if we hadn't had offshored all of our jobs and manufacturing to countries that don't have the same worker protections and don't pay as much to workers. So that was a fundamental driver

of some of the inflation that had nothing to do with the stimulus and everything to do with corporations searching for the lowest water

in terms of what they could pay workers. Wouldn't that be considered a factor right there? I think we should be talking about the success of our supply chains, not their failure. And let's look at what that success looked like. Sure. The world was ripped apart. No one wanted to be together because of this horrible virus, et cetera, et cetera. And yet you look at how much Americans purchased in terms of durable goods, how much furniture they were buying,

you know, all the different things, clothing, et cetera, et cetera. They were buying 10% more by I think May or June of 2020. By 2021, they were buying I think 15 or 20% more. And I'm not saying spending in dollars. I'm talking about actual physical quantities. So the world dramatically scaled up.

its production of manufactured goods. What it didn't do was scale it up as much as people, especially people in America, wanted them to scale it up. So a lot of what people called supply chains were actually demand. So picture this, just thought experiment. Give everyone in the world a million, everyone in the United States a million dollars. Right. You would see a lot of supply chain problems developing after that happened.

But actually that would be demand, not supply. So Jason, why didn't other countries have that? Why was there inflation in Europe? So Europe was much, Kitty is absolutely right that the unprovoked Russian invasion of Ukraine

layered on top of all of this. So it's not just one factor. Demand was a part of it. That was a much, much bigger deal in Europe than it was in the United States because natural gas is hard to ship and trade globally. So it has very different prices in different places. The price of natural gas in Europe went up

way, way, way more than it did in the United States, electricity costs skyrocketed in Europe in the way that we never saw in the United States. So they actually were hit. Their inflation was just based on electricity. They were hit by... Look, Arthur was... I'm making numbers up here. Ours was two-thirds demand, one-third supply. Always good for an economist. Ours was two-thirds demand, one-third supply. Theirs was two-thirds supply, one-third demand. So there's commonalities, but the supply shock was much, much worse.

for Europe than it was for the United States. But the United States recovered better than Europe. That's exactly related too. You know, they, they were getting a lot of natural gas from Russia. They stopped it within a year that did hurt German manufacturing that did hurt the German economy. We didn't have to go through anything like that. So yes, this was, but see, isn't this, isn't this a convenient shell game though? So now we're playing a convenient shell game.

So we're saying, well, giving the money to the consumers is really what drove it. What about Europe? Oh, they had a different problem. That was their electricity. Oh, I was saying there's different factors, but giving money to, you could not have, it was sort of a necessary part of it. Right, but the only tool we have in this country is the Fed.

And if it's different factors for each one- I guess I don't know why you're so upset about the Fed when they basically might just have gotten us to a soft landing. Here's why I'm upset about the Fed. And it's not so much about the Fed. I'm actually more upset about Congress. I'm upset that we finally did a demand-

stimulus in a crisis. And we saw that people got to keep their houses and people, uh, you know, were fed and poverty in the child tax credit, child poverty, uh, decreased and the government and wages started to go up. And what the fed did was in a tight labor market, as they saw wages go up, rack up those things, which could have created

and thrown a ton of people out of work. So I'm upset that

when we look at the inefficiencies of supply side stimulus, subsidies to corporations, billions that go out to them, that they flip, you know, corporate tax rates that get cut and they flip that and they do buybacks and they don't efficiently pass whatever savings they're getting on that or whatever profits they're getting onto their workers, that we're fine with that, that that goes on, that, that,

That that never creates a problem in the economy. But as soon as consumers or as soon as labor start to get on top of things, the Fed pulls the plug on the economy and slows that down. I mean, that's what I'm upset about. They didn't pull the plug on the economy. The economy is growing at 3%. And by the way, at the height of that hot labor market, real wages were falling.

Most of the real wage growth we had actually happened in 2020 when the unemployment rate rose to 15%. The problem with a hot labor market, it's a wonderful thing in many respects.

but it puts upward pressure on both wages and on prices. And so, yeah, people were getting faster raises the whole time, but they were getting inflation. And guess what? It was the same thing causing both of those. You're suggesting, though, that corporations are helpless in all this, that it's all about supply or it's all about wages. And they're clearly not. They're using billions. But

Oh, I don't think we have any difference here on higher corporate taxes, higher taxes on the rich, and more antitrust. I think all three of us agree with that. But guess what? I think all three of us liked those ideas in 2019 when the inflation rate was too low.

Most of those aren't really about inflation. There's not a very high multiplier for corporate taxes, for example. But it's opportunity there. Kitty, do you want to answer to that? Yeah, I do. I mean, I think Jason brought up multipliers, which is, again, all about demand side. And it's the idea that...

If you're stimulating the economy, you're just dumping money in and kind of blowing the roof off of things. And that's not why I'm interested in corporate taxes for inflationary pieces. It's not the demand side nearly as much as it is the incentive side. And I think that this is where Jason and I do differ some.

Many estimates indicate that most of corporate profits now are from market power, not from productive activity. That's what's called economic rents. And I don't know, Jason, if you don't believe those estimates or if you do. Oh, but that's a level, not an inflation thing. That has nothing whatsoever to do with inflation. Right.

That's why you want more antitrust.

whether they jack up prices at the expense of consumers, whether they raise wages. And then we need a suite of policies, including higher corporate taxes, to put a brake on that kind of behavior. And that actually does mean that the corporate tax cuts from 2017 probably contributed to the price inflation that we saw. But I also feel like, John, you were getting at something really important, that

It's just really easy to blame workers. But if you say that corporate executives have some responsibility in what's been going on, you get called silly and treated like you don't understand what's happening. And I think that's a huge problem in the way that the media covers things.

And Jason, I know that you are primarily, when you're talking about demand, that you didn't like the economic impact payments. And I hear that. But the place that I really saw this inflation narrative cause really big damage was in the conversation around expanded unemployment insurance benefits, which kept children out of poverty. It kept people in their homes. And it replaced wages that were lost because people could not go to work because they

people were dying. And I remember as the inflation narrative started to take over, there was just a lot of coverage of business owners talking about how lazy people did not want to work anymore and that that was the problem in the economy. And I'm not accusing Jason of saying this, but I think it's a really big problem when we think about

what are the drivers of inflation and how we should combat it, because that's the other piece. We can't just ask, did demand have something to do with inflation? Of course it had something to do with inflation. But when we're talking about the tool, the question is, how much damage do we have to do to the pocketbooks of American families in order to bring down inflation?

using interest rates? And is it worth it? And the question is not- That's the formulation. That's right. Yeah. And the question is not, should the Fed have brought interest rates up from zero? I think yes. The question is, did they really need to do four back-to-back 75 basis point increases and land at 5.5? And did they then need to keep

interest rates at five and a half, despite the fact that outside of housing, inflation has been hovering around 2% for more than a year now.

This is my problem with collapsing all of the little stories into one big story. You really miss what's been going on. And I also want to say we focus a lot on the Fed's effect on the labor market, which is really important. And it's partly important because that is their theory of the case. How do you bring down inflation? By squeezing worker pay so that we don't get a wage price spiral. That was never our problem.

And instead, what the Fed is really doing is taxing back

all of those wage gains through higher costs for borrowing. And we don't think about that effect nearly enough. There's the theory of what the Fed is trying to do, but what they're actually doing is taking money out of people's pockets through higher interest rates. And frankly, that's a huge driver of why people are so upset. We have a lot of conversation about the vibe session and why don't people just understand that their wages have grown more than in

inflation and that inflation is down, the rate of change is lower. Part of it is that

People look at what things cost now and what they cost a few years ago and things are really expensive. But part of it is that their actual costs are now being driven more by high interest rates than they are by price inflation. Because if you're a middle class person, you do not buy a car with cash. You certainly do not buy a home with cash. And so people are paying a lot in interest. And if you actually just add that to the

Bureau of Labor Statistics, like Consumer Price Index, you see that people have been facing higher and higher costs long after inflation peaked, and that it's really driven by those interest rates. And so I want to see the Fed bring interest rates back down to normal as quickly as possible. I think they should have done it sooner. I don't think that that's going to cause an inflationary spiral, but it is going to really help families right now with the costs they're facing. Jason?

So let's do two things. One is you compare the United States to 30 other advanced economies and we have a higher budget deficit than any one of the other economies by a decent size margin. When you have that high budget deficit,

That drives up interest rates. That is pretty basic economics. The government tries to borrow more. It drives up the cost of borrowing. Or thought of another way, those budget deficits are inflationary. And so part of why the Fed did raise rates more in the United States than anywhere else

and was slower to cut them than most other places is again, goes back to all this money the government was spending. So you sort of can't have it all. So that's the first thing. The second thing is- - All right, all right, do the second thing, but then I'm jumping in, Jason, 'cause now you're making me mad. Now you're making me mad, Jason.

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Go through and calculate how much that did to lower inflation, and it's about 0.0001%. It is imperceptible. So these tools that you sort of hope are there, they just don't work at any particular scale. That's because they're fighting corporate legal departments. Then let's understand most of how the Fed cut inflation. Most of how the Fed cut inflation was not the taking money out of people's pockets, raising the unemployment rate, that stuff. It was keeping people's expectations of inflation anchored.

As Kitty said before, when businesses are raising prices, they're keeping their eye around. Is the other business raising prices? Okay, then I'm going to. Are wages going up? I'm going to raise prices. But they also understand the opportunity to raise prices and set a new market. So the cheapest way to control inflation-

is to keep inflation expectations in check. That's what did not happen in the 1970s and 1980s, ended in a huge, horrible recession to bring inflation down. This time, because the Fed was so aggressive, they actually needed to do much less and cause much less pain because everyone believed it would work. And magically, that actually helped it work. And that's one of the biggest tools the Fed has. Jason, I want to jump in very quickly. And Kitty, then you can address this as well.

So we talk about, geez, this irresponsibility of government spending and they put a trillion dollars on the demand side and they put it in people's pockets and then they had money and they had to do that. I want to talk about when Trump came in. In 2017, there was a tax cut for corporations, as Kitty said earlier, 35% to 21%.

There was also a deregulatory regime for corporations so that that also was a subsidy in kind. So you're talking about trillions and trillions of dollars, right, that went to the supply side and to corporations. Trillions.

But the $1 trillion that went directly to consumers is the problem. So if you want to talk about deficit, Trump had an $8 trillion deficit over four years. I'm just talking about...

Suddenly, when the deficit is about money being given to workers or consumers, it's a problem. I was out there, a huge critic of the 2017 tax cut, a huge critic of the 2001 tax cut. You get my point, though, as far as- But no, that tax cut didn't cause inflation because of the way it was spread out over time.

So there's two different questions. If you're talking about-- No, because when money goes to the corporations-- --deficits, absolutely. That 2017 tax cut, much bigger deal for the deficit. If you're talking about inflation emerging in mid-2021-- Right, but consumers pay the price. We pay the price, because when you put trillions into the economy at the corporate level, it doesn't trigger inflation, because it doesn't trigger demand, because trickle-down economics doesn't work. The best way to bring interest rates down

over the next couple of years will be to let those tax cuts expire next year. And I'm really, really hoping they have the nerve to do that. But they won't. They probably won't. But they only do it. But the point I think Kitty and I are making is the Fed only reacts when it's on the demand side. So we create the conditions, right? We create these big deficits with corporate subsidies and all these buybacks and all this nonsense.

And that extra trillion that went to consumers is the straw that breaks the camel's back. But we create, Kitty, can you explain better what I'm saying? Yeah, I mean, I think, I don't,

I actually don't want to beat up on the Fed too much. I think they're doing the best they can with the tool they have, but I think they've made some really big mistakes. And I think those mistakes are driven by the wrong stories about what was going on. And I just want to respond to a couple things. I mean, first, Jason...

To pivot from interest rates should come down and should have been lower to the budget deficit, do you think that the federal fund rates moves would not bring down mortgage rates? I don't think so. This is a little bit of a shell game that I'm kind of surprised by when I hear it. It's not a shell. It is very, very basic. Higher budget deficits are

higher interest rates. That's why the Fed funds rate is two points higher in the United States than it is in Europe. So, Jason, I agree that it's very simple. I think it's not actually right. And I think that... So you think the empirical evidence is when you run larger budget deficits, what do you think it does to interest rates? I think that the empirical evidence is that the

pandemic recession was a very unusual period in history that was much more like the post-World War II inflationary period than it was like the 1970s. And I think it's kind of bizarre that we keep looking to models that

don't explain the data well. But I want to say a couple of other things. I mean, the other thing, a huge driver of the increases in the deficit over the coming years is actually net interest payments and having to finance net interest payments with more deficit, which is a result of the federal funds rates increasing. But, you know, setting that aside, I think

To go back to the inflation expectation story, I'm really glad that you called that, said that it worked by magic. Because that is the only way that it works. And I'm really unconvinced. And it feels like a pivot from...

The traditional stories don't explain what happened. And so we have a new story in which the most important thing is what Jerome Powell says. And that just makes everybody happy. And one of the things that I'd look at is actually, if you look historically at inflation expectations,

they lag inflation. People adjust their expectations based on what inflation was previously. And inflation expectations never became unanchored throughout this period. And again, I would just go back to the question isn't, did the Fed play any role in disinflation? And should they have kept interest rates at zero? The question is, did they need to go to 5.5%

in a year and then hold even as inflation outside of housing had already dropped to around 2%? I think the answer is no. And I think it's really damaging. And I think we need to spend some time after

this period, really thinking about what we've learned from this period. And I worry that if we just keep going back to, no, no, it's simple, just Econ 101, we're going to miss some really important learning opportunities. Kitty, I teach Econ 101 and you're sort of misdescribing what we teach. So for example, we teach about oligopoly, we teach about monopoly. So I think you have a slightly strange notion about what's taught there.

But let's go back. First of all, we're about to have potentially the first soft landing that we've basically had in our history. So this should be a time to actually probably celebrate the Fed rather than direct our fire at it would be the first thing. But that's supposing that the Fed is why. And I would make the argument that the soft landing is based actually more on direct demand stimulus. I just disagree that the Fed is what created the soft landing. You could disagree all you want, John, but-

You need to understand some of what you're talking about too. And a lot of it right now, you actually don't understand what you're talking about. Now that's hurtful. But how does demand lower inflation? That doesn't make any sense to me. That's just-- Can you-- No, demand is not what lowered inflation. We're talking about two different things.

I'm considering the soft landing being the lack of recessionary action. And the Fed jacking the rates up to 5.5% could have created a tremendous recession if people didn't have a little bit of that cushion that was created. Oh, absolutely. Well, that's my point. Exactly. That's the same point I made. That's the point I made before. You have a larger budget deficit. So I guess I do understand what I'm talking about. You have a larger budget deficit increasing demand. Pushed

pushing one way. You have the Fed reducing demand, pushing the other way to cancel it out. You're not addressing my question. Part of why interest rates went this high was precisely because. It's not like the interest rates went up and then the demand came. The demand was all there and that's why the interest rates went up. Please address the question though. My question is, because we generally run this supply side

corporate kind of grease of lowering corporate taxes or tax cuts for higher people, we have less reserve when we are hit with a catastrophe.

In 2008, we were hit with a catastrophe. So with less reserve, when the government went to a more demand-side stimulus, right, there was very little play in the economy because of the deficits to stop the inflationary period. But it was our economic behavior in the years leading up to that that gave us fewer tools

to do the thing that government's supposed to do, which is keep people in their houses and keep children out of deep poverty. Because we have all these stimuli and trillions that go to corporations, the government spending where it should be going to people.

people, we have less ability to do that. Would that be something that sounds reasonable? And I'm going to ask Kitty first, because she's less condescending to me. Kitty. I actually think Jason would agree on a lot of those points. So I'm just going to assert that and then he can come back and clean up if he thinks I'm wrong. But I do actually want to address...

There are ways that government spending, and I think we make a mistake when we just talk about stimulus. Government spending that was undertaken in 2021, there are ways that that brought down inflation and can bring down inflation. And examples are things like

child care subsidies. We had a huge problem. I suffered through it, right? I had two kids home. Reopening schools, the things that we do to support people in reentering the labor market and doing it safely are a really important thing for supply, which is a really important thing for dealing with inflation. And so again, I think when you zoom all the way back and start just like

Going back to the old saw about the government deficit, instead of thinking about what the spending was actually for and what it was on, you really miss what was going on. And the other thing, we keep talking about deficits driving interest rates up. Jason, do you think that the Fed had no choice over how long to keep

the federal funds rate at five and a half? Or do you think that if they had cut, interest rates wouldn't have come down? I think there are policy choices here, and they're important policy choices. And it's for the Fed. But I also agree, like, the reason that I don't want to spend too much time blaming the Fed, but I do want to see some pretty quick course correction and some admission of mistakes is that

We do need to do other things like raise the corporate tax rate. And by the way, those corporate tax cuts in the 2017 tax law, they don't expire. They're permanent forever. And they were paid for by things on the individual side and by cuts to services over time. So we really do need to focus on the kind of non-fed things that we can do for inflation and to invest in those things like

childcare and elder care and helping people live a dignified life and helping workers thrive. And that's really important. Bars, Katie, bars. So I think part of the problem with this is that you're trying to make it all about inflation when most of it's not about inflation. So if the three of us are having a conversation in 2018, we would have thought corporate tax rates should go up.

Tax rates on the rich should go up. There should be more antitrust. There should be more support for childcare, et cetera, et cetera. And none of us would have used the word inflation as having anything to do with any of that stuff. In fact, at that time, inflation was too low. And I don't think any of us would have said, oh, we're worried if we do more antitrust, we're going to take the already low inflation and make it even lower. Um,

All of these things are incredibly important, but they're sort of settings you always want to do regardless. When inflation is low, you'd like to do them. When inflation is high, you'd like to do them. The Fed is quite different. It did a different thing. In 2019, it was actually cutting rates because inflation is low. Even before the pandemic, it was cutting them.

Then it was raising them because it was too high. Now it's cutting them again because it's changed. The Fed is this thing that goes up and down when circumstances change. Some of this other stuff is actually not related to inflation. It's related to all sorts of other things like people living better, happier lives, having a better income distribution.

having an economy that generates benefits for everyone. That's what most of that's about. And then we have the Fed taking care of the other thing, which is inflation and changing its settings up and down, depending on what you need to do. I actually... This is not a gotcha question. I really want to know, Jason, do you think that if the Fed had...

like, hiked aggressively, said, "We are going to keep an eye on this system, but because of long and variable lags and our concern about overshooting, we're going to stop at 3.5." And then they'd let 3.5 sit for a while, and when they saw inflation coming down, they had brought us back down to 2.5.

Do you think that we would have seen a huge spike in inflation? Or do you think that the path of inflation would have been about the same? And how do you think that would have affected workers? Well, we talked about inflation expectations before. And you said that was some sort of new thing being introduced into the conversation when literally- No, I think it's old. I think it's old. The model that the Fed uses and the model that economists use, that's the first term in the equation. It's inflation expectations before you get to anything else. And-

Those inflation expectations, you are absolutely right that if you look at what people expect for inflation over the next year, that is a function of what's happened over the last year. If you look at what they expect on like a five-year horizon, say from one year from now to six years from now, that is very affected by the credibility of the Fed. And that longer-term inflation expectation stayed what economists called anchored, stayed quite low the whole time.

I think if the Fed had kept interest rates at three, there's a real risk that investors, businesses would not have thought inflation would come under control. You'd have more self-fulfilling price increases. I don't think it's like a huge spike in inflation, but it's like an extra percentage point of inflation. And that would have been much, much more painful to wring out of the system, just like it was in the 70s and 80s. So this is a little bit of preventing it from being embedded

makes it just much less painful to bring out of the system. And my goal in all of what I was trying to do here and everything I was advocating was how to have less of an increase in unemployment. And credibility is the most important step the Fed at least can take. Do you think the Fed could have cut sooner?

I think you could make arguments that they could have gone in March. They could have gone. I mean, March is really different from now for the people paying interest rates, right? I mean, that's the problem. It's decently different. No one I know borrows at the federal funds rate, which is the rate for banks, which is the one that the Fed is effectively setting. They borrow at mortgage rates, and mortgage rates have been coming down for the last couple of months in anticipation of what the Fed does.

But mortgage rates would have come down sooner and faster if the Fed had started cutting rates because they would have anticipated that the federal funds rate would be coming down because it would be coming down, right? Oh, I think there's a perfectly reasonable set of debates about when the Fed should have started, how much they should do, et cetera. Well, so again, so here's our final question because I know you guys got to go. And this is a more macro view. And this is kind of more my point.

It appears to me that we are very comfortable economically in stimulating the economy at the corporate level, that we spend a lot of government resources at the corporate level. And by doing so, it is not the most efficient use of capital that a government could use. But it was very clear

when you stimulated the economy directly to people, you got more economic activity. And wouldn't that be, in a country that runs deficits, a more efficient way of looking at the economy? Wouldn't we be having a very different conversation if we hadn't hollowed out our ability to react to a catastrophe and a crisis at the demand level? Is that an insane thing to say, that on a macro level,

We are topsy-turvy that we've been an investment economy rather than a labor economy. This is where I think that Jason and I might have a lot of agreement. But no, that's not insane. I think we have been...

engaged in a radical experiment in trickle-down economics, especially in tax policy, for the last 50 years, and it has not gone well. We have not gotten the growth that we were promised. We've gotten skyrocketing inequality. We've gotten hollowed out government services. And we have been just over and over unprepared for these crises. And we've seen a lot of crisis in the

and the pandemic. And all of those trickle-down tax cuts for the wealthy and corporations really left us in a bind. So, I mean, I guess I'm repeating myself here a little bit, but maybe I have to do that. I try to do that in my classes, John, which is that this isn't all about... Jason, you are brutal, man. You are brutal. This just isn't all about inflation. I just would ask you to say, if there was something that you thought was a good idea in 2019 when inflation was too low,

and you still think it's a good idea now when inflation is still a bit too high, find another argument for it. It's to help children. It's to help families. It's to help workers. It's not to bring down inflation. No, no, no, no, no. You see this on everything, like immigration, for example. I was really in favor of more immigration in 2017, 18, 19. A lot of people were.

And I never said, oh, but that's going to bring inflation down. I didn't think it would have anything to do with inflation. No, I'm not talking about inflation. I'm talking about the efficiency of the way the government spends their money, which makes it more difficult. Oh, absolutely. To fight inflation. That's my point. Oh, it doesn't make it more difficult to fight inflation, but- Because you don't have the tools. It doesn't really have much to do with inflation. Well, no. So it does because- Jason, I think he's making your deficit point. That's my point. I

Oh, it certainly means interest rates are higher. Oh, it certainly means interest rates are, yes, the level of interest rates are higher. We're starting higher, we're ending higher. Jason, that's the whole fucking point. Great. So you want lower interest rates, you want more deficit reduction. And the best way to do deficit reduction is corporations and the rich starting there. Absolutely. I think we all agree. But that's what I was saying. You know, I don't want to have to repeat myself, but I guess I'm going to have to, Jason, which is what I do with my students.

Okay, excellent. That's exactly what I was saying, sir. And there is a part of me that feels like there is, and I don't mean to make it this way, but-

There is a condescension amongst economists that I have found that is rampant and that when you make the point, there's always this sense of like, that's cute, but you really don't get it, buddy. And I actually think the opposite. I think maybe it's time for a certain humbling amongst the basic economics class of people that are in charge of pulling the strings for all of us, that maybe they listen to us a little bit.

And maybe not so much about these curves that they developed in the 1940s. I guess, John, I would ask you, and I don't look at all your pronouncements on the economy. You probably don't look at all mine. How often do you say, I was wrong, or I don't understand this, or I learned something? Those are three words. Fucking every day. Those are three words. Every day. That's good. I'm really happy with it. Those are three words I say every day. The unemployment rate went up much less than I thought it would. The...

The amount of stimulus you need and all of that. There's a lot of this that I really, really don't understand and change my mind on. And one thing I've changed my mind on, by the way, is I think the Fed did even better than I thought. Because guess what? The results are pretty darn good. Well, see, I disagree. I think the Fed did better than we thought because-

we are expectations of what should be for workers and for people is so low and we expect so little of it. But the thing I would say is they can solve that's the corporate taxes and all that. You were right. But you Jason being, you know, saying, Oh, I was wrong about that. Like I'm not in charge of creating policy.

You know, I'm not in charge of that. You are influential in the economics world. Larry Summers is influential in the, like when they're wrong, it means something. When I'm wrong, it's just a goofy thing.

And, you know, I think if the Fed had started raising interest rates a little bit earlier, they wouldn't have needed to raise them as much. If we got rid of the corporate tax cuts that I said we should get rid of, interest rates wouldn't have been as hard. It's a larger question of rejiggering how we view the economy, not through the supply side. But I think you want to do it based on like actually looking at evidence and thinking about it, not sort of making up brand new ideas like corporate tax cuts increase inflation through the supply side, but not the demand side. I mean, that's just sort of a...

You know, maybe that's true, but you made the point yourself when you said that helps create larger deficits and that interest rates create more inflation. That was on the demand side, though. That's a demand channel, not a supply channel. No, because we have a higher debt. We're paying more interest on the deficit. I'm not talking about demand. I'm talking about the deficit. Well, anyway, that's aggregate demand is increased when the deficit increases. But we can come back to this. All right. Kitty, final word.

I think that the Fed is going to do what the Fed is going to do. And in fact, by the time you're listening to this, they've already done it. But...

I do really hope that folks take away the importance of focusing on the tax fight that's coming up next year. So, um, the individual income tax provisions of the Trump tax cuts are going to expire at the end of 2025. And that's causing a lot of excitement on Capitol Hill. In fact, I have to run from this event to, uh, getting yelled at by some senators later. Um,

But I really want us to focus on we can't just let the parts of the Trump tax cuts that are slated to expire expire. We have to take a look at the entire tax code. It's got to be about taking a comprehensive look at the ways in which the wealthy and corporations are able to pay very little in tax at the expense of everyone else and how that damages the economy.

Jason agrees with me on this. He might not think that it has an inflation hook. I disagree. But that's where the money is. And that's where some big decisions are going to be made about this.

whether we value and support workers or whether we continue with trickle-down economics. Come on, Kitty! Jason, we outvoted you two to one. Great, and I just hope Kitty does not change her advocacy of this if the inflation rate falls below 2%.

And say, oh, no, wait, we don't need to do this after all because inflation is too low. So I'm nothing if not consistent, Jason. All right. Beautiful. Guys, thank you so much for joining. This was can I tell you something? I could do this every week. I think it's the most important conversation in America.

I really do. I think the conversation about whether we are a supply side economy or a demand side economy and how to balance that better is the most important economic conversation in the country. And we don't do it enough. And we don't help people who aren't economists like you guys understand it well.

and helping me understand it better, I really do appreciate it. Kitty Richards, Senior Fellow, Groundwork Collaborative and former Treasury official. Jason Furman, Aetna Professor of the Practice of Economic Policy at Harvard University. And I'm going to guess, Jason, I did not do well in your class. You can come anytime. Yes. Thank you guys so much and enjoy the rest of the stuff that you guys have to do today. Thanks, John. Thank you. Wow. You know, I...

I am not a confident enough person that when over a period of time, a professor in passive aggressive ways calls me a fucking moron over and over again, that I can walk out of that and think like, like I walk out of that thing and like, Oh shit, I must be a dumb ass. But then I, I, there's a part of me that comes back and goes like, wait,

That, I think that's part of the problem. What is it about? Like, I don't think I've ever spoken with people in a profession that are more boy condescending, maybe arrogant. I don't know. Like I get schooled by smart people all the time, but I never mind it except in that situation. I was going to say, were you getting deja vu in this conversation? Yeah, it was a Larry Summers redux.

And they always act like you just don't fucking get it. And yet it really doesn't seem like we don't, it seems like, no, actually, I think you're just not listening. Something that we didn't quite get to because the conversation was so lively was some of the candidates proposals combating inflation and, uh,

One thing that's been in the news lately is Kamala Harris's anti-price gouging plan. And I thought it was an interesting comment we got in kind of adjacent to that, which is someone said, it's illegal to gouge people during times of crisis. Someone should let the US healthcare system know. Boom.

I thought you'd like that. That's right. It's like the Martin Shkreli thing. Like, oh, you need that to live? Well, what if it was $15,000 in injection instead of $25?

That's a great point. Who made that? One of our listeners made that point? Yep. Bring in a listening comment. That's such a smart point. And it's so funny. And this is the way we talk about the economy. Anytime you say like, oh, we've got to do a little something about profit taking and gouging and those kinds of things. And they're all like, so communism. You're like, wait, most states, like if there's a hurricane, a gas station can't be like, okay, it's $40 a gallon now.

But if you think about that during a pandemic or during other things, suddenly you're a fucking communist. No, this is a point you brought up, which is that, uh,

Trump has been calling Kamala Harris comrade because of this plan. Sure. Texas has anti-price gouging laws. Right. In a crisis. That's the whole point. That's not price controls. It is a totally different thing. What else did the listeners say? Do they have any other things to say to us this week? Was there anything else? Yeah. I want to make sure I get this one right. Are the Mets going to make the playoffs or should we just give the trophy to the Phillies now?

Well, you know, if it's a Mets related question, I will always answer, give the trophy to somebody else now, because as a, as a Mets fan, I'm very, I'm very comfortable giving the trophy to somebody else. And to have it go to Philadelphia obviously is even more hurtful given the proximity between there. And yeah, there's, there's nothing worse than for me, Philadelphia's

uh resurgence as a sports town and having the eagles and the sixers and the phillies do great thank god for the flyers is all i want to say because they still suck but it is very difficult to live in a town of of uh no no sports championships i think the last one was the yankees in you know probably 15 years ago something like that so we we haven't had anything uh

You know, very, very disturbing. Although the Giants, actually, I can't remember when the last one was, but I think the Giants maybe were the last champions, but...

Very disturbing. And to have to give it to Philly, dear God. But are you hopeful at all? Hopeful at all? Is that part of being a Mets fan? Wait, what? Brittany, what don't you understand about being a Mets fan? Hopeful. Listen, I just hope, and they'll be on the verge of winning the championship and like Francisco Lindor, his knee will spontaneously combust or something will happen. Something always happens to the Mets. I'm accustomed to it. Would I love to see a championship? Of

Of course, but I have no, I mean, I have no confidence in that. Brittany, so before we go, what do we got on socials? How do people keep contacting? We are Weekly Show Pod on Twitter, Weekly Show Podcast on Instagram threads and TikTok. And please subscribe to our YouTube at Weekly Show with Jon Stewart. One personal item to the person who commented that my TV is hung too high, noted and thank you.

Keep your questions and comments coming though. We love them. Wait, Brittany, are you going to lower your TV based on this or just raise your couch? I'm going to look into my options. Just sit on a phone book and you can, you can make that. I actually love that. And I think this week we're actually, because of the conversation, we're going to get a lot of

You get them, John. Or yeah, you're a fucking dumb ass and you don't understand basic economic theory. And so we can, what'll be nice is somebody's going to reach out who's like, I can either explain this better to you in a way that makes more sense and doesn't make you feel incredibly small. Or I can explain this in a way that makes it

that he, you know, wasn't hearing you. And I'm looking forward to maybe helping that some of that clarification from some of our audience. Fabulous job as always, guys. Very spirited, very lovely.

Really good conversation. Lead producer, Lauren Walker, producer, Brittany Mamedovic, video editor and engineer, Rob Vitolo. And by the way, Rob, thank you so much. I'm clearly not in my normal home, but Rob was able to deliver the equipment to me and get this done in a little Pelican case, which made me feel like a spy. And I was very excited to walk around with it.

Audio editor and engineer, Nicole Boyce. Researcher and associate producer, Jillian Speer. Executive producers, Chris McShane, Katie Gray. As always, thank you so much, guys. Great job. And we will see you all next week. The Weekly Show with Jon Stewart is a Comedy Central podcast. It's produced by Paramount Audio and Busboy Productions.

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