Chapters
Shownotes Transcript
The U.S. is at its highest level of inflation in over four decades as prices on everyday consumer goods. It is the fastest annual rate of inflation since December of 1981. This is honestly.
And today, the state of the economy. A new CNBC and Acorn survey finds nearly half of Americans say they think about rising prices all the time. And more than three quarters say they're worried higher prices will force them to rethink their financial choices. Let's save ourselves a big wind-up introduction here because this is something we all know and that we're all feeling. There was not one
One government item that went down in price. Energy in vehicle prices went up highest. Gasoline alone cost 50% more. New vehicles cost 37% more. Food prices are up 6%. Houses prices are up 4%. Right now we are living through an economic catastrophe not seen in half a century. And at the center of it, the thing we're feeling is inflation. Prices surging and there doesn't seem to be an end in sight.
But if you're anything like me, you've got a lot of questions about things you don't know. Like, why is this happening? Who's to blame? Is it the Democrats? Or is it everyone, Democrat and Republican, that's been urging the Fed to just keep printing dollars? What can the government do to get us out of this mess in the short term? What should it do in the long term?
And maybe most urgently, what decisions should we be making right now? Is it smarter to rent, to buy, to get into the market? Here again to answer these questions and more is economist Tyler Cowen. Tyler is a professor at George Mason University, and he runs one of the most useful websites online. I really feel that way. It's called Marginal Revolution.
Tyler also writes columns for Bloomberg, The Wall Street Journal, and The New York Times. He's authored over a dozen books and has been named one of the most influential economists in the world. But more than just being a really smart person, or even as some have called him, a genius, he has a rare quality, which is wisdom. One of the things I admire about Tyler Cowen is how little he seems to care about partisanship. He's not rooting for or against any particular party.
He's also willing to say when he's gotten something wrong. And he's never afraid to go against what's popular or what's fashionable. I think those qualities allowed him to predict some of what we're living through long before others were able to recognize it.
So if you're like me and you find yourself confused about what's going on and what the root causes of it are, I promise you that this conversation will not only answer many of your questions about the current economy, but will impact your thoughts about how these questions are way bigger than money, about how they connect to a lot of the themes we talk about on this show, like distrust and the way that the current incentives in our culture are broken and why we need to get busy fixing them fast. Stay with us.
I'm Peter Savodnik, and I'm a senior editor here at The Free Press. Over the past 25 years, I've written for Vanity Fair, GQ, Harper's, The New York Times, and a bunch of other publications. I've brought all of those experiences to my role here at The Free Press, where I work with reporters on long-form investigations, profiles, and essays on politics and culture.
Thank you.
When you subscribe to the Free Press, you're supporting a whole team of writers, editors, producers, interns, and business people who are building a new media company outside of the mainstream. If you believe in our mission and want to support us, go to thefp.com to subscribe. Hey guys, Josh Hammer here, the host of America on Trial with Josh Hammer, a podcast for the First Podcast Network. Look, there are a lot of shows out there that are explaining the political news cycle, what's happening on the Hill, the this, the that.
There are no other shows that are cutting straight to the point when it comes to the unprecedented lawfare debilitating and affecting the 2024 presidential election. We do all of that every single day right here on America on Trial with Josh Hammer. Subscribe and download your episodes wherever you get your podcasts. It's America on Trial with Josh Hammer. Tyler Cowen, thank you so much for coming on again. My pleasure. Thank you for having me, Barry. Okay, so let's pick up where we ended last time, which was around Thanksgiving.
inflation. Right now, prices of all kinds are way up. Groceries up, rent is up, diapers are up, gas is way up. And those are just the things that we can see. I keep reading about fertilizer, a subject I don't know very much about, but I'm reading that costs of some fertilizers are up by more than double, which is going to make all farming costs go up, which means that the price spikes we are seeing now aren't going anywhere soon.
And I think that sometimes inflation or phrases that I've recently learned, like hedonic adjustment, make people's eyes glaze over. But this is a subject that affects every single one of us. So, Tyler, can you explain to me how inflation affects real people in their daily lives in the short term and also in the long term? There are two very specific and different kinds of inflation problems we face right now.
One is inflation on some very specific commodities, goods and services, that come from very specific problems in individual markets. The good news is those problems are likely to go away over the course of the next year. Price goes up, market supply goes up, say, we'll do more fracking for energy, that problem will take care of itself.
The other problem, which is more enduring, is that the Fed and Treasury together engaged in excess stimulus, especially following the election of Joseph Biden. So there was a recent estimate by the San Francisco Fed that we ended up with three percentage points more inflation than we should have had. So we've had about 8% lately. We could have kept it to 5%.
Most of the rest of the Western world has had much higher inflation. Economies are covering after the pandemic, having done some stimulus, but we did far too much stimulus. So we're stuck at eight. The Fed will be taking actions to rectify that. The big question is, how much will that cause a recession? OK, I'm wondering, Tyler, if you can explain this concept of inflationary inequality, how inflation hurts the poorest in society most acutely.
The higher your level of wealth, the higher your level of education, the easier it is for you to make adjustments, right? Okay.
If there's one set of shops that cost too much, well, if you're truly wealthy, you send out your servants to another set of shops and they buy at the cheaper prices. You will know better how to use the internet, you will be better at negotiating prices, you will have better agents or intermediaries working for you, and you can undo a fair amount of that inflation just by working a bit harder, trying harder, paying more attention to it. If you are poorer, if you have lower education,
you might be skilled in particular kinds of bargain shopping, but overall, when it comes to, say, paying for medical care or buying a home or gas, which is much harder to shop around for, you're pretty much stuck.
So you will face very often a higher inflation rate than wealthier and better educated people. OK, so there's a lot of people out there right now from the Biden administration, but also columnists at major news organizations who are still insisting that it's not so bad out there. There was a line I read last week in The Washington Post from Jennifer Rubin that said, quote, If it weren't for inflation, this president's economic performance would be unmatched.
And I'm not just dunking on Jen Rubin. Right. CNN ran a story in December headlined Why Inflation Can Actually Be Good for Everyday Americans and Bad for Rich People. NPR ran a story entitled The Economy is Strong, but Voters Aren't Feeling It. Is it true that we're just not feeling it? What do you say to people who say this isn't actually that big of a problem?
We've made some major mistakes. So, for years, Janet Yellen and other people were telling us we need to do something called run the labor market hot. And that would mean more people get employed and real wages would go up. What we found with inflation is real wages for most Americans have gone down. So, if you think higher wages is a good thing, you should be worried about inflation. Now, it's a complex question. To what extent is inflation
simply one way of taking back real wage increases that were denied us by the pandemic. Obviously, we spent a lot of money against the pandemic. You have to give some of that back one form or another. But right now, we're faced with lower real wages and a very real probability of a forthcoming recession. So we should not be happy about that. Are these people saying it's not that big of a problem just purely because of politics?
Well, motives are mixed. I'm not sure I know the motive in many individual cases. I think a lot of people believe what they're saying in any setting. But nonetheless, there is such a thing as motivated belief in self-deception. And in all administrations, people in power should be more worried than what they say in public, right? Right.
Okay, so let's go back to last fall, which feels like 100 years ago. And back then, the talk from almost everyone, you know, blue check marks on Twitter, talking heads on cable news, even the Fed, they were saying, okay, I know things look a little inflationary, but don't worry about it. This is transitory. And it's really just about supply chain issues due to COVID. No need to worry. Where do things stand now, Tyler?
Inflation has come in at levels consistently higher than most people expected. I wouldn't include myself in the group of individuals making an error. But look, over the last year, M2, one measure of the money supply, it's gone up by about 40%. So, it's not just about gas prices or supply chains, you have multiple causes pushing up the rate of inflation.
And it has been worse than we thought. But it was always a mistake to think it was just the supply chain. Well, you were one of the voices in the wilderness back then. You told me last fall that inflation was going to last longer than many experts were saying that it was. You know, so did Larry Summers, former U.S. Treasury Secretary, who warned that we were headed toward a crisis not seen in a generation. What did you see? What did he see that others didn't?
Well, I think Summers was more correct than I was. One thing I didn't see, I know we'll get to this more, that the Ukraine war would come along and just reset everyone's expectations on the macroeconomic front. But I think also, I wasn't quite aware of how much the Federal Reserve was simply continuing to add to its portfolio. Even now, with rates of inflation, you know, right at 8%, they're still buying securities, there's talk, well, we're going to undo all this in May.
But it's April. Why are we waiting till May? Is the rate of inflation not high enough for us? So they should have gotten their act together at least several months ago, I would say earlier, and had rate hikes and stopped buying all these securities, stopped quantitative easing. Before we get to Russia's invasion of Ukraine and the way it's reset everything, I want you to educate me a little bit on how we got here, what the policies were that led to this moment.
Obviously, I'm not an economist, but it seems to me that since the Great Recession, one of the main solutions that the U.S. government has undertaken to deal with our economic problems has essentially been to print money and that by printing money, everything would right itself. So the short story I've got in my mind goes something like this. 2008 crash, then the Great Recession.
And we have these huge stimulus plans, these bailouts of banks and car companies that are too big to fail. And they don't seem to do much for years. And in hindsight, a lot of people are like the stimulus should have been bigger or we should have given more money to small businesses and sent checks directly into the hands of normal Americans. And those were our mistakes. Fast forwarding to the COVID crisis in 2020. And actually, the government does just that. It prints money.
It gives away more of it than it ever has in U.S. history. And those checks are going exactly to the people that Occupy Wall Street said that it should have in the first place, to middle class and poor Americans. Now,
A decade ago, during the Great Recession, a lot of people on the right and the left, from Occupy to the Tea Party, were upset at who got the money, right? That it was going to banks rather than people. But maybe the problem isn't who we give the money to. Maybe the problem is printing money to get us out of a jam. Tell me where I'm right and where I'm wrong in this unbelievably crude capsule history of the past 15 years.
There's a lot of complicated issues at every step along the way. When we, meaning the Fed, poured more reserves into banks during the 2008-2009 crisis, at the same time, they started paying interest on those reserves. So, the banks held the reserves, and the reserves just kind of ended up stuck in the system, like at the bottom of a bathtub. And it wasn't inflationary.
I think the Fed more or less did the right thing. But you have people saying for many years, well, the Fed didn't do enough. In my opinion, the Fed should have done more in 2008, 2009. But the notion that, say, come 2015, the Fed could have much influenced the recovery of the real economy, I think that's completely false.
And you will hear many economists, pundits, blue-check Twitter people just insist that at any point in time, all the Fed has to do is print out money and more jobs are created. That is a forgetting of the wisdom of economics, as has been discovered and measured and verified over many decades, starting with Milton Friedman. So, fast-forwarding to the present day,
You have combined actions of fiscal and monetary policy, which roughly give Americans $2 trillion too much. And they do it at the time when the economy is recovering rapidly. When you should do it is when things are falling apart, which was the first set of stimulus payments from Trump. Those actually worked pretty well. But we just did too much. It was a central plank of Biden's reelection plan. Most Democratic-leaning economists endorsed it.
It's turned out to be a disaster. That would be my take. And it's been worse than I thought it would be at first. So again, I would say I underestimated this problem at the beginning as well. I want to pick up on that phrase, the denial of the wisdom of economics. Can you explain that a little bit more? What does economics reveal that those that suggest that printing money is the solution don't understand?
I've created a Twitter hashtag that I plan on using more often. I call it the great forgetting. One word strung together. Hashtag the great forgetting. Let's make it go viral, Tyler. Yes. There are many things in economic theory that we knew in the 1970s, 1980s, 1990s, maybe even in the 2000s.
But we have deliberately forgotten. Some of it is simply history receding. Others is a kind of willful forgetting, people wanting the world to be different than the way it is. The simple reality is this: if you're faced with an immediate recession and downturn, the Fed can, to some extent, hold that off by printing more money, and that is useful.
But looking forward, the Fed just can't wake up in the morning, print more money, and have more jobs be created. That's just not the regularity, statistical or causal, that shows up in the numbers. It's also not common sense. So, the Fed can offset negatives to some degree. It can usefully react.
But again, there's no free lunch here in the economy as a whole. If you could just wake up every morning, create more jobs by printing money, it's like a world without scarcity. Economists for many decades have known that, even early in the 19th century, most good economists knew that. We have forgotten that. There was this insistence after Biden was assuming office that all we had to do is gear up the mechanisms of stimulus and everything would be great.
And that was completely wrong. The great forgetting. Tyler, what's causing the great forgetting? And is the great forgetting actually giving too much credit to the people who are doing the forgetting? It seems to me more like deluding.
Well, again, individual motives are diverse. We had another great forgetting before 2008, 2009. We called it the Great Moderation, like the business cycle's dead. Because the Great Depression had been so long ago, we thought, well, we fixed this. We know how to deal with issues of debt, money supply. But it turned out we didn't. So that was another kind of great forgetting.
People forget that major wars are possible. So I don't think it's mainly ill-intentioned. I think it happens all the time. It happens on both sides of the political spectrum. Okay, let's get into how much of the present situation you blame specifically on Democratic policies. I could go into a tremendous amount of detail here. I'm not going to, but here's the short version. In March 2020, Democrats and Republicans passed the first round of COVID stimulus bills together.
Then they passed a second round again together in December 2020. And that one was around 900 billion, although Democrats wanted much more. Then last March, March 2021, Democrats passed another $1.9 trillion bill. And this one wasn't bipartisan. No Republicans at all signed it. And in fact, two Democrats refused to sign it. It only passed thanks to a tie-breaking vote from Vice President Kamala Harris.
And there were a lot of moderates and Republicans who warned that passing this bill was going to trigger inflation. It's no longer March of 2020 when the economy was in free fall and businesses and places of employment were shut down. They said, do not do it. At this time, why not help those hurting and not pour gasoline on the inflationary fires?
Republican Senator Chuck Grassley said enacting a stimulus unmoored from economic reality poses real risk to our economy, including inflation and slower economic growth moving forward. They are in denial of the hardship that the American people are experiencing now. And we were repeatedly told that those warning back then about inflation were just fear mongering and weren't looking out for ordinary Americans. These Republicans in the Senate seem to have an endless,
tolerance for other people's sadness. Now, since that last stimulus bill was passed in March 2021, it seems to me that few pieces of legislation have done more at a critical moment in our history to lift us out of a crisis. The Democrats are proud of the bill, delivered immediate economic relief to tens of millions of Americans. They brag about all the money they've gotten into the hands of Americans. Unlike the $2 trillion tax cut passed in the previous administration,
that benefited the top 1% of Americans. The American Rescue Plan helped working people and left no one behind. But they haven't been willing to own the fact that it might have helped trigger the inflation that we're seeing. So to what extent should regular Americans blame the Democrats for the mess that we're currently in?
Well, the best estimate I've seen, if you think of the most recent inflation print as we're speaking, is 7.9%, that about three percentage points of that come from the excess stimulus. Something like, well, 5% inflation we would have had anyway. Just if you look anecdotally around the world, again, this is before Ukraine energy price spikes, but other countries in Western Europe typically were having inflation rates of 4% to 5%.
obviously higher than usual, but broadly what we would have had had we not done the additional stimulus. So I would say three percentage points. Okay. So when it comes to the bad economy, obviously Republicans blame Democrats, Democrats blame Republicans, but it seems to me that they've both been doing versions of the same policies, low interest rates and easy money for decades. So does one side deserve blame more than the other or are they both in on it? Well, I would put it this way.
easier money and lower interest rates can be appropriate when your economy is crashing in that moment. So, the earlier payments under the Trump administration, I think, worked relatively well. I was actually surprised how well they worked. I was very nervous when they were done.
But we needed to stop there. It became like a drug that we're addicted to. And now there's an expectation, well, when's the next batch of money going to be sent out? So there was a certain danger in what the Trump administration did. But just as an abstract policy, I think it was the right idea at the right time, with excellent timing, in fact.
But again, once you are in recovery, it's the last thing you should do. And by the start of the Biden administration, we were in a full-blown recovery. It came along much quicker than almost anyone had expected, which was great news. But then we did exactly the wrong thing.
It looks like some Americans are blaming Democrats. I saw something as I was preparing for this conversation that among people who received the expanded child tax credit last year, support for congressional Democrats dropped 13 points. And now Republicans are leading with that group. So Democrats gave out this money, but now the group that got the money seems to be turning on them. How do you understand that response? Because to me, it seems counterintuitive. Yeah.
Well, you know, I try to not think about things so much in terms of individual parties. So, for instance, some time ago, it's now decades ago, I would think, well, the Democrats are not fiscally responsible. Okay, maybe that was correct. But then we elected Bush, Republican House, Republican Senate.
And they spent like a drunken sailor, worse than the Democrats ever had done. So, you don't know the counterfactual of what mistakes the other party would have made. And I think more of American politics in terms of what are the interest groups at play, you know, what does the median voter want, what are the incentives for reelection? And I think ultimately our problems are structural, even though, you know, in one particular case, you might say, well, the Democrats did this, and clearly they did, you know, that extra $2 trillion in stimulus.
But the Republicans might have screwed up just as badly. So in that sense, I don't focus on a kind of rhetoric of blame. I think, how is our system screwed up? When you say our system is screwed up or the problem is structural, what are you referring to? Political time horizons are too short, most of all in the House, but everywhere. And arguably, the practices of media have made them even much shorter.
So you respond to what's in front of your nose. You don't think long term. The surface is in so many areas, really just about every area you can think of, including foreign policy. And that's our basic curse. If you could wave a magic wand and change three things about the structure, what would it be?
More power for the Senate on average, longer terms for the House, maybe one six-year term for the president. If you're talking about electoral changes, but the changes I would really want are in culture, education, and media. And those are like truly magic wand waving, but just everyone to have a much longer time perspective and be more rational and more analytical. Tyler, there are still people out there who are saying,
The problem isn't that we printed money. It's that we didn't print it right. It's kind of like the argument for communism not being tried correctly. The Times published an article in February saying that the stimulus bills, that the problem with them was that they didn't account for resource constraints. Do you have any sense of what they could have done differently to account for those constraints? Because it seems to me that no matter what else they did, sending thousands of dollars to every American was almost inevitably going to lead to the situation we're currently in.
Sure. Just not doing that final round of stimulus was the right thing to do. Keep in mind, they did another thing just a few days ago, the moratorium on student loan repayment. Larry Summers estimated that has the impact
in essence, of another $100 billion of stimulus now, which, again, is exactly what we don't want. And it's done to pander for votes. Educated people are more likely to vote Democratic. It sounds good. You think the poor, struggling students. But obviously, people with student debt have above-average lifetime income prospects.
and you're helping out people who are going to be relatively wealthy. And that was just a terrible idea. That, to me, seems like pure political pandering. On Twitter, like even the usual suspects won't defend it. They just go silent. So, you know, yes, we're talking about the past, but we just did this again as we're recording a mere few days ago at the tune of $100 billion by one estimate.
Elizabeth Warren lately has been making the argument all over Twitter and TV, her allies, too. And it's starting to pick up traction with more and more Democrats, including even Biden. And the argument is this. What's really happening here, Tyler, is that big businesses are being greedy. And the reason we're seeing high prices is because companies realize they can charge more. And so they are because they want to get rich.
I find this sort of amazing only because I'm wondering in this worldview, what triggered them to suddenly get greedy just by the terms of this argument? What do you say to people who are pushing this line of thinking? Well, we had an average of 1.8 percent inflation for a long time, you know, starting in the early 90s.
And were these people then, during those years, saying companies aren't greedy? Like, are they consistent? So, I mean, I don't take it very seriously. I don't think I would say anything back to a person who made that argument. I just think it's wrong. Okay. So, let's talk about what we're doing about all of this. What is the U.S. doing right now to try and get us out of this mess? And do you think it's going to work?
Well, the Fed has signaled that it will engage in quite a few rate hikes over the next year at least. The market believes the Fed will do this. I believe the Fed will do this. I think it will bring rates of price inflation down to what market securities are predicting will be about somewhere between 3% to 3.5%, which is higher than you'd like, but obviously much better than 8%.
So, that's the good news. The potential bad news is, many economists believe that bringing the rate of inflation down so rapidly in that fashion creates a recession. So, part of the problem with inflation is it's like taking a drug, and it's not just the drug is bad for you, but having to stop the drug is very bad for you, sometimes worse.
So I would say we don't know if there'll be a recession. Those things are hard to predict, but there's certainly a very good chance there will be. And that's my big concern. I guess I was going to ask, who are these policies going to help and who are they going to hurt? But I'm guessing you're going to say a recession hurts everybody.
A recession hurts everybody. Now, it might be better than just continuing to inflate, inflate, inflate, right? But again, it's obviously painful to go through. So, when Paul Volcker put the reins on the money supply, we had the 1979-1982 recession. It was better than just continuing with what we were doing in the late 1970s. But you had high unemployment, and it was extremely painful.
And it also encourages people to look for bad policy solutions. In recessions, people seem to get stupider ideas about, you know, say, trade and investment. So this is a funny period because there'll be all this negative economic pressure from the Fed due to the rate hikes and the tightening. But we are still in a boom of sorts. Like a lot of sectors are recovering from the pandemic. Service sectors are coming back. A lot of Americans still have quite a bit of money saved up.
And for those two forces to be interacting at the same time, I've never seen that. It's why I'm not confident there will be a recession. Though typically, if the Fed were to tighten so much, almost always there would be. But this is a special case. We don't know, I would say. Can you put our inflation in context for me? The last time it seems that we were crippled by inflation was the 1970s. What was the root cause of that inflation?
And how much overlap is there between the circumstances then and the circumstances now? I would blame the root cause of the 1970s inflation as with a number of our politicians. I would say starting with Richard M. Nixon, who wanted the Fed to goose up the money supply to help him get reelected in 1972. You then had a lot of pressures on the Fed.
to be loose with monetary policy. You had oil price shocks, which hurt the economy very badly back then. All the more pressure for the Fed to do something, try to help the economy. You have monetary policy for years on end doing exactly the wrong thing. You end up with extremely high interest rates, very volatile prices. People don't know what prices to expect coming up. It was crashing the American economy.
So the good news is you have Paul Volcker step in. Paul Volcker, who was running the Fed. Chairman of the Federal Reserve at that time, starting in 1979. He pulls in the reins, tightens the rates of monetary growth.
causes a recession, basically knows he's going to do this. But at the end of the day, we're grateful he did it. And a lot of the 1980s, 1990s, U.S. economy does quite well, has reasonable price stability. And we needed the Volcker purging to get to that place. So we finally were brave enough and had a good enough leader to do the right thing. What were the core lessons that economists have learned from that whole experience? That there's no simple way to get out of an inflation without a recession.
that it really helps when your central banker is tough and credible and means it and sticks with it, that it really helps when your president -- initially it was Carter, but it was actually Reagan who did the important supporting of Volcker. And he said, "Look, I have your back. I get why you did this. This is necessary. Maybe it's bad for my term, but it's better for the U.S. economy." And Reagan absolutely had Volcker's back.
Those are some of the lessons. But the biggest lesson is simply that you cannot, by printing more money, inflating the money supply on an ongoing basis, keep on creating more jobs. It simply doesn't work. Is Jerome Powell, the current head of the Fed, tough and credible in the way Paul Volcker was in the '70s? Well, I think we'll see. I think Powell is a very smart individual. I do think he recognizes that he and the Fed staff made a big mistake.
There may have been political pressures behind that mistake, but nonetheless, a mistake it was. And the really tough moments will come when the recovery slows down and there are political pressures to reverse the tightening. And we'll see. I am hopeful, but I'm not going to say. Last question on this. Why isn't he tightening now? Why is he waiting to do so, as you mentioned earlier? There could be a number of reasons. One is, you know, the Fed is more beholden to Congress than it ever likes to admit.
So, there's a lot of legwork that has to be done with Congress and an administration before any change, just to make sure the support is really there. Also, you want the markets to be ready for the tightening. It seems to me that they're ready enough. But if you just woke up one morning and did all the tightening, markets would be shocked. You'd have more volatility, maybe some crashes, liquidity problems, clearing problems. And the Fed wants to make sure everyone is maximally ready. But still, it seems to me they've waited too long.
And they should have been doing it, you know, some time ago at this point. OK, let's talk about the war in Russia and the impact it's having on our economy. Right now, the U.S. and our allies from across Western Europe to New Zealand have put these massive sanctions on Russia because of their war of aggression against Ukraine.
And the president has not minced words about the effect it's going to have on all of us. He said, not going to be great for the economy, but it's going to be worth it. First, how are these sanctions affecting the U.S. and the global economy? The sanctions, especially their effects on energy prices, trade with Russia, it's been a big deal for much of Western Europe.
which is paying much higher prices for energy. It's a big deal for countries such as Bangladesh that get a lot of their wheat, a lot of their fertilizer from Russia. I actually don't think in any direct sense they've been a big deal for the U.S. economy. I do think they're probably a big deal in the following sense, that so much of economic activity is about expectations,
Before the war, we all had the expectation that recovery was simply an ongoing thing. It was in the bag. We had it all figured out. Even with inflation, everything was great. There's then a very large negative event that comes along. Even if the direct impact on the U.S. economy is not enormous, people have to rethink their expectations. Like, what are the risks here? How does the world really work? Are the next five years really going to be so hunky-dory?
So quite possibly the war has had a major effect on us in that manner. But the direct effects we can handle, we produce enough of our energy domestically. We need to gear up fracking again. There's a problem. The Biden administration has discouraged a lot of this over the last few years. But, you know, I think we'll manage. U.S. economy is well situated to deal with the war in Ukraine, but the global economy is not. One of the things that has alarmed me is reading about wheat prices.
You know, whatever we thought about Ukraine or did or didn't know about it before the conflict started, I and the world have now learned that Ukraine is the breadbasket of Europe. Between Russia and Ukraine, something like 30 percent of global wheat production comes from there. And the U.N. and others are warning that Ukraine
the war could trigger an actual famine. I was shocked a few weeks ago when President Biden said, yeah, there are going to be food shortages, just kind of said it very bluntly. And I guess I'm wondering if there's anything that can be done to prevent it. Well, I don't think there will be food shortages in this country at all. And if you don't believe me, try driving through Kansas or Iowa.
you know, prices go up, markets adjust, supply adjusts. Again, we will be fine. But food shortages in places maybe, say, like Egypt or Middle East or Africa. And those countries also have much less of a market economy in food and otherwise. So their ability to adjust, they're poorer, they have worse technology, worse governance, more regulation of the wrong kinds. So it's quite possible they will have very serious problems. I don't know if starvation is the word, but serious food pressures...
and much higher prices for families that really don't have the means to pay for it. Other than...
Vladimir Putin deciding not to invade a neighboring country. Is there anything that we could have done to prevent this possible food crisis that Biden's warning about? Well, if you look at food markets in general, they're amongst the more regulated markets in the world. They're full of government subsidies, price supports, trade restrictions. If there's any area where we should have free trade, it is food.
Again, not that big a deal for Americans, but for people in Bangladesh or Egypt, utterly urgent. Whenever there were shocks to world food supply, and there were earlier commodity-based shocks not having to do with war, where again, you had food pressures as serious problems, markets were not that good at responding because across borders, food markets are not allowed to operate.
So, I don't have much hope of liberalizing food markets in the next few years. We're moving in the opposite direction. But that is the solution. And then having enough countries be rich enough and have enough technology that they can just have higher yield crops. You had a really excellent post on your blog, Marginal Revolution, about who wins and who loses because of the war in Ukraine. Can you walk me through some of the items on your list? Who wins? Who loses?
Well, the biggest loser, I think, is an entire generation of German politicians who decided to fund Russian tyranny by buying their gas and other energy sources from Russia on a massive scale. And they were warned about this at the time by many different people. They went ahead and did it. They said, oh, we can handle this situation.
One of the greatest blunders in the world of any kind over the last few decades, my opinion at the time, all the more now, is that Germany in essence had left the Western alliance when it put its energy supplies as dependent on Russia and Putin. So that Merkel, oh, so wonderful, you know, she was in office for so many years, Germans have these fond memories, all that I think we should change or are changing.
I think she was a terrible leader who made some huge mistakes. Another big problem we had, there was the debate, you may remember this, between President Obama and Mitt Romney, where Mitt Romney said, Russia's a big deal, we need to worry more about Russia. And Obama made fun of Romney.
And the 1980s are now calling to ask for their foreign policy back because the Cold War has been over for 20 years. Now you might think it's only a remark, but I don't think it is. I think it was an entire attitude in American government that somehow this was not a thing anymore. And that again was completely wrong. I felt that at the time. It's, I would say, now proven to be wrong.
And that view and the people who held it, I think also have been losing status. So Angela Merkel, a loser, but Sarah Palin, a winner. I mean, was she right when she said drill, baby, drill?
Again, I'd want to go back and look at her exact remarks, but that the United States encouraged fracking was one of the very best decisions we've made. I would say, actually, Obama let that happen, to his credit. It's not what you will see in the rhetoric, but he sort of quietly let the fracking revolution proceed. And he actually deserves somewhat higher status for that, though, because those on the left will never boast about that kind of thing. He probably won't ever really get. So, he was screwed up on Russia, but pretty correct on fracking.
What about nuclear power and our attitude and policies toward it? Talk me through the risks and rewards there.
Well, as you probably know, France, Sweden, Slovakia, China all use significant quantities of nuclear power. It has been safe. It is close to completely green. It's as green an energy source as we will find. Germany made the crazy move, again, the miracle legacy of moving away from nuclear power. It seems they're not even going to reverse that.
The United States should have much more nuclear power. I'm not sure we're the main country that needs it the most, because we have more potential for solar and wind than a lot of other places. We have more and better fracking than other places. We just innovate more, and we're actually most likely to be the ones who lead a green revolution, whether it's nuclear or not. But my goodness, we've had green energy for many decades, and we're afraid to do it. So, to me, that's crazy.
One of the legitimate fears around nuclear energy, I think, is human error. I mean, living in L.A., L.A.X. is like a third world country. So why would I want the same people who are in charge of our airports and our roads and our bridges running nuclear power plants?
Well, you might prefer, say, wind and solar over nuclear. That's fine. Wind and solar in the right places also can be cheaper. But nuclear power plants are much, much safer than they used to be. The nuclear accidents we've had, you can debate how many people died in them, direct, indirect, but it's extremely small numbers of individuals. I think it's fine to say, well, Los Angeles County, it's prone to earthquakes. Maybe we shouldn't put nuclear power plants there.
But again, keep in mind, burning coal has killed millions of people and still does now, right now. Just regular air pollution. I'm not talking about carbon, global warming. Regular air pollution in the world today, according to WHO, kills 6 to 7 million people a year. Every year, 6 to 7 million people. Nuclear wouldn't do that. So, you have to think these supposed nuclear accidents are going to be very, very bad to be worse than, say, coal.
But again, if you can make wind and solar or hydroelectric work for you, that is probably better. Yes. Tyler, how do you understand why Merkel and Germany under Merkel pursued the Russia dependent policies vis-a-vis energy that it did? What's the best faith argument for what they did?
Well, there's several degrees of what happened. Before Merkel, there was a leader of Germany, Gerhard Schroeder, who has ended up on the Gazprom board. He's paid large sums of money by Russia. I know. And I think he can properly be considered a kind of traitor to his own country. So it extends before Merkel. I think she is just part of a process.
where Germany does have a very real problem with its own energy supply. You have the rise of the Green Party, which is extremely anti-nuclear. Other German politicians, non-Greens, afraid to stand up to them. And the Greens have done very well in elections, as you know.
And then the Germans have long had a fair degree of anti-Americanism and just a sense of we're in the middle of Europe, we're the real politic country, we can handle Putin, we can be tough, we can do this balancing act.
And I think that was just naive and a mistake, not ill-intentioned, but just a completely wrong worldview and not quite coming to terms with the fact that there are governments out there that are just downright evil. Yeah, I think that there's been a major reckoning on the people who believed that somehow markets would change.
act like some kind of universal solvent to make us, to make all countries around the world sort of harmonious in some way. And this war in Russia is a reminder that that's just not true. Correct. And keep in mind, Russia is not exactly a market economy, but nonetheless, it is far more globalized than it used to be. And the taming effects of that, we're still waiting to see them, you could say, to put it generously.
OK, let's look ahead toward the future and policies that are being discussed. It seems to me that Democrats are still spending most of their time in front of the public fighting for kind of New Deal style laws that cost trillions of dollars. And the story just keeps repeating itself over and over again.
The left wing of the party suggests these kind of bills and moderates in their own party and Republicans, of course, put the kibosh on it and say, too expensive. The last thing we need to do right now is that and add more money to the system, add more debt to our astronomical debt. How do you see it? I think the Democratic Party won't quite admit it, but it seems to me it has stopped moving to the left, got scared by the governor's election in Virginia.
not doing well in a variety of other contests. The candidates to the more extreme left have not done that well lately. So I think when you look at American voters, no matter what they say, they think what they actually want done with the federal budget is not that different across the two parties. It's a radically different view on the culture wars. But just how much should our government spend and on what? The American people agree, whether I agree with them or not.
And in that environment, I don't think the Democratic Party will move that far to the left or the Republican Party will move that far to the right. Trump stopped talking about, you know, cutting Medicare and Social Security. It's a big reason why he was popular. Whether or not you agree, politicians notice that. Do you think there's a big difference between the parties, either the politicians or the base or voters, between their attitude toward taxes and how high taxes should be?
Well, the Democrats control and controlled all three branches of government. Trump cut the corporate tax rate down to 21% from 35%, and the Democrats haven't increased it again. That, to me, is really striking. And the Democrats have adopted as a kind of informal rule, well, we can't have a tax hike for anyone below some salary range, and that number keeps on changing with, you know,
political moods of the time. But Democrats, other than on the very wealthy, they're not keen to go around talking about tax hikes. So I think the tax debate is a stalemate for the foreseeable future. One of the billionaires that gets focused on maybe the most in the conversation about taxes is, of course, Elon Musk.
Elizabeth Warren and others say, Elon Musk pays no taxes. Elon Musk responds, what are you talking about? I paid more taxes than any other American in the history of the country. Who is telling the truth? Elon Musk is telling the truth, right? So how are people claiming that he pays no taxes?
Well, not everything spoken in politics is the truth, right? No, Tyler. What are you talking about? Now, you might think, well, we should boost the rate of tax on capital or on capital gains or different other proposals you could make. In my opinion, none of that is going to help the American economy. Elon Musk, with the money he earned, has done incredible things, starting new and amazing companies. He's the last person you want to tax.
Tyler, rents have been, as that amazing and notorious New York City politician put it, too damn high for a decade now. And they seem to only get higher and higher. But so do home prices.
So with interest rates still low and inflation on the rise, would it be wise for renters to take loans and try and stretch to buy a house right now? Or does the risk of a recession just mean that if a bunch of people do that, we might face another housing market crash? What do you advise people?
Well, it depends on your time horizon. If you're 80 years old, I'm not sure you should be buying an extra home now. But I would say, in general, over the course of history, real estate is one of the better hedges against inflation. So, at the margin, housing probably does look more attractive as an investment now. But of course, it costs more, and you might have to borrow money, borrow at higher rates, so it will depend on your situation. But I would nudge many, but not all people, additionally in the direction of housing. Yes.
On the one hand, it feels like Americans should save money because a recession could be on the way, as you've discussed. On the other hand, as inflation rises, the money in our savings account is less and less valuable. So what are the pros and cons of spending versus saving right now? Again, it depends on the individual context. People who are fairly well off probably should just be spending more. Almost all of those people die with very positive net bequests, right?
Now, they might be happy that they're leaving wealth to the next generation. But if they're high wealth, are they really much happier because they left an extra $30,000 or $40,000 more to their children or grandchildren? I don't know. So wealthy people, I'll typically tell, spend more. And by spending, I mean that can include giving it away, which in a way is another form of spending, because it's rewarding.
People of lower means, it's hard to give good advice when they're losing no matter what happens. So try to get a better job if you can. Avoid status quo bias in your life. Try to improve habits so you can earn more. But that's tough advice. Explain what status quo bias means, please. Status quo bias is when you are afraid or too inertial to change your current circumstances. So if you look, say, at the rate at which Americans move from one state to another,
It's been going down since the early 1980s. We're less willing to, you know, pack up the house and move across the country for a better job. For many people, it's not a problem. They're already living where their best job is. But I think for the economy as a whole, it is a problem. There's too much status quo bias. People think, I'm fine here. They don't look around enough or don't think hard enough about changing the basic circumstances of their lives. How do we overcome it? What are the tools?
I think that's cultural. Now, there are some policy tools, so it should be easier to move by having greater freedom to build, so there'd be more low-cost housing in a number of different areas. The American South has done this. People are pouring into Nashville like crazy. It's great for Nashville, it's good for them. So, to some extent, we're doing it. But a lot of the country is like a locked refrigerator. Try to move to the Bay Area right now. Well, you have to already be wealthy to do it, essentially.
So we should have deregulation of building in many parts of the country and this big cultural change that people just have higher aspirations and think I could do better. Some of that I think would come from having a more religious America once again. Ooh, let's talk about that. Tell me what you mean. Rates of religious participation and belief in this country are now declining for some while.
I think religion, for all of its complex effects, is on net a social good. It makes people work harder, have more children, be more family-oriented, be more community-oriented. And I think of a lot of our problems as stemming from this decline in religion
And the notion that you have all these people out there on the internet believing, saying crazy things, that is one, in my opinion, secondary effect from the decline of religion. Religion had filled a gap, whether or not you think some particular religion is true, but it gave people something to clutch onto. Those were actually better doctrines than what has replaced them, whether or not you literally believe in the truth of those religions.
And now we've just gone crazy without religion. So this worries me that religiosity seems to be declining. Do you consider yourself religious? Go to church, synagogue? No, I am what I call a non-believer. I have a very disciplined, strict work life. I sometimes joke to my wife, you know, I'm the truly religious one in the family. But no, I don't believe per se in a supreme being.
But nonetheless, I think it's a positive social benefit and it's one of America's great strengths that for a long time when Western Europe was secularizing, we stayed quite religious. One more break and we'll be back with Tyler for a very fun lightning round. Stay with us. Time for a lightning round?
I am ready. Okay, Tyler, what's the last book you read? The last book I finished was written by Terry Eagleton, and it was about 19th century Irish polymaths. It was a lot of fun. How do you discover new books to read?
New books come at me. If I go home on a given day, there'll be maybe five review copies waiting for me. I'll at least start all of those. Then I'm typically reading in clusters. So, I have my own podcast, Conversations with Tyler. I have guests on and I read up in their areas. So, I was reading for one guest who was an Irish historian that got me reading Irish history, and I've just kept on reading Irish history. And I know enough about the different books now
to know what I should read next. So I'm going to read some more Flann O'Brien soon, the Irish novelist who wrote wacky stories, which are very interesting. Other than Irish history, what subjects are you obsessed with right now?
I think I try to be obsessed with everything in the social sciences and history and economics and philosophy and literature and the great classic books. I'm not saying I succeed at it, but anything in those areas that I think might be good, I'm very willing to give a try. The new Richard Overy book on World War II, I think World War II is still an undervalued topic, though that may sound crazy. Yeah, it does. That we think of it as some weird extreme event that could never be repeated, but of course it can be.
And a lot of what happened during that war is, in fact, to my dismay, normal, ordinary human behavior. And we need to study it more. So he's writing a book about how World War II was fought in the imperial parts of the different combatants. So it's about northern Africa. It's about Persia. It's about Japan ruling Malaya and what the war was like in these more distant parts rather than what we usually think of as the main battle scenes. And that is an excellent book. Do you think it's possible we could be heading toward a world war?
It's possible. It's not what I would bet on, but it is thinkable again for the first time in a while. Yes. Relatedly, how worried are you about populism? I'm never sure what that word means. Like, is populism simply what voters want? Is it simply what's popular? Does it only count as populism if someone thinks it's stupid? I would say the candidates typically called populist. I never like in that sense. I'm against populism.
But the word to me seems like a misnomer and trying to smuggle in premises about what's right and wrong without arguing for them directly. And I get nervous when I hear the word populism. Fair enough. What do you think about the Florida law, which has been dubbed don't say gay by the left and anti-grooming by the right? I haven't read the law. I haven't read a serious summary of it.
I would just say this in general. I think American parents have a growing and now large suspicion that their school systems have political and cultural agendas that they are uncomfortable with. And those parents will strike back. What's the best way of striking back? I'm not sure. Is this law it? I'm not sure. But I think we're at a margin where there has been considerable overreach on the culture wars front.
from sources on the left in schools, even on issues where I might agree with the left-wing point of view. So this is a kind of corrective. You know, could someone talk me into, well, if you really read the bill, you'll see it does all kinds of terrible things that weren't intended or you wouldn't like. Again, that I can't judge. But I think the important point is in the schools, there has been overreach. And yes, American families are running this counter-reaction and it's going to succeed in many parts of the country.
Tyler Cowen, who is your economic nemesis? I don't think I have one. I hope I don't have one. Ask my nemesis. Do you have a nemesis outside of the field of economics? I hope I don't. But again, you would have to ask the nemesis. I would just say when I make arguments, I really go out of my way to try not to make them personal. I'll try to focus on the idea, not so much while blaming person X.
and to encourage people to think about things in as analytic a way as possible and as detached from personalities as possible. And I found on Twitter, if you simply don't go after individual personalities, you're treated much, much better. I'm not saying I always succeed in sticking with that, but I think it has kept kind of my direct enemies to a minimum. Some have said, Tyler, that it's safer to put your savings in Bitcoin or Ethereum than putting it in your savings account.
What do you think? No, it's not safer. So there's potential for upward price appreciation. So it's an interesting speculative play you can make. I'm not telling people not to do it, but only do it with monies you can afford to lose. It is not safer. Is social media slowly ripping apart all sense of human cohesion and the fabric of liberal democracy?
I'm not sure what that means. For me, it's too big a claim. You know, when I was a kid, we had the Vietnam War on. It was a terrible idea. The Vietnam War would not have lasted a week on Twitter, I think. So Twitter has social media. They have pluses, they have minuses. I've never seen a calculus that convinced me the minuses were bigger than the pluses. It's fine to say we don't know. I think over time we'll get better at using them, as we did with the printing press.
But I would be like very calm and measured in my assessments and want a lot of hard evidence before making sweeping claims. Where do you most want to travel that you haven't already? I suppose that would be Iran, which is essentially impossible at the moment. But it's a fascinating culture, great history. People are supposed to be amazing. It's an important country in world affairs. Now, I've been to over 100 countries. So sort of the marginal country, like most places I want to go, I've been.
It would be Iran and then next South Africa. South Africa, I'm pretty sure I'll get to. Iran, we'll see, but I'm not counting on it. Is it a good thing that the MIT is reinstating the SAT? Of course. So standardized test scores reward people who may not have elite backgrounds, but who are very smart. It boosts opportunity. It's more egalitarian. It's a better measure of who's likely to be successful. And it helps poorer kids. So I'm all for that. The drive to get rid of test scores, uh,
I think it's a very bad idea. What book should everyone read? Well, everyone in the United States, I would say the Bible. And, you know, the Hebrew Bible, New Testament, however you want to talk about it, Jewish or Christian visions. But I teach a law and literature class in George Mason Law School, which are like elite, well-educated people. They're super smart. It's like a top 20 program.
And I make them all read Book of Exodus at the very least, Christ's Sermon on the Mount, sometimes Book of Job. I'm amazed how many have not read it before. Or like maybe they read it when they were six in Sunday school in some terrible edition or translation, but they don't know those books at all. So all Americans should read, if not every part of the Bible, you know, the most important parts.
which for me would be like the Torah minus Leviticus, the four gospels, the book of Job. And you could add on to that, but just like for a start. Favorite biblical character. Favorite biblical character. Well, Moses, right?
So Moses starts off, actually you could say he's a murderer or it was manslaughter in Egypt. He's a stutterer. He's highly unsure of himself. He's not a very good leader. No one wants to follow him. And yet somehow by the end of the story, he's created two, some would say three, if you count Islam, three religions that
that as they have evolved, have been dominant religions in the world. And okay, do you credit God? Do you credit Moses? Do you credit Muhammad? Very complicated. I'm not going to try to resolve all that. I don't mean to offend anyone. But when you look at the Mosaic legacy as a whole, it is really so amazing. What do you see as the mission of your life?
I think I'm on a quest to assemble and gather information and satisfy my own curiosity and see as much of the world as possible and also try to give some of that back to others. So I think it's a pretty selfish mission. It sort of has some altruistic byproducts, but I enjoy the really selfish part of it, of just learning things. Tyler Cowen, as always, an absolute pleasure to talk to you. Barry, a pleasure on my side as well. Thank you for having me on. Thank you.
Thank you to Tyler. I urge you to bookmark Marginal Revolution or listen to his podcast, Conversations with Tyler. And thanks as always for listening. Great news. We are still hiring. So if you're a producer or an engineer that loves telling stories and knows how to use Pro Tools and you want to help us make new shows and maybe help with this one, please email us at tips at honestlypod.com and put producer or engineer in the subject line. We'll see you soon.