Crazy But Correct
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Welcome to inside economics. I'm mark andy, the chief economist of moody analytics, and i'm joined by my two trusty cohoes mdina al Christians. Hi guys.

mark. Good morning, mark. How's IT going? Good, good, good, good. Uh, so I joined, uh, blue sky. You know, blue sky, the new social media platform, and I ve heard about IT.

but I don't know much about IT.

Yeah, I disposed my first post this morning. I've one hundred and fifteen followers. I don't know how that happened, but i'll take IT. yes.

So are you awful? Right I don't I think on blue sky legitimate I think 你看 burn but burn now yeah in my auth x not yeah um you know should I be off x what you think i'm not on IT so oh yes， you're not on IT right? You want to come over to linked in, you know, should I, you get yeah I don't know， I don't know.

But we will see how this goes good to have an alternative out there. So uh, and I saw paul cw is on there and Jason forman, I haven't looked really a lot, but just very curious, you know what you thought. So what else anything else going on before we kind of dive into things?

In other news, I, I, I see the snow in here in the suburban filly. That's the big news. Here is the big news.

Big local. Okay, no big news. What we have a guest. Uh, joe, you know joe, I is a hazle.

He right?

Yeah, i'm so sorry. Yeah 交过来 我。

这边 call you too。

I don't know yeah by your last name to his so so it's good to have you on that's .

great to be here having me um mark, Chris ma, really excited to get into IT get in the economics .

are you twitter guys are thinking about .

so I really am using both right now. I think it's it's good to keep the platforms competitive. Um you know the exact of market Price are used in both.

I'm more of consumer than producer. And at this stage, you kind of noticed the different sub groups have uh segmented into different platforms. So you the the the people who are active on linton x or twitter and lose guy to different people.

So honest mics all on blue sky, I think media is still mostly on x lash. Twitter businesses are linked to and I want all of IT so I kind of train and you know I am my spare time, i'm a big runner as as a hobby and their own instagram. So why not use them all? And then the hope is that you keep these giant CoOperations a little bit competitive because they've got the pressure that you you are able .

to switch fully, right? I shouldn't know that, but you know never. That makes perfect sense. You know academic business in media, I I didn't didn't done on me but that much, but IT doesn't IT take a lot of energy to be on all those platforms.

I I read for programs intor, so I I have so my my embarrassment is the way that I get stuff done. As I like to spend every half an hour, I like to two or three minutes to to my energy, expect minutes me under around social media during that that so I was going to say.

I mean, you were seem so productive, but the procrastination doesn't seem like that would be in M. O.

I, I, I, I like to think is part of the process.

but no part of the process.

and leaving all this on this money on the table.

will see what I think everyone can hear, that accident, uh, so that that's a british x.

british x.

exactly in your teaching at L, C.

correct.

In my wife, I told, I told my wife, i'm gonna be talking with you today. SHE said, oh, tell him that I would like. So he was here. It's, it's a wonderful place and .

really lucky. It's like you can you can feel the history in the hall ways you know we ve had these amazing economy. I went there um uh um john hicks um you know so after Lewis, the first development economist, will the beverage of the beverage curve your wife? I mean, all of .

the how is the cast?

Yes, so amazing place. Um there was a .

pretty tough year, he said. You guys work .

pretty hard of after other phillips, the inventor of all right, also at delis. So you know, we have this amazing Peterel. You can really so are the phillips actually invented the first computer for mac economics. So in nineteen, I guess, in the early one thousand hundred and fifty, he invented this computer that which was actually based on water there. There was you would see how the economy would would flow around. We'd have this this system where the water would flow around the economy um using very sort of pipes and so on and plugs a bit like some very complicated water wheels left bath up and he would use that to try and focus the economy. So we have a somewhere and I I see though I haven't seen yet, as the original mac economic computer model.

So it's in an amazing place. Oh, that that sounds fascinating. So you actually try to use this to eat. Wow.

methods have come on since then.

yeah. Uh yeah that's that's pretty mazing. So how long will you be been at .

the c i've been there for three years now. So ah so this is just start of my forth year. I'm so go right now in california, but um no i've been have been there for three years and is an amazing place to it's an amazing environment.

Why does that happen? You get to basically after three years.

what was the academic means? You have equally terrible work life baLance in another place that isn't your home sitution. So IT isn't um it's not it's not the holiday that that so is so such .

thing as a bedroom. We actually good time off to go.

Think I think I always say to people that the the chAllenge of academia is that it's like your own holiday all the time and never because you know, in in some ways the mechanism in the in the next year, if I did, if I took all of my time off, that would actually be other than showing up each of few classes, that would they would actually be within the realms of the contract that that I have and so on. But instead I spend all my time researching. So you know if if this of things, you can do whatever you want with them.

but most, yeah, that is what we got to know each other was you. I kind of not done my door and you said, hey, i'm doing this research on uh, inflation, you know, the causes of inflation and am very interested in kind of the work that you did around, uh uh, the senate races, the back in georgia because that was a key point kind of crossing point with what fiscal policy the future would be like and ultimately what that might mean for inflation.

And um you produce to study a can I ask up before I can handed over? You maybe can describe this some more detail. Is inflation and inflation dynamics kind of sort of where your most focused in your research? Or is IT broader than that?

So I inflation of the core, I ate something always been fascinated with ever since I started thinking about economics and is just one of those funding tal depressions. So even before, and of course, the best thing about IT is always interesting. So before the this kind of post panna ic inflation, there was a long period when inflation didn't move very much.

And that was also a great time to write papers about invention because you have the sort of the puzzle of what people called the flat phillip's curve before twenty, twenty. Now inflation is that's interesting to write about two. So I think it's it's a sort of pretty interesting topic because I always something happening or getting to happen and that yeah that's my main focus for at least.

okay. So that's interesting. So before because I I was going to say, but that was that has been pretty boring of to focus before the inflation actually took off. You would you make a great impression, was very low and sub optimal for a long time. So that's also interesting.

absolutely. yeah. So you know, before twenty, twenty people used to kind of talk about the last forty years of A U.

S. Micro history in this, in this interesting way that raised puzo. In particular, during the one thousand eighties, there was a very strong kind movement between unemployment and inflation.

And then over time, ever since IT fell and fell and fell. So during the nineteen nineteen, during the twenty ten, unemployment was very beautiful. Lation wasn't very high. And so people kind of called this the missing distinct lation, or the missing the inflation, which was that in the decades before the pandemic, inflation and unemployment didn't move very much related to the ninety eighties. And one thing that I was trying to do before the pandemic happened was simultaneously think about why IT is that inflation was so sensitive to the unemployment back during the vocals, and yet less sensitive since. And of course, every new data point creates a new puzzle for us, which is after them, that make maybe we were back in this street.

So going before we move on to the is the work that you did, the study around the pandemic and inflation. And I I is very, very critical a kind of conversation around, uh, what caused the high inflation of of twenty, twenty one, twenty two thousand and twenty three because that, that goes to what the improper contact to policy is and what that might mean for future policymakers and how they think about these things. It's really an important debate.

But before we get there, how do you what you're thinking around why inflation was so sub optimal between the financial crisis and the pandemic? IT was consistently below the target? Know what? What was going there?

Absolutely so the way that that I ve thought about I have I have with amazing culture um I an act and john's stinson but clean and U S. Ago we were the paper arguing that one can explain both the the missing differs tion of the missing reinflated of the ninety ninety omits and the high inflation and volatile inflation of earlier periods with two ingredients, which I will call maybe the flat phillip's curve and the gradual angering of inflation expectations over right.

So then let me give you just that kind of quick one minute summary of this economist organizing framework for thinking about inflation is what we call the Philips curve, which relate inflation today to inflation expectation and current unemployment intuitive tive. The idea is, look, if unemployment is very low, inflation all as equated rice, and if inflation expections are high, people are gonna have realize this and raising inflation today. And these you know these these are court is very to a debate, very at the heart of economics, are simply explanation for why you could have very volatile unemployment in the eighteen seventy s eighties, but relatively not volatile unemptied since is what originally bemba anche put for just got the angle expectations hypothesis.

And this was the idea that during the seventies and eighties, inflation expectations were very volatile. why? Because monetary policy was very volatile. IT was very unclear what the fed was going to do, what their inflation target is, what they were planning to do in the near future.

You know you hear all these stories about nixon pressure ring the fed and in the earlier part of that period and then volker through the resolutions, we're onna bring down inflation on no matter what. If you look at the data, infection expectations are all over the place in this period. So I can really explain why on inflation was so volatile that other period after about nineteen eighty five in the united states, you see inflation expections are ready, flat, really angry at that point.

Inflation itself stops moving. So we said to think that really what's going on with this period of volatile inflation before one thousand eighty five, but relatively quiet and inflation after one hundred and eighty five is the gradual increasing credibility of the feed that kept the inflation expectations more ankle over time. And leaving that on one side, we were also saying that conditional holding fix up inflation expectations.

Unemployment itself wasn't having very big effects. And inflation, which is say, even when unemployment became very low, IT was unlikely that inflation would rise very much. And so I was the paper we had had a new arguments based on regional data that we think kind of sort flashed out that that idea, little bit of the people have been doing previously.

like most things, are more than one explanation kind of in my narrative around that period of time in inflation was also the back that china was really coming on in a big way. And that creates going to come this actually deflation on the good side at the time.

absolutely. So I I don't think this is the only story, the fact that we brought to the table that sort of supported our story a little bit was to go to regional data. We construct some regional data.

So we actually made state level Price inflation index. State level Price inflation induces for the united states quarter by quarter from one thousand and seventy eight eight months. These didn't exist before, which is a little about surprising. And with that regal data, we should studied the co movement within regions between the inflation and unemployment from one thousand nine hundred seventy eight onwards. Now what we found is that in regional data, the co movement between unemployment observation was actually very, very stable over time.

Why was that interesting? Because because regional data, in some sense, when you're comparing two regions and how their inflation and unemployment is, is, is moving in one region relative to another, what you're doing is a holding fixed what's going on of the aggregate. And one of the things you're holding fixed that the aggregate is federal as policy federals of um uh inflation target of the federal reserve and so on.

And to think that was pretty interesting was that a lot of stories for while overtaking the relationship tween unemployment and inflation might be declining, would sort of show up to some extent in the real data. Like if you thought that that was more trade open nose over time, even within regions, unemployment should respond less to invade. That's not really what we thought pressure.

I can I would say it's it's part of the story. But what we really liked was that by looking at regional data, we gonna hold fixed issues like the federal station target. That could be really important for thing .

about inflation. Yeah, very cool. We actually construct, uh, C, P, I measures. I do you update you're .

still it's a great questions on the next few weeks are .

planning to do a new release. H really OK. So yes, we do that as well. Oh, excEllent.

Maybe I can ask you off towards harassing for .

a link to you. Yeah, absolutely. yes. yeah. Colleagues, ads spends a lot of time and spend a lot of time on this.

So and I know he updated every month. So yeah, absolutely. okay. So let's move forward to the the study you did on the inflation around the pandemic.

And yeah, you're really focused on this, and i'm going to frame IT. You just temp if I got the frame right. But basically, the argument or debate has been raging around what caused the acceleration. High inflation that begin kind of in the second half of twenty twenty one throughout twenty twenty two coming into twenty twenty three demand and supply. And I think everyone who would agree that both demand and supply um but where you land on that in in terms of whether is more demand or supply as big implications for policy and what the appropriate conductor policy is. So is that a reasonably good frame?

That's exactly the frame. Um so you know exactly like you say, mock. But I think is the key question of the last four years, which is the way I would put in, is that around the world, deficits were high, inflation was high and there's a question about where and not the two related.

And its related to this classic question of wether than our deficits cause inflation. But of course, like you're saying, is very hard to know because we have a single data point, a single time there is you have lots of shocks going on. At the same time, we have this deficit shock uh from the the by administration in twenty twenty one.

But then we also have supply shocks like all shocks, supply bottom ex the lingering effects of the pandemic itself. There's lots of stuff going on that could, of course, the inflation, what we were trying to do was trying to teese out the effect of deficit separate from these other inflation with shocks. And of course, that targets the classic admitted variables problem.

But it's particularly avare here because you have just got one period of time and you have a load of different shocks. So to think tangling one of them is different. What we try to do is we try to introduce what we call a high sequencing native approach.

The idea here was um using the historical narrative to find a specific event that released a great degree of news about inflation and then look at the high frequency response of asset Prices of inflation expectations from swap to see what the effects may be on inflation and the appeal of this is that um if news about deficits during this window is released sort of separate from any of the other shocks that drive inflation, then maybe one can get a handle on the contribution of deficit. So i'll say more about that um as I say how we did IT. So the event that we focused on um was the twenty twenty one georgia senate election on off so you probably remember exactly what happened.

But for your listeners um in twenty twenty one uh at the start of twenty twenty two one a president biden had just won his presidency and had forty eight senators but there were two senate seats that were two goes to school in georgia. A democrat were to win both of these senate seats, they're be able to pass their physical stimulus. But if they didn't win both senate seat or they lost even one of them, probably to have a senate majority and democrats wouldn't be able to pass physical stimulus.

So these georgia sent elections, they were paid at all for the chance that biden would be able to pass his stimulus. And that's that's the key context. And what we're going to do is we're going to study what happens to inflation expectations around that one of them. Now what you need is you need a measure basically of how much news was released to markets about the size of deficits when we go from a fifty percent chance of democrats winning just before this georgia ran off in january twenty twenty one, to one hundred percent chance of democrat waiting after they won. You know, we are releasing a bunch of news about the like you of deficits when we go from A A partial chance of democrat Victory to a full chance of democrat Victory.

So how do we measure how much news? Well, that's when I came to you, mark, because I said luck, places like moodie on the evil of the election just after the election are going to say things like, well, we think that if republicans win this election, then that's going to be a certain amount of death is spending. And if democrats win, that's going to be a certain other amount, death spending.

And you know the consensus reading your reports as remember, the time was to say, look, if democrats win, this gna be a bunch more spending something like a trillion dollars. And if republicans win, there probably isn't going to be in that based on my pigeon understanding of us politics, that when one side has the presidency and the other side has the senate, nothing gets done. And so my my sense is that where you were coming from as well. And so the second part of this narrative piece is to say, well, reading coffee the reports like the reports that you generously shared with me um when democrats were in georgia that releases to use to markets that probably we are going from a fifty percent chance of of a trillion dollars stimulus is to say fifty percent chance the so that that was the narrative parts of trying to carefully measure around the senate election exactly how much news about deficits was released .

and you guys you guys a number of different uh investment banks, other forecasters to participate right? I think I was about to cord, been .

you guys, and you are most for time. Well, what we wanted to do, so we started by reaching out you because we wanted to have some sense of, is this gonna you the everything? And then what once we have a sense of, you know, this is the kind of thing that people commit to paper, then we wanted to sort of see as many as we could to have the maximum sense of this is what the markets thinking. But as a fair consensus, at that time, the democrats were likely to spend about a trillion dollars if they want, and that republicans were likely to enforced Normal spending if if democrats lost in georgia.

of course, they went on and spend two trillion dollars.

right? Yeah, exactly. This is one of the interest. So what what you guys said at the time, and this was kind of the consensus, was that, well, democrat are unlikely to spend more african because the democrats senate is relatively conservative. And then over february, march, a bunch of negotiations to take place so that in march twenty, twenty one, when the deficit packages eventually passed, IT turns out to be quite a big quite a lot big IT quite a lot more missing because the margin democrats dommage in of west beginning turned out to be more favorable in clients to stem less than anyone thought in january um but in january, people thought was gonna trillion .

dollars and said that sort that's .

the native piece um how much uh markets expected would happen to deficit as a result of the georgian, the high frequently piece that said OK so what happened to inflation expectations? How much did markets expect inflation was going to rise as a result of this news about deficit spending and the answers? That seems to be quite a bit. So deficits, inflation expectations jump up and around the news about the stimulus. So over the next two years, markets expect forty basis points more of inflation and is expected to be quite persistent.

This is what you glean from swap and flash exactly .

is so is extremely simple. You just you put the sp and you see that the sort Price just jumps around. The news of democratic actually.

Is that simple? Then the final part is to say, well, look, what we've got here from this window is we've got a measure of for a given extra deficit dollar by how much do inflation expectation rise? And what you can do is you can take that sort of increase in inflation expectation for dollar of deficit spending, and you can scale up the total deficit over this period, buy that sort of inflation for deficit dollar amount to figure out the total effective deficits on inflation.

You just sort of extrapolate from this narrow window how much deficits were expected to increase inflation, to figure out how much total deficits caused inflation and the number that we get. What I sort of, I guess, agree with my prize, but it's kind of useful to have Better evidence on this that death is probably caused the death system is probably caused something like between the third and a half of the inflation over twenty twenty one and twenty twenty two, you know, might take away from that is that deficits were probably barely important for inflation, but other shocks were probably equally, if not more important. There's no shortage of other shocks over this period, supply shocks, bottle next, that kind of thing.

And so I suspect IT was a mix. I just like that was a bit of a perfect storm of perhaps a little bit too much demands. Stimulus, although not, I think, crazily examine excessive amounts, combine with some difficult supply shocks at the same time like the russia, ukraine warn zon that also pushed up inflation.

You came up with a kind of a cool rule of some you call inflation multiple er or point memory serves point one eight of every percentage point increase in the deficit to GDP. That would add ultimately over, I think, a couple of your period point one percent to inflation exactly .

and take that number and multiple by the total amount of deficits and then you get some kind of back of the old globe .

of how much did you came up with two to high percentage points inflation kind of closer to six and six, seven percent. So therefore.

that's how you got to the third kind.

right? right? Well, that is very tube of the one in some of the email conversations we had to follow. The one thing that I I questioned or I was just curious about was whether that inflation multiple er is a constant.

You know whether IT is is a function of the you know the state in which you're in as if you look at traditional multiple ers, you know output mult for the listen out there, you're just looking at what is the impact on GDP or the impact on jobs from an increasing fiscal policy, government spending or tax policy. That is those multiples aren't thought they thought to be uh, that they change their function of what's going on. If you if you're in a weak economy, the multipliers larger, if you're a full employment economy, that multipliers are are smaller. Uh, is that the same? You is that work here as well?

absolutely. So the my my mental model is that monetary policy is very important for the size of and the classic multiple are linking government spending to output or what i'm growing the inflation multiple layer which links government spending to inflation. Um and you know as a thought experiment, imagine the following two things.

First um there's as a government spending shock of some kind and the fed hikes interest rates enormously and immediately then the effect on inflation could be there or even negative. And if the fed does nothing or cut interest rates immediately and then the effect on inflation to be very, very big. And so of course, a range of things are possible. And this multiplier that we were talking about is a sort of multiply conditional on the stand of monitor. 嗯， one of the other things that were able to do is just look at the sense of monetary policy and how do we do that around the shock.

You can see market expectations of all sorts of interest rates, the short term bond rate, the future guessers of what the federal funds written someone will be and the striking thing here is that markets believe the monetary policy will be relatively loose response the fiscal shock um which is to say that in the short run, markets believe that nominal interest rates aren't onna change at all after this fiscal shock from georgia. Meaning that in real terms, short run rates are falling by quite a bit in response to the physical shock. This suggests that lose monitor policies is is part of why that is reasonable, large effect and inviting.

I don't I always Carry a here. I don't want to engaging in, I guess, what you americans were called monday morning court backing. I think I think the fed had a very different. I mean.

I think the fed now go head job, please feel free.

I think exposed the fed was probably there was probably a little bit too much demands stimulus by the by administration, a little bit on a try accommodation by the fed. But on the other hand, um at the time, I was a little bit discount to know that. And the flip side, the the byproduct or the benefit of this higher inflation was an extraordinary ily good G D P growth performance um and I always try to emphasize this.

So this is another thing that we can see in the data, which is that if you look at proxies for G D P gov version bank forecasts for master Prices, markets Price in response to this fiscal shock, really tremendous ly good GDP growth performance. And that's one of the real benefits that the the company is hired. Inflation and IT kind of accord with our traditional view that when you have a big demand stimulus, output goes up and inflation goes up.

Um so I think it's important to stress that is not clear to me this was bad policy because one had a love about her inflation but at the benefit of a very strong um real side of very strong outperformance. Um and you know I look to europe, look to my native U K. Which over the same period of amErica from sort of the end of twenty twenty or twenty twenty two saw a the decline.

And I think perhaps american make IT a very good job because the american recovery, the american GDP performance of the last four years is is really extraordinary and and remarkably good compared to anything in europe. And in some ways, you know, amErica has had high inflation, but everyone has had high inflation on yet. American prosperity in american recovery is sort of the envy of the world.

I I do want to a stress, a baLances view that I think perhaps exposed. There were some mistakes made, but it's not quit. And these mistakes had at the least benefits accompanying them that were .

quite evident to, you know, one other consideration is is is at that time. But this is my recollection of the period when we're talking about early twenty twenty one now with the american rescue plan that the two, two, one doors packages that were on here and that was deemed to be what let me call a good inflation, you know, as we were talking earlier, inflation have been sub optimal, mean below the feds two percent target really.

Since the that started targeting inflation in twenty twelve officially started the two percent targeted in twenty twelve through up. And through that period, inflation had been consistently below target. So in twenty twenty, the fed changes policy framework and say, hey, look, if you if you experience appeared of sub optimum flag now I want a period of inflation above target to make the Price level more consistent with, you know what I would have been otherwise and here we were, uh, inflation in twenty twenty one picked up, as you know, as that we've been discussing.

But that was, that was not a problem. That was, that was good inflation. Here we were.

The fed got exactly what what I wanted. The inflation became a problem later in twenty twenty two, when we got another supply shock. You know, the russian, this is on the supply side, the russian invasion of ukraine. So almost like a, you got got exactly what you want IT. You got, you got inflation, you know, back the feds target, and you got an economy that's performing much Better, and as you point IT out Better than anywhere else on the planet, your economies now leaving the way across the globe. So 是， from my perspective, it's almost like that's the .

exact policy you want IT. I so .

very to the caveat.

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yeah 哦 oh okay there you go。 He's very smooth. I agree with you got so much OK I think no .

I I think this is basically right. Um I don't feel agree but I most agree. So so the same I certainly x and y this was a very sensible decision even if exposed that being so Price.

So let me say, well, I think this, this makes a lot of sense. Okay, imagine the following scena. Imagine that the U.

S. Had done this demons, and then there had been none of these adverse supply shocks. Taking the numbers from my paper seriously, which I think in a ball park sense, so are pretty reasonable.

Inflation might have overshot maybe five percent the one one year, two years, and then gone back down the two percent. And I think that basically would have been fine. Alongside an excEllent GDP recovery, the feed heroes, the by administration, the heroes, everyone sets off into the sunset.

The problems of the p2 economy， you know, the overhang of the great recession, excessively low interest rates, or in the review mirror, you have a great out of performance, moderately high inflation. And everyone, I think that's a very paul to know. And instead the by administration work were unlucky with some adverse ve facial supply shocks are affected many countries.

So I think that I think that's probably true. Um I think that's a big prospice that that's definite point of agreement. My caviar. Is that relative to what I believe in twenty twenty, I and I think many people, including me yourselves, have revised up how much people dislike inflation relative to unemployment. yes. And so I think you know from the standpoint of twenty twenty a um uh A H tradeoff that says inflation going to five percent foot for one to two years with an accent GDP growth performance and unemployment falling very rapidly feels like a very favorable trade off from the standpoint of twenty twenty four.

That seems like well, if we think that actually people dislike inflation more than unemployment relatives, what we previously believe, perhaps that kind of menu of policies is a bit less attractive than we thought and here I am thinking about this this idea which sometimes um people call this quote on quite vibe session which is that um you know consumers right now seem more pessimistic about the economy than they were any time during the long slow recovery from the growth recession. So unemployment was very high at the time. Everyone rightly thought this was a very bad situation.

People were very upset, but they see more upset now with what I view as a relatively modest inflation. But it's not my position to say what people should think is modest or not. It's clear that people just really hate inflation, perhaps more than they had unemployment.

And perhaps that's because no inflation affects on everyone and unemployment only affects the select few who and for not to be unemployed. But that something that policy has to take into account. So so that's my cavet. I, I, I agree with you that that there was good inflation, good inflation plus bad luck. On the other hand, even good inflation seems a bit more dislike than I am.

I would have get okay. You make a great point, a great point. So what you're saying is luck beds, waiting inflation fit says I want inflation above target, right? So I can make IT all iron now. But maybe that's not the right strategy in the context of the fact that people really .

hate inflation much more than they hate unemployment. exactly. And that's just not what I expected.

And I think no generations live. You know anything that times have changed, but maybe times didn't change. And I mean, I was I was very I was very surprised by this. You know, I rode a paper trying to reevaluate White people dislike inflation so much.

And it's definitely that's probably the biggest lesson that that I learned from this period because I think you know our basic mental model describing the world of, well, what's going to happen and to infection after a bunch of supply and demand shocks, what fairly well I think, which is that the U. S. Is a big to mark, a big supply shock. So output does pretty well, but inflation goes up by a lot. I think that model basically worked okay. But are, are, are, even as our descriptive model of the work of of the world work pretty well, I think our side of a model of how people feel, what economists sometimes call on model welfare or a Normative model of the world, I think that work pretty badly in that people seem really, really upset about this in the way that I wouldn't guest.

That's really interesting. Chris, you have made this point to me as well in in the context of the federal reaction function, right? Because you know, you got unemployment, you got inflation, and they seemingly equally weight. The two in the reaction reaction function is, I look at inflation, look at unemployment, I look at financial conditions, I look at stuff.

And then I say, what's the optimal? What's the proper ate federal funding target in a ten, the equally weight, the unemployment objective and inflation objective and Chris, you arguing, well, maybe they shouldn't be doing that given exactly what you said, joe, that people really hate inflation. Do I had that race? Yeah, that's the connector. Yeah, really learning .

this over time. I, I, I fed you know i'm pretty confident that i'm summarizing the conventional wisdom of twenty twenty of the fed believed. And I think the fed is probably because that I mean, you know one thing that's remarkable about the food is very impressive.

Ready to do the central banks as I think over this period. Um you know they were a little bit slave of the mark, but I think that they were relatively quick updating their their framework and their view of the world. Er's new information came in.

And I think I think that's really commendable. I think E C B, the bank of england obviously took a lot longer to kind of react the changing circumstances. I think probably within the fed, what i'm saying is kind of our controversial, which is that in twenty twenty, we thought one thing about the kind of social welfare function of the relative cost of infection unemployment, and we realized that wrong. And it's a lesson will learn going for that's my guess of me. I don't speak to the fed.

but maybe you do. I mean, maybe no, no, no, no. I I think that's exactly right. And although like everything in macro a, we got MC economics to get to know just one more data, it's hard to trust a conclusion. There's a lot going on here. This is your your most recent paper you to send to us, which is actually very interesting around this topic, trying to explain why people, he, inflation， did you want to talk about that?

yeah. So so I always like to when I try to explain this paper to people. I was like to start with an animal when I when I first had this discussion um with my mother many years ago. So we were talking about White people. My mother is not an economist, but she's a woman of great common sense.

And so we, my wife.

to say, yes, exactly exactly one of your famous isn't my mother is a dark and so so I said to her, why do, why do you think people dislike inflation?

It's all the way. Second, wait second. So are you making this up? You you actually had a conversation about why people hate inflation.

Absolutely because it's very I mean, and precisely to this point, I think inflation is something is that people out there in the real world not going to do. You have very strong opinions about.

yes, right?

So SHE may have initiated the conversation this, but I don't remember, but he said, I don't like inflation because wages don't keep up with Prices. You know everything. I've still got the same amount of money, but everything's becoming more expensive.

And I think if you speak to anyone out there on the on the street, economist, anybody, I think this is Normally the first thing that comes up. And there are influential surveys, a classic one by robber shiller, the rober prize money economist, animal recent one by stephane stand chavez, who is a harvard professor that finds that this is kind of university, why people dislike invention. However, traditionally, economists have dismissed this reason for why people is like inflation for one good reason and one bad reason.

So the bad reason is that economists say, as I said to my mother at the time, they say, no, no, no, that cannot be the cost of inflation, because when Prices go up, wages should rise to. And if wages and Prices both go up, then, then, then everything's fine. Your wages have not risen more than Prices because because wages should rise with Prices.

And this is, this is a sort of theoretical argument motivated on the idea that the kind of invisible hand of the market will make sure that when Prices rise, rates rise to, and that no one's worth. And so this sort of seems I could relies on, on this, this strange worked out logic that only an economist could dream up. But this is what manu says in his tech.

He said, this is not a cost of inflation because, because, you know, wages should rise to when inflation goes up, so wages can be outraged by Prices. A slightly more reasonable version of this is, economists point out that if you look at time series data, often during periods of inflation, Prices do keep up with wages, so during parts of high inflation, often the labor share of income doesn't afford. Often real wage growth is fairly strong over this recent period. The statistics are pretty contested in a little bit messy, but what is clear is that at least for low weight workers, your wages did perform fairly well over this episode. Yet no wage workers still seem very upset about inflation on so that's that's the kind of the the the the the scene setting, which is that people have the strong view that one other chAllenges, we just don't out Prices, but economists say maybe the data .

doesn't fully support that. G I go the way, just don't go for a year too.

Maybe is be called about really part of IT. Our perspective is just to say, well, perhaps when there's inflation, workers need to hate costly actions in order to half wages, keep up with Prices, they need to fight with their employees. Perhaps they need to take industrial action, go on strike, perhaps they need to search for another job, perhaps they need to have a tough conversation with their employer.

All of these are very costly actions that workers need to take to have wages touch up with Prices. You know, take the example of me in a system professor at the long school economics, as you know, and over the spread of inflation, elsy gave me A A Normal race of approximately zero percent. And so I have to contemplate, will I go on the job market? I, for another job, just get my and I just to get my wages back.

And that's that's obviously very costly. And perhaps eventually, at some point, I will have to do this. So notice then that real wages no longer summarized the cost of inflation. Real wages could not change at all during a meeting of of asian yet that could be these enormous costs going on in the background, which is the real wages are staying level precisely because workers are exerting all these costs in the background in order to have wages catch up with the Prices.

That's the kind of key observation I think you kind of reconcile IT can reconcile my starting my starting kind of tension between the people and the economists because my sense is that what's going on, a lot of the time, there's some survey evidence in support of this, including survey evidence that we provide our paper that people say, well, you know, I really don't like this feeling that wages aren't catching up with Prices. So what i'm going to have to do, i'm going to have to take all these costly actions to rectify the situation by getting my wages to increase. But that stops pretty painful because that means, you know, my case, that might mean some extremely difficult and chAllenging costly negotiation um process um one one would have other fact and support of this is that over the recent episode and more generally, periods of high inflation, also periods when there's lots of industrial action.

So here is when workers and firms seem to be conflicting a lot, because workers sort of feel they need to fight with their employers to get pay raises. And then that the final antic dote offin supporters, I, I, I share this, this paper idea with an argent time colleague of mine. He said, he said, this is exactly right in argentina, during the period of high inflation, everyone is just fighting over time. And I think that I think .

that in true, I think first in time, fighting since the beginning of time.

that's that's what I said. I think I said, well, when inflation was low and I was living in argentina, although the main point, and I don't want to um do at the SARS again starting in with this podcast. But but I think A I think you know I we haven't seen this exact observation um anywhere before, but I think IT .

the one so of coffee at my mind is during this period, people avoided conflict by quitting and going to get other jobs. I mean, this was the was the phrase quit session or .

great nation.

great, great nation, right? So like they could have they could get their pay increase and they actually did. If you look at the wages of people who switch jobs, they got prety size of wage increases.

They got Better jobs. They are more suit to their skills and education and towns and interest. So they were able to avoid the recession. But still they were angry.

Well, so we think of this is potentially one of the costs, which is that so exactly of low wage workers, I think sort of the fact is that low wage workers or strong real wage growth realized entirely few jobs switching. So the low wage workers who didn't switch jobs had big real wage falls. And the workers who did we switch jobs had big wage increases.

And so that you know, in some ways, that seems like a very good thing for exactly the reason your saying market seems like relocation. That seems very good. People going towards Better jobs that are Better suited to them.

Real wages are very high. Now for low wage workers, the U. S, that seems great. You know what we want to do to say, well, the flip side of that, the one should acknowledge, is that the process of searching for new job is is, is probably one of the any given year or any given five year period is probably one of the most costly things that a person can do outside. Outside professionally is one of the most costly things that a person can do. And so that that great resignation could have playing out alongside substantial costs of various kinds.

The discussion so far has really been about the past, you know, yes, coming here, I want to talk a little bit about the future. But before I do that burst, uh, you gna play this. Are you going to play this that game, joe? Okay, we can play this state, right? Okay, fantastic. But before we do that, let me did this have kind of cut off merson and Chris, anything, uh, that you guys wanted bring up in the in the conversation about the conversation so far .

before we move .

onto the stats game.

where are turn to you? Yeah I I mean, I i'll just say I think that the comment about people's perception that their wages haven't kept up with inflation really resonates because every single time I talk to someone, that's the first thing that they say, right? And then as an labor, as I say to them, well, no, actually in fact they have as of the third quarter, the E, C, I shows that wages are up twenty two percent, just like inflation is since the end of twenty nineteen, right? But but then they always say, well, not mine, you know, I don't know whose that is, but it's not mine.

The point about the lag is really important because even though that is, I can technically say that's true, wages have kept up IT really just happened like in the third quarter, that convergence just happened, right? So while inflations gone like this, wages have had to had to come up and and some of that is just inflation slowing down so wages could catch up recently. Here's my question, please.

When you when you this this trade off that you're talking about, people are more sensitive to inflation than they are to unemployment. If we look that if you look back at periods where you have very high unemployment or you have unemployment rise and you have maybe moderate or low inflation, what is what is the dynamic that you see there in terms of people's perception of the economy or um you know that this this sort of yeah I guess this perception of the economy, how different is IT? I mean, like I have trouble remembering right, what that looks like because we've been in this inflationary environment for the past four years. But is IT really true that people dislike inflation more than they dislike the potential of losing their job? And that's a great question.

So before I answer, I think um just to pick up on some series, would I totally agree with, I think um one of the reasons that I like this paper is sort of a little born out of talking to to real people and not just said of looking only at aggregate statistics and models because um i'm guessing i've had the same experience you have where you should have you the value from economist you cut you, you you charge and you say, well, actually you're correct.

And wages doing great. And it's not a great way to make friends, I guess because because say, this is what my experience at all. And so to somehow I I felt that one of the things I liked about this paper is to try and sort of leave the ivory and and look careful in what people say and try and model that, and often economist sort of trying not to do this and say, let's not look at what people say, just look, but sometimes really miss things out.

The answer your questions specifically about people disliking inflation versus unemployment. A A lot of work remains to be done there. I think I suspect economists and also political scientists will spend a lot of time over the next years thinking about exactly this question.

Um the the fact that that I know that is interesting on this is that consumer sentiment, as measured by the ichigan consumer sentiment index, seems to correct much more strongly over the last few decades in the time series with inflation and unemployment. This is very surprising. It's not what I would have expected.

But IT is the is the IT is the fact, as I understand IT, Larry summers has a paper which shows that if you kind of adjust inflation so you added housing costs and I think are more plausible way than it's done, the basic inflation measured, this correlation is even more sort of in favor of of inflation and unemployment, which is to say a measure of inflation that includes proper measures of housing costs like mortgage rates and so on, which the baseline inflation measure doesn't. That measure of inflation seems to predict consumers self assessed well being much Better than unemployment. But this is you know at the times areas.

try the support survey if you tried that.

So I I this this is based on me just .

I was okay because I bet to get a different resolve interest.

So like I said, the mean i'm saying this year, um I didn't want to say a caviar to the people is like an inflation more than unemployment which is that um IT eat the losses from unemployment are very concentrated, but the losses of inflation are quite refuse. So you might think that for the five percent people who who get unemployed, they lost us from unemployment and sort of plausible far, far bigger then the losses that everyone suffered from inflation. But you know, in in a survey like the conference bor, the michigan consumer sentiment server, everyone has sort of one vote as IT were. And so there's no way to say, well, look, the five percent whose lives are ruined by unemployment should be waited x times more than the ninety five percent who dislike inflation and so that that my fear is that may be there is something about the difference between sort of aggregating person by person versus waiting by how bad the experiences .

yeah that makes total sense, right? Because everyone's face everyone's buying eggs, but not everyone gets .

unemployed exactly. You know, more expensive eggs is less bad than being laid off as yeah.

well let's move on cause and we I do want to get to the future, but before that, just play the game is that game which before the start, the rest of the group tries to figure that out with clues, questions, deduct the reading. The best dad is one that's not so easy to get in immediately, one that's not so hard with never get IT if it's that proposed the topic at hand inflation all the Better but IT doesn't have to be and you just, uh, we always go with mercy first, this tradition that will let her go first. Uh, with mercy europe.

My start is eighty nine point .

two index.

IT is an index. Yes.

if they come out this weekend is from the U. S. In michigan, an survey is IT present conditions. No, eighty nine point two because its low was IT was a low, came in another low room.

Republicans IT is republicans expectations in that which rose twenty seven point eight .

percent .

and fifty before the .

election and after the election. I jove Y I don't know, mark.

Like I think this goes to exactly what we're talking about. If we had listen to the university of michigan survey, we would have correctly predicted the election.

Yeah, yeah, yeah, yeah. Yes, exactly. I mean, i'm not saying it's not crazy, but I could be both crazy and correct.

Yeah, I know. Yes.

about the a title for this podcast, rays. incorrect. correct.

no.

The decline .

in democrats is democrats .

declining seventeen point seven points. And there was a paper, I think IT was by paul krugman.

He did a few had more than a few months ago at this point, but he was talking about michigan, and he was talking about how there is this a symmetry between the way republicans view a democratic a president in the White house versus the other way around, right? Republicans punish a democratic president more than than democrats punish a republican president in this survey in terms of their perceptions of the economy. And this is exactly how you see IT.

So now that republican expect stations for the future are the highest that they've been since october of twenty twenty, I mean, this is like the biggest jump that I can find in the data series. And this is just, oh my god, election, right? That doesn't .

not bring up an interesting point though. I mean, the this this whole pain around inflation could be this simply politics. I mean, yes. And this is how I view things about the prison. My political prison has nothing doing any else.

No I I that's absolutely possible. I mean I think it's a fascinating that um the uh there are few actually using the twenty sixteen and twenty twenty versions of this. There are a few academic papers that were documenting that um I believe in twenty sixteen my all artists and he shows that um that the republican democrat lit was a very strong predator of subscribe consumption.

So people really, really kind of live these expectations. So it's not just sort of uh partiers and jelly ing. Maybe that's part of IT, but it's also the case that after two thousand sixteen, republican democrats spending patterns, investigate patterns, mutual fund investments or diverge ramadan, to which is fascinating.

people really .

believe media platforms, dia a forms, you know, jonathon Parker, M I T. Sloan shows uh, using, I believe, vanguard data, that photo relocations for democrats versus republicans were very significant. Just crazy. You know, they were really changing their stock market allegations .

into twenty sixteen because of a site like this.

crazy. But correct.

Four six point four percent relation related .

sort of labour .

market related, not really, not really really okay. Uh, as a percent of GDP.

let me say .

six point four percent deficit, 我 现在 the deficit， oh there you go.

the full year deficit of twenty twenty four as a percent of GDP s that's one point eight three trillion dollars and i've wrote IT here is a step because I wanted ask this is it's a bit of a mystery to me why deficits were are so high um last year because the the major uh the major stimulus of the biden administration was the american rescue plan whose effect of longer SE have been passed on the inflation reduction net which was at least as scored in twenty twenty two approximately deficit neutral. So what i'm just totally confused about is why deficits remain very high potentially on an ongoing basis and and this is not something I been able to find out much about. So i'm not sure if this is something that any of you know about, but it's it's a mury to me anyway.

Well spending levels are elevated, right? I mean ah despite all the efforts to IT in around that did on the battle in twenty twenty three, that didn't happen. So uh, we've seen up as a share GDP expenditures remain you know very evvy and tax revenue has not increased despite right write the strong economy is not increase negotiations, the tax cuts.

right the the combination of entitlement spending growth and the T C G, A long shadow.

Ah it's not less than entirely some of that obviously, medicare or medical cost, the health care, but it's also discretionary spending up, uh, you know pretty much across the board of defense, non defense. You know everything is up right now. That's the other thing in so the primary deficit is what I don't know, that's probably closer to three and half to four percent, something like that. But still that's large in the full point economy.

That's yes, makes a little worrying.

It's it's very high little worrying. I say you know, I say a lot of worrying. Yeah, you go for the, uh, that was a good one to create good job.

Yeah, so understated. If I had gotten net, i'd have been jump ing up and down and how great I was. You not ris, yeah yeah.

Of course you you're up. Only one. I'm up.

okay? I'm going to be a light hearted statistic. Take off some of the tension here.

Fifty eight dollars and eight cents. That's the cost of thanksgiving dinner. IT is how much? Okay, joe, joe.

I just now and I was so quickly.

what was the increase over last year? Oh, that's .

interesting. Is that from last year.

you tell me really with that your guess that's .

what I seem to remember.

I think my down the turkeys B.

F, I, yes. So I say it's up, up by percent. Morris is write its down five percent. Oh wow, well and it's down nine percent from twenty twenty two.

Why is down turkey? Turkey Prices to type flow down OK? I think the turkeys is the problem. They don't.

And then this, oh, I say, I say just but I what I read was both supply and demand for turkish down. Uh, both supply. The demand was more. There's also not doing .

turkey .

this year seafoods do. I don't location to your thanksgiving dinner. Yeah.

traditional in my limited .

understanding. Americans, this this is far out on .

the on the IT is far out. Well, yeah. Mrs, a little weird.

I'm the same. Yeah, we all know that low word. Um I have an iranian person.

nice.

yeah. And Chris, you have an italian. I am. Well.

some possible. See not .

no one's having .

turkey on the joe. I probably going to have a sandwich. I got a turkey sandwich. Yeah, yeah. Maybe maybe there's .

two things forward looking I want to talk about. One is present trump in his policies and what that might mean. But before we get there, one of the key kind of increasing, and I don't want to say concerns, but kind of things that are back of people's minds, this inflation doesn't feel like it's all the way back into the bottle that, you know, if you look at core, inflation is measured by the consumer expenditure for later, I think, or two percent is and we need to be closer to the two.

Is that a concern for you? Is that a big deal? You know, is this last so called last month gonna traversed here or or what are you thinking about that?

I think two and a half percent inflation doesn't seem like a big deal. You know, the problem we would have killed for really at any point in the last twenty five years. Uh so so two and a half percent doesn't worry me.

My my lingering concern is exactly what we were speaking about before, which is did if you have a um persistent or permanent deficit that is sort of in like a five to six percent range, that's very, very hard. That's gonna lost forever. Perhaps that's leading to tune after three percent inflation on forever and that does seem a little concerning. So you know a couple of years of above target inflation IT doesn't seem like a problem. But if you just have permanently high deficits and that's leading to permanently high inflation, if we think there's a deficit of inflation, link would I sort of a sweating myself of I would be I would be worried about so yeah, so like I said, I worried about just sort of the persistence of this all if that's this persistent deficits .

and persistent inflation result that brings. I, I, I kind of thought of your work as the change in the deficit effects inflation. This change in inflation that right, okay, that the levels don't matter, really, are they might matter. But I think I .

think it's it's come so so .

the the way I .

would think about IT is you know somehow starting from a baseline when deficits Normal um so like two or three percent and and perhaps that seems consistent with two percent inflation starting from the baseline. The the change of the shock is like a world where now deficit to always double that. And I would think that would have some effect on inflation. Now it's going to be very sensitive to exactly what your favorite model of the world is. But intuitively, if the government, federal government is always running quite big deficit.

you would expect that the sharp and inflation now, I guess, depends IT is it's gonna get two percent of the once two percent.

even if you get a yes, exactly. so. So then the concern right is that if if the the federal government is primly running these big deficits, what does IT mean for monetary policy in the context of industry costs and debt? Is that potentially a risk about the erosion of monetary icy independence? Um this seems very concerning.

Uh you know one thing that I feel pretty confident is that having monetary policy making independence of of government is is good. And six percent deficit, sort of lots of constant injection demand into the economy, a constant risk of a fiscal dominating monetary that seems that seems worrying. So I I not worried about sort of slightly high inflation ent persae. I'm a little worried about what I could and what I could signify for the future.

Yeah, one other perspective on that, I just want to get your reaction is that the principal reason why inflation is above target, we say we're at two and half now and target is too is the cost of home owner ship is so called owners equivalent rat that still remains elevated. It's it's it's moderating but very slowly for little different reasons. And if I exclude O E R under equality, I am there and then some you know inflation below target. So does that does that resonate with you or does that make lets to worry some that the case you .

know you know yes and no, the star is fact from the last all the U S. Business eyles is that rent is main sync component yeah of the inflation index. That's basically what I mean.

They're some services too, but that's that's the main finding. And so uh IT depends whether or not I I i'm comforted by the fighters. All rent depends on why you think rent is the most second component. One reason could be that rents kind of easier to measure than other components of inflation.

And you think there's an underlying the cache and rents a good way to measure IT? Because the way that the beer of labor statistics means of health care inflation is is pretty, pretty hard, pretty unclear what is doing. Where's the way measures went?

Inflation, I think, is very clear and easy to understand and like to be correct. So there's this question about whether or not you think that rent is just a good proxy for the for the cynical component of inflation or you think that there are rent specific issues that that that we shouldn't worry about too much. And I would say the jury still out on that. I haven't seen a really sharp and asis that says that the red stuff is all all just passing back is only OK.

Okay, very good. Let's let's move on in the end with a president trump in his policies on um you know of course, there's a lot of uncertainty, hear a lot of script to be written. But you know if you look at or listen to what he said on the campaign trail, and I think we need to take roughly at his word, at least directionally.

He's not gonna pose the kind of terrible s or deportations. He's talked about the campaign, right? But he's going in that direction.

So we we get terrorists, the, you know, meaningful china particular. But you know, I was in the europe last weekend, and the eu. Is quite nervous.

U. K, less so. E, U, much more so about the terrorist, particularly germany on vehicles are talking about some deportation. We're talking about tax cuts, talking about deficit dead.

That probably will add the deficit that despite increased revenue and you mention but independence, that does feel like that might be under some pressure here as well. Given what person trump is said on the campaign trail, you kind of add all all that up. I come to a place where IT this feels like, you know, all else being equal, that's inflationary. Some come combination of inflation in the higher interest state diminish growth. So with that is, as a process on me just thrown back in your record, get your reaction to all that.

So so let me, let me, let me first void that now I have a little peace.

So I of piece.

the sky is skating title. So you know, when you you're sky, maybe this is only a european and things specific. So what? When you're skiing on the slopes, right, you might be on on the groom, on the groomed piece. I go off into the woods, and when you go off into the woods, it's a little bit more uncertain.

So would you call a piece just .

so maybe this is a european? We call the piece the groom slope. And then the of peace is the is the bit that's not groomed where everybody know that.

did you know that person's, that person knows that Christal most, most of the stuff. Do you knew that? Right, Chris? Course, because.

well, and maybe let me say maybe off the beating track, and maybe .

no for my .

american cousins.

And yet that these .

are now just my conjecture, but something I have thought about a bit. So okay. So before I get into what I think of them, I think there plans to to uh, trump economic policy.

The first is likely some kind of an large taxa um either uh uh either sort of renewal of the T T C J A or or or perhaps even bigger CoOperation tax cuts. The second is tariff s the third is a risk of a loss of independence of the federal reserve. And the fourth, which is suit related to the first three but maybe I think useful to be conceptually distinguished, is permanently higher deficits.

And you do see you can bring deportations.

immigration policy .

and deportations OK.

You are OK. No, no, no. I, I, I, I, I, I should that. So, so let me go through all of them one by one because I I think actually I think each of them is is usually different.

So firstly on the tax cuts, this is something that I um other then IT affects on permanent death s it's right which i'll get to um I think i'm not worried about the inflation effect of corporation tax cuts. My reading the the academic literature, the T C G A A bit of introspection suggests to me that that CoOperation tax cuts, uh to some extent working on supply as well as demand so that unlikely to be that invention. Y which feels like an obvious point, but not the point that I I hear raised that often. So now there is accent micro evidence about the effects of the. T, C, J can say .

this further. listened. That's the tax cut. B, so actually .

I sticker for not using acronyms. So which unfortunate I was later that rule hit night it's you never use action the tax cuts and job act which is also easy to say of two thousand sixteen a big CoOperation tax car.

There's now great micro evidence um by a couple of people so this guy pat canada U C L A um and a team based at harvard chicago booth and they independently find that I had quite big effects on investment, which is what you would expect because it's a big subsidy to investment. Um now uh when do you think this is a good policy? Um it's going to boost the supply side of the economy.

That's what investment does. And there could be some inflation effects, but you wouldn't even expect them to be that that big relative to media classic demands to do something like giving people stimulus checks. And there is a long time serious lecturing in in economics that also looks at the effects of CoOperation tax cuts in the economy.

And again, they don't seem to have big effects and inflation. So so so plank one is is renewed or even greater CoOperation tax cuts for infection and not that worried about them. The second is terrace.

And again, this is slightly out of consensus, but i'm also not that worried about the effects terrorist and inflation. Um and I would cite two pieces of evidence. So the first just looking back at some fairly sizeable tariff s in three to the inflation didn't change very much.

Um it's also the case that I think the best evidence on brakes so from my home country suggest that for all the problems that may have raise you to break IT IT wasn't a bit contributed to inflation on. So food and grocery Prices seem to have risen a little bit, but you know they're a relatively small part of the overall consumption baskets. Ts, so overall, consumer Prices didn't rise that much after a very big tariff and non tarriff barrier shock in the U.

K. From break. So I have update towards thinking tariff s are probably a bad policy for other reasons, but probably not very then the three things that I am worried about.

Well, first, fed independence. I I think, you know, I just diverse, sort of a strong prior. And I think quite a lot of historical evidence is that monetary independence is just an excEllent thing for keeping inflation at day.

And IT seems likely this could come under threat. So I think this is very bad. I think basically all economists think this. I think that sometimes economists overstay what we do not know about the world.

But I actually think just our evidence less from theories, but just a careful read of all of the history suggests that central bank independence really good so that I am worried about. Fourth is sort of maybe permanent higher deficits. We discuss this already doesn't seem like a good idea.

IT seems like a potentially relate ed to the third thing because as Chris was saying, where if you have permanently high deficits, that maybe is gonna raise interest rate costs on debt by a lot. And that's the point at which may be the the government leads on the central bank to to keep interest rates low to prevent sort of aspiring deficit. And that's the kind of thing we might think we lead to inflation.

And then finally, the fifth thing is deportations. And here I I think it's complicated. And in my mind, i'm still a little bit confused and the reason confuses. I think IT depends a lot on the time path of how these deputations would work at how big they are but also how how um how long IT takes the the massive increase in immigration in the U S. From twenty twenty onwards.

Um it's big, but I haven't seen yet credible estimates that suggests that there was a big contributed to inflation because you know it's big, but it's a relatively slow moving effect. And at least for now, the academic consensus is that immigration doesn't tend to have very big effects on wages. You know that is a whole debate that's right with debates.

But for now, academics seem to think the immigration doesn't have big effects on wages. And the immigration doesn't have big effects on wages than you ouldn't expect, have big effects and inflation. Now I think maybe that evidence could be revisited at some point, but most of the papers that i've read say, luck. Immigration is unlikely that big effects on wages. And so you know in the flex side, deportations would be unlike the effects on wages to we see um you know there I think the the the microwave l evidence about immigration way just I think has lots of problems, potentially lots of publication bias issues and so um the juries out in that last one so to up i'm i'm definitely worried not really about corporation tax cott and tears, but fed independence and permanent deficits do seem to meet to be big concerns.

So the if you look at the the bond market, yeah take look at five year break even so that I look at the the yield on the five year treasury bond and I compare that to the yield on the five year treasury inflation protected security. So compensate for inflation risk. You can that break so called difference or break even is a window into what investors people put money where their mouth is a on inflation over the next five years.

And if you go back a couple months ago, can I say midst september um when Harris was winning in the polls in the betting markets and compare that till now, I was to see loss and trump. One, those break events are at almost fifty basis points point five percentage points. So the markets seem to be seeing and of course, there's a lot of move in party and maybe reading too much.

The other things may be going on here but feels like a pretty clean read. Uh, that it's about a half a point. Is that now about right to you?

Yeah I mean, so mind, that's that's half a point every year for five years. Yeah that's a lot. I I guess my sort of out of consensus would be less worried about inflation.

worried about that. okay.

But this is something where, you know, I would actually want to look carefully at the whole range of data. So one thing that i've learned is there's lots of different data sources and inflation expected and one wants to care. So first, sometimes probably not something this, but sometimes the differently tly break hubs and swap instance can be very big. Yeah, i'll be the first thing.

The second is my colleague, rice has this wonderful work looking at the whole side of distribution of markets, expectations about inflation, not just the the mean outcome, but is the tail risk of a big inflation real distance facially event rising? And to me, I image a lot of IT wood shop maybe as tail risk that there's a meaningful chance of some kind of uninquiring event. So do I would want to look at that too? My sense would be the mean expectation is less bad than the market is, but there is some televisa of something really bad happening that, that would be my my slightly out of consensus relative to the market. take.

Great, great. Well, this is a fantastic conversation. I really enjoyed and learned a lot from IT. So I really appreciate that. And thank you for all the really good work, and thank you for including us.

your work that was very kind of you, you I mean, there was a lovely IT was really chat, lovely to chat the three of you and i'm so grave because, you know, I have a paper now uh and hopefully one day it'll get published somewhere. And IT was IT was possible because I was able to to look at this great data da .

moods so you know in in the notes to the park as if you're interested, definitely link to all the papers that you find, both the papers that you gave to us and any others that you think are appropriate.

That's really, really kind to speak you and .

I had thought you were in the U. K. This was on friday but the thank you for doing this friday afternoon, actually friday morning where you .

are don't know it's it's for me. It's a pleasant with morning. It's a real pleasure. So thank you.

Any guides before we call this the podcast? Chris, thank you. So thank you.

Dear listener, thanks for listening. I hope you enjoy the conversation and we'll talk you next week. Take care now.