What did you make of the jobs numbers? And by the way, there were other eco
numbers as well this week. David, these are hot numbers.
The rate of job creation is twice as great as the growth in the number of
adults. In an economy that's already overheated.
That's not consistent with bringing inflation down to its target level.
And you see that in the wage data, which is pointing to inflation way above the
Fed's target. We've got a low unemployment rate at
3.6%. And if you look at any of the other
labor market indicators that we got this week, the quit rate, the level of
vacancies, the layoff rate, the insured unemployment data, all of that based on
past patterns is suggesting it even tighter unemployment rate than the 3.6%.
So I think we've got an economy that is currently very strong, not sustainably
strong in terms of the rate of job creation.
And not very surprisingly, given that strength, we continue to have inflation
and indicators of forward inflation well above target.
So I think the market is right to judge that.
Once again, the Fed has underestimated inflation for basically the eighth
quarter in a row. They've been surprised on what's
happened to inflation and because they're surprised on what's happening
with inflation and the strength of the economy, they're going to be surprised
by what they have to do to interest rates.
And so I think you've seen an appropriate adjustment in medium term
interest rates to this reality. My best guess is that you're going to
see further adjustment as the data continues to come in.
But I think it's a mistake to be distracted by the Wiggles.
Yes. The ADP number yesterday was super duper
strong and today's number was not nearly as strong as the ADP number.
But if you step back to the bigger picture, nobody thinks we can continue
indefinitely to create jobs twice as fast as the adult population grows.
And that means we're having tighter and tighter labor markets.
And that means an inflationary picture. And the Fed's going to have to respond
to that. Larry, you were one of the very first,
maybe the very first to identify this risk here on Wall Street, but also in
your pieces for The Washington Post. I guess the two questions that occur to
anyone is, number one, what's it going to take for the Fed to get really
inflation under control, number one? And number two is why has it taken so
long? It's taken so long because we started
out so late, and given how late we started, we didn't move sufficiently
because we believed mistakenly that the neutral interest rate was still very low
and we believed mistakenly that raising interest rates would have large impacts
on the economy that were greater than the impacts of interest rates in the
current structure. And we haven't really recognised that.
It's a basic feature of the inflation process that while you get transitory
fluctuations, you don't stop an underlying wage inflation without having
a significant slowdown in economic activity.
And since we haven't yet had a significant slowdown in economic
activity, it shouldn't be surprising that we've still got inflation well
above target. Nor should anybody take comfort from the
fact that the components of inflation that everybody recognized were
transitory. The fact that they've come down and in
some cases even gone into reverse is better than if they hadn't.
Much better than if they hadn't. But nobody ever thought we were an
underlying 8% inflation country when we were having 8% inflation.
So the fact that the rate has come down shouldn't be confused with saying that
we can be confident that we're on a path of this all being okay.
And certainly not with saying that we're can be we can be confident that we're on
a path for this all being okay without the Fed doing more to raise rates.
So anything's possible in all of these judgments, David, or statistical.
Maybe we'll get a big productivity boom out of I very quickly, though, I think
that's unlikely. Maybe the inflation process will behave
very differently than it has in the past.
But I think the best guess has to be that the Fed's going to have to raise
rates more, that if the Fed wants to see inflation get back to its target, it's
going to have to raise rates enough that at some point
the economy suffers a downturn. And I've said it many times on your show
before. But I don't see anything that changes my
mind from the view that soft landings represent the triumph of hope over
experience. Larry, I want to turn to a different
subject here that you wrote about in The Washington Post this week, and that is
the so-called affirmative action decision coming out of the Supreme
Court. And it says you not only are an esteemed
economist, you not only were secretary of Treasury, you also ran Harvard for
some time. You really lay out there how difficult
this issue is, that it's a broader issue.
It's an important issue there, broader issue than simply race.
Look, I wish the Supreme Court hadn't acted.
I wish it had let the world continue on the path that it was.
Let private institutions make their choices about how they're going to
pursue fairness as they see it. But right now, there's a critical choice
that leading universities face. One option is that they can gerrymander
the place, the admissions criteria, and change just exactly how they do it and
encourage people to put certain sentences in their essays and do away
with standardized tests that have a lot of information and fight to try to keep
the exactly same percentages of racial groups where they are.
That's one approach. I think if they do that, they will be
increasingly resented by the broad public.
They will diminish the intellectual quality of
their classes. And in fact, they will have done very
little to promote social justice. The alternative path is that they step
back and they recognize that really the important test for them in this era is
their overall contribution to opportunity in America.
And if that's what they want to maximize, it'll be a very different
path. No more legacy admissions, no more
special admissions for people who've been coached extensively to be good at
aristocratic sports. Deciding to expand their class sizes so
that more can benefit from what they bring and not defining their greatness
by just how exclusive they are using the power of distance education for their
education to be defined by more than what happens in the fall and spring
semester on their campus. But training teachers during the summer,
training able students with computers
and crucially, crucially, turning their energy to strengthening what happens in
our public schools across the country. All right, look, David, only about one
and a half percent of the students who swore in the top ranges of the S.A.T.
are African-American. Yep.
Until we fix that, no durable solution to these problems.
That needs to be a crucial part of the mission of our elite schools.