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This is question of the Week from
BU Today.
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>> Let's talk inflation.
As we look forward to 2023,
the health of the domestic economy
remains a concern as high cost
linger hiring slows and
the salaries stagnate.
Many industries in the US and
abroad have increased costs due to
supply chain issues and other
factors leading to some of the
highest inflation in recent memory.
I'm Doug Most,
the executive editor over BU Today.
And for this latest edition of
question of the week, our
guest today is Lawrence Kotlikoff,
a William Fairfield Warren,
professor of economics.
Kotlikoff recent research studies
global macroeconomic transition in
the future of economic power,
inequality, banking reform,
marginal taxation, and
even healthcare reform, and
social security.
We're going to have a conversation
about inflation, what to look for
in 2023 that's going to impact all
of our wallets and pocketbooks.
Lawrence, thanks so much for
joining us today.
>> Great to be with you Doug.
>> So let's jump right into it,
this was sort of not a pretty 2022
when it comes to the economy,
this was an ugly year.
Do you expect 2023 it'd be much of
the same or do you anticipate,
perhaps a little bit of easing of
the inflation?
And so where do you see
things going?
>> I think most of the inflation
was due to supply side disruptions
supply chain bottlenecks.
China is often on production due to
their zero COVID policy which now
seems to be lifting to the prunings
war in the Ukraine where he's
impacted we wheat and other grain
prices and also well energy prices.
But if you look at the price of oil
today, it's slower than it was when
Putin invaded.
If you look at the price of
wheat today,
it's lower than when Putin invaded.
So we're seeing is that there's
other sources of supply and there's
also been a reduction in demand.
Like in Europe there's about about
about a 15%, 20% reduction in the
use of gas which is quite amazing
that factories and households can
get by with so much less gas.
But there has also been warm
weather in the US and Europe that's
reducing the demand for gas.
So I do believe we'll probably have
more like a 6%, 5% inflation and
going down to 3% and 2% well 3%.
The long-term,
the markets suggest they're looking
at about a 3% long-term inflation
rate three years, two and a half.
If you look at long term regular
interest rates on 30 year treasury
bonds versus inflation index
treasury bonds the differentials
telling you about inflation.
>> It's been interesting sort of
how Americans have responded to
inflation because spending has
still been sort of substantial.
Americans sort of talk about their
worries of inflation and yet
sometimes you feel like how they're
spending doesn't always equate with
their fears.
Why is that do you think?
Why do you think that
Americans even though we talk about
being scared of inflation,
being unhappy with inflation, being
worried about inflation, and yet we
still seem to be spending at a good
clip, is there a disconnect there?
>> Yeah, I'm surprised because
nominal wages haven't kept up, so
real wages have gone down.
And I would think that people
are shying away from going to
restaurants as much because
the prices are so
crazy high compared to pre COVID.
So I am surprised that that's
the case, but
it may be that there's also people
that are really hurt and people
that are benefiting from inflation.
If you're a debtor and
you have a mortgage,
you're paying back and
inflate it and
water down dollars, right?
So you're
making money off of the inflation.
On the other hand if you own short
term, medium term, long term
regular dead from the government
maybe your own treasury bills or
treasury bonds.
Well, you lost eight and a half
percent in real terms over the last
year because of the inflation if
you're on a fixed pension.
Like maybe you're a retired
policeman in Detroit and
your pension was already cut
through say 40 cents on the dollar
ready because of the bankruptcy of
Detroit and
now it's fixed in nominal terms.
And you've lost 8% purchasing
power, so somebody must be getting
it in the next year in the country.
So I don't know what the aggregate
numbers are telling us,
but we know that some people must
be hurting a lot because of this.
>> Yeah, the Fed has certainly come
under criticism for
how it's handled this.
Do you feel like they could
have taken different measures or
perhaps approached inflation
sort of with a different strategy?
Or do you feel like they did
the best they could with
obviously challenging times,
the pandemic, the war,
so many factors sort of and
the supply chain, as you mentioned?
What have you thought about sort of
the Fed's handling of this?
>> I think it's been quite good
actually, I think we'll wanna do is
adjust the economy to deal with
this temporary,
basically supply side driven
inflation index the tax system, get
the social security system indexed.
So people aren't being taxed
additional amounts because of
inflation because the level beyond
once your benefits are taxed.
The level of what's called modified
adjusted gross income is fixed in
nominal terms.
So more and more people just
because of inflation are subject to
taxation on their benefits.
And so we wanna fix that we wanna
live with
inflation not kill the economy so
we can get inflation down.
I think that's an appropriate
economic view, and
I don't think how Jerome Powell,
this chairman of the Fed is
listening to somebody's responding
but he's basically not increasing
interest rates that much.
>> We're coming into the holidays,
and I'm curious how much of
a bellwether is holiday spending?
Because obviously the holidays come
right at the end of the year,
how much of a bellwether for
what's to come in 2023?
Or is holiday spending at the end
of 2022 or should we not pay that
close attention to it?
In other words,
if holiday spending is way up and
if the numbers are tremendous,
could that be a good sign of
what's to come in 2023?
Or is it sort of a little
misleading and wrong don't read too
much into those numbers?
>> On December, the last quarter
probably represents about 40% of
your total spending across the year
it's really really high, so
it's a big deal.
So if a lot of companies suffer
much lower sales than expected or
or than last year, then that's
a signal that the economy is
potentially going into recession.
There's a potentially,
if we have enough people talking
ourselves into recession,
we will have recession, it will be
a self-fulfilling prophecy.
>> I hate to bring politics into
this conversation,
but it's impossible to talk
about the economy and
not talk about politics.
We just came through sort of some
pretty brutal midterm elections,
some would say they were quite
surprising the results that we saw
in those midterm elections
they were not what people
were expecting.
How much does that impact sort of
the economic future where we're
headed?
In other words, sort of Fed policy
and decisions that are made and
also the markets,
how close to the markets pay
attention to sort of who's in
charge which way the political
headwinds are blowing so to speak?
Right now despite everyone thinking
that the Republicans were
just gonna dominate and
take over suddenly, the Democrats
seem to have a little momentum.
And so it's gonna be interesting
obviously leading into 2024 and
the general election.
But I'm just curious sort of how
that plays into sort of
the markets and to the economy and
where things could go.
>> Well, I think the fact
that the Fed has done so little
really relative to the inflation
is really accommodating inflation.
The market gets that and
they realize that they also know
that this is a basically
temporary supply side.
Think so
that they're happy with the Feds
policy I think they didn't do too
much they didn't do too little it's
kind of the just the right.
As for stability Biden is a mature
stable guy, I think he's gonna go
down as one of the best presidents
and the postwar.
Maybe the best in terms of what
he's accomplished even as difficult
political environment.
What happened in the election is
that people that were radical that
thought the election was stolen
that they thought think it's okay
to suspend the constitution to move
to autocracy.
That our countries democracy is up
for grabs they were systematically
defeated.
So what this message is in
the market is that things
are likely to be much more stable.
And therefore, the risk premium of
investing in, let's say, the stock
market has gone down, so people are
willing to add more insurance if
they are gonna get decent returns.
And we wanna have
somebody who's very elastic,
who wouldn't want a civil war or
anything at the snitch erupting
in our country and we will.
So I think that what's happening
was actually good for the market.
It's to reduce the level of risking
to the future, and
that's why I think you see
the market basically going back up.
>> Do you see yourself as sort of
a glass is half full or
glass is half empty when you look
at the economy and looking at 2023,
do you see more signs for optimism?
Or do you see more signs for
sort of concerns and
a little pessimism?
>> I think that people claiming
we're gonna have a recession
probably have taken short positions
in the market to try.
Think about that Jamie Dimon,
the head of JP Morgan,
he said back in June that we're
gonna have an economic hurricane.
It could be category six, seven,
eight, he doesn't know,
he can't say for sure.
Goldman Sachs was predicting
a recession, now everybody's
changing their tune.
So I think the psychology is
changing I think that the people
that are trying to kind of make
money off of bad
times are realizing that they chose
the wrong horse.
So I'm optimistic that the economy
will not be in recession, you have
extremely low unless postwar low
unemployment, very high demand for
workers, very high increases in
employment from month to month.
I think we are fine unless we scare
ourselves to death unless we
have too many people that are not
me speaking to people like you.
So I'm optimistic yeah,
and basically, but I am pessimistic
about the economy's long term
future because our fiscal problems
are so big.
We need to address those in
a serious way and we can't be
the economic hegemonic through time
China's gonna take over.
So we have to get a relationship
with China that's stable and
it does not involve fighting over
Taiwan, for example.
We have to figure out how to manage
that relationship without butting
heads.
>> Okay, we're out of time, but
this has been enlightening and I'm
hopeful I appreciate your optimism,
glad to hear the optimism.
So I appreciate your insights and
your thoughts on this,
it's an important topic and ways on
every American sort of minds,
especially coming into the holidays
going into the new year.
So I'm glad we were able to connect
with you and talk economy,
talk inflation.
So thank you for your time today,
we really appreciate it.
>> My pleasure, let's do this more.
>> Yes, absolutely.
Thanks again.
>> Yeah, and
happy holidays to everybody.
>> Thanks, happy holidays to you.
>> This episode of question of
the week was edited by
Doug Most and produced and
engineered by Andy Halleck.
For more information about
inflation and economic policy,
be sure to check out the links in
the show notes.
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Thanks so much for listening and
we'll see you again soon.
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