Let's start at the end of the week with what you told us last week was the most important indicator that we should be looking
at the economy. And that is the employment cost index. It came in it came in above survey. David we we weren't sure what was
going to be happening with wage inflation. We hoped that the indications in some of the monthly surveys that earnings growth
was slowing and that that might slow the whole inflation process would materialize. That didn't happen. Looks like inflation is
running at a pretty stable rate. It's still two and a half points at least above where it was before this whole episode
started. Depends on just how you look at the figures. But really no evidence of a significant decline. If you look at the private
sector and you take out benefits then it's going up a bit. If you look at the 12 month figure it's going up a bit. Those may
be the wrong things to do. So it may be better to look at the overall figure. But I think it's showing what I've been saying
for quite some time now which is that we are eating grain moderate to high inflation economy. Nothing like 9 percent
inflation is built in but inflation above 4 looks to be pretty securely built in. And if productivity growth doesn't accelerate
it could be worse than that quite easily. So I'm pretty uncomfortable with the current situation and I think it just
points to the difficulties that the Fed is facing going forward and confirms the broad diagnosis that we
have an overheated economy that's not going to fix itself and therefore we're not likely to get out of this excess inflation
situation without having a recession. So there you have been steadfast on this program and elsewhere on your views about
inflation. And yet there's something of a debate going on right now between on the one hand the markets and on the other hand
economists with the markets sort of saying OK the Fed will hike for a while and then they'll start backing off next year and
actually we'll have some reductions in 2023. But they economists say boy the economy doesn't look that way. We're gonna have to
keep going and keep it pretty high. What do you do when you have that kind of debate. We'll see what judgment the Fed's make it
makes. The challenge they're going to have and it's a agonizing
challenge and it's why would be better if we weren't in the kind of configuration we were in and would be better if we had not
overstimulated the economy last year. Is that on the one hand I think you are likely to see a significant slowdown in growth.
You are likely to see recessionary forces develop over the next year. And on the other hand it's going to take a lot to get the
inflation out of the system. The danger David is that they don't persevere strongly enough in restrictive policy. And that's what
gets you a stagflation situation where growth slows and you don't beat the inflation out of the system. It's like if you
don't complete your course of antibiotics and then your illness comes back and the drugs are bacteria resistant. On the other
hand I don't think we can deny that if they do what's necessary to contain
inflation then it's not going to be a happy economic situation over some over some interval. Secretary Yellen said yesterday
that she held out the prospect of getting out of this without unemployment going above 5. I've got enormous respect for her as
an economist but I have to say that statement greatly surprised me. It didn't surprise me as much as the Fed saying we were
going to get out of this with four point one percent unemployment. But I don't see any basis for thinking that either
of those statements is a reasonable prediction given what we know. My own research with Olivier Blanchard looking carefully
at vacancy statistics looking carefully at quit statistics would suggest that just to get to a neutral posture with. Aspect to
inflation. We're gonna have to take unemployment up towards 5. And in order to bring down inflation we're going to have to be
restrictive which means an unemployment rate above 5. So Larry you mentioned some of the questions about the neutral
unemployment rate. We heard about from Secretary Young. We also heard about where we were with a neutral rate on interest rates
from Jay Powell. What do you economists do when you put together these neutral rates. Look I think Jay Powell said things that to
be blunt were analytically indefensible. He claimed twice in his press conference that the Fed was now at the neutral interest
rate calling it two and a half. It's elementary that the level of the neutral interest rate depends upon the inflation rate.
We've got on the most quoted measure a nine point one percent inflation measure. He extrapolated off core or something. It's
four or five percent inflation. There is no conceivable way that a two and a half percent interest rate in an economy inflating
like this is anywhere near neutral. And if you think it is neutral you are misjudging the posture of policy in a
fundamental way. So I was very sorry to hear him say that and frankly surprised. He said back in 2018 that the neutral
interest rate that the Fed was approaching the neutral interest rate at a time when the inflation rate was one point nine
percent how he could be saying the same thing today when the inflation rate is where it is is inexplicable to me. And it's
the same kind of to be blunt wishful thinking that got us into the problems we have now with the use of the term transitory. So
I hope the rigor of the economic analysis at the Federal Reserve is going to step up. So Larry in the meantime we have some
legislation coming out of Capitol Hill something perhaps we didn't even expect. We had the CHIPS Act but now we have this
proposed inflation reduction act. Last week on this program you sent a powerful message to people who are saying increasing
taxes actually might be inflationary. So that's really not true at all. I suspect one of the people you're communicating with
may have been Joe mentioned through Wall Street week. I don't want to ask you about what you said specifically Joe Manchin but
give us your reaction to what the proposal is now that's come up with respect to increasing taxes. Yes paying for it but also
addressing climate. I was glad to see the bill. I think it's going to reduce the rate of inflation because it's going to
reduce deficits and demand over time because it's going to use the federal government's power to negotiate lower prices for
pharmaceuticals and because it's going to increase supply of energy. So demand supply pricing power all working to reduce
inflation. I think it's going to help the environment because of the climate change measures. I think it's going to help fairness
in our country because of the expansions in health care availability. I think it's going to help fairness in our country
by closing some very important tax loopholes that allow very profitable companies to avoid paying any any taxes. Could the
bill be improved. Of course. I was really sorry to see that the very important enabling legislation for the international tax
agreements that Secretary Yellen has negotiated didn't get included in this. And while I was glad to see progress in
reducing the carried interest loophole frankly there's still some loopholes in the solution. I think we should be saying that
all carried interest when realized is taxed as ordinary income when the investor takes it out. And this bill is still well
short of that in a variety of respect.