To start with those jobs numbers that came out on Friday, a lot more than
expected. Thirteen and thirty nine thousand jobs
at the same time, we also had an increase in wages and we had an increase
in unemployment. What do you make of this surprise?
No, I think for most people, look, I think these are strong numbers in toto.
Three and thirty nine thousand jobs is a lot.
There were upward revisions for the previous two months.
We've always known that the monthly unemployment rate is a very noisy
series. That's especially true in May when you
got all the seasonal adjustments going on with respect to the kids who are
leaving school and looking for summer jobs.
So I think you have to read this report as strong.
I think the forecasting community's got to do a little soul searching.
They've been low on this report for 14 months in a row.
That has got to suggest that there's something about the underlying strength
of the economy that they're missing. Or another way to put it is that they
are exaggerating the impact and efficacy of monetary policy in slowing the
economy down. So I read these as a strong report, and
I think the general tendency of the data has been very much towards saying that
the economy, at least for this while has a fair amount of robustness in it going
beyond the jobs numbers out this week. The other big development over the
economy, I dare say, is that package that did make it through actually the
Congress that took care of the debt ceiling problem.
I wonder what you make of that package and maybe more specifically what it
means for the fiscal policy, United States of America.
David, before I say something about the debt limit issues, I want to just say
that with that behind us, with these employment figures, with the general
evidence of robustness in the economy, I think the lower risk strategy is for the
Fed to raise rates in June. It's a close call.
And if they don't raise rates in June, I think they have to be open to the
possibility that they may have to raise rates by 50 basis points in July.
If the economy continues to stay way hot and if inflation figures are robust, I
saw that some of the governors have been saying that maybe the Fed can move to a
mode of raising rates by 25 basis points, only every other meeting.
It's certainly possible that that's a mode that they can move into.
But for there to be any sense of commitment to that, given the risks,
would, I think, be repeating the kind of mistakes that the Fed has made
repeatedly over the last several years. I vacillated after the first run of
serious banking issues, but seeing where we are now, seeing the general picture
in markets, I think we are again in a situation where the risks of overheating
the economy are the primary risks that the Fed needs to be mindful of.
And of course, that's just reinforced by the fact that we've put the debt limit
and the potential loss of confidence from it
very much behind us by reaching this deal.
Look, the thing I'm worried about coming out of this deal is not what happens in
the near term. The IRS provisions there, I think, are
really a serious error. And we're missing a chance to catch lots
of people who have just cheated on their taxes, who are going to go undiscovered.
And because we're not investing enough, we're going to probably have even more
people playing the audit lottery. And that's a mistake.
But serious mistake. But I think the really big issue that
focus is going to need to turn to is the long run fiscal picture of the country.
CBO says that we're headed to a projected deficit more than twice as
large as the one we had when we set off the Simpson-Bowles
process. More than seventy five percent larger
than the one that was there when Bill Clinton came in as president.
And there are all sorts of reasons to think that the.
Low estimate is way optimistic. I don't believe for a moment that one
month, three month Treasury bill rates are going to average two point three
percent over the next decade. I don't believe for a moment that
defense spending as a share of GDP is going to fall by 20 percent over the
next decade. If anybody believes that 100 percent of
the Trump tax cuts are going to be terminated when they come due, come up
for renewal in 2025, I'd be happy to make them a bet or even happier to sell
them a bridge because they're very gullible.
So I think if you look at the numbers in the right serious way, you're looking at
projected budget deficit that could approach or exceed 10 percent of GDP.
Well, that's fast thing, Larry, because I don't want to say you're sounding a
little bit like Kevin McCarthy, but you are concerned about the deficit and the
debt. Let me talk to you about how we should
look at that problem. You just talked about the ratio of the
debt to the GDP. You wrote a paper with Jason Furman a
few years back saying it really is the question of the size of the debt service
against GDP. There's a report in Bloomberg this week
that that's what Janet Yellen, the treasury secretary, is looking at.
And then she looked at that ratio. It's not that disturbing.
Should we be disturbed looking at it through that lens?
Look, when you look at it in terms of debt service, David, what that depends
on, obviously, is what the level of the interest rate is.
And if you believe, CBO, that the one month or three month Treasury rate is
going to stay below two and a half for 10 years, then you can be serene about
debt service. But that's a kind of assume a can opener
approach. My guess, given all the debt that we're
accumulating, given what the Fed's going to have to do to contain inflation, is
that rates are going to have to be substantially higher than that.
And if you take a more realistic approach, you are looking at debt
service levels, that whether you use the nominal interest rate or the real
interest rate are getting very close to the levels that Furman and I said would
be it would be dangerous. So I think it's absolutely right to
focus on debt service as the issue. But we have in part because of all the
massive QE where the Fed, which is after all an arm of the government, has bought
up all the long term bonds. We're now running the country's finances
like a homeowner with a floating rate mortgage.
And if you've got a floating rate mortgage, it's not enough to say that my
debt service payments are low right now. You've got to think about what could
happen in the future.
So I don't think that there's a basis for
high serenity. And I look at all kinds of shocks that
could happen coming out of defense spending, coming out of the need to
reconstruct Ukraine, coming out of climate situations that look more
serious, coming out of the fact that I saw some numbers yesterday that suggests
that there's probably a one in three chance that we're going to have another
Covid level health event within the next decade.
I do think we've got to be preparing for contingencies.
And this is a time when we need to be reloading in terms of the in terms of
the fiscal situation. So, Larry, finally put this all
together, if you would, take take the really robust jobs numbers that we've
talked about. Put it together with what you're
admonishing the Fed. They should be at least willing to put
on the table 50 basis point rate hikes in order to get our arms around
inflation. Given how strong the economy is.
Where are you now on recession? Because people.
Tyler, recession, for a long time you've been talking about I've been talking
with a lot of people have we keep putting out the time for it.
Where are you on the likely recession? When is it hit?
David, I I still think that it is unlocked.
Soft landings are very unlikely that it's unlikely that inflation will come
down to the 2 range without an economic downturn.
And in a way, it's a policy choice when that downturn comes.
And we have put it, we have put it off. The worry is that when you delay taking
your medication and. Then you only take part of your
medication till you feel better. You don't really get cured and there
ends up being more pain down the road. It sure doesn't look to me like we're
going near recession before the end of the summer.
And if I had to guess right now, I think the Fed will end up doing enough to
restrain inflation. And that's going to mean it's quite soft
economy some time in 2024. But the dynamics are very difficult to
gauge.