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The State of the Economy

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The State of the Economy

10 Blocks podcast December 22, 2021
Economy, finance, and budgets

Economist Milton Ezrati joins Brian Anderson to discuss the state of the U.S. economy, the role our fiscal and monetary authorities have played in fixing it—or making it worse—and the most important long-term macroeconomic trends.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the Editor of City Journal. Joining me on the show today is Milton Ezrati. He's been on the show before. He's a Contributing Editor at The National Interest. He has an affiliation with the Center for the Study of Human Capital at the State University of Buffalo, and he's the Chief Economist for Vested, the New York-based communications firm. He's written for City Journal frequently on economic and policy issues.

We're very glad to have him on the show. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live. So Milton, thanks for joining us on the show again.

Milton Ezrati: Pleasure to be here.

Brian Anderson: Several months ago, you wrote a piece for City Journal, making the case that our economic situation, our economic woes, were not going to be transitory. The Biden administration's economic authorities, Janet Yellen, Jerome Powell, they've been contending for a while that the inflation that the country was experiencing was the result solely of supply chain issues caused by the pandemic, and that those issues would soon abate, and so inflation would come down.

You wrote at the time, that this explanation ignored the demand side of the ledger; that you've had massive government spending, which has driven up consumer demand for goods, and that producers have been struggling to meet this demand. At the same time, you've had a shortage of workers, exacerbated by policies that paid people not to work. And this, you said, has well added to the problem. So I wonder, since you published that, I think it was in October, could you elaborate a bit on the argument in that article? And what are you seeing in the economy that may have changed since?

Milton Ezrati: The economy is much as it was. What's changed is the tune in Washington. Jerome Powell, the Chairman of the Federal Reserve, who had been a major proponent of the transitory argument, has walked that back, and actually, Fed policy has begun to change, which shows that they're taking this inflation much more seriously than seemed to be the case in October, when I produced that article.

The supply chain problems; one of the things I argued then, is even if it was all just supply chain problems, the transitory argument was misstated, because supply problems, whether it's labor shortages or the situation in Asia with the Chinese Zero Tolerance policy, and of course, oil shortages, or energy shortages, to make it more general, will all last a lot longer than they were implying at the time, and the White House continues to imply.

There are also, as you point out, this tremendous surge in demand, supported by the federal government; and there is the legacy of tremendous amounts of liquidity that the federal reserve has been pouring into this economy to a greater or lesser extent for almost 15 years now. And there is a price to pay for that, as well.

Brian Anderson: So in a way, the Fed has started to come around to the position you were articulating in that article. So it's winding down it's bond buying program. It looks like it's going to be raising rates several times in 2022. But the Fed has been more cautious than some other central banks, the Bank of England, for example. And some people have criticized Powell for even these cautious steps.

So the economist Ryan Avent, he's written that, "Central banks should be slow and cautious in tightening monetary policy, because even in the absence of rapid tightening inflation, is likely to fall." So, when we're looking at central bankers today, what are they basing their decisions on? And what are the risks of tightening too fast, or of keeping policy too loose?

Milton Ezrati: Well, the risk of too fast an action, and I sympathize with Powell. I didn't when he was saying transitory; I thought that was nonsense. But he did want to get reappointed, and you'll forgive my cynicism. And that's what the White House wanted him to say. And now he has changed policy. He's going very gradually. He's, I think, given the inflationary push we have, especially this legacy of all the liquidity of the Fed has poured on the economy over time, that the Fed should act in a more aggressive way. But I'm glad it's acting at all.

Now, it's important to note that even with three small rate increases that Fed is contemplating for next year, policy would still be stimulative. Those interest rates would still be lower than the rate of inflation, even if the rate of inflation comes down considerably. And I'm skeptical that that in fact is going to happen. So if I were advising the Fed, and I'm not; but if I were advising the Fed, I'd be saying to them, "We should be acting if not the way Paul Volcker did during the Great Inflation in the late seventies, we should be acting more aggressively." The Central Bank of Europe has special problems. Of course, the Bank of England is acting somewhat more aggressively.

Brian Anderson: What about on the fiscal side of things? We've seen this incredible avalanche of relief spending since the pandemic began; but Joe Biden's social policy legislation, the Build Back Better Bill obviously hit a major wall in the Senate this week, as Joe Manchin came out against it. The current version of this bill, the Build Back Better Bill, it's front-loaded, runs up deficit spending between now and the mid-2020s on programs like childcare, universal pre-K, renewable energy. There's an entire progressive grab bag included in it. If some version of this bill eventually does get passed, what in your view, would be the implications of such an infusion of cash on the economy?

Milton Ezrati: Well, it would compound the problems in two ways. The first is that it would just be more spending, when we've had a great deal of that already with the COVID relief. And it would, of course, compound the Fed's problem. It would put a lot of pressure on the Federal Reserve to print more money. I know it's electronic, but the electronic equivalent of running the printing presses; and that's what the Fed has been doing. So there would be that problem.

The other thing is, is a lot of this legislation is still paying people not to work. Now, we've gotten rid of the special unemployment benefits, but there is still a great deal here that dissuades people from going out for work. And we already have a labor shortage in this country. My calculations, or at least using the Department of Labor data, shows that we have about five and a half million fewer people looking for work, or working, than we did before the pandemic. And that's about three and a half percent of the workforce, so it's a not insignificant number. And if we pass this child credit, it's going to dissuade more people not to work. I've seen numbers about a million, a million and a half; I can't verify them. But that just compounds the supply side of this thing, even as it exaggerates the demand side. So, it cuts badly from the inflation point of view, in two ways.

Brian Anderson: Interesting. I wonder if we could talk a little bit about the broader macroeconomic trends that are at play. So you have the US, Europe, and China all intent, at least rhetorically, on phasing out fossil fuels, replacing them with renewables like wind and solar, other forms of power. The cost of renewables has fallen in recent years, but there are logistical problems to their widespread implementation. These still remain. They can be more sporadic as well, in terms of energy, as we've seen with recent shortages.

So meantime, policymakers aware of long-term deflationary pressures, shifting demographics across the aging developed world, have decided until this year, that inflation was this thing that was gone. They've been pursuing highly inflationary fiscal and monetary policies. So I wonder if you could say our current troubles represent in some sense, the culmination of these decisions; that chickens are coming home to roost. What are, in your view, the most consequential broad trends for the economy, not just over the immediate future of the next six months, or year or two, but over the long term?

Milton Ezrati: I'm glad you brought up the renewables, or the green energy. The problem with that was, we have had a surge demand, as you pointed out, when you introduced this. The federal government has been putting a lot of money in people's hands; and that's you across the world. The Federal Reserve has been printing a lot of money, which effectively, indirectly puts money in people's hands. So the demand surge, as soon as we ended the lockdowns and all the strictures; now, maybe we're going back. But as soon as we ended the strictures, there was a tremendous demand surge. And even in the best of circumstances, that would have strained energy supplies.

But we have shut down coal mines. Not that I'm in favor of dirty energy; but we have shut down coal mines. The Biden Administration came into office, and did everything it could to discourage fracking. It shut down the Keystone Pipeline. All of this may it much harder to respond, because windmills and solar panels, you cannot ramp them up as fast as you can, just pumping a little more oil or running a refinery 24/7.

And I'm not saying that the ultimate goal of getting rid of fossil fuels is a good or a bad one, but there was absolutely no consideration of what would happen if we had this surge in demand. And we did. China is an object lesson; they closed down coal mines. They stopped importing oil. They were counting on a lot of hydro. They had a drought; there wasn't the hydro. In the meantime, demand picked up, and they had rolling blackouts effectively across the country, that shut down factories, contributed to our supply chain problems, as a matter of fact.

Brian Anderson: And we're seeing this in other countries as well, right? These kind of rolling blackouts; or at least in incredible crunch on energy. And there's some worries over the winter, that this could become a significant problem.

Milton Ezrati: If we have a cold winter, it will be a very severe problem. And as it is, given what's happened to the price of energy. Now, some of these prices have come down a little bit, as people have stepped up supply. But given what's happened to the price of energy, even if there is enough to go around, it's going to be a real burden on household incomes, as they try to heat their homes, especially if we have a difficult winter.

Brian Anderson: Last question. In your futuristic eyes, where do you see the global economy heading five years from now, if it's even possible to think that far in advance?

Milton Ezrati: Well, the short answer is no, it's not. But, well, I think we have, unless this Omicron thing becomes much more severe, or the authorities panic, either/or, and we shut down, we are having a very prompt and effective recovery from the strictures that we were put in place in 2020, and have come off and on since. That should probably continue for at least another year or two; after that, a great deal depends on the inflation.

If we continue to have the inflation, and as I've said, there is a lot of fundamental push for inflation built into the system. If we continue to have that, that is destructive of economic growth, it is destructive of investment; and that could make life, economic life, much more difficult looking out beyond two years, three years.

The other thing that I would point out, is that a lot of countries in the world, in fact, most major economies: ours, Europe, Japan, and even China, are suffering a demographic problem. There is a shortage of young workers, trained young workers. And especially as the huge, relatively huge, Baby Boom generation retires, there is going to be a difficult time getting workers to replace them, and that, too, tends to slow growth.

So I'm looking for my near-term outlook is continued recovery from this, the pandemic strictures; and that will produce very impressive growth rates, I think for quite a while. And I say quite a while, I mean a few quarters or so; after that, everything seems to point to a much slower economy, more like we had 10 years ago.

Brian Anderson: Right. Thank you very much, Milton. Don't forget to check out Milton Exrati's work on the City Journal website. We will link to his author page in the description. You can also find City Journal on Twitter, @CityJournal, and on Instagram, @cityjournal_mi. As always, if you like what you've heard on today's podcast, please give us our ratings on iTunes. And Milton Ezrati, great to talk with you again, and thanks for coming on the show.

Milton Ezrati: Thank you.

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Photo by Joe Raedle/Getty Images

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