Jason Furman is an academic, an economics professor at Harvard who has also been a policy practitioner as the head of the Council of Economic Advisors under Barack Obama. As the Federal Reserve begins the review of its policy framework, and economists continue to debate what went happened during the pandemic which allowed inflation to get so far out of control, he has written an article for the prestigious Foreign Affairs magazine where he dissects what went wrong, where the Biden economics team when off track, and the main mistakes that were made by the Fed.
It is a concise article written in terms that non-economists can understand and sophisticated practitioners of economics can appreciate, whether they agree with Jason’s views or not.
We also talked about tariffs and other steps the Trump team is taking as they map out their vision and strategy for the economy.
So dive in hear what he has to say. And let me know what you think.
Jason Furman sees Inflation as a result of overzealous government actions but sees a role for government Economist: tells it like I see it 00:01:34.390 --> 00:01:42.150
Jason Furman: Yeah. So I'm an economist. First and foremost, I'm in a university. I think my goal is to tell it like I see it.
Admitted Democrat sympathizer…00:01:42.540 --> 00:02:02.189
Jason Furman: I don't think that's always going to be truth. By the way, I have misjudgments. There's things I get wrong, but in general I think the world is a better place if people don't self censor, they say what they think, and we have a debate between different ideas. And, by the way, ultimately, yes, I'm more sympathetic to the Democratic party.
Debate is good 00:02:02.510 --> 00:02:09.859
…and I think this is even more important for them to have that type of robust debate about the best way forward.
Let’s get fiscal…to excess 00:02:49.290 --> 00:03:35.500
I would divide it into 2 parts. There's the macro part. The initial fiscal stimulus was too large for a whole lot of reasons. But part of it was a theory that a hot economy was something you should aspire to. It could turn around, solve a lot of problems in labor, markets, inequality, and the like. Moreover, once that economy got underway, they then did more rounds of fiscal support, including relief for student loans and other legislation that additionally added to demand. So there was just way, way, too much demand, I think. Central banks, which are your normal stomping ground, made some mistakes, too, but they were powerless against the magnitude of this demand.
Other objectives fared better 00:03:35.650 --> 00:03:51.000
Jason Furman: Then there's a whole separate set of policies related to trying to redo the structure of the economy. Industrial policy, antitrust policy and the like. And in some cases I think that worked out okay.
Inflation was Public enemy No 1 0003:51.000 --> 00:04:11.170
Jason Furman: But it didn't redo the economy because it got hit by the same forces. High prices made it hard to build infrastructure, driving interest rates higher hurt the parts of manufacturing that weren't subsidized. So in that sense.
Remaking backfired 00:04:06.690 --> 00:04:11.170
The remaking of the economy backfired as well.
Money though unneeded was ceded 00:05:00.570 --> 00:05:41.899
Jason Furman: So look in 2020. I had no idea what was going to go on in the economy. As a result of Covid. No one did. I had no idea how to size relief for the economy back when the Cares Act was done by March of 2021, just to take an example, and it's a pretty big example. States and localities. Their revenue was back above where it was prior to Covid. They were running budget surpluses. They were in no trouble at all. But the law gave them 500 billion dollars. And that's a lot of money, 500 billion dollars. That's enough to do all sorts of things if you spread it out over time and it was pretty knowable that they didn't need that money.
Like underdog inflation was everywhere 00:05:42.100 --> 00:06:07.959
Jason Furman: I do want to pick up on the global argument, because that one is the most exculpatory argument you hear, which is inflation happened everywhere. Why would you blame the Biden Administration say several things about that. First of all, we don't say that, you know. Herbert Hoover did everything perfectly, just because there was a depression in other countries, just because something's global. Well, in this case a lot of countries made the same mistake, which is, they did a lot of stimulus…
The ‘luck’ of the inflation draw 00:06:08.140 --> 00:06:17.139
Moreover, a lot of other countries had worse luck. Natural gas prices, for example, went up much, much more in Europe than they did in the United States.
Not all ‘goods spending’ is good spending 00:06:17.440 --> 00:06:42.050
Jason Furman: The Fed was forced to raise rates by more than the ECB raised rates and the Fed keep them higher. So we did more of a monetary tightening than others did, and finally the United States exported and caused a certain amount of the global inflation, especially on the goods side where you see American spending on goods go up quite a lot, at a time when good spending did not go up in other countries.
Shocking! 00:07:28.750 --> 00:07:50.149
Yeah, that's exactly right. I mean, picture this. Give everyone in the country a million dollars. You'd cause a lot of supply chain problems. There would be ships lined up at the port. There would be empty shelves in supermarkets. There would be difficulties in car factories making the cars people wanted, but that wouldn't be a supply shock. It would be a demand shock.
Shocks and fallout effects guaranteed 00:07:50.760 --> 00:08:29.999
And there were some supply shocks here, but an awful lot of the things that were called supply were really supply, being unable to keep up with the voracious demand. Moreover, if you have a lot of money, it's going to show up in higher prices somewhere and supply might determine where it shows up. So if you gave everyone a million dollars. I don't know what would go up more in price cars, restaurants, or clothing, but I know one of them would go up, so supply might determine where the price increases, show up, but the price increases themselves, they were almost guaranteed and locked in. Once you send people all that money.
The Fed’s mistake repeated 00:09:29.050 --> 00:10:04.799
I think the Fed in some way… their mistake was more egregious. They're nonpolitical and technocratic. They're filled with PhDs. Moreover, they didn't just make a mistake in March of 2021, which was the main Biden mistake, but they kept making it, as you just pointed out, month after month after month, until into 2022. So I think it was more egregious, but it was also less consequential, because, no matter how quickly the fed has raised rates with that much money working its way through the economy, it would have been pretty hard to avoid a decent amount of inflation.
…and the Fed got greedy 00:10:05.280 --> 00:10:27.270
Jason Furman: and the Fed in part, I think, was actually infected by the same hot economy theories that were guiding the Administration, the sense that we'd been below target on inflation for a long time employment had been not everything we'd like, at least in terms of the overall employment rate, including labor force participation, and wage growth wasn't everything we wanted...and <the view> that by really heating the economy the Fed could solve this bigger set of problems.
Fed strove beyond its limits 00:10:34.490 --> 00:10:50.919
Jason Furman: And the truth is, the fed can do price stability. It can maybe do maximum employment. It really can't do much about inequality, labor force, participation, real wage growth and the like, and it probably shouldn't have ever fallen for the illusion that it could.
An unpaid political announcement 00:11:10.240 --> 00:11:26.790
Jason Furman: It's a good question. Look, by the way, I love the Fed. I really admire the Fed its independence. It's incredibly important. They also, by the way, cleaned up very quickly and effectively in 2022 by raising interest rates quickly. So, I want to give a bunch of credit as a political messaging matter.
The Fed: a Counterfactual 00:11:27.490 --> 00:11:52.190
Jason Furman: Look, I think that's one nice thing about the independence of the fed. I don't like it when politicians yell at them, but you know they don't care that much, and so they can absorb some of the blame in terms of blaming the fed. I don't know. I mean, the President did reappoint Jay Powell, so that probably made it harder for him to blame Jay Powell for all these problems, and you know I'm not sure the charge would have stuck.
A lesson learned 40 years ago is re-learned 00:12:51.580 --> 00:13:03.920
And this type of inflationary experience is a lesson for Central Bank that I expect to last several decades. You know, we don't want this to happen again. Price stability.
Forgotten history? Models without memory? 00:13:04.610 --> 00:13:19.560
Jason Furman: even though it's part of the dual mandate for any central bank. I think it actually is the more important part of the dual mandate. And you know people had forgotten about inflation, and by this even affects technical things. If you look at the Fed's models, they weren't predicting very much inflation.
Models are no replacement for thinking 00:13:19.670 --> 00:13:28.480
Why? Because they were based on data from the last couple decades, during which there basically wasn't inflation. So no matter what you put into the model, it <does not generate inflation>.
00:13:29.010 --> 00:13:40.909
Jason Furman: Inflation, and that worked decently well as a model for the last couple of decades up until 2021 and 2022. So I think some of their models a lot of their thinking.
00:13:41.080 --> 00:15:39.109
Jason Furman: This is, you know, I think they're taking the right lesson from this experience. I mean, it's interesting. The story's not over. We keep thinking it's the soft landing it's over. It's done. There was at least one time I thought that that was the case. But inflation has not come down to target yet. 3 things that could happen.
· The 1st is, it just gradually gets back to target, in which case we'll think, you know, this inflation was a painful, terrible experience, but we got out of it without a recession.
· The second is that this last mile is so difficult, in which case we'll look back on the inflation. It was worse than we thought, because not only was it bad while it lasted, but it required some pain to get rid of it.
· The 3rd possibility is, we won't get any clean test of proposition. One versus proposition 2. Because President Donald Trump will throw all sorts of new, rather interesting and exotic policies into the mix that will, you know, overtake the normal dynamic. The economy was already on.
The tariff conundrum 00:16:22.030 --> 00:16:45.339
I'm very torn and uncertain on tariffs, and when I say, torn and uncertain, I'm uncertain as to whether they're worse for consumers. Worse for workers, worse, for the United States is standing in the world, or just worse, for, like what they say about rational thought, I don't like them at all. I think they are almost always terrible in some very limited and targeted circumstances
China tariffs were too-much 00:16:45.340 --> 00:17:07.890
Jason Furman: there is a case that you should be willing to undergo some pain in order to achieve something. So some of the tariffs against China might make sense as part of a negotiation or for national security reasons. But even there. I think the Biden Administration went too far in maintaining the trump tariffs and adding on top of them vis-a-vis China.
Canada, Mexico, others…00:17:08.270 --> 00:17:21.439
And then, when it comes to tariffs on Canada, Mexico, but pretty much, almost any country in the world other than China. I can't imagine there's anything on the positive side of the ledger that could outweigh the many, many negatives that they have.
Goodbye Mr Chips? 00:17:47.960 --> 00:18:05.019
Jason Furman: In very limited cases for national security reasons. It makes sense. So I think the the chips program to make microchips in the United States makes sense, not as an economic strategy. It's not good for our workers. It's not good for our businesses. It's better to just import the chips they make from Taiwan.
The truly dead cannot be revived 00:18:10.150 --> 00:18:24.450
You know. If you're talking about increasing manufacturing as a whole, I am very skeptical that we know how to do that. It certainly didn't happen under Biden. It didn't happen under trump one. I would bet against it happening under Trump 2.
Why pick manufacturing? 00:18:24.820 --> 00:18:37.359
Jason Furman: And, moreover, I don't think that should be the goal. There's lots of great types of jobs we have in the United States. A lot of people would like their children to be working in something other than manufacturing. I wouldn't pick that one sector.
00:18:37.640 --> 00:18:47.990
Kathleen Hays: (Let me) Ask you about wages. That's another when you talk about what happened under Bidenomics. And here we are now looking at wages again…
The residual left by inflation is high prices 00:19:12.020 --> 00:19:34.359
Yeah. Workers got into a deep hole with the inflation which outstripped the wage growth they have been digging out of the hole. That's the good news. This is moving in the right direction lately, but this is still a big gap to overcome, and I think that's part of what's weighed on sentiment for the last couple of years.
Heat can be hard to contain 00:19:34.480 --> 00:19:46.590
Jason Furman: and is also a useful reminder that when you heat the economy you can generate faster wage growth. But you also generate faster price growth, and which one of those 2 wins. The race is not obvious.
Germany is not a model for the US 00:20:51.420 --> 00:21:11.190
Jason Furman: but that's not the way it works. Economically. Germany has had a big trade surplus. That's been a sign that their demand has been weak. That's come at the expense of domestic investment. That's not an economic model. The United States should be emulating the United States has had a trade deficit in part that reflects the confidence investors have in our economy
Demand good; big deficit OK 00:21:11.190 --> 00:21:31.890
Jason Furman: the strength of our demand. And it's helped finance investment which has contributed to some of the strongest economic growth in the world of the advanced world. So people need to get out of this. You know the idea that trade deficit bad, you know presumptively. That's just not true.
Polarized to death 00:22:29.670 --> 00:23:08.810
…just everything is so polarized. What so many people think about, you know, wide range of unrelated issues like you know climate change, or how confident are you in the economy? Just depends on politics. I mean, there's something pathetic. IN about October of last year. If you surveyed a Democrat, their consumer confidence was high. You surveyed a Republican. Their consumer confidence was low, and 2 months later those reversed by the way, the Republicans moved more than the Democrats, but most of them moved. So it's just so hard for people these days to take off their partisan glasses and try to look clearly, and
ADVICE TO TRUMP 00:23:43.530 --> 00:24:03.660
· The biggest is stop with the tariffs.
· The second is, if you want to bring down the trade deficit, do deficit reduction.
· and the 3rd is, if you want to reduce the deficit, go where the money is, and that's a combination of revenues and the big entitlement programs. And then the last is.
Political Suicide Watch? 00:24:03.810 --> 00:24:23.059
Jason Furman: it would be political suicide to try to do anything about entitlements on your own. You couldn't do anything about taxes with Republicans in Congress, so sit down with the Democrats, do something. Bipartisan adopt a different approach than the Maximalist single party one you've been following to date.
Jason Furman
Professor of the Practice of Economic Policy
Jason Furman is the Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School (HKS) and the Department of Economics at Harvard University. He is also nonresident senior fellow at the Peterson Institute for International Economics. Furman engages in public policy through research, writing and teaching in a wide range of areas including U.S. and international macroeconomics, fiscal policy, labor markets and competition policy. He co-teaches Ec10 “Principles of Economics,” the largest course at Harvard University.
Previously, Furman served eight years as a top economic adviser to President Obama, including serving as the 28th Chairman of the Council of Economic Advisers from August 2013 to January 2017, acting as both President Obama’s chief economist and a member of the cabinet. During this time, Furman played a major role in most of the major economic policies of the Obama Administration. Furman also served under President Clinton.
Furman is a member of numerous organizations including the Council on Foreign Relations, the Group of Thirty and the Economic Strategy Group. He also serves as a Trustee of the Russell Sage Foundation and on the advisory boards for the Brookings Papers on Economic Activity, the Bund Summit, the Hamilton Project and the Washington Center for Equitable Growth.
In addition to articles in scholarly journals and periodicals, Furman is a regular contributor to the Wall Street Journal and Project Syndicate and the editor of two books on economic policy. Furman holds a Ph.D. in economics from Harvard University.
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