Doug Holtz-Eakin, President of the American Action Forum, joins the podcast to provide his take on the U.S. economy, inflation, employment, and GDP. The big topic fiscal policy while everyone provides their odds of a recession.
Doug Holtz-Eakin, President of the American Action Forum, joins the podcast to provide his take on the U.S. economy, inflation, employment, and GDP. The big topic fiscal policy while everyone provides their odds of a recession.
Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two colleagues and co-hosts, Cris deRitis. Hi, Cris.
Cris deRitis: Hey Mark. How are you?
Mark Zandi: Good. You made your way back from Toronto, I see.
Cris deRitis: I did. You too?
Mark Zandi: Cris and I... Oh, and of course Ryan. Ryan Sweet, how can I not introduce you right up front, Ryan, Director of Realtime Economics. How are you?
Ryan Sweet: Good. So how was Toronto?
Mark Zandi: What do you think, Cris?
Cris deRitis: It was great. It was great.
Mark Zandi: The client dinners in Toronto and Chicago.
Cris deRitis: It was great to see them again. This was our first foray back on the road since start of the pandemic. We haven't done our own conferences, or had these types of dinners since then. So it was really great to be back out there, and hear the opinions of a lot of different folks around the table.
Mark Zandi: And we got good feedback on the podcast, right? I thought.
Cris deRitis: We did. Lots of fans, lots of fans.
Mark Zandi: We got a lot of people listening to this.
Ryan Sweet: Did you guys have a hot dog when you were in Chicago?
Mark Zandi: Hot dog?
Ryan Sweet: Tell me... You can't go to Chicago and not get a hot dog.
Mark Zandi: Really? Where do you get hot dogs?
Cris deRitis: Oh, gosh.
Mark Zandi: Everywhere?
Cris deRitis: Got to get the [inaudible 00:01:25].
Ryan Sweet: They're everywhere.
Mark Zandi: Oh. No, I didn't... Did you see any hot dog... When in Toronto, I did have a Tim Horton, is it Tim Horton? Donut for the first time ever. And I'll have to say, I paid a price for eating the donut.
Ryan Sweet: Apparently you got the wrong one.
Mark Zandi: I got the wrong donut. Yeah. I got all kinds of advice of what kind of donuts I should eat, but anyway. So I got to keep that in mind about hot dogs. I didn't know Chicago was known for hot dogs, but-
Ryan Sweet: Pizza, you have at least a slice of pizza.
Cris deRitis: No, no, no, no, no, no. Chicago pizza, come on.
Ryan Sweet: That's delicious.
Cris deRitis: It's not right. It's not right.
Ryan Sweet: He'd spent a whole podcast debating this.
Mark Zandi: Well, anyway, it was really good to be out there with folks, and in person for the first time in almost three years. So, that's pretty amazing. Good. Well, and we have a guest, Doug. Doug Holtz-Eakin. Doug, good to have you.
Doug Holtz-Eakin: Thank you. Thanks for having me on. I appreciate it. Do I get a free hot dog for doing this? It's exciting.
Mark Zandi: No, a bottle of wine. There's a cap on how good a bottle of wine we can give you. Hopefully it's reasonably passable, but-
Doug Holtz-Eakin: Yeah. Well-
Cris deRitis: Would you prefer a hot dog?
Doug Holtz-Eakin: No.
Mark Zandi: Doug and I, we've been crossing paths for many, many years now. Doug, we obviously got to know each other when you ran the McCain campaign, the economic side of the McCain campaign, and you asked me to help participate. And that was one of the best experiences just being involved in all that was just fabulous. But did we know each other before? I can't even... I can't remember.
Doug Holtz-Eakin: I believe that we met when I was at the Congressional Budget Office. I think I asked you for some advice on a housing question or something. That was-
Mark Zandi: Okay. And of course, you were the Director of the CBO, the Congressional Budget Office, back in the 00s, I believe.
Doug Holtz-Eakin: 2003 to 2005.
Mark Zandi: Yeah. So those were years. What kind of legislation were you focused on at CBO at that time? Was that... I can't quite remember.
Doug Holtz-Eakin: That was during the passage of the Medicare Modernization Act, that gave us the Prescription Drug Program. It was also the Iraq war. I testified more on Iraq troop rotations than almost anything, believe it or not.
Mark Zandi: Oh, that's interesting. Well, that was when Larry Lindsay got in trouble, didn't he?
Doug Holtz-Eakin: Yeah, got fired.
Mark Zandi: Got fired. Because, he was chair of the Council of Economic Advisors?
Doug Holtz-Eakin: No, he was director of the National Economic Council.
Mark Zandi: Oh, okay.
Doug Holtz-Eakin: [inaudible 00:04:17] was chair of the CEA, and I worked for Glen as the chief economist, 2001, 2002 then went to CBO, and then after a year's hiatus went to the McCain campaign.
Mark Zandi: Right. And oh, I didn't realize you were the chief economist of the CEA, under Glen Hubbard. Oh, okay. Cool.
Doug Holtz-Eakin: And that was controversial, because I was the first CBO director to go directly from the White House to the CBO. And since that's a nonpartisan position by statute, there were people who believed that I couldn't do the job properly, just because I was coming from a Bush White House. But I assured them, that my job at the White House was to organize the staff, to deliver our best economic advice to our political superiors, who then ignored us. And I asked them, "Organize the CBO to deliver our best budgetary economic advice, would they ignore me?" And they just laughed. And they said, "You got the job."
Mark Zandi: That's great that all worked out. Well, that's obviously what we're going to talk about here later in the podcast is about fiscal policy, because a lot of stuff to talk about, a lot of pieces of legislation, and executive orders and everything else, under the Biden Administration, that's Congress. And I'd love to get your take on all of that. And I know you do that today in your work at the American Action Forum, and that's where you are today. Is it fair to say a think tank, and it's a think tank that you've founded?
Doug Holtz-Eakin: I founded this, opened up January 1st, 2010. And it's not your typical think tank. Your typical DC think tank is full of deep subject matter experts who close their door, think deep thoughts, write books. Periodically the world collides with them in their relevance, and then their office for a couple years.
Mark Zandi: That sounds like Ryan somehow, right, Cris?
Cris deRitis: No.
Mark Zandi: It's already started. Yeah. Yeah.
Doug Holtz-Eakin: So, as I said, I worked at the CEA, CBO, McCain campaign ran the policy shop on the campaign. And what I realized at the end of those experiences was that in those jobs you did policy research, education, options, advice, but you did it in a very particular way, which is number one, you worked on whatever was happening that day. You didn't have the luxury of saying, "I do turtle migration. When that comes up, let me know." You work on whatever's happening. You had to deliver whatever you were preparing your research, your product, in English to non-specialists. So there was a real premium on the communication function. And lastly, you had to know the political lay of the land. When you work in the White House, it's all about the president's agenda. Everything else is the enemy. Doesn't matter who's actually running Congress. They're the enemy.
At CBO, it was by law nonpartisan, so I had to be very careful to not have any bias. Obviously on the campaign, you're trying to make good policy, good politics, which is the challenge. And I realized that I liked that work, and it didn't seem to me, there was any reason why that was unique to government. There must be people out there who are center, right conservatives like I am. And something happens and an oil rig blows up in the Gulf, they want to know from their perspective, how do I think about this? And they don't sit and read white papers in advance, if something happens, they want to know about it. So, that's what we do. We try to deliver the waterfront of domestic and economic policy issues on whatever's happening in the Congress and the agencies. That's the mission of AAF.
Mark Zandi: And I notice you write every day, right?
Doug Holtz-Eakin: I write our morning email every day.
Mark Zandi: Yeah. That must be tough.
Doug Holtz-Eakin: No, that's just therapy.
Mark Zandi: Therapy. Okay. It's like jogging or eating breakfast.
Doug Holtz-Eakin: There's probably healthier therapies. This one's mine. I'm a burn it down rate that begins when I wake up, and this helps me with it.
Mark Zandi: Yeah. Well, I will say, you certainly helped my career, I would say, because when you brought me into the McCain campaign... Because I'm center, left, you would be center, right. You center left and of course, you weren't asking me to opine about a lot about policy. Although, you did ask a few things that I really appreciate, but it was mostly about the economics, what was going on, which actually turned out to be quite important, didn't it?
Doug Holtz-Eakin: Yeah. I mean we had the first hundred dollars oil prices back then. We had the [inaudible 00:08:54] prices onset of the great recession. It was an ideal time to be on a presidential campaign. Things went just right.
Mark Zandi: Yeah, exactly. Right. Well, Cris, everyone, we're talking about the financial crisis. This was the start of the financial crisis when this campaign was going on. Hey, in that regard, and I don't know if this is an unfair question, but I'll ask it anyway. Looking back on the campaign and how it responded to events, the unfolding crisis, the financial crisis, would you have done anything different now in hindsight?
Doug Holtz-Eakin: Oh yeah.
Mark Zandi: You would have?
Doug Holtz-Eakin: In terms of the intersection of the policy and the politics, there are two things that really stand out to me. Number one, as an accident of the history, I went on the McCain campaign, January 1, 2007. There were a hundred people, and he was the presumptive nominee at that point in time. And with the collective geniuses we had of at the headquarters, we took him from first, to dead last, and bankrupt by July 31, 2007, really a outstanding performance.
Mark Zandi: Oh, boy.
Doug Holtz-Eakin: And at that point, I worked for free from July to March, 2008. And it was just a skeleton staff and McCain put the whole thing on his back, and got himself back in, and it's all him. But, during that period, he just said, "Have some plans. Be bold." And so for example, I had a healthcare reform that featured eliminating the exclusion from tax of employer sponsored insurance, and providing a universal refundable tax credit for families and individuals, that looks a lot like the premium tax credits in the ACA exchanges, but...
Mark Zandi: Affordable Care Act.
Doug Holtz-Eakin: [inaudible 00:10:41] reform. And when he got the nomination, the political guys who came on board, looked at it and said, "You got to be kidding. We're going to get killed." And we did. We got killed. Obama ran an ad that showed a ball of string unraveling, and talked how McCain for the first time attacked your healthcare, and that's the single most run political ad ever still.
Mark Zandi: Is that right? Wow.
Doug Holtz-Eakin: Just crushed us. So, that was probably mistake. I didn't know anything about politics. [inaudible 00:11:14]. So I did this, and it was very specific and it was very controversial, and that was great when he wanted attention, and it was really bad as the candidate nominate. Second thing is, in responding to crises, [inaudible 00:11:27] to solve problems. My instinct is, GSEs are going down, let's solve the problem. Let's figure out what we're going to do.
The Obama campaign's response to the same events was to fly to Miami, and invite all the former treasury secretaries who were Democrats, down to brief Obama. And he walked out and said, "It's really bad. And I'm worried about the American people. I just got a great briefing so that we understand this better." And that's all he did. They didn't try to solve it.
Mark Zandi: Interesting.
Doug Holtz-Eakin: That was smarter. Right? I mean...
Mark Zandi: That's interesting
Doug Holtz-Eakin: Appear that you care, appear that you're smart about it, that you'll be capable of dealing with it, but don't suggest anything, because it's hard. And in real time we had no data, it's the follow war thing. We made a lot of mistakes.
Mark Zandi: Yeah. That's fascinating. That's fascinating.
Doug Holtz-Eakin: I would do it differently if I did it again. I'm never going to do it again.
Mark Zandi: There you go. Yeah. Yeah. And of course, I did not get paid, just so everyone knows. I was not a paid.
Doug Holtz-Eakin: No, no. So everyone knows, what Mark did, is he was one of three people who got on the phone with me every morning, and whatever data had come out that day, told me how to think about it, how to tell McCain to talk about it. And since it was an extraordinarily difficult period, economically, it was a huge service to me. I mean really valuable.
Mark Zandi: And I remember some calls. It was so cool. You had Marty Feldstein, you had Ken Rogoff. I can't remember... Of course, Glenn Hubbard, you mentioned. Larry Lindsay, a really cool group.
Doug Holtz-Eakin: So, I don't know who I'm more grateful to. And I mean this sincerely. People like you, who every day helped out, for nothing. That's an extraordinary service. All you can do is say, "Thank you. It was fantastic." Or, the people who I called out of the blue, with no reason for them to expect to call and say, "I need ten pages on what to do with oil price shocks, for the candidate tomorrow." And they'd do it.
Mark Zandi: Yeah. Yeah. Pretty amazing.
Doug Holtz-Eakin: It's-
Mark Zandi: The beauty of the American system, really. Yeah, yeah, yeah. People are committed. Anyway...
Doug Holtz-Eakin: I will tell you, I was 50 then. It was part of my mid midlife crisis, to go on the campaign. And everyone else on campaigns is 20 something. And there's a reason for that. It was the most exhausting thing I've ever done.
Mark Zandi: Well, let me just say... I'm sorry, go ahead.
Doug Holtz-Eakin: Two weeks out from the election thinking, "I'm not going to make it. I don't know how I'm going to die, but I'm definitely not going to make it." [inaudible 00:14:04].
Mark Zandi: Well, let me just say, you still look 50. It must be that therapy you write every morning, I don't know, working for you. But thank you for coming on. And we're going to come back to fiscal policy. We do want to talk a little bit about the economy, because I know you're a careful observer of that as well. But, let me bring in back in Ryan and Cris.
Ryan, let me turn to you. This is a light week on the data side. And we are going to come back and play the statistics game. So, I don't want you to give away any statistics, but given all the raft of information that came out, there's a lot of meetings of central banks, ECB, so forth and so on. Bank of Canada when we were in Toronto that day, I think, the bank of Canada raised their target rate by 75 basis points. Anything that strikes you about the data, and what it means for the economy's performance outlook? Anything you want to call to our attention?
Ryan Sweet: It was really light. There was very few indicators. ISM, non manufacturing survey came out, that unexpectedly increase, which is a good sign. So, jobless claims remain really low. The labor market is overall is very, very strong. All the attentions on the Fed and what they're going to do, and it seems like for central bank, 75 is the new 25, and you're already got the leak in the Wall Street Journal, so the Fed's going 75 in a couple weeks.
Mark Zandi: Yeah. We're going to have to change our forecast. I think we had 50 didn't we? Or we were contemplating 75.
Ryan Sweet: We were debating. We were going to wait till the CPI next week, which should be good. You should see it declined in the CPI next week, but it's not going to alter their view. They're not going to declare victory on just two months of improving inflation. So I think we're going to have to change our forecast.
Mark Zandi: Well, I guess when UI claims are 222,000, that means effectively no layoffs, which means job markets rip roaring, which means, "I got to slow things down pretty fast."
Ryan Sweet: Yeah. There's not any numbers in it, but the Fed's Beige Book came out, and if you read all the anecdotes, businesses are going to keep hiring, because they know how difficult it's to fill open positions, and that they have this backlog of work to do, and they need to fill people in seats. So, the idea that the Fed's going to be able to cool labor demand quickly, I think is a challenge for them.
Mark Zandi: Yeah. That's a real test. Hey Cris, anything you want to bring up? The one thing that struck me about our dinner with clients in Toronto, was the Canadian job market's even tighter than the US job market. The stories they were telling about labor, their workers, and wage demands and remote work, it was pretty interesting, I thought.
Cris deRitis: It was. It was. And I think many of them were secretly hoping for a little bit of a recession, just to restore some normality here. Sounds pretty unsustainable, what's going on there. But yeah, I agree with Ryan in terms of 75 basis point, every central bank seems to be adopting this as the standard tool at this point. So, I got to buckle in, because the tightening cycle certainly is here to stay for a while.
Ryan Sweet: [inaudible 00:17:18] looked at this week was the economic surprise index, which measures how the actual data performs relative to expectations.
Mark Zandi: Is that our index, or whose index is that?
Ryan Sweet: City Group.
Mark Zandi: Oh, City.
Ryan Sweet: [inaudible 00:17:30] has one. City has an economic surprise, and they're rising. So for the most part, the data is coming in a little bit better than what the consensus was expecting.
Mark Zandi: Yeah. Okay. Hey, Doug. So what's your sense of things? One question I might ask is, do you think we're in recession?
Doug Holtz-Eakin: No.
Mark Zandi: No. Right.
Doug Holtz-Eakin: I don't know what the first quarter was, but if you looked inside the anomalist net export and the inventory moves, domestic demand's very solid in the first quarter. So, second quarter weakened more than I expected. So that did concern me a bit, but it appears that that's behind it. So we had a slow quarter in the second quarter. Third quarter looks to be something like between one and one and a half. And that's about what I expect for the second half of the year. So no we're not in a recession. And certainly, if you take seriously the definition of a sustained and broad decline in economic activity, you can't make that case at all.
Mark Zandi: That's the National Bureau of Economic Research definition.
Doug Holtz-Eakin: Yeah. Right. [inaudible 00:18:36] standard. So, everyone gets all excited by every monthly labor report. But I now just look at two things. I look at the growth rate, and aggregate payrolls, is a proxy for labor demand, and look at labor force growth. And labor force participation is a proxy for supply.
And if you look at year over year growth rates of those things, demand's been way above supply for a long time, and remains way above supply. And there is no evidence for cooling really at all. So the idea that the Fed is going to look at this top line that was driven largely by gasoline prices, and declare victory, is insane. And all the easy money addicts in New York who keeps saying it's time for them to quit, better get over it. Powell has now twice, just basically said, "Wake up. Freight train coming. Stop." I admire him, he just don't look.
Mark Zandi: Couldn't say it more plainly.
Ryan Sweet: Yeah. He's having more and more Volcker's moments.
Doug Holtz-Eakin: Well he what's the name of Volcker's book?
Mark Zandi: Oh, I don't know.
Doug Holtz-Eakin: Keeping At It, the Search for Sound Monetary Policy. I'll keep saying, "We're going to keep at it."
Mark Zandi: Oh, is that... I never connected those dots. Okay.
Doug Holtz-Eakin: It's a full scale, put on the Volcker suit and go.
Ryan Sweet: Al just needs a cigar.
Doug Holtz-Eakin: Yeah.
Mark Zandi: That I can't imagine, but...
Ryan Sweet: No.
Doug Holtz-Eakin: Yeah, don't see that. But so I think I've thought 75 was a lock for a while. I really have. And he has basically said, "It is worse to do too much too quickly. It is worse to pause, than to do too much too..." So he did the whole Jackson [inaudible 00:20:31] speech without using the phrase soft landing. It's gone. You never used it anymore. He used to always say, "Well, we're going to try to engineer a soft landing." He stopped saying that.
Mark Zandi: When you say aggregate payrolls, do you mean simply payroll employment, the growth and payroll employment?
Doug Holtz-Eakin: Oh, payrolls. There's an index in the report. There's an index of aggregate payrolls, which is...
Mark Zandi: Okay.
Doug Holtz-Eakin: People, hours.
Mark Zandi: Oh, okay.
Doug Holtz-Eakin: Earnings. So that tells you they can be operating on a lot of dimensions, but it's demand for labor. Getting more bodies, more hours, more pay for them, whatever it might be.
Mark Zandi: Got it. So, what does that actually called in the report? It's index of...
Doug Holtz-Eakin: The area of weekly payrolls, I think is what it's called.
Mark Zandi: Oh, okay. Okay. And that's-
Doug Holtz-Eakin: If you looked at that, the early part of this year, that was going up at 12% annual rates, just red hot. Now, not into single digits now, and it was 3.4 in the last report. So there's some cooling there. That's good.
Mark Zandi: That's year over year, 3.4?
Doug Holtz-Eakin: But 3.4 was just the annual rate for that month.
Mark Zandi: Oh, that month. Okay. [inaudible 00:21:36].
Doug Holtz-Eakin: So, a little bit of noise, labor supply ticked up three tenths of a percent, labor demand ticked down. It's one month of information. If you extrapolated it, you declare victory, but don't extrapolate it, because we've seen this movie before, and it just goes right back.
Mark Zandi: It's so simple, but actually very intuitive and appealing. Just look at growth and labor force, growth and hours worked, essentially.
Doug Holtz-Eakin: You have to interest people in the story without talking about the number of jobs created, or the unemployment rate, because I don't pay attention to them anymore.
Mark Zandi: Quite interesting. Well, okay. So the Fed's obviously on high alert, and going to press... What do you think? Are they going to be able to pull this off without actually breaking the expansion, and pushing us into recession?
Doug Holtz-Eakin: I was at a conference recently, a housing conference, and this really, really bright eminent economist said that he guaranteed there wouldn't be a recession. Do you know that guy?
Mark Zandi: Guaranteed?
Doug Holtz-Eakin: That was you.
Mark Zandi: No, no, no. I don't guarantee anything. Oh, did I guarantee that at that conference?
Doug Holtz-Eakin: You did.
Mark Zandi: Oh, boy. See what happens when I get in the heat of the moment? Oh, I forgot about that. That was a Bipartisan Policy-
Doug Holtz-Eakin: Yeah. Yeah. Bipartisan [inaudible 00:22:54].
Mark Zandi: Commission. Yeah. Guaranteed.
Doug Holtz-Eakin: I probably said-
Ryan Sweet: Mark.
Doug Holtz-Eakin: I don't think we're in a recession. I'm optimistic like Mark is, but I'm not going to guarantee anything.
Mark Zandi: I said that?
Doug Holtz-Eakin: I think there's a good chance early next year that we see a downturn. I do.
Mark Zandi: Yeah.
Doug Holtz-Eakin: Better than [inaudible 00:23:12].
Mark Zandi: Right. It's just going to... You're thinking as the Fed can't thread this needle, they've got to slow job growth to quell wage growth, and inflation. And to do that, they're just going to have to step so hard on interest rates and the economy, that something's going to break somewhere.
Doug Holtz-Eakin: As we know, it operates with long and variable lags, and they're more interested in getting inflation under control. And the way they're doing that now remember, is they're looking at actual inflation so that this backward looking approach where you look at actual inflation, make sure it's come down to an acceptable level, for a couple of reports. They're not going to just do it on one. That almost guarantees that by the time you get to the full impact of the policy, you've over done it. They're going to overdo it.
Mark Zandi: That's pretty tough not to, I guess. What was I going to say? Oh, I think this might be a good place. We usually just talk about probabilities of recession at the end. But since we're here in this part of the conversation, just to get a more concrete sense of that.
Doug, what do you think the probability of recession, and hopefully this is a fair question, because this is the way people seem to think about it, what is the probability of recession over let's say the next 12 months, next 18 months? What do you think, between now and the end of 23?
Doug Holtz-Eakin: 75%.
Mark Zandi: Oh, that high? 75?
Ryan Sweet: I like him.
Mark Zandi: Yeah, but you're down to 60, I believe, Ryan.
Ryan Sweet: Oh, I'm back up, back to 65.
Mark Zandi: See, but Doug is influencing your thinking, I'm pretty sure.
Ryan Sweet: No, no. It was all Fed. I agree with him. They're going to overdo it.
Mark Zandi: They're going to overdo it. So what are you back up to, 65?
Ryan Sweet: 65.
Mark Zandi: Okay.
Ryan Sweet: So are you down to zero?
Mark Zandi: Down to zero?
Cris deRitis: Guaranteed.
Ryan Sweet: Guaranteed.
Mark Zandi: Oh, I don't know. I got to hear the tape recording of that. I find it odd that I actually use that word, guaranteed? That doesn't sound like Mark Zandi. Yeah. Really? Okay.
Doug Holtz-Eakin: You got all pumped up.
Mark Zandi: Did I really? Okay. Oh yeah.
Cris deRitis: No. I'm surprised, you never brought this up before.
Mark Zandi: I'm at 45. I do want to ask one... Oh and Cris, are you still at 60, right?
Cris deRitis: I'm at 65, actually.
Mark Zandi: Oh, you went up?
Cris deRitis: I went up.
Mark Zandi: After Canada. You listened to those Canadians. You think, "Oh my gosh, we're going [inaudible 00:25:43]."
Cris deRitis: Not just Canada. But more international, definitely.
Mark Zandi: Well, okay. What changed?
Cris deRitis: I'm personally worried about China and Europe.
Mark Zandi: Last week to this week you went from 60 to 65. What's behind that?
Cris deRitis: Yeah, just I'm increasingly concerned about Europe and China.
Mark Zandi: Oh, okay.
Cris deRitis: So the international impacts and I... US is great, but I don't know that we're immune.
Doug Holtz-Eakin: What are the rules? Am I allowed to ask a question?
Mark Zandi: Yeah. Fire away.
Cris deRitis: Absolutely. Yeah.
Doug Holtz-Eakin: What's the probability that China's in a recession right now?
Ryan Sweet: Ooh, excellent question.
Mark Zandi: It is a good question.
Cris deRitis: How do you define a recession for China?
Ryan Sweet: Like a growth recession?
Mark Zandi: Well, it can't be definitely-
Cris deRitis: Definitely a grown recession.
Mark Zandi: ... can't be negative GDP, because that'll never happen.
Doug Holtz-Eakin: I don't believe any of the numbers, so...
Mark Zandi: Yeah. Oh yeah. A broad base slowdown of some sort.
Doug Holtz-Eakin: Yeah. I mean it really seems like-
Mark Zandi: Well I'd say they were in a recession back a couple, three months ago when they were on lockdown. That felt like a recession, right? GEP-
Doug Holtz-Eakin: They just locked down 65 cities again. I think they still are.
Mark Zandi: Oh, that's right. They are starting to lock down again. Yeah. We'll see how that goes. It felt like they had come back a little bit though in the last few months, maybe the last quarter. So I think Q2 was the really low point.
Doug Holtz-Eakin: I've been reduced to basically gauging the Chinese economy by global oil prices. Because, they're the marginal demand.
Mark Zandi: Great point.
Doug Holtz-Eakin: And when it goes down, that's it.
Mark Zandi: Yeah.
Doug Holtz-Eakin: So I think they're really in bad shape, and that's been the inflation relief we've gotten.
Mark Zandi: Yeah. Ironically.
Ryan Sweet: That's right, right?
Doug Holtz-Eakin: [inaudible 00:27:14] in a heartbeat.
Mark Zandi: We're at $85 on a barrel of oil this morning, I think, because of the concerns over China and Chinese demand, which actually is a plus for us, a big plus. Yeah. Okay. Let me throw out a quick logic for no recession, see what you think.
I've been arguing that the consumer is going to hang tough. That there are lots of jobs, low unemployment, but more importantly, they got a lot of extra saving built up during the pandemic, balance sheets are strong, low leverage. They've locked in the previously low interest rates through refinancing. Asset prices and stock prices and housing values are weakening here, but still much wealthier than they were 3, 5, ten years ago. Does that resonate at all, or is that just a reason why, if we do have to suffer a recession, it just might be less severe, than otherwise would be.
Doug Holtz-Eakin: Yeah, I think that's logic. So, I did an exercise. I have to write something every day. So I end up asking myself a question, and then not knowing the answer. So I went back and I looked at all the previous business cycles post war. And if you date it from the peak, and start to downturn and you look at components of spending, relative to their value at the peak, it's the business spending that turns down first in every recession except the most recent one.
I think we're overly influenced by the pandemic recession, which is completely different than every other recession. Income went up, wealth went up, consumption went down because people couldn't go out and drink, and go to shows. So, everyone's staring at the consumer. I'm staring at the business sector. When they go down, that's when it starts. And then the consumer comes after usually, a quarter or two later. So, that's worth keeping in mind.
Mark Zandi: That is interesting. And in Q2, I guess investment spending, fixed investment was negative, wasn't it?
Cris deRitis: Yeah.
Doug Holtz-Eakin: Yeah.
Mark Zandi: Although, it feels a lot stronger than that. The durable, good-
Doug Holtz-Eakin: That one alarmed me. That's why that GDP word really did get my attention.
Mark Zandi: Got it. Got it. And Ryan, it's stronger in Q3 though, right? Because the durable goods orders have been good, I think [inaudible 00:29:30].
Ryan Sweet: They've been decent, but some leading indicators point towards some softening in core capital goods orders. So that's like the key component that feeds into GDP, and that's going to be weak over the next couple months.
Mark Zandi: Although, if I look at shipments of non-defense capital goods, X transportation, that's been pretty solid.
Ryan Sweet: Yes.
Mark Zandi: And that's what drives equipment investment. Right?
Ryan Sweet: Correct.
Mark Zandi: Okay.
Ryan Sweet: Yeah.
Mark Zandi: But that's an interesting point though, Doug. I always look at through the prism of the consumer driving the train.
Doug Holtz-Eakin: That's the way most people looking at it. There's been this obsession with the confidence index and what's going on there, and that's all interesting. But one thing I learned about, this a campaign lesson, if you look at consumer sentiment, Michigan consumer sentiment, it's driven a lot by partisan considerations.
The people whose party has the White House, are way more optimistic than everyone else. And this is this unusual period, because the Democrats have lost faith in the Biden Administration. And so, both of them are way down. And that's the only reason confidence is so low.
Mark Zandi: Although, Democrats are still a lot more optimistic, or less pessimistic, than the Republican.
Doug Holtz-Eakin: Less pessimistic, yeah.
Mark Zandi: I think Republican sentiment, correct me if I'm wrong, in the [inaudible 00:30:46] surveys, the lowest ever been.
Doug Holtz-Eakin: [inaudible 00:30:50] pulse.
Mark Zandi: They're really pessimistic. Although, with the declining gas prices, that might be turning a little bit. But this is a good time to play the game, the statistics game. And just to remind folks the game is, we each come up with a statistic, the rest of us try to figure out what that is through clues and questions, deductive reasoning. The best statistic is one that's not so easy we get it hands down, not too hard. Something that's apropos to a point you want to make, or relevant to the data. And Doug, so you just get the hang of it, let me go to Ryan first, because he's the maven at this. He's really good at this. So Ryan, what's your statistic of the week?
Ryan Sweet: 179,111.
Mark Zandi: Is it a job statistic?
Ryan Sweet: It is.
Mark Zandi: Is it-
Doug Holtz-Eakin: The increase in job openings in the JOLTS data?
Ryan Sweet: It is not.
Doug Holtz-Eakin: It should be.
Ryan Sweet: It should be.
Mark Zandi: It should be. It could be. It could be.
Ryan Sweet: Definitely could be.
Mark Zandi: It might be. It sounds plausible, actually. We were at 11 million and it went up by a hundred percent.
Ryan Sweet: [inaudible 00:31:57].
Mark Zandi: Yeah, that would... Man, if you got that, Doug, you would've gotten all kinds of cow bells. That's pretty good. Is it in the employment report that came out Friday?
Ryan Sweet: I'm sticking to the rules. This appointment came out at 8:30 on Friday.
Mark Zandi: Oh, it's this week. Oh, it's this week.
Ryan Sweet: This week.
Mark Zandi: Oh, 179,000.
Ryan Sweet: 111. Don't forget that 111
Mark Zandi: It can't be related to unemployment insurance claims, is it?
Ryan Sweet: It's claims.
Mark Zandi: Oh, it is claims.
Ryan Sweet: It is. I think [inaudible 00:32:32].
Cris deRitis: Seasonally, unadjusted [inaudible 00:32:34].
Mark Zandi: Seasonally, unadjusted claims. Initial claims.
Ryan Sweet: Yes. The four week moving average in non-seasonally adjusted initial claims.
Mark Zandi: Okay. Doug, what do you think, man? That's got to be sort of cowbell? No?
Ryan Sweet: No. [inaudible 00:32:50].
Mark Zandi: All right. Okay. All right, baby. So explain. Why'd you pick that?
Ryan Sweet: Jobless claims. It's one of my favorite economic indicators, comes out every Thursday. It gives you a real time read on what's going on in the labor market. And they usually don't send false signals except around hurricanes and things like that. But when jobless claims are rising, layoffs are increasing, and that's a recipe for a recession.
I looked at non seasonally adjusted this time of year, because Labor Day, they have hard time seasonally adjusting the data around holidays so they can be volatile. But, the non seasonally adjusted data is trending lower. And since 2000, the lowest four week moving average was 170,000 and we're at 179. So, it's just the testament to the overall strength of labor market.
Mark Zandi: Say that again? What's the lowest? It was what?
Ryan Sweet: The four week moving average, non seasonally adjusted claims, since 2000, is 170,000. And we're at 179.
Mark Zandi: Yeah. Okay. Back to you guys. Good news is bad news. Fed's going to look at that and go, "Oh my gosh. I can't stand." Yeah. Oh, okay. Okay. That was a good one. That was a good statistic. Yeah. Yeah. Cris, you want to go?
Cris deRitis: Sure. 259.3 billion dollars.
Ryan Sweet: This is in the trade report?
Cris deRitis: Yes, it is.
Mark Zandi: Oh, why did you go right there with that, Ryan? Was it the 0.3 that gave it away?
Ryan Sweet: No, it was a billion. When he said billion.
Mark Zandi: Billion. He said billion. Oh, and there limited releases this week. So trade came [inaudible 00:34:28].
Cris deRitis: Covers this indicator.
Doug Holtz-Eakin: Does it have to be from a release this week?
Mark Zandi: No. No, no. These guys are so literal about these rules.
Ryan Sweet: All right, Mr. Guarantee.
Mark Zandi: I want to see the transcript from that.
Cris deRitis: That is definitely going on Twitter.
Doug Holtz-Eakin: I think there was a live stream. So you can go back up to their web page and check it out.
Mark Zandi: Yeah. I got to take a look.
Ryan Sweet: Is it exports of a specific thing?
Cris deRitis: It is exports overall.
Ryan Sweet: Overall
Mark Zandi: Is it nominal exports for the month? Was 259 billion... Oh, okay.
Cris deRitis: Which is a record high.
Mark Zandi: That is interesting. On a nominal basis.
Cris deRitis: On a nominal basis. Okay.
Mark Zandi: Meaning, not accounting for inflation.
Cris deRitis: Correct. Although, I think even on a real basis it might.
Mark Zandi: Oh, is that right, either? Oh, that's interesting. You have any sense of what's driving that.
Cris deRitis: So, two things. So, we have a smaller goods deficit. So, as consumers are switching away from goods into services, and we have a bit more of a services surplus, that applies to the exports of US services. So that's a combination of those, is leading to a narrower trade deficit.
Mark Zandi: Well, oh, hold on. So that 259 billion, what is that exactly? That's nominal-
Cris deRitis: Exports. I just confused it.
Mark Zandi: Okay.
Cris deRitis: 259.3 billion is the exports component of that.
Mark Zandi: Oh. And now you're-
Cris deRitis: And overall trade deficit for the month was 70.7 billion.
Mark Zandi: Which was quite a significant narrowing. Correct? Yeah.
Cris deRitis: Correct. Correct.
Mark Zandi: And trade is going to be a plus for growth. Isn't it?
Ryan Sweet: It is.
Cris deRitis: Correct. That's why I chose this one. Okay. Third quarter, we should actually see someone improvement here. Trade was a drag in the first quarter, as Doug mentioned, but it's going to flip.
Mark Zandi: And you're saying that trade balance is now improving because one, export growth is stronger, feels like-
Cris deRitis: Correct.
Mark Zandi: ... rest the world must be waking up a little bit, or maybe it's the Chinese reawakening from their slumber earlier. And imports are weakening, and that goes to the shift in consumer demand away from goods to services. That's [inaudible 00:36:45] you're saying.
Cris deRitis: That's what I'm saying, yes.
Mark Zandi: Okay.
Cris deRitis: Or, trying to say. Yes.
Mark Zandi: No, no. I got it. I got it. I got it. Yeah. Makes sense. Makes sense.
Cris deRitis: This picture could shift though, with the strong dollar, right?
Mark Zandi: Although, the dollar's been pretty strong for a while here. Right? So...
Cris deRitis: It is, but as it continues to remain strong, assuming it does, then that's going to be even more of a drag going forward. The rest of the world might have been able to cope so far, but it gets progressively harder to buy US goods with a strong dollar.
Mark Zandi: Yeah. That's a good one. That's a good one. Doug, you want to go next? Or do you want me to go next? You go next. Okay.
Doug Holtz-Eakin: Here you go. Ready?
Mark Zandi: Yep.
Doug Holtz-Eakin: 11.6%.
Cris deRitis: What's that? 11.6?
Doug Holtz-Eakin: 11.6%.
Mark Zandi: It's an economic statistic?
Doug Holtz-Eakin: Yes.
Mark Zandi: And is it related to the labor market in any way?
Doug Holtz-Eakin: No.
Mark Zandi: No.
Ryan Sweet: Oh.
Mark Zandi: Yeah. Generally, I would've thought that. And is it a recent release of data?
Doug Holtz-Eakin: Most recent release of these data.
Mark Zandi: The most... Oh, okay. That's interesting. The most recent release of this data. Does it come from the GDP accounts? The NIPA accounts? No.
Doug Holtz-Eakin: No.
Mark Zandi: Well, maybe I be because we're struggling a little bit, can you tell us what part of the economy you're focused on, or would that be giving it away?
Doug Holtz-Eakin: It's for the household sector.
Mark Zandi: For the household? Oh. Is it housing related?
Doug Holtz-Eakin: No.
Mark Zandi: No.
Ryan Sweet: Consumer?
Doug Holtz-Eakin: Yes. Consumer.
Mark Zandi: Oh, okay. So this is the growth in consumer credit?
Doug Holtz-Eakin: No, not credit. Sorry, I thought you said consumer prices.
Mark Zandi: Oh, consumer prices.
Ryan Sweet: [inaudible 00:38:37].
Mark Zandi: Oh, prices.
Doug Holtz-Eakin: Now, you know that. 11.6%.
Mark Zandi: So is it-
Doug Holtz-Eakin: CPI [inaudible 00:38:43].
Mark Zandi: Is it a component of the CPI? Is it is a-
Doug Holtz-Eakin: Yes.
Mark Zandi: Year over year growth rate in one of the components.
Doug Holtz-Eakin: More than one of the components.
Mark Zandi: More than one of the components? Oh, it's an aggregate. 11.6. What is that, guys?
Ryan Sweet: Food's up more than that, isn't it?
Mark Zandi: Food?
Ryan Sweet: I'm trying to think.
Mark Zandi: No, I don't think it's more than that. Food prices, Doug?
Doug Holtz-Eakin: They're in there.
Mark Zandi: Oh.
Doug Holtz-Eakin: [inaudible 00:39:13] in there as well.
Mark Zandi: Okay. Cris, Ryan, what do you think?
Ryan Sweet: [inaudible 00:39:19].
Mark Zandi: Huh?
Cris deRitis: In there.
Mark Zandi: It's one component of the CPI. It can't be core. It can't be-
Cris deRitis: And it's not the top.
Mark Zandi: It's not top line.
Cris deRitis: It's food plus energy.
Doug Holtz-Eakin: Close.
Cris deRitis: Close? Okay.
Mark Zandi: Oh, I give up. I give up.
Ryan Sweet: I give.
Mark Zandi: Yeah, what?
Doug Holtz-Eakin: It's the year over year inflation in food, energy and shelter. That bundle, which is [inaudible 00:39:45].
Cris deRitis: Ah.
Mark Zandi: Oh.
Ryan Sweet: Ah.
Mark Zandi: That was quite interesting.
Doug Holtz-Eakin: That's the political bundle.
Mark Zandi: Oh. Now I'm connecting the dots.
Cris deRitis: Oh. Yeah, dots connected.
Doug Holtz-Eakin: [inaudible 00:39:56] store, and then you got to pay your groceries. And that's why inflation is such a political issue. 11.6 still in the July report. That's brutal.
Mark Zandi: Yeah. It is brutal. So, you're saying if I add up food, energy, and cost of shelter, rent-
Doug Holtz-Eakin: Right weights.
Mark Zandi: Right weights, it's up 11.6%-
Doug Holtz-Eakin: Year over year.
Mark Zandi: ... year over year, through July.
Doug Holtz-Eakin: So that's why this is such a big deal.
Mark Zandi: Yeah. Well, let me ask you from a political perspective, the midterm election perspective.
Doug Holtz-Eakin: Reason I stare at that is, that's half of the CPI, and it's the one that matters. And inside that is shelter. And shelter's a third by itself. And shelter's now at five seven, and it has yet to peak.
Cris deRitis: Correct? Yeah.
Doug Holtz-Eakin: So, once I look at those two things, I just think, we haven't made a dent in the inflation issue from making the public happy, point of view.
Mark Zandi: Well, let me ask you a question on that. So, the midterms are coming up in a couple months, but we're going to get, I guess we'll get at least one more CPI. We get two more CPIs.
Doug Holtz-Eakin: Two.
Mark Zandi: And this one, and Ryan correct me if I'm wrong, but this CPI report coming out next week for the month of August, is going to decline. We're going to see a pretty big decline, obviously.
Ryan Sweet: And mostly energy.
Mark Zandi: Mostly energy. Shelter, rent will continue to add, but big decline in energy. Probably the one we get next month, will show a modest increase or decline, basically flat, probably, given energy prices again, and food prices.
From the voter's perspective, do you think it's the rate of inflation, or do you think it's the recent change in the rate of inflation? The fact that it's decelerating now pretty quickly, that last few months coming into the election, gas prices are down, and inflation broadly is rolling over. Still high, no doubt, very painfully high, but rolling over. How do you think about that in the context of the outcome for the election?
Doug Holtz-Eakin: So first, just on the way I think about the data, outside of gasoline, oil related stuff, we've seen very little change in the inflation. So, I don't think of it as rolling over for sure yet. When we finally got the market based PCE stuff, the core, it finally came down a little in the last, but not much, too tenths year over year, still quite high.
So I think there's a lot of work to be done in general. Voters treat prices, asymmetrically. They look at the level of gasoline prices. When they say they want to get rid of gasoline inflation, they want to go back to two bucks, or whatever the level was that they think is appropriate, and they look at the rest of them as, inflation rate isn't coming down. Is it going from 8% down to 6%, down to 4%? But they look at the level of gasoline.
Mark Zandi: So, right now, it's $3.75, probably? I [inaudible 00:42:56].
Doug Holtz-Eakin: It's still too high.
Mark Zandi: Still too high. Yeah. In their minds. It's down from five, the peak, which is the all time high in June, but still. You're saying, when they go vote, that's what they're going to say, "It's too high."
Doug Holtz-Eakin: Yeah. And this is not a recent [inaudible 00:43:10]. It's been true in polling for 20 years.
Mark Zandi: Yeah. Interesting.
Doug Holtz-Eakin: About gasoline prices, they have a number that they think it has to get back to. That's what taming gasoline price inflation means to them.
Mark Zandi: Hey Ryan, if oil stays at 85, and who the hell knows? It goes up down all around. But say it stays at 85, where is the cost of a gallon of regular or unleaded going to settle? Do you have a sense of that? We're at $3.75 now.
Ryan Sweet: I look at wholesale gas prices, and they lead retail by one to two weeks, and they're pointing towards next two weeks getting down to $3.50.
Mark Zandi: $3.50?
Ryan Sweet: A gallon.
Mark Zandi: Yeah. That sounds about right to me.
Ryan Sweet: Yeah. It's a little bit lower, but-
Mark Zandi: And what were we pre-pandemic? Do you recall? Which, I think it was at least probably a buck lower, probably.
Ryan Sweet: Yeah. Probably $2.50. $2.50, $3 bucks.
Mark Zandi: To Doug's point.
Ryan Sweet: Those were the good days.
Doug Holtz-Eakin: Yeah.
Mark Zandi: Yeah. Okay. All right. Very good. Do you want to hear my statistic?
Cris deRitis: Yes.
Ryan Sweet: We do.
Mark Zandi: Okay. Give you two numbers. They're related, from the same data set, -0.3 and +15.8.
Ryan Sweet: Came out this week?
Mark Zandi: Indeed, it did. I stick by the rules. You know how I do that. I'm a very deciduous rule compliance person.
Ryan Sweet: Follower.
Doug Holtz-Eakin: Is it in the ISM report?
Mark Zandi: Pardon me?
Doug Holtz-Eakin: Were these in the ISM report?
Mark Zandi: They were not in the ISM report. Nope.
Ryan Sweet: Is it economic data, or is it financial market related?
Mark Zandi: Economic data.
Ryan Sweet: Okay.
Mark Zandi: Yep. Not financial. Yep. And very important in the current state of affairs. Top of mind, for lots of people.
Ryan Sweet: Are we going oil inventories?
Mark Zandi: No, I wouldn't go that esoteric on you. I'm fair minded about this whole thing. It is related to the BPC Conference that Doug and I participated on.
Doug Holtz-Eakin: Is it a housing market indicator?
Mark Zandi: It's a housing market indicator, indeed, it is. That's a big hit right there. Yeah. Come on.
Ryan Sweet: Oh. House prices?
Mark Zandi: House prices. Yes.
Ryan Sweet: So was it month over month, and year over year?
Cris deRitis: Core logic.
Mark Zandi: Core logic came out with their July-
Cris deRitis: Year over year is the 15.
Ryan Sweet: And month over month?
Mark Zandi: Month over a month is declined, -0.3. This is a big deal. July house prices declined. If you look across metro areas, almost a third of metro area saw their prices declined in the month. Obviously year over year, they're still strongly positive, because of all the price growth we got at the end of last year, and the early part of this year before mortgage rates surged. But now, the higher rates are conflating with the high house prices undermining affordability, and demand is getting crushed, and prices are coming in. Of all the big cities, where do you think the weakness is most pronounced? Usually Cris knows this data. Yeah, amazing.
Cris deRitis: I think New York was the strongest, if I'm not mistaken.
Mark Zandi: What was the strongest?
Cris deRitis: New York?
Mark Zandi: New York was strong. Yeah. Yeah. 1.3.
Cris deRitis: LA? Was LA?
Mark Zandi: LA. Very good. There you go. Now you're back in the groove. Yeah, LA prices were down. DC Doug, you're home in DC. It's negative, my friend.
Doug Holtz-Eakin: DC is the least cyclical of the housing markets, because it's a company town, and the company's always in business.
Mark Zandi: Yeah. That's true. Yeah. It's true. And everyone's at remote work, so no one's going in. So yeah. Philly prices, of course we live in Philadelphia, up 0.5. I took some solace in that. But yeah, so prices are rolling over. This is the beginning of I think, a pretty substantive... Cris, can I ask you on that? Because Doug, Cris is a former Fanny HPI credit risk modeler, back in the day. Is it surprising to you, how quickly things have turned here on prices, or not?
Cris deRitis: I don't think so. The only reason why so many homeowners were able to purchase a home, over the last couple years, given these double digit rates of growth rates, was interest rates. Very low mortgage rate, so with the mortgage rate rising 6%, that demand is getting zapped, immediately. There's just no option. There's no other money. There's no other pocket of funds that they can tap into. So that demand weakens, and that's clearly zapping the market.
Mark Zandi: Yeah. I like that word, zapped. Now we're expecting peak to trough price declines nationwide of what, 5-10%.
Cris deRitis: Five to ten-
Mark Zandi: Five to ten.
Cris deRitis: ... versus Q2, is we call the peak.
Mark Zandi: Yeah, Q2. Right. Interesting.
Doug Holtz-Eakin: That Sounds right. I mentioned this at that conference. I've been curious about just how badly the Fed is going to hammer the housing market. And I think it's going to be terrible, because A, the rates are what they are, and they've got to keep going up. They went from pumping 30 billion a month in, to taking 35 billion a month out, through the MBS, and a 65 billion swing is something like a fifth to a quarter of mortgage financed last year. I mean, that's a big-
Cris deRitis: Big number.
Doug Holtz-Eakin: You're going to have to raise rates a lot to attract private capital into the mortgage market from other places, and so on top of the policy rise, you're going to get a big impact, I think.
Mark Zandi: Just to make that clear to the listener, what you're saying is, the Fed, when it was buying bonds, it was also buying mortgage securities, mortgage back bonds, 35 billion a month, now
Doug Holtz-Eakin: Now, now 35.
Mark Zandi: Yeah. No. Okay. Now with QT, quantitative tightening, we're in reverse. And so that's why mortgage spreads over treasuries have gaped out, or one of the reasons. That's why mortgage rates are so high. Yeah, I know. And the only possible way out maybe, is the Fed tightens, those mortgage spreads come back in a little bit, because they're very, very wide by historical standards.
So you don't see the same rise in mortgage rates now going forward, that a lot of all this stuff has already been built in, but it's a good point. Okay. Let's move on. I want to talk about fiscal poll- Oh sorry.
Doug Holtz-Eakin: Before we move on, does anyone know why they were buying 30 billion?
Cris deRitis: No. No. It didn't make any sense. Why for so long, right? That one is clearly-
Doug Holtz-Eakin: I never understood that. Okay.
Mark Zandi: Oh, you mean as a policy, why were they-
Doug Holtz-Eakin: Why were they doing that?
Mark Zandi: Why were they doing that? I guess early on in the pandemic you could argue, yeah, that made sense. You want to keep mortgage rates. Record low isn't too bad. Let people refi make it easier for people to work through their mortgages, but they kept on doing it for a long time.
Ryan Sweet: Too long.
Mark Zandi: Yeah. It is a little perplexing, because also I think they would much prefer to be buying treasuries in mortgage securities. Because mortgage securities, and some have argued, that's fiscal policy. Because you're trying to affect the housing market directly. It's not buying treasury bonds.
Ryan Sweet: Do you want one more good number that came out this week?
Mark Zandi: Yeah.
Cris deRitis: Yeah.
Ryan Sweet: -4%
Mark Zandi: -4?
Ryan Sweet: 4%.
Mark Zandi: So were you back in the game then?
Ryan Sweet: Oh no, I'm just...
Mark Zandi: Oh.
Ryan Sweet: It's round two. If you knew off the top of your head.
Mark Zandi: I don't know. What is that -4?
Ryan Sweet: Manheim Index, month over month.
Mark Zandi: Oh yeah. Used car, used vehicle prices. That's an encouraging thing. Bad news, is good news.
Ryan Sweet: Correct. I mean the BLS doesn't use that as source data, they use data from JD Power, but it's just another indication that August inflation should be-
Mark Zandi: Lower.
Ryan Sweet: ... lower.
Mark Zandi: And when do new vehicle prices, they haven't rolled over yet, right?
Ryan Sweet: They keep rising.
Mark Zandi: Yeah. When do they roll over? They got to, production is picking up, right?
Ryan Sweet: Yeah. I would say probably in the fourth quarter.
Mark Zandi: Fourth quarter. Yeah. Okay. Hey, we got to move on. That was a great discussion on the economy, but let's talk about fiscal policy, and maybe Doug, turning to you, the first thing I'd like to ask is, what do you think of just what was done in this Congress, since the Biden Administration began, not almost two years ago. It was an amazing amount of legislation that was passed at the end of the day. And what's your broad assessment of the policies that were put into place through this legislation?
Doug Holtz-Eakin: I'm not a fan of what they've done. If you go through the list, the American Rescue Plan, I think was just an enormous policy error, both in its timing, its size, and the composition. It had nothing to do with the pandemic. So, I didn't like that.
The bipartisan infrastructure bill that came through is a good bill. It's not dramatic in one way or the other, but I have no problems with that. I didn't like what they did recently at all. They passed this chips thing, which is just... This is letting your fear of China turn you into [inaudible 00:52:32] Junior, and act like China. It's a terrible idea. So I'm not a fan of that.
They passed this PACT Act, which is the veterans benefits could be up to 600 billion dollars, purely deficit financed. And then this Inflation Reduction Act, which has nothing to do with inflation. And again, I think is structurally not so great. And so, there's a lot of additional deficits, much of it permanent, at a time when the economy is hot, and that's not a good idea. And it's very different in my view, from what we did in 2020, which was appropriate. I think they did the right thing in 2020, but not since.
Mark Zandi: Well, you didn't mention student loans. That wasn't legislation, obviously, that was executive order. So I assume you, you're not a fan of that either. I know Cris is not a fan.
Doug Holtz-Eakin: That's just put around money for young voters. It's terrible. I think that's indefensibly bad.
Mark Zandi: Right. So you really don't like... The one thing that you did find okay, was the infrastructure legislation.
Doug Holtz-Eakin: Yeah.
Mark Zandi: Yeah. Something we've been trying to do for quite some time. Yeah. Let's go back, take them one at a time on the American Rescue Plan. Just to remind the listener, that was the piece of legislation passed early in the Biden Administration, March of 2021. I believe it on a static basis, over ten years, it cost 1.9, maybe close to $2 trillion. And that was deficit finance. The thinking was that the economy was still struggling with the pandemic. This was before vaccines got rolled out. There was a lot of uncertainty about how effective that would be. And that was that legislation. And you don't like that legislation, why? Because-
Doug Holtz-Eakin: So, I have the benefit of actually being on record. I testified in the Senate prior to its passage. And so these are the things I said. "There's no evidence we need additional stimulus." We had just done 900 billion in December, but the economy using the realtime indicators was growing at 6-7%, turned out to be six and a half. That is not a situation where you need to be doing stimulus. So the timing's all wrong. The size is just enormous.
CBOs estimate of the output gap, between actual GDP, and potential GDP, was something on the order of 400-600 billion. You don't need 2 trillion in stimulus, to solve that output gap. So it's too big and it inevitably is going to cause some problem as a result. And the composition made no sense. It had multi-employer pension plan bailout, open-ended bailout. It had a bunch of things that were just in there, to be in there. And so, I didn't like it at all. It didn't answer any question, and it was all at the wrong time.
Mark Zandi: Well let me push back a little bit. Yeah, yeah, yeah, yeah, yeah. And that's the rap against it, for sure. But-
Doug Holtz-Eakin: I think we knew two of the big things, the size was too much, and it was not needed. We knew in real time. I don't view those as 2020 hindsight. At the time, it was wrong.
Mark Zandi: Yeah.
Doug Holtz-Eakin: Thing I got wrong. Larry Summer says it's going to cause inflation, I give him credit. He's smarter than me, always has been. I thought it would produce a bunch of asset price levels, because that's what we'd seen in 2020. You get the stimulus, saving rate goes to a third, you see asset prices. And so what I was afraid would happen is, we would get big asset price inflation out of it. The Fed would be forced to move prematurely, and we'd have a train wreck in 2021. I was wrong on that front. The train wreck got shifted out.
Mark Zandi: The counter to that is, well, two things, one, on growth, it got us back to full employment pretty quickly, much more quickly than probably would've been the case. We're only now getting back to employment levels that prevailed pre-pandemic. The unemployment rate's pretty close to what you would consider to be Nauru. The employment to population ratio, consistent with full employment.
So it helped growth and get the economy back to full employment. And on the inflation, I think it added certainly to the inflation back in the spring/summer of '21, because was lifting demand at the same time the vaccines were getting rolled out, and the economy was opening.
Hard though to connect the inflation today with the ARP in my view, because that feels supply side driven. That's pandemic, supply chains, labor markets, that's Russian invasion, commodity prices, oil, because that inflation is all over the planet. It's not just in the United States. It's actually higher in other parts of the world where they're more reliant on Russian energy, like Europe. So, how would you respond to that?
Doug Holtz-Eakin: So, I think there's a lot of truth to that. If you look at the 2021 decomposition... So, 2021 is important, because it's one of only three years in US economic history where the CPI inflation rose by six percentage points or more. One was 1951 where believe it or not, the economy was growing at 10 and a half percent. Wrap your head around that number. And we raised federal spending by 50% to fight the Korean War, demand stimulus in a hot economy, six percentage went jump.
Then the other was OPEC '74 global overprices, quadruple overnights, big supply shock. 2021's basically those two episodes run together. There are supply components. So if you take quarterly consumer price inflation, and you plot the US and the Eurozone. The Eurozone basically gets a percentage point higher every quarter. It started at zero, the ended 2021 at 4%. We had the same 1% increase in inflation rate the first quarter, and then in March ARP passes, and we go right up to three percentage points in the second quarter, and the little more than one and a half and third.
So I think that's the demand stimulus hitting, and it drives us much higher than Europe. And since then, I think what we've seen is, continued impact of the supply chains, but you're hard to quantify, but more than anything else, you're getting the classic long lag of the feds, staying on the gas pedal all through 2021, completely and explicably. And, I will never understand that. I get it, that they didn't want to prematurely tighten, but even when they acknowledge it wasn't transitory in the fall of the 2021 going into winter, they didn't take the foot off the gas.
Mark Zandi: Yeah. Yeah, yeah.
Doug Holtz-Eakin: I don't get it.
Mark Zandi: There is a place to criticize policies right in that period. What took them so long to start to dial things back? It took them a while. Okay. Oh, Ryan or Cris, anything you wanted to weigh in on the ARP, the American Rescue Plan? Doug, not a fan. Like any piece of legislation, I can find blemishes with it, either some things I wouldn't have done if I were king for the day. But in general, I thought it was pretty good legislation. You guys have a perspective on this, or you're going to stay out of this debate?
Ryan Sweet: I'm staying out of this one. Let Cris jump in.
Mark Zandi: Okay.
Cris deRitis: I'm probably a little bit more on Doug's side. Not that I could see the case for some stimulus, but it wasn't well targeted in my opinion. [inaudible 01:00:14].
Mark Zandi: This is Cris's modus operandi. It's about the implementation, which I get.
Cris deRitis: Always about the implementation.
Mark Zandi: It's always about the implementation, but-
Doug Holtz-Eakin: I did a calculation at the time. Suppose, you thought you really needed to help some people. Let's target people who were unemployed for 20 weeks or more in 2020 and send them checks. You know what that would've cost?
Mark Zandi: No.
Doug Holtz-Eakin: Ten billion bucks.
Mark Zandi: Oh, is that right?
Doug Holtz-Eakin: Then we sent out 300 billion dollars in checks overnight. It was incredibly poorly targeted.
Mark Zandi: Yeah. Yeah. Well, to some degree, and I understand what you're saying, and I hear you, but you're trying to get something done fast, get it across the finish line. There's all these political constraints that you got to keep this person happy, which we've seen, this person happy, that person happy. So, given the messiness of the political economy-
Doug Holtz-Eakin: No, I hear you, but I didn't think they needed to do something fast.
Mark Zandi: Okay.
Doug Holtz-Eakin: Urgency was political. It wasn't like the Cares Act where they needed to do things fast. I'll defend the PPP forever. I think the Monday morning quarterbacking of the Paycheck Protection Program is really unfair.
Mark Zandi: Yeah. I agree with you. This whole thing about fraud and I get it, but I mean-
Doug Holtz-Eakin: The SBA got, I'm going to try to remember this, 32 billion dollars out the door in all of 2019, and they got 500 billion out the door in a month.
Mark Zandi: Yeah. Totally agree with you. Yeah.
Doug Holtz-Eakin: That's it. I didn't think that could be done.
Mark Zandi: And-
Doug Holtz-Eakin: [inaudible 01:01:48] the mob. Things happen.
Mark Zandi: Things happen. Yeah. Right. I agree with that. I agree with that. All right. So, okay. Let's skip over the bipartisan infrastructure, because I think just broad agreement on that. And by the way, that's only now going to start kicking in, I think in 2023-4, that's when that money starts to flow and we get some infrastructure projects.
Although, judging by all the construction that's going on out on here in my neighborhood, it feels like that money's already out there. I don't know. But that may go back to the ARP because the state and local government's got a lot of money out of the ARP, that's supporting things. Let's then go to the CHIPS Act. This is the one, I was a little surprised to hear you say this. You're not a fan of the CHIPS Act. And the CHIPS Act is an effort to provide subsidy, support to mostly the semiconductor industry, to bring production here, increase investment in the semiconductor industry. And in the context of the nation, we, are very reliant on chips coming out of Asia, particularly Taiwan. And we know how vexed that is, given the relationship between Taiwan, the US, and China. So what don't you like about that?
Doug Holtz-Eakin: So, number one, you just start with the Taiwan situation. So Taiwan's a complicated little place could be invaded. If you're a chip manufacturer, you know that. You don't want to be reliant on that. That's a terrible business model. So you're going to diversify the sourcing of your chips regardless. You're going to build fabs around the Germany and other places. So we don't need the federal government to handle money to do that. That was in their interest to do it.
And Apple has 700 billion in cash on their balance sheet. Why are we handing them 52 billion taxpayer money? Build your own plant. It doesn't make any sense to me. There was at the beginning, really a kernel of the truth, which was, there are some defense related chips that should be manufactured in the US by domestic manufacturers. And they weren't, I can see spending money to make sure that happened. But after that, it all just turned into these...
And I talked to some of these manufacturers, and they were just playing one government off against the other, trying to get the biggest subsidies they could. It was no deeper than that. And it was particularly shameless. And so, I'm not a fan of that. And there's also a pile of money in there for research. And that could turn out to be valuable. I don't know.
But again, the implementation is to make it go through these regional innovation centers, and if history is any guide, there's no innovation in regional center period. We've tried that before.
Mark Zandi: Well, I think the logic or the argument is, "Yeah, I hear you about market forces working, but they're not going to work fast enough. We got a problem here. China is the blockaded Taiwan. And they can do that again. If we don't get chips from TSMC, we got a problem, a big problem. As we could see in the supply chains and vehicle markets, we need production fast. And even with the CHIPS Act, it's not fast. To put up a fat plant takes time, several years.
Doug Holtz-Eakin: It doesn't matter who writes the check. It takes the same amount of time to build it. So, that doesn't mean make any sense at all.
Mark Zandi: But-
Doug Holtz-Eakin: [inaudible 01:05:27] build the things.
Mark Zandi: You're saying, but this definitely accelerates the process, don't you think?
Doug Holtz-Eakin: No.
Mark Zandi: No?
Doug Holtz-Eakin: No.
Mark Zandi: You think these guys would've done it as fast if without the incentive?
Doug Holtz-Eakin: [inaudible 01:05:34] was going to build their plant regardless. And they-
Mark Zandi: Yeah. But when?
Doug Holtz-Eakin: They held up the government to pay for it.
Mark Zandi: Yeah. Well the argument against, in government using government money, for building stadiums and-
Doug Holtz-Eakin: It's a terrible idea.
Mark Zandi: ... attracting businesses to your state or all that kind of stuff. The same kind of argument, same kind of principle.
Doug Holtz-Eakin: This is really in the end, just industrial policy out of fear of China. And I don't think it's smart. I really don't.
Mark Zandi: Right. Okay.
Doug Holtz-Eakin: China's got a big problem, because they're moving more and more towards central planning, and they're going to fail.
Mark Zandi: Can I ask. And I don't know the answer to the question, maybe you do. Was there Republican support for the CHIPS Act? Was that there was Republican support. Yeah. It got through. Okay.
Doug Holtz-Eakin: That is a Todd Young from Indiana bill called Endless Frontiers. That was the initial version of that, wandered around for about 18 months.
Mark Zandi: Oh, is that right?
Doug Holtz-Eakin: Yeah.
Mark Zandi: Okay. All right then, let's fast forward now to the Inflation Reduction Act, which totally agree, it is not about inflation reduction, certainly not in the near term. But, what don't you like about it? Because it addresses, I don't know your perspectives on climate change, but it definitely addresses climate change. Again, abstracting from implementation issues, I know Cris, you don't like whatever.
Doug Holtz-Eakin: You can't abstract from them because I think climate's a real issue. This goes back, and this is neither enough money to genuinely deal it in a significant way, and they basically handcuffed the use of the money, through these domestic content restrictions, and all sorts of things that make it... The EV credit, there's one car out there that the average American can buy with that credit. And so they're going to not make much progress on the climate, at great expense. And that just makes me nuts.
Mark Zandi: Okay. So it's not like you don't like the principle, you just don't like the specific policies that are getting to getting there.
Doug Holtz-Eakin: So for example, on the tax side, they have this book income minimum tax, which is just a terrible idea. We did this in '86 and we got rid of it in three years because it's a terrible idea. And now we're going to do it again and get rid of it in three years. Because, it's just a terrible idea.
Mark Zandi: You're not against... It raises revenue. According to CBO, it's paid for.
Doug Holtz-Eakin: Raise the rates. Do something sensible.
Mark Zandi: But they couldn't get that done, going back to political economy.
Doug Holtz-Eakin: I know, but-
Mark Zandi: And you got to pay for it. Here, they paid for it, right?
Doug Holtz-Eakin: I'm just saying, I dislike the policy of merits, and this is bad tax policy. And it's bad for financial reporting. This gives you an incentive to distort your financial reporting for tax reasons. We work hard enough to get people to display their financial results in that clean fashion. Why are we going to make it harder?
Mark Zandi: That's the history of the tax code, Doug. You know better than I, the reason why we have all these loopholes is because we had a 90% marginal rate back in 1950, and they couldn't lower the marginal rate politically, so they gave everyone these loopholes, including the carried interest deduction, or exclusion.
Doug Holtz-Eakin: I hear you. I have no problem with that. We can [inaudible 01:08:48] it to the tax code. Don't bleed it over in to FASB's territory. They just handed the tax base to FASB.
Mark Zandi: FASB will figure it out. They always... Come on, these are accountants. Come on.
Doug Holtz-Eakin: Bad idea. Bad idea.
Mark Zandi: I was going to ask you, oh, on the funding of the IRS, to go out and-
Doug Holtz-Eakin: I have no problem with that.
Mark Zandi: No problem with that.
Doug Holtz-Eakin: I think that that's a political firestorm for the sake of having a political firestorm. Substantively, it's had about a 25% reduction in real funding over the past decade. Directionally, I don't know if 80 billion is the right number, but directionally, it's the thing to do.
Mark Zandi: I just want to throw one thing out, and this is in my mind's eye, so I might not have exactly right. But if you look at the fiscal impact of all this legislation we just discussed, over the next ten years, obviously, that's the government's deficits.
If you look over the next 20, if remains in place for 20 years, goodness knows that probably won't happen, but just for sake of discussion, it actually I think, pays for itself, because in the second decade, the tax increases, the book income taxes you refer to, the IRS, that kind of thing, raises a lot of revenue that ultimately pays for the American Rescue Plan.
Doug Holtz-Eakin: I'm not going to live 20 years.
Mark Zandi: Okay. I knew you were going to say that. Yeah. Yeah.
Doug Holtz-Eakin: In general, if we want to just place bets, you can get the second ten years every time. Good luck.
Mark Zandi: Got it. Got it. Hey, and by the way, we've done some research on the climate provisions in the IRA and the impact that is on CO2 emissions and ultimately macro economic activity. And again, boatload of uncertainty, you got to look out pretty far, but it actually does move the dial a bit in a reasonable direction, if it works out reasonably so.
Okay. We're running out of time, but I know there's one policy that I think we actually really agree on. And so I want to end on this, and that is immigration policy. I know you think I was going to say GSE policy, Fannie Mae and Fred Mac.
Doug Holtz-Eakin: We've always been in lockstep on that.
Mark Zandi: Oh yeah. We've always been on lockstep on it, but no one else cares except you and me and maybe Cris. So, let's table that one. We'll bring you back for another day. But on immigration policy, I know you've done some fantastic work in this area. Do you want to just give us a sense of things?
Doug Holtz-Eakin: Sure.
Mark Zandi: I'm going to go on mute, because my guys are losing it over here.
Doug Holtz-Eakin: This is really not complicated. For a long time, and it's gotten worse recently, the native born population in the US has had sub replacement fertility. We don't have enough babies to even stay the same population size. So in the absence of immigration, we're Japan, we get old, we get small, we become less influential.
The flip side of that is, that by choosing your immigration policy, you get to dictate the future growth and the size and composition of labor force, and the vitality of economic growth. And that's just an enormous opportunity. It's probably the biggest lever we have, in terms of economic policy. And I just want the US to do that, to think hard about economic considerations when permanently awarding visas. Right now, we award about 5% of permanent visas on economic criteria. I just want that to go north. I think it'd be a good idea.
And without trying very hard, recruiting, immigrants have provided enormous on an economic vitality. And so if we actually tried, I can't imagine what could happen. And so, there are a lot of systems out there. Canada has a system that awards points for different attributes. So I think of that as a resume reading system. You get a resume, speaks English, has a PhD, five years of labor force experience, [inaudible 01:12:45], come on in. That's part of it. I think we need to do that.
But I also want to have an employer based temporary visa, so that people who... We all know someone who didn't do that great in high school or college, or didn't even finish and is a fantastic employee. I want those people to find a place. So, they can come, have an employer employ them, stay employed, and succeed in the way that we judge success in US, success in the market, stay in the labor market, then they get points to get a permanent visa. And so, something like that I think would be an enormous step forward to the US. And it's quite frustrating to see us year after year, not take advantage of that opportunity.
Mark Zandi: Do you think we're going to get a political window at some point? It feels like that window is pretty tightly shut at the moment, but given the tight labor market in the prospects for that to remain the case forever, given demographics, staging of the population, and the lack of immigration, do you think that's going to change? And we are going to get a window where we get some rational reform here?
Doug Holtz-Eakin: I think you could get some piecemeal pieces of that right now, in farm worker immigration. And on a bipartisan basis, people know that basically the farm workers of America are largely illegal immigrants. We need to fix that. And that's an opening to think more broadly by getting the system cleaned up. We're also doing some work on literally millions of people who are in the visa backlog. And that's one where you really can't just throw money at the problem, get more quota process visas, get them in, and watch what happens to the economy. That'd be a great idea.
Mark Zandi: I agree. I don't think there's any better way to lift long term economic growth, both in terms of labor, but also in terms of productivity, as you pointed out, because immigrants are risk takers by definition, you don't pick up and leave one country coming to another, without being a risk taker, goodness knows, we need that. Then more and sound or immigration, we definitely need that. Hopefully, we find our way to do that at some point. But Doug, hey, you're the best. Thanks. I really want to-
Doug Holtz-Eakin: I learned a lot about hot dogs in Chicago. I didn't know that [inaudible 01:15:07] thing.
Mark Zandi: I didn't know that either.
Doug Holtz-Eakin: I didn't. And I'm going to get a bad bottle of wine out of it.
Mark Zandi: Yeah. And maybe a cowbell. Oh, I meant to ask you, you were telling us a story about the cowbell. You already have a cowbell.
Doug Holtz-Eakin: I have a cow because my assistant's an alum of Mississippi State, and I didn't know, but they all carry cowbells to their games. And this is to honor some historic moment when the cows invaded the football field. And so, they have cowbells. And cowbells are really loud. You shouldn't ring one in the office. They're loud.
Cris deRitis: We do.
Mark Zandi: Oh, we do, regularly. Yeah. Regularly. Apparently, if you go to Europe, every mountain, or every hill has its own cowbell.
Doug Holtz-Eakin: Really?
Mark Zandi: Different cowbell. Yeah. I didn't know that either. Yeah. There you go. You learned two things in this podcast. Very good. Well, thanks again and hopefully we'll have you soon, and best of luck with all your endeavors. So thank you, Doug.
Doug Holtz-Eakin: Thanks for having me. Pleasure.
Mark Zandi: Hey, and to the listener, this is our 75th episode guys. 75th.
Ryan Sweet: Wow.
Mark Zandi: We have surpassed a million downloads in that time, a little over a year. And I think people like this. I certainly enjoy it, and fun to have people like Doug on, and give them a hard time.
Ryan Sweet: Yeah. I was going to ask you how many of those downloads are you? [inaudible 01:16:25].
Mark Zandi: Oh.
Doug Holtz-Eakin: He's trained the dogs.
Mark Zandi: That's right. You want that bone, you got to keep pressing. You got to be pressing. Exactly. But to the listener though, we appreciate your feedback. So, if you've got any topics you'd like us to address, let us know. And questions. Different podcasts we've been taking listener questions, and we want to get back to that. So if you've got any specific questions about this podcast, or any others, fire away, and with that, we're going to call a podcast. Talk to you next week. Take care now.