Kevin Hassett, Vice President and Managing Director of the Lindsey Group and former Chair of the Council of Economics under President Trump, joins Mark, Ryan, and Cris to discuss the risk of a recession, inflation, and tax proposals in President Biden's Build Back Better legislation.
Kevin Hassett, Vice President and Managing Director of the Lindsey Group and former Chair of the Council of Economics under President Trump, joins Mark, Ryan, and Cris to discuss the risk of a recession, inflation, and tax proposals in President Biden's Build Back Better legislation.
Full episode transcript.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi. I'm the chief economist of Moody's Analytics and I'm joined as per usual by Ryan Sweet, director of real Rtime economics. Hi Ryan, how are you?
Ryan Sweet: I'm doing well. How was your week, Mark?
Mark Zandi: Went fast, Ryan. I was in Milwaukee for a couple of days for a board meeting, made it there and back. Pretty quiet in Milwaukee too I'd have to say, but that was good week. Where's the cowbells, Ryan?
Ryan Sweet: They're right over there. Can you see them?
Mark Zandi: No, you need to pull those out.
Ryan Sweet: Give me a second.
Kevin Hassett: I see the cowbell. Yeah.
Mark Zandi: Do you see the cowbells?
Kevin Hassett: I do yes.
Mark Zandi: By the way, listener, Kevin's jumping the gun here, but we got Kevin Hassett here today as a guest. We're going to introduce him formally in just a minute, but we're really honored to have him with us, so welcome, Kevin and I'm going to grill you in just a minute, so hang on.
Kevin Hassett: Sure.
Mark Zandi: But these cowbells are key Kevin, because we play this game here on Inside Economics with the statistics and only if Mark gets it right do we ring the cowbells.
Kevin Hassett: Okay.
Mark Zandi: If Ryan gets it right, I mean, what's the big deal? He knows all the statistics-
Kevin Hassett: He's supposed to know this stuff. That's right.
Mark Zandi: He's supposed to know this stuff. Exactly.
Ryan Sweet: Didn't know you were going to be in the office. I would have dropped them off.
Mark Zandi: Yeah. And I came in because I wanted to be with Cris. Cris, where are you? You're back at home? Is that where you are?
Cris deRitis: The fourth floor is actually closed in the office today. They're doing-
Mark Zandi: It is. I didn't know that.
Cris deRitis: Yeah. They're doing some repair work.
Mark Zandi: Oh, okay. Well, I had to come in because we're doing major surgery on my electrical system in my house, so I have no power in the house, no internet or nothing. So I made my way to the office. And that's Cris deRitis. You heard Cris's voice. He's the deputy chief economist and it looks like you're in fine form, Cris. I'm the one who's wearing the geeky shirt today. Cris is in... Looks like James Bond.
Cris deRitis: A little role reversal today.
Mark Zandi: Yeah. A little role reversal. Yeah. Well, good. Welcome Cris. And Kevin. Kevin, so good to have you here. Thanks for joining us.
Kevin Hassett: Great to be here. And I think you and I almost have the same geeky shirt on actually-
Mark Zandi: I know. We're two geeky guys on this. Well, I am a geeky guy, so there's no way around it.
Kevin Hassett: It's true.
Mark Zandi: That's what it is. And where are you joining us from, Kevin? Are you in DC?
Kevin Hassett: Oh, I'm just in my kitchen. Yeah. You see my wife has our kitchen filled with her chicken and rooster collection. Given the supply chain disruption, we might end up having to eat that guy back there.
Mark Zandi: So when you're on TV-
Kevin Hassett: So yeah, I'm in my kitchen in DC.
Mark Zandi: When you're on TV, do you do it from that venue or do you go somewhere else?
Kevin Hassett: Lately they've been sending trucks to the house. Like you could be a little far away from the city, but here in DC, if you see me on TV in the last month, I would have been in the van. But I have different parts of the house that are set up better for shots than the kitchen, but the kitchen is where all the work gets done right now. It is actually a supply chain story too, because we did a little renovation because we're an empty nest now and I bought some new office furniture like last February, and it's still not here.
Mark Zandi: Oh, is that right? Last February. Wow.
Kevin Hassett: Yeah. And so I literally work out of the kitchen table most of the time because I don't have a desk.
Mark Zandi: Oh my goodness. That is a supply chain problem. I wonder what part of the world that's coming from. Yeah.
Kevin Hassett: New York state.
Mark Zandi: There you go. There you go. Can't get the trucker. Yeah. Are you familiar with Room Raider? Have you seen this...
Kevin Hassett: Yeah. I don't think I've been embarrassed by-
Mark Zandi: You're not raided. Yeah. I have a home in [Vero 00:04:01] and I did some interviews down there. I love that venue. They hate my home and I wonder what they would rate this. This is my office. By the way, that's my mom's. For all the YouTubers out there that's... My mom did the big wreath back there.
Kevin Hassett: The wreath?
Mark Zandi: Yeah. She's a little bit of an artist.
Kevin Hassett: So it's your mom made the wreath. The wreath isn't your mom. That's [inaudible 00:04:22] said, that's my mom. That would be-
Mark Zandi: Yeah, that would be scary.
Kevin Hassett: That would be a little odd.
Mark Zandi: That would be scary. Right. Well, Kevin's so good to have you. We've been friends for a long time. I can't even remember when we first met it, but-
Kevin Hassett: Would've been the late nineties.
Mark Zandi: Yeah. And you've had such a great career. Still doing lots of different things. You were at AI for a while. You were director of economic research and studies there and you had this great meeting every year where you'd get-
Kevin Hassett: Oh, sure. First in Beaver Creek and then at Sea Island.
Mark Zandi: Yeah. You'd get some Ds, some Rs, a lot of Republicans in the Senate and the House and it was great several days of policy and politics and just a really fun time. And you invited me to a number of those functions and I really appreciate-
Kevin Hassett: Yeah, you did well.
Mark Zandi: Oh, I appreciate that. Yeah. I think I did my best to kind of take it right up to the line, but not go too far with the D stuff. So I thought it was pretty good. And then you were on the Council of Economic Advisors. You were the chair of the Council of Economic Advisors under President Trump. Tell us a little bit about that. How was that?
Kevin Hassett: Sure. Well, it's actually kind of interesting how I got drawn into that. One of the things, because you and I actually worked on the McCain campaign together long, long ago.
Mark Zandi: Oh that's where we got-
Kevin Hassett: That's right.
Mark Zandi: ... to know each other. Right.
Kevin Hassett: I think we had met before that, but basically one of the things that really bugs me about economic policymaking in the US is that there are a few places with these sort of black box scoring models. I know you guys actually are one of those places now, but if you don't have a black box then developing policy, you're really at an extreme disadvantage. And back when you were helping us with the McCain campaign, the Bush guys had hired every single person that would model anything in 2000. I don't know if you helped us in 2000. It might be you came for '08. I don't know if you were there in 2000.
Mark Zandi: It was '08. It was '08 not 2000. Yeah.
Kevin Hassett: But if the candidate wants to propose something then the numbers kind of got add up, but if you don't have a big model, then how are you going to make a proposal where the numbers add up? And then when the numbers don't add up, then the media just speaks the crap out of it. So anyway, so what I did is I reverse engineered... You know about this. I reverse engineered the Joint Tax Committee and CPO creating this website called the Open Source Policy Center. And the basic idea was to make it so that anybody, anyone listening right now could come up with their own tax plan and then get like the distribution tables and the revenue costs and what... And you could dynamic score if you want. There are a lot of different models verge to it. So the idea was to democratize policy debate and make it so Democrats, Republicans, Independents, anybody who wants to, could formulate a plan and sort of know what the official score would look like really almost instantly.
Kevin Hassett: And so I built that website and pretty much every presidential campaign in the last cycle was using it to some extent and also we could sort of see that a lot of people in government using it. Even a lot of people at Joint Tax Committee use. That's our software now, because it's easier to use than their software. Kevin Brady always started... he had all of his staff trained up on scoring things with the Open Source Policy Center and then when Joint Tax disagreed with the score, then he would ask them to explain why, and so kind of opened up the black box a little bit over time. But what happened was that... You might recall that in the campaign, the Trump administration had some proposals where the numbers were just totally out of line and they had the classic... It's happened to lots of campaigns, a lot of news stories about how they don't have a clue about what they're doing. That kind of stuff.
Kevin Hassett: So just a friend of Jared Kushner's who knows me said, "Oh, well, you should get someone connected to the Open Source Policy Center and use that thing and then your numbers will be fine." And so they called me up and then... I actually knew a guy. Turns out the Joint Economic Committee had just changed chairs and a bunch of the career staffers at the Joint Economic Committee got let go including a guy named Jeff Schlagenhauf. You probably know Jeff.
Mark Zandi: Mm-hmm (affirmative).
Kevin Hassett: He's right in the middle of... They're like the economic think tank for Congress. And so I told the Trump campaign hire Schlagenhauf, he knows how to run a OSPC and your numbers will be fine. And so then from then on basically they didn't... They certainly got in a lot of trouble for a lot of things, but if they said-
Mark Zandi: Not on that.
Kevin Hassett: ... something was three... If they said something was three, it was three and so then after the president won, he's kind of like, "Oh, that guy that fixed our numbers, he should be CEA chair."
Mark Zandi: That is great.
Kevin Hassett: I didn't even work for the campaign or anything. I literally was just running this website for all the campaigns, but that I might even talked to you about it. Then I thought that at some point serving your country, it's a real honor and-
Mark Zandi: Absolutely.
Kevin Hassett: ... probably wouldn't get another opportunity to, and so I decided, even though I didn't come in as... You might recall that when they nominated me, I was being attacked at Breitbart and Lou Dobbs had said that Trump has double-crossed his voters by picking Hassett.
Mark Zandi: I didn't catch that. No.
Kevin Hassett: Yeah. Anyway, so I wasn't necessarily a natural fit, but I loved it. Ended up being close friends with the president and I hope you get to serve in the White House someday soon.
Mark Zandi: Oh, you're very kind. Well, thank goodness that you did. I mean-
Kevin Hassett: Thanks.
Mark Zandi: ... really with all your talent and skill the nation really needed your help and it was just good of you to serve. So thank you for all that.
Kevin Hassett: Sure.
Mark Zandi: And then you left and then you came back and you were a special, I think the right-
Kevin Hassett: Senior advisor.
Mark Zandi: Senior advisor.
Kevin Hassett: It's actually about the highest title you could have in the White House. And the interesting thing is because the Council of Economic Advisers is spelled with an E, advisers. But if you're a senior advisor, then it's an OR at the end. So I think I might be the only person in US history to have both been an adviser and advisor. And [inaudible 00:10:35]. It's probably true, right? I mean it's-
Mark Zandi: Probably. Yeah.
Kevin Hassett: A very unique status, but seriously early in January already, it was clear to me that the COVID thing was going to be a big deal. You would have seen me on CNN talking about how bad the pandemic was going to be and how GDP already in January, my GDP as for second quarter was -30 something percent. I could run you through the math that got us there. You probably even talked about it at the time. But I think that when it became clear that that was true and then the president sort of knew me well and trusted me. The task force had basically no data operation. So the first time I went to a task force meeting, either Dr. Birx, who's a wonderful person. I love her. And I think that she kind of got some bad things. She got the short shrift at the end of that. I think she was a really good American hero, but she was literally making charts with a pencil.
Kevin Hassett: So my main job was, one, to help design the stimulus stuff, but two, to help create a data operation for the task force so that they could actually keep track of things. And so, as an example while I was there, our team... All of a sudden I'm sitting in my office and somebody says, "Oh, Cuomo is on the line." And at that point, New York was really, really in bad shape. And they said that he needs us to send him 40,000 ventilators. And we only had 10,000 ventilators in the stockpile. And so like, how am I going to send him 40,000 ventilators? And so then I got the idea that the Medicare billing data, because I'm in the White House so I can sort of get access to just about every data you need with a stroke of the presidential pen.
Kevin Hassett: I got the Medicare billing data, which is for every hospital in the country. Three times a day, they actually pay them three times a day. And it says, basically... So the first thing I did is I looked at like, what's the maximum number of ventilators ever built in a day? And then I looked, well, how many did they build yesterday? And so then I could find the empty ventilators, so then we could actually call up hospitals and send FEMA people to move ventilators from places that had low capacity to places... And ventilators are basically what you need to have an ICU bed. But then when we called the hospitals, they would say, "Hey, well, yeah, but maybe we're going to need that ventilator three weeks for now, this is a pandemic. So why should I lend it to New York?" And so actually Everett Eissenstat worked with me at the National Economic Council and was the head of the DC office for General Motors. As I called up Everett and I said, air filters, ventilators, maybe you guys could make ventilators, right?
Kevin Hassett: And so he talked to the General Motors people, and they actually really quickly started making ventilators. They're an incredible industrial company. And that made the whole thing work because then you could sort of call up a hospital down the road and say, "Hey, lend some ventilators to New York and by the time you might need yours back, if we don't give it to you back, we'll get one from GM and give it to you." And so in the middle of the crisis, there were just a million things like that, that really required data analysis and economics and so on. And that was what I did-
Mark Zandi: Really cool.
Kevin Hassett: ... when I went back in the second, my second trip to the White House. But it was pretty weird because I was on TV a lot and as you know I always just answer questions truthfully, like at this White House is pretty disciplined with their talking points. Everybody goes on TV says it's a pandemic of the unvaccinated, which is completely not true. Just look at what's going on in the UK right now, but everybody says those talking points, but I was out there basically just answering questions truthfully throughout the COVID crisis and is amazing sort of how treacherous the press could be when you're doing that. One time there was an outbreak in the White House and a number of people got COVID really early on.
Mark Zandi: I remember that.
Kevin Hassett: And we're basically, the west wing is pretty fortified. You can't open the windows. There's no ventilation and you're basically working in close quarters, doing things like getting ventilators to people, so they don't die and all around me, there are people getting COVID. Then as you know, I've had heart troubles and stuff like that, so I'm probably like the guy who, if he died of COVID, then everybody would say, "Well, of course he died. He's one of those pre-existing conditions guys." But yeah, I'm going into the west wing everyday anyway, because we got to serve our country. And at what point, I was, I think, CNN, somebody said, "Well, what is it like to be in the White House right now?" And that I just said, "Well, yeah, it is scary. There are people getting COVID, but you go to work every day because you got to serve your country."
Mark Zandi: I remember that.
Kevin Hassett: And there's a lot of people in armed services who are taking bigger risks than being around COVID. But then all of a sudden everywhere, especially the liberal media is like, Hasset's afraid to go to the White House.
Mark Zandi: I remember that. I do remember that. Yeah, I do remember that.
Kevin Hassett: So it's a very weird time. Everybody decided to fight about COVID instead of work together.
Mark Zandi: Well, I know I've told you this before. I'll say it again. You really ought to write a book on your experience.
Kevin Hassett: Oh yeah.
Mark Zandi: I mean, these stories are invaluable and highly interesting, but I think very informative for folks in the future.
Kevin Hassett: I think if I did do that, it would have to have a sufficient amount of time that it's just one of those things. It's so political still.
Mark Zandi: Yeah, Trump. Good point.
Kevin Hassett: And was it the Wuhan lab? Was it not the Wuhan lab? What was Fauci saying about masks? Did Fauci lie to Congress? I was definitely in the Oval when Fauci said a hundred percent it came from the pangolin to the president. I was in the Oval when Fauci and the president, when Fauci told the president for the love of God don't tell people to wear a mask. That's almost a direct quote because... And then he actually said if people could have masked on, then they're going to be fiddling with the masks and then they'll be touching their face and that'll probably make them more likely to get the... Supposedly the president was sitting at the resolute desk when Fauci said that to him, but then the president goes out and says that, and then a week later everybody's of course [inaudible 00:16:46] him for it. It was a big mistake. You might recall, I was always waving a mask when I was on TV back then too. And that's a sort of an obvious thing.
Kevin Hassett: Final thought on that is the economics has a lot to offer in this space because there are a lot of things like a mask, the cost of wearing a mask is pretty low. But the mask itself doesn't cost much. If you've got a mask on... We're all a little bit worse off, because we don't get to see the handsome Mark Zandi, but other than that the mask doesn't really got much social costs, but it might have a benefit. And so why not? Why not?
Mark Zandi: Yeah. Put it on.
Kevin Hassett: So you should really know that there's no benefit at all like with a high degree of certainty if you're going to not wear a mask at a circumstance like that. And it just doesn't feel like this sort of cost benefit analysis was something that the health people are trained to do and to think about things too. Like there are all these supplements that maybe help and maybe don't, but since it's just a supplement, why not take some zinc now and then-
Mark Zandi: It's that works attitude.
Kevin Hassett: Yeah.
Mark Zandi: Well, I didn't shave this morning and I thought I'd save when I got to the office but my razor disappeared from my office, so my-
Kevin Hassett: Interesting.
Mark Zandi: ... ugly mug is even uglier this morning.
Kevin Hassett: I can't tell actually.
Mark Zandi: You can't. Okay. Very good.
Kevin Hassett: Yeah.
Mark Zandi: Good. Well, good. Well, it's really a pleasure to have you and thanks for joining us-
Kevin Hassett: Sure.
Mark Zandi: ... and I will be the first in line to buy your book when you write it, but maybe a little bit of [crosstalk 00:18:12]. We should dive right in. We got a lot of statistics to talk about. It was a big week for statistics and-
Kevin Hassett: Is the cowbell ready? Is that-
Mark Zandi: I see it there on Ryan's desk over there, so we'll see how it goes. So, Ryan, I always begin with Ryan, Kevin, because Ryan is the Maven of these statistics and... Right, Cris?
Cris deRitis: Absolutely. Undisputed champion. Yeah.
Mark Zandi: Yeah. Undisputed. So, Ryan, why don't you go first?
Ryan Sweet: [crosstalk 00:18:46].
Mark Zandi: Let me just say this better be about the GDP report. That's all I'm saying.
Ryan Sweet: All right. Then you might want to start with Cris.
Mark Zandi: Okay. No, go ahead. Go ahead. Fire away.
Ryan Sweet: Do you want something related to GDP?
Mark Zandi: Well, no, I don't mean to mess with your number. So go ahead. And I actually have some pretty good GDP numbers. Do you want me to go first?
Ryan Sweet: Yeah. You go first.
Kevin Hassett: Let me go first. I have a good one for you guys.
Mark Zandi: Okay go. Kevin, you go first. We'll mix it up.
Kevin Hassett: Okay. So I'm going to give you three numbers. 14%.
Mark Zandi: 14%.
Kevin Hassett: 15.3% and 12.4%. What are those three numbers?
Ryan Sweet: Are they annualized?
Kevin Hassett: Yeah.
Ryan Sweet: Okay.
Mark Zandi: They came out-
Kevin Hassett: So they're the way you would see it at the release. They came out this weekend.
Ryan Sweet: One of them was intellectual property investment.
Kevin Hassett: Nope.
Ryan Sweet: No?
Mark Zandi: Okay. So they came out this week. These are percentages-
Kevin Hassett: 14, 15.3 and 12.4.
Mark Zandi: Hmm. That's interesting. Did they all come from the same release, Kevin or are they different releases?
Kevin Hassett: They come through the same release, but since you guys are floundering I'll say that it's the last three... current quarter and then the two quarters before the number in the release.
Mark Zandi: Oh, okay. So what was 14.5-
Kevin Hassett: So the latest release, it was 14.
Mark Zandi: Okay. So it must be GDP, right? It's got to be GDP. Something in the GDP report. 14%.
Kevin Hassett: Yeah, it is something in the GDP report.
Mark Zandi: Yeah. So it's not an intellectual property because that does-
Ryan Sweet: That was really strong.
Mark Zandi: Yeah. That was very strong.
Ryan Sweet: We're around 12.
Kevin Hassett: Yeah. 11 ish I think is what I remember, but yeah.
Mark Zandi: And these are all positive numbers, no negative numbers?
Kevin Hassett: Yeah. It's really quite a run. Right? You don't usually see GDP release numbers-
Mark Zandi: Yeah.
Kevin Hassett: ... so fast one after the other.
Ryan Sweet: It wasn't services spending. It wasn't that strong.
Mark Zandi: It's something to do with imports, perhaps.
Kevin Hassett: Nope. Well, no.
Mark Zandi: No. Okay. All right. Fair enough. I don't know. I'm stymied. Do you guys have any clue? Any ideas? You want to ask... You want to give us one more clue that without giving it away, Kevin, or is that impossible?
Kevin Hassett: Yeah. How about this? Has anyone gone to Home Depot lately?
Mark Zandi: Oh is it really consumption on... Oh, it's home remodeling and renovation.
Kevin Hassett: Well, it's to fix the inflation rate for residential construction.
Mark Zandi: Oh, oh, oh.
Cris deRitis: That's a good one.
Ryan Sweet: That's good. A really-
Mark Zandi: That's a good though.
Kevin Hassett: Those three quarters though, right? I mean, again we all love to dig through the numbers, but look at the fact. And so real residential investment was down 7%, but it was because of this [inaudible 00:21:57].
Mark Zandi: That is interesting. So this is the measure of inflation in-
Kevin Hassett: In like lumber, [inaudible 00:22:08].
Mark Zandi: ... home building. So all the building materials. Yeah, exactly. Right. Oh, that's a really good one.
Ryan Sweet: That is a good one.
Mark Zandi: That is a very good one. And this highlights the impact that supply chain issues are having on pricing. And I guess, strong demand, as well as you point out. We're all been going to Home Depot and Lowe's a lot during the pandemic.
Kevin Hassett: There's been a lot of interesting stuff for this space that shows how economics works. So fencing is a lot more expensive, but one of the ways you can make fencing less expensive is if you have wider boards so that it takes fewer boards, because each time you nail a board, there's labor costs for doing that. And so if you go look, the fence boards are wider.
Mark Zandi: No. Really?
Kevin Hassett: Yeah. Really. Yeah. And it's because it... So it helps reduce the costs for the... So the soaring materials costs can be offset by lowering labor costs if you make the thing easier to put up.
Mark Zandi: Makes sense.
Kevin Hassett: And there's a lot of that going on if you go look. My whole life I've never seen it like this with-
Mark Zandi: Oh yeah.
Kevin Hassett: ... the lumber and-
Mark Zandi: Although interestingly enough, lumber has come in quite a bit. It peaked in May.
Kevin Hassett: Sure.
Mark Zandi: I think it was at $1,600 per thousand board feet and I think we're down to like 5, $600. Still high compared to pre-pandemic. So despite that you're still seeing these big increases in building material costs. Yeah. Interesting.
Kevin Hassett: Yep.
Ryan Sweet: Have you heard about blue paint?
Mark Zandi: I have not.
Cris deRitis: What is blue paint?
Ryan Sweet: There's a blue paint crisis. Apparently the paint manufacturers are indicating that the chemicals they need for blue paint are in short supply. They can't find them, so they're just not going to produce blue paint apparently for a while.
Kevin Hassett: Wow. When I was with the fed paint was actually a really interesting thing for... It's like total esoterica, but that's why we're talking Moody's right now, right? But paint is one of those things that's like really costly to ship, but the raw materials, I guess, are not so hard to ship and so paint manufacturing is really diffused all over the place. It's kind of like the paint, if you live in Massachusetts, the paint you're going to put on your walls is probably made in Massachusetts. And so the paint manufacturers are pretty close to where they use the paint. And so paint is one of those things that it's sort of regionally interesting because it's spread out everywhere and there's paint manufacturing everywhere. And so if you follow the paint manufacturers, their earnings reports, things like that, it's a nice indicator that that's not dependent on local conditions very much because it's-
Mark Zandi: That's interesting.
Kevin Hassett: ... everywhere.
Mark Zandi: Well, it used to be the case and this... Many years ago, maybe two, three decades ago, the chief economist at DuPont told me that the most reliable indicator of the business cycle was this chemical that went into making white paint because white paint was used for appliances and cars and-
Kevin Hassett: Probably titanium dioxide.
Mark Zandi: Oh that was it. It was titanium dioxide. Hey, Ryan, where's your bell? That is bell worthy. Don't you think?
Ryan Sweet: There we go. There's the bell.
Mark Zandi: You're not going to ring it? Yeah. That's amazing.
Ryan Sweet: That's awesome.
Mark Zandi: You're going to best, Ryan, Kevin at this pace. Yeah. The price of titanium dioxide. I kind of lost track of that. I haven't been following that for a number of years. Okay. I'm going to go next then. And this goes to the GDP report and it's three numbers. You ready? 2%, two percentage points and two percentage points. A lot of twos.
Ryan Sweet: So one of them is the... Is one negative?
Mark Zandi: No. One is obvious. One is the obvious.
Ryan Sweet: Inventory is 2%.
Mark Zandi: GDP was up 2% in the quarter.
Ryan Sweet: Inventory's at-
Kevin Hassett: Inventories were 2.1.
Ryan Sweet: They had a 2.1.
Mark Zandi: It was 2.07. I'm rounding down to two.
Kevin Hassett: Okay. Well-
Mark Zandi: That was good though.
Kevin Hassett: ... you're just wrong.
Mark Zandi: Just so we catch the listener up because they're not following this at all. So the first two is GDP bottom line up 2% annualized rate in Q3 of 2021. Obviously it's a very soft number. We'll come back and talk about that for a second. The second at two percentage points is the boost to GDP from inventory. So inventory is in Q2. We're drawn down, we added to inventories in Q3, so that swing added two percentage points. So, which means without that swing, we would had actually a slight negative number. Slight negative number.
Ryan Sweet: Negative squat.
Mark Zandi: Yeah. Squat. Okay. Now, this is where you get the cowbell if you get this one right and I think Ryan should get this-
Ryan Sweet: Just a drag from autos.
Mark Zandi: Ah. You're right. Ring the bell. Ring the bell, Ryan. There you go. That's that's pathetic, that bell. Come on. Is that the best you can swing it.
Ryan Sweet: I'm not...
Mark Zandi: Oh, you're listening. Yeah, you're home. Okay.
Ryan Sweet: Baby is sleeping upstairs.
Mark Zandi: Okay. Fair enough. All right. I know. Can't sacrifice the baby to Inside Economics. Okay. Fair enough.
Ryan Sweet: [inaudible 00:27:43].
Mark Zandi: You got to work on that. You got to get your priorities straight over there, Ryan. Yeah. So the third statistically the two percentage points is the drag on GDP from the claps in vehicle production, motor vehicle production. And obviously that was pretty significant. Again, going back to global supply chains, it's not because there's no demand for vehicles. There's a lot of demand. It's that vehicle producers just couldn't get the chips and other stuff they need to build their cars.
Ryan Sweet: Yeah, you can't buy something you can't get.
Mark Zandi: Yeah. You can't buy something that you can't get. Okay. All right. Very good. So GDP was soft in the quarter and we're going to come back to that and talk a little bit about what we think that implies about the economy going forward, but before we do that, Ryan, do you want to go? What's your statistic?
Ryan Sweet: All right. 47.6%.
Mark Zandi: 47.6
Ryan Sweet: Has nothing to do with GDP.
Mark Zandi: Has something to do with confidence.
Ryan Sweet: You're getting there.
Mark Zandi: Okay. Oh, I think I know. Is it the labor market differential in the Conference Board Survey?
Ryan Sweet: Good guess. It was really strong. It was 45.
Mark Zandi: 45. So that is the difference between the percent of people who said that jobs are easy to get, less percent say they're hard to get, which I think 45, isn't that like the highest in history or pretty close? [crosstalk 00:29:16].
Ryan Sweet: Pretty close.
Mark Zandi: Pretty close. So that goes with what's going on in the labor market. But so, okay. It's in the survey.
Ryan Sweet: Right, in the confidence, because last week we talked about some economists are worried that you've got confidence driving... This is a sign of recession, but this number with the Conference Board, pushes it back against that.
Mark Zandi: Right. Well, the top line Conference Board Survey was like 113, so that's not it. So it's got to be something in the bowls of the Conference Board Survey.
Ryan Sweet: Right. Really in the bowels.
Mark Zandi: Okay. Well, I'm going to take a wild guess. It's the sentiment measure for people in the lowest part of the income distribution.
Ryan Sweet: Cris, you've got a guess?
Cris deRitis: I don't. I don't.
Ryan Sweet: All right. I won't let you guys suffer.
Mark Zandi: Okay. Go ahead.
Ryan Sweet: The percent of respondents planning to take a vacation.
Mark Zandi: Oh, okay. Give us the context. Give us the context.
Ryan Sweet: Back to where it was pre-pandemic, but if you look within the percent that travels domestic, so the US, is already back up to where it was pre-pandemic and that was really, really strong. So if people are really worried about a recession or their jobs, they're not planning vacations.
Mark Zandi: Yeah. Good point. Good point. And what was the low, if you go back into the teeth of the pandemic, do you recall?
Ryan Sweet: Low 30s, 30%.
Mark Zandi: Low 30s. Is that about as low as it gets, low 30s?
Ryan Sweet: Yeah.
Mark Zandi: Probably. Okay. All right. Well, that's a good one. Yeah, you're right because there was a lot of voices or at least a few voices, or maybe we just one voice that I heard a lot saying recession and that was because they were pointing to the collapse in confidence in both University of Michigan and the Conference Board Survey.
Ryan Sweet: That was all Delta related.
Mark Zandi: The client sentiment. Yeah.
Kevin Hassett: That was that Blanchflower paper.
Mark Zandi: Blanchflower. Yeah. I got a call from a New York Post reporter and she brought that up and my immediate reaction was no way and that's of course the quote she put into the paper and then Blanchflower started tweeting things that I won't repeat.
Ryan Sweet: This is why you shouldn't be on Twitter.
Mark Zandi: I know, but I find it so intoxicating. Yeah. It's very intoxicating thing.
Cris deRitis: Ryan Going down rabbit holes.
Kevin Hassett: So at one point I set up a Twitter account, but I've never tweeted once in my life, but for some reason I have... I haven't even checked, but the last I checked I had a few hundred followers and I just love those people. I picture them every morning, "Is today, the day? Is today..."
Mark Zandi: Kevin, I did the same thing as you. 10 years ago, I got my handle and I hadn't used it for 10 years and then two weeks ago I said, "Okay, I'm going to give this a shot." And I've been doing it for two weeks now and I find it interesting. I mean, you have to manage... Oh, excuse me. I apologize for that. You have to manage time wisely because you can get really sucked down into it, but I find it quite interesting.
Ryan Sweet: Cris, are you on Twitter?
Mark Zandi: I am on Twitter. Yeah. Oh-
Ryan Sweet: Cris.
Mark Zandi: Wait a second. Before Cris says that this is a good time for me to advertise. @Markzandi. There you go. That's my Twitter handle. Go ahead, Cris. Are you on Twitter?
Cris deRitis: I do have a handle, but I never use it.
Mark Zandi: You're a LinkedIn guy. You're all over LinkedIn.
Cris deRitis: I'm all over LinkedIn.
Mark Zandi: I'm not on LinkedIn. Yeah.
Cris deRitis: You got to choose one.
Mark Zandi: Kevin, are you on LinkedIn?
Kevin Hassett: No. I don't.
Mark Zandi: No. Yeah. Okay. Yeah. All right, Cris, you're up.
Kevin Hassett: So-
Mark Zandi: Oh, sorry.
Kevin Hassett: The number thing I have another one that I think is really the most... If we're about to segue into talking about the economy, it's like the most interesting number to be out there is 62% right now. 62%. It's pretty wild that it's 62.
Mark Zandi: I don't know.
Kevin Hassett: Just because we're going slow. I'll just tell you. So it's in the NFIB survey.
Ryan Sweet: Oh, is that the net percent having difficulty hiring a position?
Kevin Hassett: Yeah. It's people who say that they can't find anyone or having difficulty. Yeah. And it's about half and half, but it's amazing how hard it is for people to find labor right now.
Mark Zandi: Oh yeah. Yep. Cris, did you have a statistic you want to do quickly?
Cris deRitis: Sure. I have a quick one. O.8%.
Mark Zandi: And it's not housing related?
Cris deRitis: It's not housing related.
Ryan Sweet: Ah, for one.
Mark Zandi: Well, yeah.
Ryan Sweet: Did it come out today?
Cris deRitis: It did not come out today. It came out this week.
Kevin Hassett: It's the latest price for a titanium dioxide definitely.
Ryan Sweet: Yeah. I think that's up [crosstalk 00:33:59] %.
Cris deRitis: The dealer increase. The dealer increase.
Mark Zandi: I don't know, Chris. Fire away. What is it?
Cris deRitis: All right. So it was a little bit of a trick question. There actually two 0.8 percents that came out this week, but what I was focused on is core capital goods increase.
Mark Zandi: Oh, that's a good one.
Ryan Sweet: Oh, it's a good one and Cris suggested it, Ryan you did a terrible one use.
Mark Zandi: Yeah. There's some truth to that. I apologize, Ryan. You're right. I criticized you for using that.
Cris deRitis: He's grading on a scale. I got a lower bar, Ryan.
Mark Zandi: So tell us about that statistic, the 0.8.
Cris deRitis: Yeah. So the 0.8 is up, indicates strength and it shows that businesses are investing in equipment and this should pay off in terms of additional productivity later on. And I also think it demonstrates that businesses are not just sitting on their hands with the supply chain issues. They're investing. They're going to figure this thing out and therefore the inflationary pressures should subside over the next few quarters. I viewed it as an optimistic statistics. It's at all time high.
Mark Zandi: Yeah. Investments remains very strong. Quite strong. Yeah. Hey Kevin, you said to me, I think it was in an email earlier this week that if GDP in Q3 came in negative, you thought there's a high probability we'd go into a recession. It wasn't quite negative although pretty damn close.
Kevin Hassett: It was all inventories. Yeah. GDP now is down to 0.2% right before the release and that's pretty uncomfortably close to negative. Of course, the way the media covers recessions is two negative quarters, right? So you can talk about all the indicators that NBER has. But I'm pretty wary about the fourth quarter because of the supply chain issues. There are a lot of seasonals that are expecting big boost that aren't going to happen. So I think it's kind of unlikely the Q4 is going to be above Q3 and now given the big inventory build, that's probably going to be a reverse... Inventory is usually, it's negatively correlated, so maybe it takes half a percent or a percent off the fourth quarter. So you're probably looking at a negative fourth quarters is more likely than it was the day before the GDP release.
Mark Zandi: Really-
Kevin Hassett: And if it had been negative, I think you'd have had the two negative quarters and so the NBER may or may not have decided that that was a recession if you had two tiny little negative quarters after those huge 6% quarters, but the media would have said recession for sure once they saw the second negative quarter.
Mark Zandi: Mm-hmm (affirmative). Ryan, do you have any views on the seasonals? Do you think they are going to play a role here in Q4?
Ryan Sweet: And the seasonals were business investment and inventories aren't very favorable, but consumer spending is going to be pretty strong in the fourth quarter particularly since we're going to pull forward some of the holiday shopping into October, November. December is going to be a dud, but that alone should keep us north of zero.
Mark Zandi: I mean, you got personal consumption spending today and it was pretty strong. And that was on top of a very strong number for August.
Ryan Sweet: And October looks really strong.
Mark Zandi: And October looks... So, Kevin you're coming into the quarter with a lot of consumer spending, so it could be offset by inventory and maybe... In trade, I'm not sure you're going to see the same kind of drag. That was a pretty big drag from trade. It related to the inventories, right? You imported all this stuff-
Kevin Hassett: Sure.
Mark Zandi: ... and if you're going to see some unwinding of inventory, you might see some unwinding of the trade deficit. So I think it's gonna be pretty tough to get a weaker number in Q4.
Kevin Hassett: The thing is too that we have to see what happens to prices and the link between nominal and real is really uncertain now, in a way, it hasn't been since you and I were kids practically. And so when you see like a really strong M3 durable goods number, it may or may not be the strongest you think, because the prices are... Again, like what we said about the price of residential construction, little pockets like that are going to take things you thought... And you see that with disposable personal income. I mean, real disposable personal income took a pretty big fall.
Mark Zandi: And of course the transfer... A lot of that reflected the loss of the supplemental UI in September. So you saw this big drag. Hey, the one thing I did see that I was encouraged by and I'm just asking if I should be the core consumer expenditure deflator. That's the key indicator that the fed uses for kind of gauging inflation. That was only up two tenth of a percent in the month. So you annualize that and it's 2.4% roughly, so kind of where the fed would want it. Was there something going on there that's one off or does that reflect a moderation in inflationary pressures? That's a face value, that's what it's saying. Is that-
Ryan Sweet: It's temporary.
Mark Zandi: It is temporary.
Ryan Sweet: Used car prices the next couple of months they're going to be nasty.
Mark Zandi: So you think we're going to this is going to come right back up?
Ryan Sweet: Yeah. The house prices are starting to bleed in the core CPI.
Kevin Hassett: So house prices are going to be the whole thing and Ryan's exactly right. Because those haven't budged yet give, like if you look at Case-Shiller and everything and the residential construction costs, house prices should be going up 5, 6% annual rate, but they've been two in the GDP release.
Mark Zandi: The one interesting thing that was on the PCE, the rent is just as much smaller percentage than the total index. I mean, that's going to matter for CPI for sure, but much less so for PCE, but nonetheless... Okay. So I shouldn't read too much into the pretty same when inflation number that we got for the month. It must indicate that things are... I mean, if you go back and look at the monthly increase in core consumer expenditure peaked back in the summer, like April, May, June in that period. It is moderate, but you're saying it's not-
Ryan Sweet: Yeah. You're right.
Mark Zandi: Yeah. Okay.
Ryan Sweet: Yeah. We're not going to get... Usually you could forecast the core PCE deflator in normal times of a ruler, is going to be 0.2, 0.2, 0.2, but that's not going to last in the next few months. We won't get back to what we saw earlier this year, but we'll get to an acceleration.
Mark Zandi: Okay. Let's end this part of the conversation with just... And you don't have to play if you don't want to. What probability do you put on a negative GDP print in the fourth quarter? Ryan?
Ryan Sweet: 10%.
Mark Zandi: 10. Cris?
Cris deRitis: 10%.
Mark Zandi: Cris, here we go again.
Cris deRitis: Oh no. That was my number.
Mark Zandi: I thought it was going to-
Cris deRitis: [crosstalk 00:40:39]
Mark Zandi: .... be all right. Kevin, what do you say?
Kevin Hassett: Oh, yeah. It's 60%.
Mark Zandi: Really? 60%. Isn't that interesting?
Ryan Sweet: Wow.
Kevin Hassett: I mean, look at the evolution of the GDP now for Q3. Obviously everybody started the quarter thinking it was a 7% quarter and by the end, it was down to 0.2 just because of the successive revisions and the inflation. So I think that nominal GDP, you and I probably, we'll probably all agree nominal GDP, but I think that there's going to be so much in prices that you could have.
Mark Zandi: Interesting.
Ryan Sweet: The Atlanta Fed measure is... They do a very good job, but they also include some survey-based measures of economic activity. That doesn't necessarily feed into GDP and I think that's one reason they have a pretty big miss compared to what GDP actually did.
Mark Zandi: Just for the listener, the Atlanta Fed puts out a tracker based on the data that's coming out every day and translating that into GDP for the quarter. We do the same thing, but that's what Ryan means by the Atlanta Fed. So 60% interesting. I'm going to really blow your mind here. Zero probability. It's not happening.
Ryan Sweet: I thought you were going to go 50%.
Mark Zandi: Not happening. Not happening. It's not happening unless the virus comes back, but I don't think that's going to happen.
Ryan Sweet: That's the key.
Mark Zandi: That's the key, but it's not going to happen that fast [inaudible 00:41:56].
Kevin Hassett: But also even with the virus, because vaccinations have spread so much. I know that there's still more people who should get vaccinated that it's different now. Like the case fatality rate has gone way, way down and so I think that even if the virus, like there's this new AY.4.2 variant that people are concerned about, that if that did take off, I still think that as long as the case, fatality rates stayed low, that people continue to go to work and stuff. And if it's not going to be a shutdown.
Mark Zandi: They didn't do with Delta though. Delta didn't have an impact, if you look at these-
Kevin Hassett: Yeah. That's right. The first time true, but the percentage of people vaccinated is way higher now than it was like in June.
Mark Zandi: Yeah. I agree with you. I think each successive wave, unless the virus really goes off the rails here is going to be less disruptive than the previous one. So it should be less disruptive.
Kevin Hassett: Yeah. There was a really interesting Lancet article by the way on that, which is just that it's... So the people who had COVID and had been vaccinated, have a kind of super immunity.
Mark Zandi: I've heard that. Yeah. I saw that.
Kevin Hassett: So I think that there... Yeah.
Mark Zandi: Yeah. Hey, let's-
Ryan Sweet: One last thing for Q4 GDP why it's likely going to decline is that the inventories in Q3 still fell. They just fell less than they did in the prior quarter and just the way they calculate GDP is the change and the change.
Mark Zandi: Exactly.
Ryan Sweet: So even if we get flat inventory, we have to get a build at some point, that's going to really juice GDP.
Mark Zandi: Because the stock is so low. The stock of inventory is so low. That makes sense.
Ryan Sweet: Inventory is really, really low.
Mark Zandi: That makes sense [crosstalk 00:43:26] the supply chain issues. Yeah. I agree with you. Okay. Let's turn to the topic at hand, the top of mind, and that's the... Seems like this has been a topic for quite some time, the Build Back Better agenda, the proposal that President Biden put forward a few months ago kind of making its way through Congress. Now, feels like it's coming pretty close to the finish line, meaning getting passed into law although that's still not a done deal. We'll have to see. Right now, the legislation is... the proposal is sitting around 1.75 trillion over 10 years in spending on various types of social programs, healthcare, housing, childcare, climate change. Just a range of things. And there are pay for in the proposals that at least the White House is scoring at something closer to 1.9 trillion. That's I think the biggest pay for is more enforcement by the IRS to raise more revenue. There's some tax law changes on taxing foreign income for corporations, global minimum tax.
Mark Zandi: I also noticed, and I'm really curious, Kevin and your view on this, on the stock repurchases. There's a tax on repurchase of stock now that's... for some, I've seen that kind of sneak in and all of that's over a 10 year period. So a lot to digest there. But Kevin, really interested in your broad sense of this and I guess if I had asked you a very specific question, because I know where you're coming from, let me begin by saying, is there anything in this that you like if you were king for the day that you would say, "Okay, I think that's okay."? And then maybe to bookend it, what is it you really don't like in the proposal. But kind of open-ended. I'll let you go anywhere you want to go.
Kevin Hassett: Yeah. Thanks, Mark. I think that this is... I'll have to like two things after I say the next thing, but one of the things I like is that the huge increases in marginal tax rates across the board on corporations and individuals that were originally contemplated by President Biden have pretty much the probabilities of those going through have gone to zero because Sinema and Manchin say they won't vote for tax increases like that. And I think that the original corporate proposal, that's something that a lot of people didn't really understand like in the Tax Cuts and Jobs Act, corporate side cost almost nothing. I'm not saying cost nothing in the Jen Saki kind of way. I'm saying cost nothing in the Joint Tax Committee kind of the way. The international tax, like this GILTI and BEAT stuff that we added so that there's more tax on your foreign earnings, that just about offset the lower rate so that the JCT score for the corporate side of our proposal was just 300 billion in loss if you combine the international and the tax rate effect.
Kevin Hassett: And so the original proposal was raising like 1.9 billion just on corporates. I mean, trillion, corporates over 10. And so what that means is that relative to President Obama's corporate tax code you what President Biden was proposing was keeping all the base broad that we put in and then jacking the rate back up. Right. Which is one the reasons why Milton Friedman was opposed to tax reform by the way you. He said, oh, you're going to get broad base and then they're going to lift the rate back up in the future. So it exactly what they're doing. And so relative to Obama's code, it was a huge tax increase, corporate tax increase. It would have made us like by far the least competitive place. I really like the fact that people sort of came to their senses about that one because I think that would have really done quite a bit of harm.
Kevin Hassett: I think that in the spending, I guess the subsidies for green things. I've written a lot... Metcalf and I have papers on how subsidies for green things tend to work. And if you're an economist, then you think that if... you believe in [Kodovian 00:47:48] taxation, what we call it, right? So if there's something that's clear than something else than subsidizing that isn't bad economics at all. And so, yeah, I guess that if I had to pick something that at least has some economic... makes some economic sense, it would be that. The thing that sort of disturbs me is that there are a lot of really cockamamie ideas floating around or things that I view as like potentially really long run harmful because of the precedence they set. And you mentioned a few.
Kevin Hassett: So cockamamie idea number one is they have an alternative minimum tax on book income. And no kidding, Mark, in the eighties, I wrote a paper about this with Trevor Harris, an accounting professor at Columbia University. But the basic idea is that tax books and accounting books are designed for different purposes. Tax books are designed for enforcement. Accounting books for information revelation. And then if you combine the two, if you make the tax connected to things in the accounting statement, then you get all sorts of weird, strange behaviors said in the paper that I wrote back in the day, because they were using the accounting books for tax purposes in some countries. We found things like corporations were inflating their earnings by not claiming investment tax credits. So you just create this... And so Europeans used to do something like this alternative book tax, and they all stopped it because it created such weird incentives, so that's cockamamie idea.
Kevin Hassett: I take think excise tax on stock buybacks. Right now, the dividend tax is higher. It's going to be certainly, if proposals go through potentially higher still, but what people do is they repurchase shares instead of paying dividends in order to take advantage of the lower capital gains rate and if you want to level the playing field maybe you could argue that excise tax on stocks buybacks is making it so that there's not like a favorite treatment of one type of given cash to shareholders over another. It's probably not like the end of the world, the 2% excise tax on stock buybacks is-
Mark Zandi: Interesting.
Kevin Hassett: ... not something that I propose, but what companies would just do is they would retain their earnings until a Republican comes in and takes it away. And then they would start buying back shares again. There is a little bit of evidence but it's pretty old, but Fazzari Hubbard and Peterson have a famous paper that when firms retain more earnings that they invest more. And I think that that's kind of the motivation that people have, but Auerbach and I have a paper in the Journal of Public Economics that I think shows that, that doesn't really work. The firms they would be repurchasing shares, their investment isn't going to... Like think about it, like Apple. Apple's investment in the US isn't going to be effected if we penalize the-
Mark Zandi: Right.
Kevin Hassett: ... purchases. Right. And so the mark-to-market tax billionaires. It's about 107 pages, the proposal and I actually read the whole thing because I'm a tax geek, so it's what tax geeks-
Mark Zandi: You mean the Wyden proposal that they were debating.
Kevin Hassett: The Wyden proposal. Yeah. And the thing is that, that one is... The thing that's disturbing about it to me is that... So first what they're doing is they're basically saying when you have a capital gain, then you should call that income. And in a Haig–Simons sense we all learned in graduate school that it is kind of income, you're changing wealth, right. And so it's income in the year that you earn and so you have to pay tax on it. So like if the S&P 500 goes up 10% this year, then you owe tax on that. If it goes down 10%, then you can refund previous taxes and so on. And so that kind of taxing on accrual... Auerbach has a famous AER, American Economic Review paper on that, how to do it so that it's basically, you tax at the end retrospectively, but you sort of level the playing field between accruals and other types of income.
Kevin Hassett: And so the accrual part is something that's existed, the literature, but the thing that's really, I think, positively creepy about the proposal is that the first year you qualify which could happen, and you might even qualify, Mark, as successful as you guys are, but if you have three years of the row of a hundred million dollars-
Mark Zandi: I should say, Kevin, Chris is the crypto king. So if anyone's going to qualify it'd be Cris.
Kevin Hassett: Okay. So if you have three years in a row of 100 million and pre-tax income, then you're a billionaire, given that 50% of it's taken by the government. That really means that after tax income is 150 million in three years, then they're calling you a billionaire, right? But the point is that when that happens, do you know what they do? They tax all your previous gains at the capital gains rate. And so the sort of accrual taxation that happens rolling forward is after basically a 28% wealth tax which would be the highest wealth tax in the history of the world. And I think that that's one reason why moderate Democrats have sort of decided they're not interested in Wyden's proposal. But because Sinema and Manchin have decided that they won't endorse actual sort of statutory rate increases, then they're feeling around for weird tricks to raise revenue and that kind of stuff doesn't usually end well.
Kevin Hassett: And final thought is this, we're paying less of auditors, so everything to close the tax gap, the tax gap is something that every presidential campaign that I've ever seen, like going all the way back to 2000 Democrat or Republican, they always pay for what they're doing by closing the tax gap. Because the tax gap is basically... Like right now, I don't know what the current estimate is. Maybe you do Mark, but it's probably there's about a trillion or two in taxes that are owed by people that aren't paid. And there's an estimate of that that's put out, I guess, by Joint Tax every year. And so the tax gap is out there. Let's just say it's a trillion. And every campaign says, well, I'm going to increase, enforce it and close the tax gap by 500 billion and then I'm going to spend the 500 billion on like getting a dog for everybody because dogs are so wonderful. So the point is just that the tax gap is kind of like the rogues way to pay for things, because it never gets closed.
Kevin Hassett: And this idea that if we take this thing that's impossible to close and then stick a bunch of low skill, low paid IRS employees solve the problem, they're not going to close it. You're not going to get that revenue, whatever the Joint Tax says, the tax gap. [crosstalk 00:54:29].
Mark Zandi: Although, and to guess it depends on what CB... or against the Joint Committee on Tax scores or that, I guess. All right. I mean-
Kevin Hassett: No, I think in the end though, it depends on what happens. So maybe it'll help them pass it because the J-
Mark Zandi: Oh, I see.
Kevin Hassett: [crosstalk 00:54:41] always going to be effective.
Mark Zandi: It's [crosstalk 00:54:42] reality.
Kevin Hassett: Yeah.
Mark Zandi: Interesting. So it sounds like just listening to that, that on the tax side of this you're least concerned about the stock repurchase, the tax on stock repurchases or buybacks.
Kevin Hassett: Right.
Mark Zandi: Interesting.
Kevin Hassett: And I didn't get to the thing I'm most disturbed about, which I think is really going to happen, which is the surtax on high incomes.
Mark Zandi: You don't like that.
Kevin Hassett: Yeah. So it's a 5% Surtax modified, adjusted gross income above 10 million. 8% surtax on modified gross income over 25 million. And so that brings the top or the income tax rate to 48.8% in 2022, 51.4% in 2025, when the 37% cent rate expires. It makes the US have the highest marginal tax rate of any OECD country. And sure maybe you don't care if Michael Jordan or LeBron James is paying-
Mark Zandi: [crosstalk 00:55:47]
Kevin Hassett: ... tax rate like that.
Mark Zandi: Shows your age by the way, Kevin.
Kevin Hassett: I know.
Mark Zandi: There you go. Michael Jordan.
Kevin Hassett: Larry Bird.
Mark Zandi: Larry Bird. I'd go to Michael Jordan too, by the way.
Kevin Hassett: Yeah. But Michael Jordan still probably making 10 million a year that's all I'm saying, but the point is just there are a lot of small businesses in that category that employ a lot of people and so it's a very big tax increase on businesses in the US. Probably about half the people in that category are businesses, I would say. [inaudible 00:56:12].
Mark Zandi: I mean, is there any tax that you would be in favor of to generate revenue to pay for expanding government services or even just to close deficits and debt for that matter?
Kevin Hassett: Yeah, sure. I was a big proponent of the border adjusted business cash flow tax. It's basically that plus a payroll tax is sort of like a value added tax, which is a super efficient way to raise revenue. Pretty much what everybody else does. So if you look at tax history around the world, countries all around the world have started to take inefficient income taxes and replace them with super efficient consumption taxes. They don't even have to be as David Bradford taught us. They don't even have to be regressive because you could combine other transfers with the consumption taxes so that it works out for low income people or low consumption people. And so I think that if we took the corporate tax and basically modified it so that it was border adjusted business cashflow tax we proposed or that... Before I went into the White House as was proposed by Kevin Brady then you've basically taken the corporate tax and turned it into a value added tax.
Kevin Hassett: And then at that point, the distortion pyramid is much different from the current structure. So in fact, absolutely how to have revenue. It's how we do it.
Mark Zandi: Just one other tax I wanted to ask about is the carbon tax. How do you feel about that carbon taxation?
Kevin Hassett: Yeah, carbon taxation, I've written a lot about this. If you take the carbon tax revenue... Carbon tax is kind of like a value added tax. And it's sort of hitting a little bit of everything because there's embodied energy in just about everything. And so if you took the carbon tax and then use that revenue to reduce more distortive marginal tax rates then... Yeah, if you look at the academic literature, there are people who show that you can actually make GDP go up irrespective of any climate benefits. Because the carbon tax is relatively efficient and so if you take the inefficient taxes and reduce them with the carbon tax revenue, then you can come up with a trade that makes sense. And I think it's sort of a metric of how broken politics is that that hasn't happened, right?
Kevin Hassett: So let's just say that the Democratic Party is super concerned about climate change and the Republican Party is less concerned. I don't think that, that's a terrible characterization. That's probably pretty close. But if you really believe the Gretta and you think that it's like an existential threat to the world, and we've got to do something about it. Then if you're a Democrat, you basically say, okay $60 a ton carbon tax, go to Mitch McConnell. You let me have the carbon tax. I'll let you have the revenue. You cut whatever taxes you want. And if they did that, then GDP would go up and be good for the economy and it'd be good for the climate. But the fact that we can't make that trade so that when Democrats are proposing a policy in this space, they always want to take the money and spend it on their pet projects. So they're not ever like dickering with Republicans over it.
Kevin Hassett: And I think that if I thought that there was an asteroid coming to hit the planet, and you thought that there isn't, but I was really sure the asteroid is going to hit the planet, then I'd give you whatever you want for me to send Bruce Willis up there to blow up the asteroid, right? And the fact that they're not doing that at climate change suggests to me that the Democrats aren't serious about it.
Mark Zandi: They're trying everything they can given the politics of the carbon tax, right?
Kevin Hassett: Oh yeah.
Mark Zandi: I actually think that's where we ultimately land. I mean-
Kevin Hassett: Yeah, because it's a big tax increase on coal-
Mark Zandi: Yeah, I've seen that one.
Kevin Hassett: ... as an example.
Mark Zandi: Exactly. Exactly.
Kevin Hassett: [Jim 01:00:02] Metcalf and I in the early nineties did some input, output analysis so probably somebody else's updated, but a $25 a ton carbon tax just to increase the price of gasoline and home heating oil by about 11%, but it increased the price of coal by 85%. So basically a carbon tax is a tax on coal. Yeah, because-
Mark Zandi: Yeah. It goes away actually. I mean, pretty quickly. Coal [inaudible 01:00:26] carbon tax.
Kevin Hassett: It's a huge tax on coal.
Mark Zandi: Makes it very difficult. Of course that's where all the CO2, a lot of the CO2 is coming from. There's one thing I wanted to ask on tax policy, I've been dying to ask you because you were instrumental, you were... I don't know if this is an exaggeration, but you were the architect or an architect of the Trump tax cuts and there's a lot of debate, at least in the circles that I'm in, in the research that I'm reading, about whether those tax cuts had any kind of benefit except for the near term kind of demand side, cut a check to corporations, spend some juice. Is there any long-term benefit and you saw the IMF paper. Brookings came out with some work kind of saying, no, we can't see it. There's no benefit. How do you respond to that?
Kevin Hassett: There's some pretty tendentious stuff that's not very academically sensible. I don't know if I've read the IMF thing. They're usually pretty good. They have a good tax team, but you might recall that Glenn Hubbard and Jason Cummins, and I had a paper that looked at the '86 tax act that was published in Brookings and it's probably been cited a thousand times, is one of the early papers that have used the natural experiment to identify the impact of tax policy on capital investment and what Glenn and I have done with my person who worked with the SCA Tyler Goodspeed is we've basically taken everything that we did for the '86 tax act and applied it to the Tax Cuts and Jobs Act and we're just finishing that paper up right now, but we're finding actually pretty much similar estimates to what we got with the '86 tax act. So there was a big positive effect on capital spending. Again, the identification strategy that we used back then, which we haven't changed at all, so you couldn't argue that we're data mining in any way. We're just using-
Mark Zandi: Just for the listener, the identification strategy, meaning there's all these moving parts, and you're trying to tease out the effect.
Kevin Hassett: Tease out the tax effect. Right. So what we did back then is... So the problem with finding tax policy effects is that Congress tends to have an investment tax credit in a recession and then take it off when you're out of a recession. And so if you're looking over time, then it looks like investment tax credits make investment go down because the investment tax credits tend to happen when investment's low because the policies [inaudible 01:02:57] and so making it so that you can control for that is the whole challenge. And I think the first paper in the literature that did that effectively and solved the problem. Auerbach and I actually wrote it. And then a year or two later, Glenn Hubbard and I did a follow on to that paper, but it was basically how to simple identifying thought, which is that Congress is, let's just say too stupid to...
Kevin Hassett: Because there are lots of different types of assets. There's cars, there's computers, there's trucks, there's blast furnaces. So stuff like that. And Congress is too stupid to jigger the cross-section variation in the tax rate on computers versus cars when they have a big tax reform or investment tax credit, but depending on the asset life, if you have something that appreciates quickly or over a long, long time, then a tax change will have different effects on different... on the incentive to buy a computer or a car or anything like that. And so taking the broad, the BS really, really broad asset detail. It's now up to like almost 200 assets and then estimating the change in or tax policies likely effect on that asset that you end up with like a prediction of what happens to the 200 different assets, whether they went up by a lot or a little after the tax cut. The Jobs Act that you can estimate the tax policy effect, looking at how all those things vary. And when you do that, we're getting really big effects-
Mark Zandi: You see it.
Kevin Hassett: ... of the Tax Cuts and Jobs Act. Yeah. It's really obviously in the data just like it was in the Brookings paper that we wrote a while ago. The people who are saying that the Tax Cuts and Jobs Act had no effect... There are a lot of people who have said it that are partisans, not smart economists, like you guys, but there's a common mistake that I see people make and it's basically that... First of all, the Tax Cuts and Jobs Act was passed in December, right? And then it was effective or maybe it was even early January, effective in January, but what it was being debated the expensing part-
Mark Zandi: 2018, right? It was January 2018.
Kevin Hassett: Yeah. January, 2018 or December, 2017.
Mark Zandi: Right.
Kevin Hassett: So this is actually something that I insisted on while we were doing it, but if you basically say, we're going to have expensing, which means that if you buy a machine it's got really favorable tax treatment. Then the whole time that you're debating that then if people wonder whether that's going to happen, suppose they really think in September that by next January that it's going to be expensive. Well, then what you might do is not buy any capital in the fourth quarter because the tax treatment is so wonderful if you can make it to the first quarter and you don't want to create a crater as you're having a tax policy debate. And so what we did is that when we started the tax policy debate, we said that expensing will be retroactive to today. Like today we're starting to debate like September or something like that so that we'll give you that favorable treatment if we pass it. And so that way you don't get the crater.
Kevin Hassett: But in this case, the tax rate went from 35% to 21%. And so as it became obvious that the tax change was going to happen, then firms saw that if they timed the investment into the fourth quarter of 2017, then they would subtract the dollar and then get a 35 cent benefit because they'd save a 35% tax rate. Whereas if they, in January subtracted the dollar did get a 21 cent tax benefit.
Mark Zandi: Oh I see.
Kevin Hassett: And so they piled up the investment in the fourth quarter, as much as they could. And so you got this really, really big spike in investment in the fourth quarter and what a lot of people do who say that, oh, we didn't get the spike that they expected is that they don't attribute the fourth quarter increase to the tax cuts, but they should.
Mark Zandi: I see.
Kevin Hassett: And the other thing is that the investment... The other [inaudible 01:07:00] people make is that what a tax policy does is it sets the level of investment and so if you're at an equilibrium, say, then people are investing just enough to replace depreciation just say, and then all of a sudden you have a tax cut and so that people want to invest 10% more. So would they invest 10% more? The level of investment goes up by 10%. Now investment is more than depreciation. So the capital stock is growing, the economy's growing and if investment stays at that higher level, then you're going to continue to grow until the capital stock is so much bigger that depreciation, investment are equal again. And so the idea is that once the investment level jumps, then in the models that we use to model what happens after the tax cuts, that it doesn't jump again, you're not looking for accelerating investment growth. Once you get the investment level high relative to depreciation, then you get the capital stock growth you need to drive wages and economic growth.
Kevin Hassett: And so the investment to capital ratio jumped a lot and then stayed there, but in the second year after the tax cuts, investment growth was kind of squat. Right? But it was at a high level. And so the capital stock growth was actually there. And so, yeah, I think the tax cuts worked. And as you recall that the... We said like $4,000 it was going to be the wage increase for the typical family and it ended up being about $6,000 after having like eight years under president Obama of not really growing at all. And so I think that the stuff that we said was going to happen up until January before COVID happened just about the way that I expected. And again, maybe I'll come back on the podcast a few months from now, but Glenn and I are publish about to publish-
Mark Zandi: You're going to publish that paper. That'd be very interesting to see. That is great.
Kevin Hassett: Yeah. We're about done with all the tables, so it would be out now if I wasn't basically behind and making my coauthors angry at me.
Ryan Sweet: You come back on the advanced estimate of Q4 GDP.
Mark Zandi: Oh, okay.
Kevin Hassett: Oh yeah.
Mark Zandi: That's a good one. Yeah. If you're game, that'd be great. Hey I know we've taken a lot of your time and thank you for that. Just one last topic to hit on is deficits and debt. There's obviously been a lot of debate around how big a deal it is that we are running deficits and debt, higher debt loads. How big a deal is it in your mind? I mean, can we run these larger deficits? And what are the constraints on that? What are you looking for to say, "Hey, this is becoming a real problem."?
Kevin Hassett: Yeah. I think that, first of all, the deficits have skyrocketed because of COVID and that it happened, so some people are saying, "Oh, it's all President Biden's fault." Like he added maybe 25% at the end compared to all the stuff that came in during COVID. We are looking at really high levels that are a problem and the bottom line is that if you spend a dollar, then eventually you have to... somebody has to be taxed to pay it. And even if you don't pay it back, then you at least have to pay the interest on the dollar. And so in present value, you've got to tax the guy to pay the interest out of the dollar. It's sort of the same, whether you pay it back or not. Like there's somebody has got to pay the tax, if you spend a dollar. And the literature is clear that the marginal cost of a dollar of tax revenue is about a dollar 50. We had a big your report on this in the economic report of the president when I was CEA chair.
Kevin Hassett: So all that extra spending the trillions and trillions of extra spending has accumulated debt that's got to be paid back with taxes and the cost of that is about 50% of the increase in spending in dead weight loss that we'll have from the higher taxation of the future. And so, yeah, there's going to be a big price to pay, but I think that if we hadn't done PPP and all the other things that we did that... I, for one was very much in favor of the expanded UI benefit, because for most of the COVID year 2020, people weren't allowed to go to work, right?
Mark Zandi: Yeah.
Kevin Hassett: I mean, how is that going to affect... So I think by the end maybe the benefits [inaudible 01:11:15] affected the unemployment rate, but I think that getting people money to bridge them to the other side of the worst pandemic recession in US history made sense, but the cost of it has got to be severe. There's going to be trillions and trillions in dead weight loss from the higher taxes that we're going to have to pay in future years to pay for.
Mark Zandi: I guess the issue is as long as interest rates remain as low as they are, it's pretty hard to connect the dots in the minds of people that deficit and debt really matter. So what do you show to to the electorate that this is why we need to do those?
Kevin Hassett: Well, I think that it's not just the interest rate, but it's just the actual, the money that you owe. So we owe-
Mark Zandi: But the debt service is so low. I mean, like right now the debt service is one and a half percent of GDP-
Kevin Hassett: If you could issue a console at a 0% interest rate, then you wouldn't have to worry about it. I have a hard time thinking that that's going to be a market equilibrium. In the end-
Mark Zandi: So what you're saying is rates will rise at some point and at that point that'll be...
Kevin Hassett: Yeah. With inflation in the sort of 5% range, the natural time of the cycle when that would happen would be right about now.
Mark Zandi: Although market expectations are for inflation to be very low, right? There-
Kevin Hassett: Well, they're going up to the expectations. They've been ratcheting up.
Mark Zandi: Right. I don't know. Have they been? No, they're-
Kevin Hassett: Yeah.
Ryan Sweet: Recently along with oil prices, but the five-year, five-year forwards are just around their [crosstalk 01:12:47].
Mark Zandi: Around two and a half, I think.
Ryan Sweet: Yep. When you adjust that for the CPI, it runs a little bit ahead of the PCE deflator. Expectations are right where the fed would want them to be.
Mark Zandi: But anyway, I guess that's what's it's going to take for inflation and interest rates to really rise in a sustained way for [crosstalk 01:13:05].
Kevin Hassett: Right. But there's this other thing, which you might recall like some debates I had around 2000 with [Peter Orissag 01:13:13] and Bill Gale. But there was like... It's like a consensus amongst say, Democrat or left leading economists that deficits had a huge effect on interest rates, so therefore like the Bush tax cuts were going to kill the economy because of the interest rate response. You might remember that. And I did a bunch of work with [Charlie Kalamaras 01:13:39] on that topic and very much convinced myself back in 2000 that the link between deficits and interest rates is almost not there. And part of the reason is that the interest rate that the US pays is set in a global market and at the margin, a little bit of deficit that we have more or less this year is going to be low relative to the global stock of debt. It's sort of like the impact of us oil production on the global price of oil.
Kevin Hassett: It's going to be hard to get it to be a really big number because we have a relatively small share of global oil production. Well, the same is true for debt. Yeah. We have probably a bigger now share of global debt.
Mark Zandi: It's a little bigger now.
Kevin Hassett: Yeah. But it's still-
Mark Zandi: It's 28 trillion I think out of... Whatever.
Kevin Hassett: [crosstalk 01:14:23] the global market is the point. But in the end, it's the fact that you have to pay it back.
Mark Zandi: Well, speaking of debates, we had a great debate, I thought, and thank you for inviting me.
Kevin Hassett: No, yeah. Thanks. That was some fun.
Mark Zandi: We were down in Dallas. I think it was a couple of months ago now and we debated ESG and if folks are interested, should Google that.
Kevin Hassett: Yeah. The debate is online, national-
Mark Zandi: Yeah. It's a great debate. Well, I enjoyed it tremendously.
Kevin Hassett: I had a lot of fun.
Mark Zandi: I had a lot of fun. It's about ESG investing and I think the premise or the proposition I should say was ESG investing will... Was it undermined the American economy or-
Kevin Hassett: Something about like that.
Mark Zandi: Something along that. And you were defending the proposition. Of course I was taking the other side of the proposition that it was-
Kevin Hassett: And I had a very friendly audience because we were in Texas and so there was nobody in the audience-
Mark Zandi: Friendly.
Kevin Hassett: There are so many in the audience the [Excenti 01:15:16] a lot to side with you. You probably changed the minds but-
Mark Zandi: Although still they were so gracious.
Kevin Hassett: You were in unfriendly crowd.
Mark Zandi: Okay. They were so gracious though. I mean, really, really enjoyed it and I want to thank you for inviting me. But that's a topic we should tackle at Inside Economics is ESG investing because... Obviously Moody's is very... As you know, that's why you probably invited me. Is very involved in ESC investment, so a very important thing, but I do want to thank you, Kevin, really-
Kevin Hassett: Thanks for-
Mark Zandi: ... for coming on and really appreciate your perspective and the time you spent with us. And just to remind everyone, please, if... We're looking for future topics that you're interested in, so go to economy.com, there's a button there for Inside Economics and let us know what topic you're interested in and of course we'll listen to that. And Ryan, Cris, anything else you want to say? Did I miss anything? Should I be telling the listener any... Oh, we want you to go rate us on Apple or Spotify. Let us know... Give us a rating. We appreciate that. Anything else guys? No?
Ryan Sweet: [crosstalk 01:16:30].
Cris deRitis: I like to endorse the Hassett dog for everyone, proposal.
Mark Zandi: I second it. Well, do you get to choose the dog or is it determined for you?
Kevin Hassett: I don't know.
Mark Zandi: Okay.
Kevin Hassett: You should probably let me choose. You should let me choose for you. I'm a big government guy.
Cris deRitis: You got to pass the bill for us, Mark.
Kevin Hassett: Yeah.
Mark Zandi: Yeah. Let's pass the bill first. Okay. Well thanks everyone. Till next week, take care now.