Transcript: Jared Bernstein on Taxes, Spending and Inflation

(Bloomberg) -- On this episode of Odd Lots, we speak with Jared Bernstein, who’s been a longtime advisor to President Joe Biden. He was his advisor while Biden was vice president, and today he serves on the Council of Economic Advisors. He talks about the current state of the economy, inflation, and more importantly, the White House's vision for taxing and spending. You can find the episode here. Transcripts have been lightly edited for clarity.

Joe:
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy:
And I’m Tracy Alloway.

Joe:
Tracy. I'm very excited about today's episode. Obviously we talk a lot about economic theory on thid show, we talk a lot about how changes in economic thinking have changed from now and pre-crisis and so forth. We talk about the sort of condition of the macro economy quite a bit. But, you know, not as much on the actual specific policy-making side.

Tracy:
Yeah, well today is a chance for us to put theory into practice, I guess. And we've been talking basically a year now about this idea of the handoff to fiscal policy — this movement from monetary policy to fiscal stimulus being more important for economies post-Covid, and now's our chance to actually dig into how fiscal policy is enacted and how people in power are thinking about it.

Joe:
Yeah, exactly right. So that is of course a huge theme, a huge discussion, the sort of the post-, I guess I would say, the lesson of the last year is that fiscal firepower has been incredibly effective at reviving the economy. And there's certainly an increased openness, it feels like, politically and also intellectually to really take a more expansive view of what government spending and taxation power is capable of in terms of building a new economy and not leaving so much of the decision-making too the central bank.

Tracy:
Yeah, I think that’s exactly right. Even if you think back a couple of years, even the idea of massive fiscal spending — things like direct payments to Americans — were kind of on the fringe, but now not only have we seen that happen, but people are talking about other things for future crises — such as automatic stabilizers — and more things like that.

Joe:
Exactly right. It feels like it's a time of openness to new ideas, which often is the case after a big crisis. Anyway, I want to jump right into our discussion today because we have the perfect guest with the perfect perspective to talk about all this. We're going to be speaking with Jared Bernstein. He is a member of the White House’s Council of Economic Advisors, right now advising the president on economic policy. And he was previously the chief economist and economic advisor to then-Vice President Joe Biden coming out of the great financial crisis.  So he has truly an extraordinary perch, extraordinary position, a great perspective to talk about today and the past and everything that's going on. Jared, thank you so much for joining Odd Lots.

Jared:
Well, thanks so much for inviting me. I think the right way to start is to say long-time listener first time caller, as they say,
I've taken many a jog accompanied by the two of you, which has helped to  burn calories and learn something while I'm running.

Tracy:
Ah well, we’re all about physical fitness.

Joe:
Yeah, you're the second person recently to actually cite our podcast in contributing to burn calories, which is, you know, it's nice to be listened to by influential people and stuff, but we really want to help people lose weight. So that really means a lot.

But you know, I want to start actually with something kind of specific. So we're in this, I think pretty extraordinary moment of growth. Economic growth is much faster than I think a lot of people would have guessed. The willingness of the government over the last year, both under the last administration and this one, to engage in aggressive fiscal expansion is truly historical. But there is this other bill, or possibly set of bills, that the White House is aiming to pass later this year, and I want to get into those. But right now everyone's talking about inflation, lumber prices, gas prices, and so forth. We know that the Fed is planning on basically really looking through that, understanding it's transitory, but from a political perspective, and thinking about the task ahead of you this summer in building support for more aggressive fiscal firepower, infrastructure — is that a political challenge? You know, sort of thinking about, okay, we need to convince members of Congress and the Senate to spend a lot more money at the same time the news is filled with stories about rising prices?

Jared:
Well, I think any thing you undertake in Washington given the legislative environment is a political challenge. But you're very much correct to think about this, at least from my perspective and that of our economic team, from the perspective of political economy or the intersection of politics and the kind of economics concerns embedded in your question.

From the inflation perspective, it's really, really important to separate the American Rescue Plan from the families and jobs plan because the former is very much in the spirit really of relief, more than stimulus. And that that's a subtle difference but one that I think probably isn't lost on this audience. Where stimulus is often about trying to quickly address demand shock and get people back into the economy, where relief is more about helping people and businesses get to the other side. But putting that distinction aside for a second, there's a big difference between direct impact payments or the checks you were just referencing and enhanced unemployment benefit, PPP loans, things like that. And a set of investments that spend out over eight to 10 years, from both from the perspective of kind of the political economy or the kind of the politics of those different initiatives.

And to your question from the perspective of inflation, I think it's actually quite a non-sequitur to talk about the jobs and the family plan and the kind of monthly inflation reads that we're digging into right now that are very much driven by base effects by what we believe to be transitory supply and demand misalignments, by some of the pent-up demand and the elevated savings rates. And investments in long-term clean energy initiatives, advanced manufacturing, standing up a care sector, measures which I'm sure we can get into from the families and jobs plan, are pretty different creatures from the perspective of price pressures.

Tracy:
Well, just on that subject, is there anything the administration could do to expand capacity for things that are in short supply? So I'm thinking, you know, lumber is obviously important for housing, corn prices have also surged, they’re an important source of food, animal feed. Semiconductors have already been discussed by the administration as being strategically important. But is there more that you could do, would you be inclined to do more?

Jared:
So let me begin my answer ther with a very firm statement, which may sound a little tangential to your question, Tracy, but I don't think is. Which is that when comes to managing inflation, that is first and last, beginning and end — I want to just really emphasize this, the remit of the Federal Reserve, not the White House. Clearly we are tracking, carefully-monitoring inflationary developments, and by the way, not just in the data, which we're doing with the regular data, the high-frequency data, but also anecdotes — I mean, this is something we're tracking extremely carefully. But when it comes to managing price pressures, that's the job of the Federal Reserve. So that kind of independence of the Fed is a huge value of, of course, our administration.

That said you raise a perfectly legitimate question that is addressed by some of the measures in the jobs plan. In particular, you mentioned semiconductors. So there's a $50 billion investment in the jobs plan to help promote an onshore, some critical supply chain aspects, including semiconductors. But this is not something that happens right away. As I was mentioning to Joe, obviously unlike the rescue plan, the jobs plan still has to be legislated.  But it takes a couple of years to stand up a semiconductor plant.

When it comes to addressing what we're looking at as transitory misalignments between supply and demand and some of the sectors you mentioned,  I think right there, we have to think about the sort of elasticities or response functions that occur in markets where demand for lumber sends a signal to sawmills to activate lines that have been dormant. And now there are misalignments that evolved throughout the course of the pandemic where, I think some key actors took down production not foreseeing that it would come back as quickly as it did, hose sorts of things. That’s not necessarily a position for an administration to intervene in, but we'll see how that evolves as time unfolds.

Joe:
Well on that note, and this is a theme that we talk about a lot, which is the, you know, supply and demand sometimes get discussed as if they're these sort of very distinct, separate things, two lines intersect on a chart, there's the price. But of course, as you’ve basically just alluded we've lost a lot of supply in part because of weak demand. And so we lost sawmill demand over the last decade after the great financial crisis with the mediocre housing recovery and tech capex hasn't been impressive. In your thinking about investment, and again the longer-term investment, do you think about basically this idea of maintaining demand whether it's direct purchases of equipment or incentives to keep growth high such that private sector actors will be incentivized to continue to build out capacity and not just look at the current moment as a sort of short blip?

Jared.
Yeah. Generally I would say more yes than no, although nobody, I wouldn't use the phrase ‘short blip’ because we just don't know. We and others have packed a lot into this word ‘transitory,’ but I think what it really means is that we expect these misalignments to correct, although I don't know that any of us really have a great feel for the timing of that because we haven't been through this before. I mean, like you said Joe earlier, this is a remarkable period. We essentially shut the economy off and we're turning it back on. That’s not something that we have a lot of timeseries evidence. But wait, let me say a couple of things. Your questions always provoke a way too many thoughts, but let me try to organize them.

I think that theoretically the theory of the case is kind of this law, and this is very traditional kind of Keynesian economics, is this recognition that the world works much more in Keynesian term than in Say's Law term, meaning that it's not correct to believe that supply creates demand. It's more correct to believe that demand pulls in supply.  And so that theory of the case is very much embedded in my, and I would argue our, thinking in the administration.

However that said, if you look at our plans — particularly the jobs plan but also the family plan, the longer term investment plans — what you see there is not a, you know kind of acceptance that it's completely up to the market to align supply and demand and deliver whatever outcomes the market delivers full stop and we'll just stand on the sideline and observe. There's much more intention there about, for example, not just job creation, but the quality of the jobs that are created, ensuring that those jobs are union jobs that pay a good middle-class wage. That's one of President Biden's most important marching orders to us.

It's recognizing that there are serious missing markets in this economy. The care area is one where that's really pronounced, where unlike most other advanced countries we simply don't have an affordable, accessible care sector for people who are providing elder care or childcare, which those people are disproportionately women and moms, to be able to find a clear path into the job market if that's what they want to do. So we have to help stand up that sector. The economy will underinvest in research and innovation, particularly when the returns from those investments are longer-term, the economy will underinvest in clean energy at tremendous existential cost to our survival. And so there are areas where we have to make sure that our investment meets those missing markets and helps to create demand that will lead to better quality jobs and investments in underinvested sectors.

Tracy:
Hmm. So we have so much to get through and I want to make sure we have time for everything. So if I could shift gears slightly to one of the big questions hanging over Biden’s spending plans, which is how are they actually going to be paid for? So I would love to know your thinking about the deficit, I suppose. And also the proposed package includes enormous tax hikes for the rich, something equivalent to 1% of GDP per year. Why tax hikes to fund this particular package. And the reason I ask that is because, you know, Joe and I talked a little bit about economic opinion, maybe you changing in political circles, this idea of stuff like Modern Monetary Theory making inroads in the administration. So are the tax hikes because you're actually worried about funding the spending plan and deficits, or is it more about seizing a political opportunity that's arisen from this extraordinary time, as Joe mentioned, to actually tackle inequality?

Jared:
Okay. Another great set of questions to unpack. This will only take about three and a half hours, but I'll do my best. I'll try to be succinct. First of all, though, I want to challenge an adjective you used, which is, 'enormous.’

Tracy: 
Oh yeah, I knew you were going to say that.

Jared:
Well, it's not just saying that. I happen to be looking right now at a new paper that just came out by the economist Mark Zandi and in chart three of that paper, which perhaps you can link to it on  your website, he shows the Building Back Better, that is the American families jobs plan tax hikes, in context, and has a bar chart of all the tax hikes that have occurred since the 1930s really, really a lot of work went into this chart, and the one at the very bottom is the one that we've proposed. So I think you have to recognize too...

Tracy:
I rescind my adjective!

Jared:
Okay, and I think the reason you get that result is twofold. One, is that in many cases we’re resetting rates to where they've been before or not even in the case of the corporate rate. Of course, the Trump tax cut took the corporate rate from 35 to 21. We take it to 28, that's our proposal. So that's kind of right in the middle, but also, and this is most important for listeners to recognize, that these tax increases do not hit anybody under $400,000 of family income. And if we're talking about the capital gains tax increase, it's only above a million. So it only affects the top 0.3%.

Okay. So now that we've got that out of the way, let's get to the kind of meaty part of your question around how we're thinking about deficits and debt. It is the president's view that a longer-term or more permanent proposals should be paid for. And I think that makes sense. And I think one way to recognize the sense that that makes is to look at the disinvestment in the things that the plan in particular --as well as the family's plan -- invest in: research and development, innovation, the kinds of long-term return investments that private firms often won't make because it simply doesn't fit the kind of schedule that they have to report on to their investors. If you look at infrastructure, everything  from public education to replacing pipes that have lead in them — you know there's hundreds of thousands of kids who are still exposed in today's America to lead in their water, that's completely unacceptable to this administration — again, I talked earlier about a care agenda, but even traditional stuff, you know, roads and bridges, those investments have really suffered over the long-term.

If you look at the share of GDP invested, for example, in R&D and innovation, it's gone from about 2% in the sixties to about half a percent now — a big and portentous drop. Reversing those investments is a point of of the Building Back Better agenda, and one of the reasons why those investments have failed is because they don't have any reliable funding sources. So while I completely understand, and in fact contributed to the literature that understands deficits and debt in a new and different, and you could call that a more progressive way (I'd probably call it a more economically and empirically sound way) — I'm very much moved by that work. I also think you have to recognize that the effects of not having funding sources for permanent programs show up all the time in their disinvestment and their insufficient upkeep. By contrast, look at Medicare and Social Security, which have held up relatively well in that space because they have dedicated funding sources.

Joe:
So, okay. We need to keep unpacking this because I kind of get that and I kind of don't. With the so-called entitlements, or Medicare, Social Security, yes, they have dedicated funding sources, but they also just have laws that say these programs will exist and they're not sunsetted, they're not temporary. They weren't five-year health programs. They weren’t 10-year. They were permanent legal fixtures. And yes, they did come with a dedicated funding sources, payroll taxes, and so forth, but what makes the programs exist forever is the fact that the law says they’ll exist forever.

With some of these things that you described. And we agree, and many people would agree that they have been underinvested, how much is this A) just a need to pass a law that says this will always be here. So if we're talking about childcare or some sort of family leave thing, to make it permanent, it seems like it should just be a lot of saying this is a permanent benefit, or it seems like it could be solved that way. And so when you draw the connection to Medicare and Social Security, is it that those taxes are needed for the programs to exist? Or are they needed to get the votes such that politicians are willing to make them a permanent?

Jared:
No, I mean I really think on this one, the way I kind of laid it out is — this sounds more snarky than I mean — is more correct than the way you just laid it out, but let me just explain it.

Joe:
It's fine.

Jared:
Let me give you a good example of what I mean.  We actually have something called the highway trust fund. This is a Federal accounting device wherein resources are supposed to flow to fund our highway system. And its main source of income is a nominal tax on gas that hasn't been changed in like 35 years or something. And that, and even as obviously inflation has increased and the efficiency of the auto fleet has increased, the highway trust fund is always in massive trouble. And it's one of the reasons why our transportation infrastructure, including mass transit by the way — mass transit, which by the way, is in the rescue plan and the jobs plan quite deeply — that trust fund has failed to support that.

And the reason is that it's a law on the books, you know, and according to your theory, a law on the books is what it takes. But it isn't, it takes more than that. I actually think if one wanted to make a better kind of an argument against having to fund Building Back Better, it would be that the return on the investments should be greater than the cost of borrowing. And,  you know, that is true and it makes sense to me and you'll hear economists — some of my economist friends — make that point. They say, ‘Hey, look, you're going to get a return on these investments that are greater than your borrowing costs, which of course are historically low. So why pay for them?’ And I totally get the economics and the public finance, kind of the ‘G greater than r’ thinking, behind that. But what I think it misses is the political economy of the sustainability point that Joe Biden just intuitively understands.

Tracy:
So I actually wanted to ask a big picture question on this topic, but do you think that economists grasp the political realities of putting theory into practice?

Jared:
Could you run that by me again?

Tracy: 
Oh, sure. Do you think economists understand the political realities of putting theory into practice? And what I mean by that is, for instance, it's one thing to say, if you're an MMT person, that deficits are only limited by inflation, but it doesn't necessarily help you get to a place where people are enacting more fiscal spending if everyone can’t agree on what to spend the money on.

Jared:
I totally get your question now. I didn't get it at first. I totally get it now. It's a really interesting question — another really interesting question. So I think, let me answer it this way, I won't name names, but I was trying to draft an economist to come in and work with us who's someone I'm really fond of their work and. And he's a private sector person, and and what I said to him is if you really want to understand how the economy and the nexus of the economy and government work — and I would include theory in that nexus, Tracy — you've got to work for the government. You can’t understand that if you don't. So I do think that there is a kind of empirical gap between what a lot of theoretical economists sort of write about, and even some empirical economists write about, and a kind of tangible, granular understanding of how economic policy really works.

I think you mentioned MMT? That's a good example because in MMT, there's, there's a belief that if inflation were to take off — this is kind of a timely point, I think — if inflation were to take off, don't worry and don't assign much to the Fed, because that's just not part of the kind of cosmology there. You can just raise taxes to take money out of the economy. Well, that's a cogent theoretical point, but when applied to the real political economy and the legislative timing involved therein, and the partisans squabbling involved therein, that's not, you know, a very I think realistic solution, especially when you have a central bank whose independence allows it to get outside of that political constraints there and do what needs to be done for very good sound economic reasons. So I do think that there can be a gap between theory and practice, not unlike the one I just talked about in terms of, to Joe, in terms of why I think president Biden's view on payfors for the investment programs make sense.

Joe:
God, every, every answer you give, I have like a billion other questions. I want to ask another version though, kind of related to the MMT question, but I mentioned in the beginning, and as anyone who's followed your career knows, you were the chief advisor to then vice president Biden coming out of the great financial crisis. All else aside — and I think there are a lot of lessons from that period, particularly the first two years — but all those aside, I think it's pretty clear that in both the intellectual sphere and the media sphere, there is much less concern about deficits these days than there was 10 years ago or 11 years ago or 12 years ago. And I'm curious if from a policy perspective in the White House thinking about, okay, what is the best stimulus to do? What is the best way to structure spending for the next 10 years? Etc. That new sort of environment (and if you don't think that exists, let me know, but it feels like it does) that new environment creates more political space, creates more flexibility to achieve your goals.

Jared:
Yeah. That environment does exist. There's more fiscal space and there's more political space to wield that fiscal space. Now, the fiscal space existed before but here's an area where I think kind of empirical public finance economics has made real strides, say from the last time I was in government dealing with the downturn in the great recession after the housing bust. And now interestingly as you point out, the current president was the vice-president there. And I think one of the lessons he learned is o big or go homeis not just important fiscal policy when you're punching back against a globally-threatening pandemic or last against a globally harmful financial/housing bust.  But there's also not only the fiscal space to do so, but there's actually good research that shows if you fail to wield fiscal power policy with enough power to offset the contraction, your debt to GDP ratio could actually worsen because you've done too little to boost the denominator GDP. And again, there’s I think some pretty solid research that that makes this case. So I think the urgency and the intersection of good policy and politics boosted by high quality economic research as well, has all landed us in a moment where we recognized greater fiscal space.

Tracy.
Hmm. On the topic of 2008 versus 2020, after the financial crisis, we did see a lot of emphasis on trying to fix problems in the housing market that had contributed to the financial system melting down. So for instance, there was a lot of focus on GSE reform. One of the things that was left out in Biden's proposal were substantial changes to healthcare. And I'm just wondering what the thinking was there, because I guess coming out of 2020, having experienced a massive health crisis and also needing to stimulate the economy, it seems like healthcare would be a really good area in some ways to focus on? But so far Biden seems to have shied away from that.

Jared:
Well, again, I think if you look at a couple of different places you'll find that the president has leaned into that and not really shied away. So in the joint address, there was a very important paragraph where the president spoke about how important the healthcare agenda is going to be for our administration. There's also some similar language in the factsheet around the family plan. I feel like we've been here for about 10 years already, but in fact we've only been here for a few months. I think we just hit the first hundred days. So we have to move the freight on different cars at different times, but if you look back to the campaign, you'll see many areas that the president has leaned into and he is just ticking through them with alacrity, with power, with legislation, and I think really quite — here I'm somewhat padding some of my fellow deputies here in the administration on the back here — with I think some pretty well-developed policy plans. So healthcare is, of course it's going to be in the mix. It's 17%, 18% of the economy, and it fits right into the discussion we were having before about the public private mix and the importance of getting that right.

Tracy: 
So even if it's not in the actual spending bill now, you're confident that something substantial is coming down the line?

Jared:
I'm not going to lean into something substantial because that begs the question of what you're talking about and we have to run an extensive process before we, you know, I don't frontrun the president, which is why I still have my job. But look at what he said. It's actually worth reading what he said in the joint address and in the family plan, because he really does lean into what we're going to, what we're going to be planning to do it in that space.

Joe:
I want to pivot a little bit the conversation towards the Fed. And of course, obviously the Fed's independent, we all know that. But you mentioned that interest rate hike or the, you know, it is the Fed’s remit to think about inflation and of course the White House has a role in shaping who is on the Fed now and who is going to be on it in the future. So I want to ask a couple of questions on that. But to start with, thinking about the question of Powell. He's obviously had this sort of, I think a lot of people would say fairly radical shift for the Fed to really focus on labor, to not try to preempt inflation,  to commit in a way that we haven't seen to not snuffing out the recovery prematurely. That seems to be a shift. And he also seems to have also won the respect of financial markets quite a bit, which is rare. When you think about the question of a potential reappointment or replacement, is that respect that he has among financial markets, do you think that's an important thing?

Jared:
Well, I'm definitely not gonna say anything about Fed personnel.  Yeah. I used to be a gum-flapping, chin music-making pundit who talked about all this kind of thing all day long. And it's hard to draw that line now. And remember that I'm in the white house.

Joe:
We're gonna try, we're gonna try.

Jared:
You know, my goal used to be, to make news. Now my goal is to not make news, so I'm not going to make news. Let me say instead, the following. I talked a second ago about what I think is one of the most important advances in political economy, which is the recognition of true fiscal space. A recognition that I think was a significantly fogged up by views on crowding-out — how public borrowing would crowd out private borrowing and pressure in interest rates — that has long been unsupported by the empirical record.

Well, there's another important,, the other, you know, equally important, economic develop that I would put really in the stratosphere of ways economists are better at understanding how economies really work is the relationship between unemployment and inflation. And in this regard, I think one of Powell’s most important speeches was I believe was the Jackson Hole speech, when he talked about how because there's so much uncertainty around what we call the star variables — y*, u*, r*, potential GDP, the natural rate of unemployment, the natural rate of interest. These are all theoretical concepts that almost, maybe it's too strong to say that can't be, but are extremely hard to be reliably estimated. By which I mean, estimated within a policy-relevant confidence interval. That I think, you know, going back to,  Bernanke, Yellen, Powell — the recognition that the confidence interval around those estimates is far, far wider than was realized before and that it's beyond our empirical scope, to nail them down has led to a much more data-driven approach to both fiscal and monetary policy.

And that's a really great advance, particularly from the perspective of tightening labor markets. And there, you've heard, again, this dates back to before Powell, there you've heard the  Federal Reserve make critically important connections. By the way, most of my research agenda before I took this particular job was in this space that I'm about to mention. The really important connection between achieving full employment and pushing back on racial inequities, on economic inequality, providing folks and communities are typically left behind with the kind of economic opportunities they need and deserve, that is very much linked up to achieving persistent, stable, full employment. And getting to persistent stable, truly chockfull employment is itself closely related to these important insights about both fiscal and monetary policy.

Tracy:
So this is something that I wanted to ask you about. So you wrote — I think it was just last year — that the Fed should consider targeting not the overall unemployment rate, but the black rate. And now we have this idea of an inclusive and broad-based employment framework from the Fed. But in your opinion, what does that actually mean? And does the central bank need to go further by perhaps setting explicit targets for black unemployment, for instance?

Jared:
Yeah. So when I wrote that I wasn't in the administration and I felt that that, so I was again playing chin music all day about things that I don't sing about now. And by the way, I think if you look back at, at least what I was trying to say was not so much that the Fed should target black unemployment, but that racial equity and monetary policy are linked in the way that I was describing a minute ago. Because if you look at who benefits proportionately from tight labor markets, it's people in communities of color. So actually you could see this in a way that was fascinating to me, I was writing, you know, empirical papers about this, crunching the heck out of every number I could find, showing how persistently low unemployment was providing labor market opportunities on so many different margins. Not just the extensive margin, which is pulling people into the job market who weren't there before. But as much and even more so, the intensive margin of giving those people way more hours of work if that's what they wanted.

And the changes for say, African-Americans in the bottom quintile — I did a paper with a guy named Keith Bentley on this, which you can find out there somewhere — are economically large. So those connections, what I can talk about is, what I mentioned in my last comment, is the connection between critically-important new insights in fiscal space and in the relationships between unemployment and inflation. The linkage between those insights and the ability to maintain full employment with such deep benefits to groups that are too often left behind.

Joe:
So I want to explore this point further but I think one of the particularly tragic things about the timing of the coronavirus crisis and the setback was that right prior to it, we were seeing an impressive level of compression between say the white unemployment rate and the black unemployment rate as the economy continued to improve. And so obviously there's a hope that we can get back there really fast, but it also on the other hand, seems unfortunate that, okay, that was a desirable state, but that came after 10 years or nine years of a very disappointingly wide gap, and sort of labor market that was almost nobody's idea of tight. How do you think okay, like we want to get back that, but — and I guess this gets to the question of what is your, what is president Biden's vision of like the future? — can we have them sustainably? Can we have that so that we always have a tight labor market, and it's not just like a special treat that comes at the end of every expansion.

Jared?
Yeah, that's a great question. Let me talk about it from my economist perspective and then shift to the president's vision here cause the latter is way more important because he's the president.  Here’s a statistic I haven't cooked up lately, so this number changes as you'll see, but I think I'm in the right ballpark. If you look at the percentage of quarters starting around 1980, which is the period when job markets have been persistently too slack, if you look at the percentage of quarters where the unemployment rate has been above the CBO’s estimate of what the natural rate is, that is the lowest unemployment rate consistent with full employment. That ratio is 6.66, 6.70, maybe 6.75 depending on the end points that you choose. That is most of the quarters are most of the years, since 1980, this economy has been slack and that's by a measure, which probably in many years pitches the natural rate too high. So it's probably even worse than that.

So the foundation of your question is exactly right. We have not had tight enough labor markets, and that's one of the great insights of recent Federal Reserves. And again, links back to the importance of recognizing fiscal space. Now, Joe Biden is not an economist, but I've been talking with him about this since we sat down in his house in November of 2008, and talked about me perhaps coming on as his chief economist. The very first thing we talked about, he pulled out a graph that I'd made with Larry Mishel, which showed the gap between productivity growth and median compensation. Okay. So productivity growth grows, grows, grows — not as fast as we'd like but it does grow, you know, a percent percent and a half per year — on trend, and the median compensation, the compensation workers right in the middle of the scale — was flat, flat flat for, you know, not all of those years, and in fact, in the latter nineties, when the job market really tightened up precisely like my earlier theories, were trying predict, then you saw some action at the median.

But for the most part — and by the way, Larry Mishel and Josh Bivens have a forthcoming paper on this which is really elucidated, you need to get them on here and talk to them about it — and Joe Biden, who was the vice president elect then pointed to that graph and said this is what I want to work on. I want middle-class people to get a fair shake. I want to think about the policy agenda that's going to, in my words, relink median compensation and overall economic growth. And that agenda is a deep one. And now that you see what the president is up to, that's what he's doing.

So unions are part of that because the, as Bivens and Mishel have shown in various papers and it's going to be part of this new one as well, the loss of bargaining power for workers in the middle-class has certainly put downward pressure on wages. The absence of persistent full employment as Joe's question suggested is, is very much in that mix,  The inaccessibility for women, in particular, and caretakers to have a clear line of access into the job market because there's not a childcare sector that's affordable and accessible. The absence of investment in good middle-class jobs and new expanding areas of the economy, including advanced manufacturing, clean energy, electric vehicles, these are all parts of the plan. And at least from a kind of macro labor perspective, it's all about trying to reconnect middle-class working families to the overall prosperity in the economy.

And I'll finish up. That's why, we started this conversation saying we're getting some good growth numbers. GDP north of 6% in Q1. That's great. We're all for it. It does not obviate the work that I just described. Because at the end of the day, if this administration achieves high GDP growth, low unemployment, a booming stock market, but it doesn't reach the middle class in the way that the president has set out for us, we will have failed to march to his marching orders. And that's not something I want to do.

Tracy
Just on the subject of the Fed more widely. So you've emphasized in this conversation a number of times, the importance of the central bank being independent from government, but we're also talking about the importance of fiscal space. I'm wondering, do you see scope for monetary policy to enhance or work in some way together with fiscal stimulus? How do you see those two things interacting?

Jared:
Well, I think that they just naturally interact all the time. And I think that what we've seen in the current recovery, largely from a macro sense, is the importance of the one, two punch of fiscal and monetary policy. There is a risk going back to Keynes, if you're relying on monetary policy alone of pushing on a string. That is you can make credit as accessible as you want, but if people don't have direct impact payments or checks, you know, money in their pockets, they won't have the resources to take advantage of those low rates. So I think one of the lessons of the last couple of downturns is that fiscal and monetary have to work together. By the way, one way to just underscore this point is to go back and listen to what Ben Bernanke was saying to Congress back in 2009, 2010, when he was going up to Congress saying we're doing everything we can to make sure the credit markets are fluid and that borrowing costs are low, but unless people have the resources that they need, which is going to involve a temporary fiscal policy because the economy is still climbing back slowly, we'll be pushing on a string. So there's that.

I also think that if properly implemented, fiscal policy and monetary policy can be complimentary in terms of a regime wherein the  Federal Reserve is not always looking over its shoulder at the zero lower bound. So that you have robust monetary, you have robust fiscal policy, and you have a monetary regime that looks less like what we've seen over the last decade or even more, where the interest rate is at zero most of the time,

Joe:
I want to ask you another question and I kind of have a feeling you might have to answer in two ways between your economist pundit self versus your employee of the White House self. But when thinking about creating a sort of a sustained high level of activity and not having these downturns that create slack that take years to overcome, should we have automatic stabilizers so that we don't have to hope that Congress, that the political alignment of Congress is such that they could pass a bill like the Cares Act when there's a downturn, but rather that checks automatically go out to start counteracting a downturn, right away?

Jared:
Well, actually this is something that the president has leaned into on occasion. In some of his speeches, he's talked about the importance of that, and there've been various pieces of legislation.  I think, again, I think the political economy of that is challenging because there's a discretion that Congress likes to hold on to, but I think there are politicians, quite a few prominent folks, I don't remember names right now because this is in some bills, that agree with this proposition. And that recognize that when you hit a downturn, when the economy hits a shock, it could be whether it's a housing or a financial bubble or a pandemic or the kind of thing that hits us hard and fast, sometimes the political process can be too cumbersome. So the idea of these triggers is something that the president, as I've mentioned, has talked about on occasion. But I think that where we go from there I can't speak to at this point.

Tracy:
Do you think there's an expectation now that having sent out direct payments recently that in the next crisis, or the next time economy falters, people will expect that kind of stimulus again? I guess what I'm asking is, do you think there's a sea change in attitudes among U.S. voters towards fiscal stimulus and especially direct payments?

Jared:
I think there might but just for the record, we should recognize that this isn't the first time we've done that by a long shot. And in fact,  I remember, checks going out under George Bush before the financial crisis and earlier checks as well. I think what happened this round is that they got out really quickly and they were of a magnitude that made a real difference to people and the president was talking, I think before he was president in November and December, after he won the election, he was talking about how important it was to not just get these checks out, but to get another round of checks out. So I think your prediction about future expectations is probably correct. And I think one thing that complements that prediction is the fact that the IRS infrastructure was put up pretty handily and quickly, to get out at this point, over 160 million checks. So it's made a real difference.

Joe:
All right. I just have one more question and then we can wrap up. But you know, this is a topic very near and dear to me, maybe it's my only single thing that I really care about. If there's ever another debt ceiling impasse is the president prepared to mint a trillion dollar coin to circumvent it or at a minimum at least take advantage of this brief window where there's control of both houses of Congress to at least abolish the debt ceiling permanently.

Jared:
Yeah. That's one of those things I'm not going to lean into, but it’s a fair question.

Joe:
Had a feeling. All right. Well, Jared, thank you so much for joining us. We really appreciate you taking your time to come on online.

Jared:
My pleasure. Thanks for inviting me.

Tracy:
Thanks Jared — really enjoyed that.

Joe:
Tracy, I thought that was really awesome. Getting to speak to Jared on that. I really, I feel like, the term that he kept using over and over again was political economy. And I think that's what our discussions that we keep having are really all about. It really is about, okay, we know what the theory is, what does it actually take to get something passed or make something sustainable in D.C.? And I feel like Jared just by dint of his career, just has such a great perspective on all that.

Tracy:
Yeah, it's kind of a shame we didn't really get into the debt ceiling, but in one way it's the perfect example of that, right? So the suspension is supposed to end by August and like, clearly it's going to have to be dealt with at some point, but for years now Congress has been suspending rather than actually raising the limit. So even if someone can make a rational argument for why they should permanently raise the limit, there's already, you know, people are clearly reluctant to do that. And it's going to be interesting to see how that plays out.

Joe:
Well, it's also even more importantly, almost everyone will agree, especially if they're not in politics, that the law is bad. That the idea of  a statutory debt ceiling that's disconnected from the budget is not a good system. But we can't get rid of it. And there's various reasons we can't get rid of it. And there are various reasons no one has ever tried, actually there's been no real attempt to abolish it. But again, it speaks to the politics of all of this. That here's this thing, it gets in the way, it almost created a crisis in 2011 when people might think that it was going to lead to a default on the U.S. debt. So it's kind of this weird little annoying thing, but it speaks to where there’s this conflict between what makes sense on paper economically versus political will.

Tracy:
Yeah, it goes back to that theory versus practice point, which was sort of the foundation of our conversation. This idea that even if you have a big new economic thought, actually putting it into practice and coming up with specific policies to enact it might be more difficult and does require, as Jared said, an intimate knowledge of the political economy and the way things actually work. 

Joe:
Exactly. Right. And of course, so it's like, there's a microcosm, but the bigger story is this sort of question of what can get passed on the spending side. And it's interesting to hear sort of Jared's perspective. And also his, I guess I would say translation or insight into president Biden's thinking about, okay if you want to do this, maybe economists can make this case and they probably can, that a lot of this spending, particularly the investment spending, doesn't need to be paid for in the traditional sense. But it's interesting to hear the politics perspective that on some level yes, it does. I thought that was very useful.

Tracy:
Yeah. I'm also curious to see what happens on healthcare, because that's another topic that's politically loaded. There seems to be consensus building in the States so that there is something wrong with the U.S. healthcare system, but actually fixing it, I mean as we've seen over and over and over again, tends to be much more difficult. So that's also going to be an interesting thing to watch, I think.

Joe:
Yeah, it should be an interesting summer to see like what eventually… It seems like that's the timeline that we're looking for. Okay. The next few months of negotiations, then maybe something gets passed in September after that. So should have an interesting few months ahead of us watching to see what policies get put into place. And as Jared said, you know, we have the stimulus, but it does feel like to some extent the legacy of the Biden administration will be much less about the recovery and more about what the sustained future economy looks like after that.

Tracy:
Yeah, absolutely. On that happy note, shall we leave it there?

Joe:
Let’s leave it there.

You can follow Jared Bernstein on Twitter here. 

©2021 Bloomberg L.P.