INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. This is actually take two for this introduction. I introduced myself of chief economist of Economy.com. Well, I have Economy.com on my mind. You know why? Because we're coming up to the anniversary of the sale of Economy.com, the company I started with my brother and a good friend. It'll be 16 years ago now since we sold our company to Moody's, and I've now been part of Moody's longer than I was a part of Economy.com, 16 years. I guess I'm allowed that mistake, but we had to restart. But I'm joined by my colleagues at Moody's Analytics, my good friends and co-hosts here, Ryan Sweet, director of Real Time Economics, and Chris deRitis, the deputy chief economist. Hey, guys. I see Chris is in the office. How does it feel, Chris?

Cris deRitis:                       It feels good. It was a little weird, I have to say, coming back. It was like coming back to the spaceship that had been abandoned, so you had the calendar still on March, had to fix the espresso machine, but it's good. It's good to be back.

Mark Zandi:                      That's good. Is anyone else back? Are you there by yourself?

Cris deRitis:                       There are a few of us trickling in here. Damian's back.

Mark Zandi:                      Oh, Damien's back. Oh, Damien Moore. That's good. Ryan, are you going back anytime soon, or you're happy at home?

Ryan Sweet:                      I'm happy at home.

Mark Zandi:                      You are. Yeah. 

Ryan Sweet:                      And my office is right next to Damien's, so my productivity would tank if I go back to the office. 

Mark Zandi:                      He's such a chatterbox, that Damien. 

Ryan Sweet:                      He is.

Mark Zandi:                      Listener, he's just the opposite of a chatterbox. He's an Australian. You would think these Aussies would be more gregarious, out there, but Damien's a very quiet, thoughtful fellow. But anyway, it's a very nice day here in suburban Philly, and we're going to keep this podcast short because this might be the last nice day for a long time. We're very happy to have a guest today, Joe. Joe Kennedy. Hi, Joe.

Joe Kennedy:                    Hi. How you doing?

Mark Zandi:                      I am well. And Joe, you're in D.C. Correct?

Joe Kennedy:                    I am. I am. I'm just delighted to be here to help you relaunch your career.

Mark Zandi:                      Thank you so much. That was pretty funny.

Joe Kennedy:                    I hope this Moody's thing works for you.

Mark Zandi:                      Yeah, me too.

Joe Kennedy:                    Especially after screwing up the name.

Mark Zandi:                      Yes, exactly. Exactly. What was I going to ask? I can't remember. There was a question I was going to ask. Oh. Are you back in the office?

Joe Kennedy:                    I've been going back. I try and go back once a week. They give us free food, so that's-

Mark Zandi:                      That helps.

Joe Kennedy:                    It helps. I can take out four candy bars.

Mark Zandi:                      And Joe, you and I have known each other for a long time, all the way back, I think the first time I met you, you were chief economist of the Commerce Department under George Bush, I believe.

Joe Kennedy:                    Yeah. The last two years, so during the Great Almost Depression.

Mark Zandi:                      Yeah, that's right. I remember that. And I remember, I think I gave a talk, or we had a bit of a conversation at the Commerce Department. 

Joe Kennedy:                    I reached out. One of the nice things about that job was people returning calls, like Mark Zandi.

Mark Zandi:                      Exactly.

Joe Kennedy:                    So I reached out because I was trying to get different views of what was happening and what was going to happen, and you were kind enough to come in and talk to the staff about just what you thought was going on.

Mark Zandi:                      Right.

Joe Kennedy:                    And I think it was kind of early in the process when the economy, people didn't realize how bad it was going to get-

Mark Zandi:                      How bad it was. Was I sufficiently bleak? Do you remember? Probably not.

Joe Kennedy:                    I forget.

Mark Zandi:                      Yeah. I forget too. I was pretty bleak, but I'm sure I wasn't sufficiently bleak, given what happened. And then, you went on to work at a think tank, right?

Joe Kennedy:                    Yep. Pew Charitable Trusts.

Mark Zandi:                      Oh, you were at Pew. That's where you went first.

Joe Kennedy:                    Yeah. And then I did that, we were in touch over the financial reform task force that we had put together.

Mark Zandi:                      And that was a pretty cool exercise, as I recall. You actually drafted legislation-

Joe Kennedy:                    We were going to. We got 15 bipartisan, really well-respected financial people, including Alice Rivlin, Bob Steel, Bob Litan, Peter Wallison, Alan Blinder, and they agreed on this plan to reform the financial system. And then we had two law firms, including we had the head of Sullivan & Cromwell, and then then would then turn this into legislation. But we just never got that quite that far. But we did introduce basically the only bipartisan plan that anybody developed during that day.

Mark Zandi:                      Yeah. It was a lot of the elements of that plan, as I recall, ultimately found their way into the Dodd Frank legislation that actually got passed. I remember that very, very well. And then you went onto another think tank, Information Technology and Innovation Foundation. Is that right? Do I have that-

Joe Kennedy:                    Yeah, yeah. I spend about half my time building, trying to get my own clients, and then half of the time as a senior fellow there on a wide variety of topics.

Mark Zandi:                      And I think that's where you really got interested in questions about competition, market structure, antitrust, market concentration, those kinds of issues, which is what we're going to talk about today with you in just a bit. As you know, Joe, we have a bit of a game here with the statistics before we actually get to the big topic, and I think you told me you're going to play the game. That's what I heard.

Joe Kennedy:                    I had two statistics.

Mark Zandi:                      Oh, okay. Very good-

Joe Kennedy:                    One for now, and one for-

Mark Zandi:                      One for later?

Joe Kennedy:                    ... the main topic.

Mark Zandi:                      Excellent. Good. Perfect. He's ready. He's armed with statistics. That's very good. And now you're at MITRE.

Joe Kennedy:                    I'm a senior principal economist at MITRE Corporation.

Mark Zandi:                      Can you just tell us a little bit about MITRE and what-

Joe Kennedy:                    Yeah. It's this huge nonprofit that works almost exclusively with the federal government. It works very closely with a wide variety of agencies, and most of its work is highly technical, so it'll help agencies choose what computer equipment to buy, and help them go through the process of buying it. It helps with managing the data that they gather, the IRS is a big client, helping them learn how to protect that data. They help some of the agencies with satellites. They helped the FAA think about remodernizing the air traffic control system. It's amazing what they do.

Mark Zandi:                      Yeah, really.

Joe Kennedy:                    Just really nice, dedicated people, and I'm working on a project there, and it's studying the rise of Great Power Competition.

Mark Zandi:                      Yeah. I want to come back to that in a little bit, talk a little bit more about your Great Power Competition. It looks fascinating. One quick question about that, though, because you're tackling a number of different issues that are related to the power dynamics between U.S., China, and other major powers. Are supply chains in there as well? You were focused on-

Joe Kennedy:                    Yeah. One group is studying supply chains, and they're focusing on looking forward on the mRNA supply chains, and trying to make sure that a lot of that work and development is done in the U.S., but also that we're not dependent on unreliable countries for that technology in the future. They have another looking at the digital SIM code, and big investments in Africa and Asia that the Chinese are helping to fund for developing modern information that works. It's amazing.

Mark Zandi:                      Yeah. We'll definitely come back to that in a little bit, but thanks for the introduction. It's, again, really, very good to have you. Let's play the game. We're going to talk about the economic statistics mostly focused on the past week, and just to remind everyone, the best statistic for this game is one that it's not so easy that it's a slam dunk that we're all going to get, but not too hard that without a bit of questions and quizzing we can't get it. And it's related to something about what's going on in the broader economy. It gives us some sense of what's going on. And one thing I'd like to ask also is how are you feeling about things? 

                                             I'll have to say, I feel a lot better about the economy today, I mean meaningfully better about the economy today and its prospects than I did just literally a week ago when we were talking about the jobs data, or certainly two weeks ago, and I'm just curious if you're feeling the same way as I am. And my statistic, if you guys don't take my statistic because I'm going to go last, if you don't take my statistic that'll highlight it. Okay. I'm pretty sure Ryan's going to take my statistic. He always figures out how to do that, but we'll see. Well, we generally go with Ryan first, but let's mix it up. Let's go with Cris first. let's hear your statistic, Cris.

Cris deRitis:                       All right. This was a rich week for statistics. I had a hard time. I've got a number here that I could choose from. I'm going to go with 0.7%, though, because this one stuck out.

Mark Zandi:                      Well, immediately comes to mind, Ryan. Ryan's saying this is retail sales-

Cris deRitis:                       This is a slam dunk.

Ryan Sweet:                      It came out tonight. Yeah.

Cris deRitis:                       It did.

Mark Zandi:                      Yeah. Retail sales?

Cris deRitis:                       It did. Yep. Yep. 

Mark Zandi:                      Okay. You violated the first rule.

Cris deRitis:                       I think I violated all your rules.

Mark Zandi:                      Yeah. Too easy. But okay, fair enough.

Cris deRitis:                       I'll go to another one if you prefer.

Mark Zandi:                      No, no, no. Retail sales, that's something very good to highlight, though. Go ahead.

Cris deRitis:                       But I think it goes to your last point about feeling a lot better, because this one was a surprise. The Moody's Analytics Forecast was for -0.3%. 

Mark Zandi:                      Is that Ryan? Is that Ryan's forecast?

Ryan Sweet:                      That was me.

Mark Zandi:                      Oh, okay. You had a negative?

Ryan Sweet:                      I usually get this one pretty close. My statistic is actually related to this. Vehicles is just really puzzling to me. Unit sales, that fell by a million, but nominal spending at motor vehicle parts went up 0.5%.

Cris deRitis:                       That's where I was going. Yep.

Mark Zandi:                      Just to frame it though for a second, retail sales are sales of things, stuff. One thing, stuff, is vehicles, so vehicles are in these numbers. We knew that in the month, vehicle sales were very weak not because there isn't a demand, but because there's just no supply.

Ryan Sweet:                      New vehicles.

Mark Zandi:                      Makers can't produce vehicles. And we thought, and Ryan thought, that would be a big drag on this number because vehicle purchase is a big part of the number, but no, we got a pretty sizeable increase of 0.7. So what's going on? What drove that?

Cris deRitis:                       In terms of the vehicles themselves, it's parts and used vehicles. Right? People can't buy new cars. They are fixing up their own cars, and that seems to happen enough to offset the loss or the weakness in new vehicle sales. But then outside of that, the retail sales were strong pretty much across the board. You had strong growth in sporting goods and hobby stores, and general merchandise, some weakness in electronics. I chalk that up to some of the supply chain issues and appliances, but overall, this report indicates that consumer is still very healthy and willing to spend, wanting to spend. So to your question do you feel more optimistic? Certainly after seeing this, I'm feeling more optimistic. Then with the Delta variant falling, confidence should start to pick up again. We should be off and running once again.

Ryan Sweet:                      See, I thought the Delta variant was going to weigh on retail sales, and then when the number came out I'm like, "All right. Maybe people went online shopping again," but non-store retail sales weren't something to write home about, so it was surprising-

Mark Zandi:                      They were positive.

Ryan Sweet:                      Yeah. It was positive, but it wasn't the growth we usually see for non-store.

Mark Zandi:                      Was there anything in the report that you found cautionary or worrisome, or it was all positive?

Cris deRitis:                       Well, gas station sales are up, are positive, and you have to always read a little bit into that. Is that because the gas prices or are people traveling more? [crosstalk 00:14:17]

Mark Zandi:                      It's prices, right? That's prices. 

Cris deRitis:                       Right. So that could be a risk factor.

Mark Zandi:                      But if you take retail sales, take out the autos because of who knows. Take out the gas because that's price. You are still left with a pretty solid increase, I think.

Cris deRitis:                       It's the same. 0.7 if you exclude auto-

Mark Zandi:                      Was it 0.7? Okay.

Cris deRitis:                       Yeah. Excluding autos, it was 0.8.

Mark Zandi:                      Yeah. Here's the thing I've found fascinating, taking a little bit of step back. Retail sales surged during the pandemic. Not when we got immediately hit. Then everything stopped, but pretty soon we were all sheltering in place, and we couldn't go to restaurants, we couldn't go to ballgames, we couldn't travel, so we started buying stuff. And retail sales are purchases of stuff, so stuff soared. And if you take a look at a chart of retail sales, the level of retail sales is really high, even higher than you could've even possibly imagined pre-pandemic, assuming there was no pandemic. Right? And it doesn't feel like it's coming back in. It feels like it might be leveling off at a high level, but it's not coming back in.

Cris deRitis:                       Yeah. And sporting goods is the one that makes me scratch my head. Right? I can understand during the pandemic, you're not going to the gym, you're going to buy your Peloton. But now it's continuing, so what's going on there? Are people still choosing not to go back to gyms, and they're still buying another piece of equipment? 

Mark Zandi:                      Then on the service side of the economy, that's picking up too. Right? So consumer spending broadly, stuff and services, experiences, everything, the whole shooting match, pretty high. Pretty high level consumer spending, which is encouraging. Very encouraging. Anything about, Ryan, what Cris said you would add color to, or take umbrage with?

Ryan Sweet:                      No, I think he hit it all. The cautionary tale is that the next few months, retail sales could really be volatile because retailers are warning people to shop early, so that's going to throw off the timing of all the seasonal adjustments factors. We could get a really strong October and November, and then December could be an absolute disaster.

Mark Zandi:                      I guess the supply chain issues are behind a lot of that. Yeah.

Ryan Sweet:                      Correct.

Mark Zandi:                      Okay. So, at least so far, the supply chain issues, the higher inflation, which is sapping real after-tax incomes, none of that, even the Delta variant doesn't seem to be denting it, so that's good. All very encouraging. Good. Ryan, I do want to point out on your forecasting, I think the Cortera data, the business-to-business spending data, Cortera tracks B2B spending and we can see what retailers are buying before they sell it to consumers. Actually, Moody's bought Cortera not long ago. That, I think, was pretty strong in September. That might've given you... You don't use that data in your estimate, do you?

Ryan Sweet:                      No, I'm starting to.

Mark Zandi:                      Yeah. You should. I think you should-

Ryan Sweet:                      Yep. I'm kind of running parallel forecasts, my go-to model versus one that incorporates Cortera. I'll see over the next few months which one wins.

Mark Zandi:                      Yeah. Okay. Very good. Okay. Ryan, you're up. And Joe, I'm coming to you next so get ready, man.

Joe Kennedy:                    Okay.

Mark Zandi:                      And we're [crosstalk 00:17:49]

Ryan Sweet:                      I didn't get the memo that we had to have an upbeat number, but I have an explanation of why it was weak. 67.2.

Mark Zandi:                      67.2

Joe Kennedy:                    Is that percent, 67.2?

Ryan Sweet:                      It's an index.

Mark Zandi:                      Okay. I know [inaudible 00:18:10] came out, and that was pretty soft.

Ryan Sweet:                      You're going down the right track.

Mark Zandi:                      Okay. [UMich 00:23:41] is University of Michigan Consumer Confidence Index, and that got nailed by the Delta a couple months ago, in September, or excuse me, August I think. Came back a little bit in September, and we got that data point today. It came back down again, and it's very low. Is that the expectational component of University of Michigan?

Ryan Sweet:                      Very impressed. Yes.

Mark Zandi:                      Ding, ding, ding, ding. See, Joe, I do that when I get the answer right. Yeah. 

Ryan Sweet:                      Here comes Cris with the emojis.

Mark Zandi:                      Cris and his emojis. Yeah. Yeah. Very good. Okay, so I really want to know what's going on here. Why are people so nervous, at least as measured by the University of Michigan survey?

Ryan Sweet:                      Over the last few months, you had the Delta variants, you've had an acceleration in inflation. Gasoline prices recently have started to tick up, but I think our forecast was well below the consensus. It was 71.4 for the total Consumer Confidence Index. It's because of the debt ceiling. If you look at Google trends, searches for debt ceiling, and you go back to past instances where we had this nasty debt ceiling fight, it always hits consumer confidence right away, so that's why we were well below the consensus on this forecast. I think reason for optimism is I think confidence is going to pick back up over the next few months because we don't have the debt ceiling. We don't have to worry about that until December. But stronger job growth, I think that's really going to start to lift Michigan going forward.

Mark Zandi:                      Well, then hopefully inflation subsides here.

Ryan Sweet:                      Hopefully. Well, it's not going to over the next couple of months because energy prices.

Mark Zandi:                      Oh, the energy prices. But excluding energy, it feels like it already has rolled over, though. I mean, the Consumer Price Index, core CPI excluding food and energy is what economists look at because that's the best gauge of future inflation. It's high, 4% year-over-year, but that has definitively rolled over. It was like, 4.5%. Okay.

Ryan Sweet:                      But what was interesting in the CPI data is that all the gain in September was in the non-reopening components. The reopening components are rental car prices, lodging away from home, which is hotels, motels, airfares. Typically, that was adding a little bit to the CPI over the last few months. Now that's essentially neutral, and new and used vehicle prices are beginning to moderate a little bit.

Mark Zandi:                      Okay. Well, the one other index or sentiment survey, there are now a number of Consumer Sentiment Surveys. Morning Consult has a pretty good one. Actually, a very good one. It comes out daily. Asks the same questions as the University of Michigan, but on a daily basis, and it's online so they have a lot more respondents, is The Conference Board survey. That's another monthly survey that also weakened because of Delta, but that's held up a lot better, hasn't it, than the University of Michigan survey?

Ryan Sweet:                      Yeah it has. Well, The Conference Board is much more labor market sensitive, so even though job growth has slowed, it's still pretty decent. Unemployment rate's coming down, UI benefits have dropped recently, so I think that's helping cushion the blow to The Conference Board measure.

Mark Zandi:                      Yeah. Cris, were you even close to getting that number, or I blew you out of the water, didn't I?

Cris deRitis:                       Expectations?

Mark Zandi:                      Yeah. Were you even in the-

Cris deRitis:                       I was in the right ballpark. 

Mark Zandi:                      In your mind, you were in the right ballpark.

Cris deRitis:                       Yeah, yeah. 

Mark Zandi:                      Okay. All right. Very good.

Cris deRitis:                       You jumped the gun.

Mark Zandi:                      Yeah, yeah, yeah. You got to be quick in this game, Joe.

Joe Kennedy:                    Yeah. In my mind, I'm always in the wrong by about 5%. 

Mark Zandi:                      Well, you're up, Joe. 

Joe Kennedy:                    Thank you. Okay, so mine's 4.2%.

Mark Zandi:                      4.2%. Is this an economics statistic?

Joe Kennedy:                    Yes. I'll give you a hint. Annualized.

Cris deRitis:                       Did it come out this week?

Mark Zandi:                      Did it come out this week?

Joe Kennedy:                    I don't know. [crosstalk 00:22:21]

Mark Zandi:                      It's recent, though.

Joe Kennedy:                    It's for September, so it was taken this week, or this month.

Mark Zandi:                      Okay. 4.2. The unemployment rate's 4.8, so that's not it. What else if 4.2%? It's not the hiring rate or... no. Can you give us another-

Ryan Sweet:                      I was thinking separations, or quit-

Joe Kennedy:                    It's a New York Fed statistic.

Mark Zandi:                      Oh. You know what? I don't really follow the New York Fed very carefully, because they have a bunch of surveys.

Ryan Sweet:                      Is it their Nowcast estimate of GDP?

Joe Kennedy:                    No.

Mark Zandi:                      I know they have a bunch of consumer expectations, consumer-

Joe Kennedy:                    You're getting warmer. 

Mark Zandi:                      You know, Joe, I don't look at them. Should I? I guess I should be looking at them.

Cris deRitis:                       Is it inflation expectation?

Joe Kennedy:                    It's inflation. It's a three-year looking forward expectation, which the one-year is 5%, so that means that they're actually predicting that inflation in years two and three is going to be well below 4.2.

Mark Zandi:                      How much-

Cris deRitis:                       The UMich survey was 4.8% for one year, so it's pretty close-

Ryan Sweet:                      But that tracks gasoline prices very closely.

Mark Zandi:                      Well, I would imagine so does the Fed Survey. Wouldn't you think?

Ryan Sweet:                      Yes, I would imagine.

Mark Zandi:                      Joe, inflation expectations obviously are very important for understanding the outlook for inflation, because if you believe that inflation's going to be high in the future, then it's more likely in fact it will be high because they'll demand higher wages, those wages get embedded in the undermined margins, businesses will raise prices. But how much weight do you put on consumer expectations of inflation as a barometer of future inflation?

Joe Kennedy:                    In the short-term, not much, because I figure that the markets will take care of it when you have these shortages. The businesses are trying their best to get around the shortages and eliminate them, and in the future they'll figure out a way. So natural shortages, I think in the short-term, inflation isn't driven so much by expectations. Expectations can change a lot. In the longer-term, I think it's very significant for the reasons you just said, because it creates this internal dynamic.

Mark Zandi:                      Right, right. There's a market-based expectation, so what investors are thinking, and that's embedded in interest rates primarily. You can tease out what they think. There's surveys of businesses, there's surveys of economists, and on their inflation expectations, and then there's these different consumer surveys, where they're asked questions about inflation. So of all of those different measures, where would consumer inflation expectations stack up, in terms of their information about future inflation?

Joe Kennedy:                    I would tend to put more weight on the business expectations. I think where the consumer markets and expectations come in is really in this internal dynamic. Businesses, I think, are better at looking at just the fundamentals, and so for the fundamentals, I'd look to business expectations.

Mark Zandi:                      Okay.

Joe Kennedy:                    But if you do see consumers jumping up, especially and it remains sustained, then I think you have to worry about have we gotten back in the situation where we had stagflation, where everybody just expects and demands that their wages, their prices are going to go up by 5, 6%.

Mark Zandi:                      I don't know about you, but I'm hearing the word stagflation a lot more these days.

Joe Kennedy:                    Yeah. And I'm not worried about it, because I think this statistic shows that at least consumers, maybe their out view is they're thinking three, 3.5. And also, inflation's been below two for so long, and people got comfortable with it, and then when it rises and people are getting wages going up, then everybody screams, "Inflation." And I think we can live for a couple years with 3% inflation, and we'll be just fine.

Mark Zandi:                      And I think consumer expectations generally are on the high side anyway-

Joe Kennedy:                    Yeah.

Mark Zandi:                      ... because people just think they're higher than they actually are. Or maybe it's not that. The Consumer Price Indices that we economists look at are quality-adjusted, and they're adjusted in lots of different ways that consumers, that's not the way they think about it. They're in the store and they see what they're paying for the things that they're buying, and so that doesn't quality-adjust. But if you quality-adjust, which is in the CPI you get lower rates of inflation, so they tend to be a little bit higher. Okay, good. That was good. I need to pay more attention to what's coming out of the New York Fed. Ryan, do you look at their releases? They have a fair number. Do you look at them carefully?

Ryan Sweet:                      Yeah, I do. I pay attention to them. That survey is a good one to look at. I also look at, it's not from the New York Fed, but comparing it to the poll survey. New York Fed has a Nowcast estimate, so it's good to compare what ours is saying versus some of the other metrics out there.

Mark Zandi:                      Nowcast meaning?

Ryan Sweet:                      Estimates of current quarter GDP.

Mark Zandi:                      Yeah. And the poll survey meaning? What's the poll survey? Our poll survey. That's our measure of inflation expectations.

Ryan Sweet:                      Correct.

Mark Zandi:                      Right. Which is a compilation of all those different measures that I articulated. Yeah. Good. Okay. You ready for mine? I might violate my rule too, but here it goes. 4.3 million.

Cris deRitis:                       Oh. Quits.

Mark Zandi:                      Yeah. That was too easy. I got a second one though, just to raise the bar here a little bit.

Ryan Sweet:                      Hat does Cris have over there? He's got a cheat sheet. He keeps looking down and referencing-

Cris deRitis:                       I told you-

Ryan Sweet:                      Googling it.

Cris deRitis:                       That was my backup.

Mark Zandi:                      No way. You're writing things down now?

Cris deRitis:                       No, no. I got nothing written down here, but I had that. That was my backup statistic. Ryan went with retail sales.

Mark Zandi:                      Oh, I see. I see. Yeah. 4.3 million quits. That's a record high, and that's the number of people who quit their job, said, "Hey, I'm leaving," in the month of was it September? No.

Ryan Sweet:                      August.

Mark Zandi:                      The month of August, because it's one month lag. The month of August. That's amazing, right? I think it was almost 3% of the labor force quit. Can you just annualize that for a second? That's just an incredible number. And quits are up pretty much across all industries. I mean, obviously, higher in leisure and hospitality industry, accommodation and restaurants. Higher in retail. In the lower paying industries, we've seen higher quits. But manufacturing, transportation, distribution, construction, although that was higher back in the housing boom before the financial crisis. Financial services. Everything very, very high, so that just goes to the large number of open positions out there. 

                                             They're not quite at the record high that they were a month or two ago, but people obviously feel like they can quit their job and find another one pretty fast. And I think the pandemic also has had an impact on collective thinking about work and leisure, and what do I want to do, and do I really want to go back to that job I had before? Particularly if it was generally low-paying, bad hours, and had a tough boss. If you work in the restaurant business or the hotel business, the work arrangements aren't particularly in favor of workers, so I think people are reevaluating. That's a pretty amazing statistic, and I think talking to business people and our clients and others, if it's not already, it's becoming the number one problem for business people who are trying to fill those open positions.

Joe Kennedy:                    I wonder if you compared that to new unemployment claims, if you could get some rough estimate of how many of those quits already had a job lined up and went from one job to a presumably better job.

Mark Zandi:                      Yeah. Ryan, you make a point about that in terms of keeping unemployment a little bit elevated because you've got people in transition, so that tends to lift the unemployment rate a little bit while you have a lot of quits going on.

Ryan Sweet:                      It also may explain why we're seeing such large revisions to job growth month in, month out, is because when we looked back on when we had elevated quits, not at the levels we have now, but when quits are growing this quickly, you get people in between jobs. It makes it much more difficult to accurately count the number of people that are nonfarm payroll, so that may be one reason why we are seeing these massive [inaudible 00:32:16] revisions month in and month out.

Mark Zandi:                      Yeah. Yep. Okay. All right. Any other? Oh, I did want to mention one thing. Joe, we each picked a statistic to follow on a regular basis and call it out when it was doing something. We thought these statistics were important to judging what was going on in the broader economy, and we promised to call them out if they started moving in one direction or another. And I'm going to call out copper prices. Have you guys noticed?

Ryan Sweet:                      They're up.

Mark Zandi:                      They are up a lot, up to $4.75 per pound. That's about as high as it's been. I think we got a little bit higher, a penny or two higher than that back in May, but that's rip-roaring. That's saying this global economy's kicking back into gear as Delta winds down here. Another reason for a bit of optimism, I think, related to all the global supply issues that's kind of come to the floor again in the collective conversation and psyche. Like all markets, commodity markets and the copper market has been somewhat disrupted, so that might also partly explain what's going on. But $4.75? Anything over $4 is rip-roaring. $3 is typical. That's where you would expect it to be in a typical economy, so that's a strong economy. And Cris, I think your statistic also, right?

Cris deRitis:                       Yeah. Made a headline. UI claims, unemployment insurance. New unemployment insurance claims are down to 293,000 last week, so below the 300,000 psychological barrier. But there's an asterisk, and Ryan will call me out if I don't-

Ryan Sweet:                      Huge asterisk. Huge asterisk.

Cris deRitis:                       Seasonal factors are certainly a big consideration here, but I think there's still something there. The retreat of the Delta variant is real, and it's having a real effect on those UI claims. I'd say moving in the right direction, but let's not get overly excited. Next week they could pop up above 300K once again.

Mark Zandi:                      And again, what's the stake in the ground? What would you consider to be a level of initial claims for unemployment insurance that are consistent with a well-functioning economy?

Cris deRitis:                       Yeah. I'd be looking for 250 or lower.

Mark Zandi:                      250. Even with seasonal adjustment, we're getting pretty close. We're getting pretty close.

Cris deRitis:                       And the trend is what matters, right? As long as we're moving down, that's what we want to see.

Mark Zandi:                      Okay. So take all this, what we just discussed. I'm feeling a lot better about the economy. Q4 is going to be a lot stronger than Q3, and it feels like we're going to enter into 2022 on a high note. As the Delta winds down, things seem to be revving up. Are you on board with that everyone?

Joe Kennedy:                    Yeah.

Mark Zandi:                      Joe, you feel the same way?

Joe Kennedy:                    Yeah. I think unless we get another variant of the virus, which we could get a worse variant. And if it starts out in Africa or Asia where people haven't gotten vaccinated, and it spreads-

Mark Zandi:                      Don't bring us down, Joe. Don't do it. Don't do it, Joe.

Joe Kennedy:                    I think the odds are low, but that's the only real risk I seel other than energy prices. I really don't understand why they've peaked so much, unless it's the producers looking forward and seeing a lot higher demand.

Mark Zandi:                      Yeah. I think you're right about he energy prices. I think it's idiosyncratic market to market, especially when it comes to natural gas, which is a localized market that varies quite a bit. But I think it's roughly the same dynamic in lots of markets. Big increase in demand. We've seen a big pick up in demand, and the supply side of these markets just take time to kick into gear. And businesses like the higher prices. They make a boatload of money, so they want to hold onto those higher prices as long as they can, and they're kind of looking at each other as competitors. By the way, this is a pretty good segue into the big topic. 

                                             They're looking at each other as competitors and saying, "Hey guys, maybe we can hold onto these higher prices for a little bit longer." But ultimately, these are competitive markets, and competition, juices flow, people start producing more, and the supply side responds, meets demand, and prices start to come in again. So it feels like the energy markets, again, there's a lot of other things going on, like decarbonization in China, and pipeline issues from Russia to Europe, and all kinds of things going on. But most fundamentally, it feels like the dynamic that's at play in these energy markets.

Ryan Sweet:                      Even with the higher energy prices? I'm not too concerned about consumer spending because if you look at gasoline as a share of total consumption, it's still well below what we saw 2011, 2012, 2013. Heating oil makes up a very small share of consumer spending. Household balance sheets are in really good shape, so I think the consumer can digest the recent run-up in gasoline prices.

Mark Zandi:                      Yeah. Does that help, Joe? Do you buy into that?

Joe Kennedy:                    Yeah. [inaudible 00:37:45] Buy long, present short. My broker handles it.

Ryan Sweet:                      And all the high frequency data, the Google Mobility, the number of people passing through TSA checkpoints, even box office receipts, all in the last couple weeks have made noticeable improvements, so that kind of made me feel a lot more comfortable where we're headed.

Mark Zandi:                      Good. Okay. All right. Well, that all feels pretty good, so let's move onto the big topic, which is competition, competitive markets, antitrust. And Joe and I have been having conversations around these issues for quite some time. I actually really bugged him when I was asked to moderate a discussion with Amy Klobuchar. She's the senator from Minnesota who, obviously, ran for president. Great senator, and she's very focused on antitrust issues. I think just today or yesterday, she introduced some legislation in the Senate that's going to line up with legislation that was already passed in the House, and we'll come back to that later in the conversation with Joe.

                                             She wrote a book called Antitrust. It was just a nice history from her perspective of antitrust law and some of the limitations of that. Gave a number of suggestions on how to approach antitrust in the world we live in today, with Big Tech and Big Pharma, and Joe was very helpful in educating me, getting me up to speed for that moderation. So it's good to have you on the podcast to talk about this, Joe. And I guess I want to start with the basic question, do you think markets are becoming more concentrated? Are they becoming more dominated by a few companies? That is definitely the narrative that most people bought into. Is it true? From your perspective, is that what's happening here?

Joe Kennedy:                    Yeah. I don't think the evidence bears that out, really. A lot of these economic statistics are complicated, and if you really dive into it, you get a different picture than what you see on the surface. And I think a lot of the studies that have concluded that concentration has increased have looked at broad markets like transportation. If the government divides markets, there's a two-digit NACE code, and this five-digit NAICS code, and the five-digit NAICS code is very specific.

Mark Zandi:                      And NACE is North American Industrial Classification System. Are you impressed, Joe, I got that?

Joe Kennedy:                    Yes. Very good. Very good.

Mark Zandi:                      So that's an industrial classification.

Joe Kennedy:                    Yeah. When you look at the two-digit numbers, then concentration has increased. But lot of companies within that broad definition don't compete against each other, really. So when you look at the five-digit, the more specific definitions of markets, the concentration ratios are usually much less, and they haven't grown all that much over the last 30 years. And where they are high, they're usually still well below the guideline that the federal government has for challenging concentration, so the number is not high enough for the federal government to define them as concentrated. One of the statistics people look at is the market share of the top four. So when that gets to 40%, then that is considered relatively high. But that means that those four average just 10% of the market, which is not really a dominant position. 

                                             And meanwhile, there's 60% of the market that's serviced by smaller companies. And also, there've been some studies that really show that when you look at really specific markets. Not just defining the market specifically, but also just looking at the geographic area where the competition occurs. So, for instance, restaurants. You don't go to the next state for a restaurant, you just go within your own neighborhood. There, they found that concentration has actually decreased and competition has increased, largely because you get big national chains that come in and establish themselves in each neighborhood. Meanwhile, you still have the local restaurants, locally-owned restaurants, or barber shops or whatever. And so on the whole, there are very few markets where the top four really control say 80% of the market.

Mark Zandi:                      There are a few notable ones, though. Let me just make you agree. Big Tech.

Joe Kennedy:                    Yeah. And again, the big thing to remember about antitrust is it really depends upon the specific market, not just the company in general. It depends upon the market, and the group of companies that actually compete with each other, and that consumers check before they make a decision. And there's some areas where a tech company has a dominant position, but there are a lot of areas where they compete fiercely, like cloud storage now. Artificial intelligence.

                                             One or two are trying to get their own retail shop set up so they can compete with Amazon. The Economist magazine's had a couple of stories about the fact that competition among the big four or five has increased in specific markets. In other specific markets, there could be a problem, but that, again, you have to look at hat specific market. In my opinion, you have to look at is it harming consumers or not? And it certainly isn't a justification for breaking the company up, which is a drastic decision, or resolution.

Mark Zandi:                      Okay. So you're saying it's complicated-

Joe Kennedy:                    Yeah.

Mark Zandi:                      ... those things. This is particularly complicated because it goes to defining markets. What is a market? And if you get the definition wrong, you could potentially come to a very wrong conclusion, that the actual market is narrow enough that there is actually competition in it. But if you broaden it enough, you can't see it. You get lost in the data.

Joe Kennedy:                    Amazon's a good case in that. Everybody points to the fact that Amazon has this huge share of online sales, retail sales, but there is competition for online sales, and Walmart is trying to set up its own store. But Amazon has only a small share of total retail sales, and most people, they consider the local Walmart or the local Safeway, or the local LL Bean store. Amazon has to compete against all those other stores, so when you look at the whole of the retail market, it often has a reasonably good share, but not dominant.

Mark Zandi:                      What about Big Pharma?

Joe Kennedy:                    Big Pharma's different. Big pharma, I think there's a stronger case that there's some antitrust problems, but Big Pharma also, the model requires a certain degree of size. It costs over $2 billion to develop a drug, on average. A lot of 90% or more of your drugs you develop are failures, and you don't collect anything. You have to have a huge infrastructure to comply with all the government regulation. You have to have a huge infrastructure to do all the retail sales. And so this industry has gone to a model where a lot of the experimentation occurs in small companies and investors can bet on specific approaches, and then when the drug starts to prove itself, a big company comes in and buys it up, and provides the expertise needed to get through the regulatory approvals, and to get it into circulation.

Mark Zandi:                      So are there any markets or industries where you are more worried about potential market concentration and the impacts of that concentration?

Joe Kennedy:                    Not really. I think there are certain practices that maybe could be looked at. There's been an allegation that when Google has an auction for advertising on a certain site, it gets to see the last bid and decide whether it will match that to beat it. You could change that so it doesn't get that last look, and that might spark competition a little more, so there are little areas like that, that I think maybe bear some investigation. But as a whole, no. And actually, my second statistic, everybody else had one.

Mark Zandi:                      I had two. Go ahead.

Joe Kennedy:                    Okay. It's 127.5 billion.

Mark Zandi:                      127.5 billion. Is this something you think we can get?

Joe Kennedy:                    Probably not.

Mark Zandi:                      Probably not.

Joe Kennedy:                    I designed it that way. I'll just tell you. That's the amount of money that the top five tech firms spent on R&D in 2020. That's twice the amount spent by the top five pharma teams. It's more than the amount spent by the top 10 pharma teams. So these companies, they're not just sitting on this cash, giving it back to shareholders, or they're making their executives rich. They're investing in a lot of high-tech research that's important to this country, and that doesn't always make total sense with the job market. You have Bezos spending a lot of money on space exploration. That's great for the country. If you're an Amazon shareholder you might wonder what's going on, but they're spending in area after area, after area. Artificial intelligence to mRNA. What do you call those computers? Not nuclear computers, but-

Mark Zandi:                      I don't know. I hear you, though. 

Joe Kennedy:                    Yeah. And if we break them up like some people want to do, what happens to that spending? Who picks it up and does that research?

Mark Zandi:                      So Ryan and Cris, do you want to push back on what Joe is saying here at all?

Cris deRitis:                       I just have a question first. It sounds like are you arguing that this two-tiered system is optimal? What you described for pharma is you have a few firms that are able to take advantage of economies of scale, but I see that in finance, I see that in tech. You have a few players, like banking. You have a few banks, and then you have a lot of fintechs exploring and innovating, and eventually get bought up.

Joe Kennedy:                    Yeah. I think it is fairly healthy. There's some exceptions. Cases where a company may pay another company not to launch a generic. Maybe that should be changed, but that's a relatively minor thing. I think this division of responsibility into small companies that focus on a promising technique or development, and that are totally focused on it, get a lot of help from venture capitalists. And then when they have to get big, because they have to deal with all the regulations, they have to run the trials, then they go to somebody who's experienced and can do that. I used to play poker, not very well, with the guy who invented Honest Tea, and he got to a certain size and then he sold it to Coca-Cola. And the minute he did that, he had a nationwide distribution system and an advertising budget to reach everybody in the country. He couldn't have done that if he'd stayed small.

Mark Zandi:                      Well, that's Economy.com's story, my company's story. We were 15 years old. We got to a point where the way we had to grow was to go global, which we started to try to do. We opened up an office in Sydney and London, but quickly figured out that the costs of doing this were crazy high, and it's going to take us forever to do it. And then Moody's knocked on the door and said, "Hey, I've got this global infrastructure." And of course, Moody's is in every capital on the planet, and has a sales force all around the world. That seemed to make a lot of sense. But that's certainly our story. Cris, you had something else you wanted to say or push back on?

Cris deRitis:                       Not really. To my mind, that is optimal state if I look at-

Mark Zandi:                      Oh. You agree with that.

Cris deRitis:                       I think it's a natural state as well, that you would have this type of consolidation. And you see that across industries, whether it's tech or finance, or pharma. Across the board, that seems to be the natural state of affairs.

Joe Kennedy:                    I can honestly say that there are legitimate concerns over privacy, over data security, over the political power of large companies, but those are not antitrust problems. They require separate treatment, and in some cases, legislation. I think if somebody's going to hold your credit card data and there was a breach, they ought to be punished, and they ought to have a strong incentive to keep your data safe. And if somebody takes your data and uses it, say like the Cambridge Analytica Case, there ought to be a big, huge penalty with that, that deters anybody from trying that again. But again, that's not an antitrust problem. That's not a competition problem.

Mark Zandi:                      Although there's debate around that, right? It's be good if you could explain, but there's this general shift in thinking that it's more about consumer surplus. It's more about protecting the consumer. It's also about things like dominance of the political system, or the dominance of information flows, the ability to control data and information. Kind of the things why Big Tech is making people so nervous. It's that they have such dominant control over all these other aspects of our lives, and that should be part of antitrust. Right? I've got that right, right?

Joe Kennedy:                    Yeah. Yeah. I don't think it should be part of antitrust. I basically think there's four groups of people who study this, and one group is just against bigness, period. Not only don't they think there should be an Amazon, they don't think there should be a Walmart. They don't even think there should be a Safeway. They think that it ought to be all local stores.

Mark Zandi:                      Who would lead the way on that? Who would lead the way?

Joe Kennedy:                    Open Markets Institute, I think is pretty consistent on that.

Mark Zandi:                      [inaudible 00:55:22] financial services.

Joe Kennedy:                    So I disagree. But I do think we need-

Mark Zandi:                      You said four. You said four, there's one. What are the other three?

Joe Kennedy:                    The other three, let me get my cheat sheet. One, the second most stringent group basically thinks you ought to do away with the Consumer welfare Standard. Right now, the key test is what you're studying, does that hurt the consumer? And if it doesn't hurt the consumer, doesn't erode quality or raise prices, then the government ought to usually stay out of it.

Mark Zandi:                      And that's the Borkian-

Joe Kennedy:                    Yes.

Mark Zandi:                      ... so that goes all the way back to Bork.

Joe Kennedy:                    Bork, and Posner, and a couple others. And then-

Mark Zandi:                      Very famous legal mind, wrote a book called I think The Antitrust Paradox, right?

Joe Kennedy:                    Yes.

Mark Zandi:                      In 1978. That has been dominant intellectual foundation for antitrust policy, beginning with Reagan and almost up until now, really.

Joe Kennedy:                    Yeah. And it stemmed really from history, where courts and the government had gotten really strict. In one famous case, broke up a merger that would have given a shopping store 7% of the local market. They thought that was too high. And most people now think that and other cases went too far. So the second group basically says, "We ought to do away with the Consumer Welfare Standard. We ought to consider the interest of workers. We ought to consider the interests of the small businesses that big companies compete against," and so on. And then the third group-

Mark Zandi:                      Can I say, just because people might hear these terms, those are the so-called neo Brandeisians.

Joe Kennedy:                    Brandeisians. Yeah.

Mark Zandi:                      Yeah. Okay. After Brandeis.

Joe Kennedy:                    Yes.

Mark Zandi:                      Yeah. Okay. So you have these Borkians, if that's a word, Borkians that say, "Antitrust should really be about preserving consumer welfare," meaning basically if you have a combination that leads to higher prices, that's a bad thing. You want to make sure that there's competition, prices are low. And then you have the Brandeisian view, saying, "No, no, no. Consumer welfare matters, but it's much broader than that. It's about monopsony power, the company controlling wages in the labor market. It's about dominance of the media or political influence." It's just a broader set of criteria for deciding whether antitrust should be used.

Joe Kennedy:                    Yeah. Yeah.

Mark Zandi:                      Okay.

Joe Kennedy:                    And then the third group basically agrees with the history of the last four years, but thinks that on the margin, antitrust policy should've been a little tougher the last 10 years and going forward. And so you don't need to redo the laws, but you do need to have a little stricter enforcement within the current understanding. And then the last group basically thinks we're doing fine.

Mark Zandi:                      And you're in the last group.

Joe Kennedy:                    Yeah, pretty much. I do see antitrust problems, or possible problems there, but I think you need to look very carefully at these specific markets, and measure if consumers are being hurt or if innovation is being slowed, and-

Mark Zandi:                      Well, one observation that I think is supportive of your perspective, "Yeah, were doing pretty well here. What's the big deal," is inflation. Abstracting from the recent surging inflation, which is pandemic related, has nothing to do with anything other than that, inflation has been very low here in the United States, and globally very, very low. So if we were having trouble with markets being uncompetitive, wouldn't we see higher prices? That's kind of what you're arguing.

Joe Kennedy:                    And there's been a couple influential studies that basically argue that where there has been an increase in concentration in the market, it's because some companies have gotten very good at using information and computers, and modern technology to get much more efficient, and reduce costs, and increase their profits and increase their market share. So the market's competitive, it's just that some companies are just beating the competition badly. And the answer there is I think to figure out why the bottom half of the companies aren't quick at adopting new technology. A lot of it's there's a pretty strong link between IT spending and spending on other intangible assets and profitability, and so a few firms in a couple industries have really revolutionized their industry, and we have to try and encourage the other firms to copy that and become more competitive.

Mark Zandi:                      Now, on the point that inflation is low, therefore what are we worried about, there's two retorts I've heard. I'm curious to hear what your reaction is to them. The first is well, yeah, that's true, inflation is low, but it's a lot lower let's say in Europe, the other big, developed economy, and that's because they have more competition. They are much stricter with antitrust laws. You can see that clearly with the way they've been handling Big Technology. And therefore, yes, inflation's lower here for a lot of other reasons, but it should be even lower and it's not because we're uncompetitive. It wouldn't even matter.

Joe Kennedy:                    But I think Europe's making a big mistake. It's gotten very aggressive on these firms, and are really bending, I think, the laws themselves. I think some of the decisions have been overturned, I think others will. But you look at how is Europe doing on new tech? Not very well. With one or two exceptions, all the new tech is happening here or in China. Uber got started here, Facebook is here. You just go down the line, and they haven't been very good at attracting and growing new tech companies. In pharma, a couple decades ago they got really tight, tightened up pricing laws and reduced prices, which was great for consumers, but all the research started going to the U.S., and so the U.S. is where people do pharma research, much less so in Europe. And so in Europe, the policy the pursued made them uncompetitive in pharma research, so I don't think that's a good model to follow.

Mark Zandi:                      Okay. Fair enough. And I guess you could also argue, do we really want Europe's inflation rate?

Joe Kennedy:                    Yeah. And then, we want to be dynamic. I don't think people think of Europe as being dynamic anymore.

Mark Zandi:                      Yeah. Okay. All right. So the second retort is it's not about pricing anymore, it's about several other things, and I'm going to list each one of them and see what you think. And you've already talked to it to some degree, but just to get it on the table, we can get your views very clearly. There is an argument that it squelches innovation, that the big guys, the Big Tech, the Big Pharma, the big fintech come in when they see competition coming, they buy that competition, Moody's bought Economy.com, and that that reduces the amount of innovation that goes on. That we would've seen more innovation if those companies continued on and did the things that they were doing.

Joe Kennedy:                    Yeah. And I know there's this widely cited study that finds that in pharma that's happened in some cases, but I think that there's some good reasons for that. In tech, not so much. There have been a huge number of mergers and acquisitions over the last several years, but all the focus, all the criticism is on two or three, Instagram being one of them, Facebook's purchase. And people say, "Well, Instagram would've been a semi-dominant company that could've really competed with Facebook." Maybe, but maybe not. Maybe Facebook just would've, within the league of standards, copied all of what Instagram was doing, and just beaten it. You just don't know. 

                                             But what you do know is that these big companies buy up a lot of small companies, and that's the exit point for a venture capitalists who fund these small companies. And IT investment by venture capitalists has been very strong. So it's true that nobody really wants to start up a small company that's going to take on Facebook head on, but there are a lot of other technologies, other markets that can be very valuable that companies go after, and then when they prove themselves, then a big company will acquire them and use that technology, and like they do in drugs, expand the market and give it to everybody. If you shut that off, then what happens to the venture capitalists? What happens to these small firms? It's probably they don't do so well.

Mark Zandi:                      Well, the other thing I've noticed is that some people are just entrepreneurial. They don't want to stick with a company when it becomes big and more bureaucratic, and you got all kinds of check the box things going on, which you need that in large, multinational organizations. But that's not the world for them, so they go start a company, they get out, and they go start another company. And then they get out, they sell again, and they go to start another company, so it's almost like you're freeing them to be able to do what they're best at, and that's starting companies.

Joe Kennedy:                    Yeah. A great example is Diapers.com, where Amazon was selling diapers through it, in a third party company on its platform, and Amazon decided to get in the business, and they basically bought this company up and shoved it out. But Amazon then found out it was competing with big stores like Walmart, and the suppliers of diapers like Pampers were huge companies, and tough at negotiating. So a couple years later they shut down the business, declared a big loss on the merger, and meanwhile, these guys who had started Diapers.com went in and started another company that was a market platform that they sold to Walmart, and that became the basis of Walmart's retail platform. And people still refer to that as how Amazon out-competed or squelched a small firm over the diaper market. They don't point out that it was a huge financial mistake for Amazon, and that these guys took the $0.5 billion or whatever it was, and started another company that is now a serious competitor to Amazon.

Mark Zandi:                      Right. Well, another way anti-competitive behavior can lead to deleterious impacts, we talked about prices and inflation, we talked about innovation. The other that you hear about put forward is monopsonystic power, that these large companies basically gain control over the labor market, and they can set wages. So they're not raising prices, but they're keeping wages very depressed. And this is one reason why we've seen this skewing of the income and wealth distribution, that since the Borkian view of the world and antitrust took over, antitrust kind of was put to the side. It was only about prices and consumer welfare. We've seen this period of relatively weak wage growth certainly among low income households, and the skewing of the income and wealth distribution. What do you think of that argument?

Joe Kennedy:                    I wrote a lot of papers on these topics for the Information Technology and Innovation Foundation, and one of them dealt with that. At first, it looked at the decline in labor share overall, and when you compensate for the significant rise in housing prices, that decline basically goes away. So when people talk about labor, the workers not getting their fair share, a lot of that's artificial constraints on building affordable housing. As far as the monopsony argument, there've been a couple papers, but basically haven't seen that. There was the one case where the Big Tech firms basically agreed not to cold call each other's workers, and that was a clear antitrust violation. They paid a big fine. It wouldn't have bothered me if you'd doubled that fine.

Ryan Sweet:                      How about tripled it? 

Mark Zandi:                      Ryan's saying triple it.

Joe Kennedy:                    Yeah. But the enforcement agencies had the power they needed to deal with that case. They didn't need an expansion of the law. They had all the power they need, they exercised them. You can quibble about how strict they were, but if that happens again, they've got the power they need to go after whoever it is.

Mark Zandi:                      Okay. One more. And I'm sure there's others, but one more because we are getting a little long here, and I do want to talk about the Great Power Competition a little bit before we call it quits. Is the increased market concentration leading to greater control of information and personal data? That they have this control, and this is a problem on lots of different levels that is very intuitive to people.

Joe Kennedy:                    Yeah. One, a lot of these services are free, so the consumer's benefiting. Two, a lot of the information they're giving isn't valuable. It's like in one of my papers, I cite the market prices for the identity of a newly pregnant woman so if you know who it is, you can send her all sorts of flyers. I don't even know, it's under a dime. It might be under a penny to each distinct name. So most of the data isn't that valuable. Other people can get it through other means. There is some data that's highly sensitive, highly valuable. We do need to have a conversation about how to protect that data. Maybe we need to tighten up the laws that deal with cases like Cambridge Analytica, although the regulators had the power they needed. They got a big fine. But it wouldn't hurt. It might not hurt to tighten that up, but that's not, again, an antitrust issue. That's a data privacy issue.

Mark Zandi:                      Okay. So to conclude the conversation on antitrust, and we could go on for another three hours but we don't want to do that, it's a nice day outside, there's really four strains of thought here. One is, "I don't like big. Anything big, I don't care what the impact is, I don't want big." Two is, "Okay, I don't like big if it's messing up, resulting in higher prices for consumers or hurting consumer welfare." That's the Borkian.

Joe Kennedy:                    The second one is basically do away with Consumer Welfare Standard. Don't have that be the only guidepost.

Mark Zandi:                      Yeah. That can't be the only guidepost. It's a neo Brandeisian... I always say it different each time I say it... Brandeisian theory. The third perspective on this is, "Okay. Yes, basically everything's okay, we just need to enforce the laws we have. The Sherman Antitrust Act, the Clayton Act. If we do that, then we're golden. We're good, so no big deal." And then the fourth is really, "We're hammering about very little here. Yeah, we've got our problems. Yeah, income and wealth distribution's a problem. Yeah, low productivity growth is a problem, but don't blame it on market concentration and big companies dominating their markets. That's not the issue here." And you're in that last camp. Ryan, where are you in that view?

Ryan Sweet:                      I'm probably in the fourth group.

Mark Zandi:                      What does that mean? Joe's group?

Ryan Sweet:                      One notch below Joe.

Mark Zandi:                      The third group.

Cris deRitis:                       Number three.

Mark Zandi:                      Number three.

Ryan Sweet:                      Number four.

Mark Zandi:                      No, no. Number four is Joe saying-

Ryan Sweet:                      Oh yeah. No. So I'm number three.

Mark Zandi:                      Number three. So you're saying, "We just need to enforce our antitrust laws a little bit more carefully."

Ryan Sweet:                      I agree. Yep. That's where I would be.

Mark Zandi:                      You would be there. Okay. And Cris?

Cris deRitis:                       Well, in classic Cris fashion, I'm at 3.5.

Joe Kennedy:                    That was my next statistic.

Mark Zandi:                      That's so frustrating. Do not do that. Give us you've got one, two, three, or four.

Cris deRitis:                       Three. I'm more three than four.

Mark Zandi:                      You're more three than four, meaning-

Cris deRitis:                       You've got to tighten up a little bit.

Mark Zandi:                      Okay. Tighten up a little bit. You know, Joe, I love you and I respect you, and you have really made me think more carefully about this. And I need to do more research, but I think I'm more two than three. It makes me uncomfortable-

Ryan Sweet:                      I'm surprised.

Mark Zandi:                      Really?

Ryan Sweet:                      Yeah. I would've put you in three with Cris and I.

Cris deRitis:                       Shocking.

Mark Zandi:                      Well, I think it's more than just doing away with the consumer welfare criteria. I mean, I should say it's more than just consumer welfare as measured by price. I think you really... let me put it this way. I don't know what the answer is, but what I think the question should be is are these large companies impacting our economy and our daily lives in a broader sense than simply prices and consumer welfare? It goes well beyond that. 

                                             It goes to innovation, it goes to productivity gains. It goes to monopsonystic power. It goes to controlling suppliers, enforcing things on suppliers of these bit companies. It goes to control of data. So I would say I think our way of thinking about antitrust should be broader than simply prices and the straight lien consumer welfare definition that is the Borkian view. Whether that ultimately ends up in antitrust action, different story. But I do think we need to think about this more broadly, in terms of what it means for the economy. Does that make sense? Joe disagrees.

Joe Kennedy:                    Yep.

Ryan Sweet:                      He's being nice.

Mark Zandi:                      He's being nice.

Joe Kennedy:                    It's fine.

Ryan Sweet:                      He doesn't want to strain your friendship too much.

Joe Kennedy:                    Yeah.

Mark Zandi:                      That's funny. I am surprised you guys... did Joe influence your thinking, or were you always in that camp?

Ryan Sweet:                      I was probably in that camp.

Mark Zandi:                      You were probably in that camp.

Ryan Sweet:                      Particularly more with finance than tech.

Mark Zandi:                      Yeah. Okay. All right. Well, very good. That was a very good discussion. I think this is very confusing for people, and kind of put a nice frame around thinking about it, so thank you for that. Before we leave, Joe, I want to double back and talk a little bit more about the Great Power Competition, which is an initiative that MITRE is leading the charge on. Can you just describe that a little bit to the listeners? Because I think they'll find that very interesting.

Joe Kennedy:                    So in addition to doing projects for the federal government, MITRE spends a ton, tens, hundreds of millions of dollars a year, on research that they think is going to matter in the next couple of years, that they think is going to help government agencies in the future. And one of those is the increased importance of international competition. I think people are coming around to the belief that China and Russia are not going to go the way of Taiwan and South Korea, where they gradually become more liberal societies. They're going to stay oligopolistic.

                                             In fact, they're ready to take us on because they think we're declining, and we cannot afford to have key technologies like AI and quantum computing. That's what I was trying to think of earlier. We can't afford to have those controlled by hostile totalitarian governments, and so we need to be much more concerned about our own competitiveness, and we need to have tighter ties with our allies. And so they're spending a lot of effort studying that, and they have different groups. One is looking at the supply chain for mRNA. Another is looking at the Digital Silk Road and the importance of that. Another is looking at China's [inaudible 01:19:50], buildings and roads. That's not quite it.

Mark Zandi:                      One belt, one road.

Joe Kennedy:                    One belt, one road effort. And one is, and that's the one I've been working on, looking at the importance of the dollar. The benefits that the U.S. gets because of the dollar's dominance.

Mark Zandi:                       The reserve currency.

Joe Kennedy:                    Yeah. What lies behind that, and what are possible threats to it, and how should the government respond?

Mark Zandi:                      Can we have you back on for that one?

Joe Kennedy:                    Sure.

Mark Zandi:                      I'd love to have you back on that, because you must be thinking about crypto, and the effect of crypto as well.

Joe Kennedy:                    Crypto, central bank digital currencies-

Mark Zandi:                      Okay. We're going to get you right back on.

Joe Kennedy:                    ... electronic payments in general, trade markets. In fact, they're coming out with a paper relatively soon, looking at summarizing what they've done over the last two years, and providing some recommendations to the government agencies about what they need to track and what they need to think about, as far as possible policies.

Mark Zandi:                      Bottom line, in our lifetime, Joe, will the U.S. lose the reserve status?

Joe Kennedy:                    Well, if we perform moderately well as a society, I think no.

Mark Zandi:                      Moderately well, meaning what we have done since World War II?

Joe Kennedy:                    Yeah. And the biggest thing, we don't let inflation get out of control. It's hard to have a dominant currency when everybody thinks its price is going to fall. But as long as we have a strong currency, no, I don't think. In fact, I think you look around the world, and more people want dollars because of the uncertainty. That'll decline as the world economy gets back to shape, but I think that the advantages are just too strong. And the Chinese, the government's refusal to open up the capital markets, its continued intervention and financial markets, its restriction on moving money overseas, nobody wants to hold a lot of their assets in Yuan because the government can take it away tomorrow.

Mark Zandi:                      Joe, you should know that Cris is a big crypto guy, and he thinks that Ethereum is going to displace the dollar at some point here in the near future.

Cris deRitis:                       Now the new thing is the Arabian Falcons. Right?

Mark Zandi:                      Oh. The Arabian Falcons.

Joe Kennedy:                    Oh, is that a new one now?

Cris deRitis:                       Arabian Falcon Coin, according to your Twitter feed, Mark.

Mark Zandi:                      Yeah. Oh, by the way, I'm on Twitter, guys. I mean, I've always been on Twitter. I've been on Twitter for a long time, but I was kind of dormant, but now I'm in gear. Have you noticed in the last week or so, I'm really on Twitter. @Markzandi, so I'm advertising. @Markzandi. So Joe, have you befriended me? Are you following me?

Joe Kennedy:                    No. I'll follow you, and then we'll think about befriending you.

Mark Zandi:                      Okay. Thank you. Exactly.

Joe Kennedy:                    We'll see how this goes, okay?

Mark Zandi:                      I appreciate that. And I do want to thank you, Joe, for joining us, and really appreciate all your insight, and we definitely want you back. I want to talk about reserve.

Joe Kennedy:                    Okay. I'm so glad this Moody's thing is working out for you.

Mark Zandi:                      Yes. Yeah, I know. 16 years later, it's still trial. It's still a trial basis kind of thing going on. I also want to let everyone know that please, we want your reviews. We have 99 reviews. Someone put us over the top, here. We need at least 100 reviews.

Joe Kennedy:                    Maybe my mom will put you over the top.

Mark Zandi:                      Oh, Joe, you can do that too. No, only kidding. 

Joe Kennedy:                    My mom will put you over the top.

Mark Zandi:                      Your mom will. Your mom will. Oh, there was one other thing I wanted to mention. We are now doing, obviously, this podcast every week. We're also now putting up special editions of podcasts. We did a Moody's Analytics webinar, and we put it up as a podcast. The audio was pretty bad, so we're going to fix that and make that good, but you'll see evergreen podcasts that we're going to do and put them up there for folks, so watch out for those as well. And please, fire away with any suggestions that you may have. Any parting words, guys? Joe?

Joe Kennedy:                    Next time, I'd like to plug my widely unread book.

Mark Zandi:                      Well, do it now. What is it?

Joe Kennedy:                    I just happen to have it.

Mark Zandi:                      Oh yeah. Wait a second. Ending Poverty. Oh yes, I remember. Very excellent book.

Joe Kennedy:                    Yeah. I think I gave you a copy.

Mark Zandi:                      You did, indeed. It's an excellent-

Joe Kennedy:                    Did you read it?

Mark Zandi:                      I did, indeed. Now, you wrote that, that came out when, though?

Joe Kennedy:                    That was a while. 2008, I think.

Mark Zandi:                      2008, so it was a while ago.

Joe Kennedy:                    I got six bookshelves of them, so anybody wants a copy-

Mark Zandi:                      Join the club, Joe. Join the club. Yeah.

Ryan Sweet:                      Mark's office has boxes.

Mark Zandi:                      I've got boxes. I got boxes. My great claim to fame, though, is one of my books got put in the Mandarin, so I hit the big time.

Joe Kennedy:                    Oh.

Mark Zandi:                      Yeah. There you go. Anyway, we should call this quits.

Joe Kennedy:                    Okay.

Mark Zandi:                      Thank you, Joe. Thank you, guys.

Joe Kennedy:                    It's been a pleasure. 

Mark Zandi:                      Listener, next week. We'll talk to you then. Take care, now.