INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi the Chief Economist of Moody's Analytics, and this is a special bonus podcast, and special on a lot of levels because we had some great guests. I want to introduce my colleague, Cris Lafakis. Cris, this is not your first rodeo, is it, on Inside Economics? You've been on before.

Cris Lafakis:                      I've been on for oil and for climate, so I think this is my third appearance.

Mark Zandi:                     Perfect. You're the right guy for this podcast, so it's good to have you back. And, Cris, we've been working together a long time, at least a decade. Probably longer than that, right?

Cris Lafakis:                      Yeah, I joined in August of '06, so I guess this August, it'll be 17 years.

Mark Zandi:                     Okay. What was the unemployment rate in August of '06? Come on.

Cris Lafakis:                      I'm going to guess 4.9%.

Mark Zandi:                     Let me think about this for a second. And Franco, you need to look this up. Okay? He said 4.6. August of 2006 before we were still in the middle of the housing boom, house prices hadn't rolled over yet. They were about ready to. 4.6 sounds pretty good to me, but I'll say 4.8. 4.8. So Franco, you're going to look that up. Okay? Or, Sarah, you can look it up. FRED, oh, don't go to FRED. Go. Go to our Date Buffet. I shouldn't have said that. And look up the unemployment rate for August of 2006, but it's good to have you, Cris, and welcome back. And we have Heather Boushey. Heather, it's good to have you on. Heather is on the Council of Economic Advisors and just a real honor to have you on. Thank you, Heather, for joining us.

Heather Boushey:           Oh, it's my pleasure. Really great to be here today.

Mark Zandi:                     I love your background. I've had a couple of zooms with you and I don't know if I've told you this, but I love that background. Is it real? Is it a real background?

Heather Boushey:           This is my bookshelf. Yep. This is my house.

Mark Zandi:                     So cool.

Heather Boushey:           Yeah.

Mark Zandi:                     When's the last time you actually read a book from that bookshelf?

Heather Boushey:           Oh, I feel like it was a long time ago, but I did actually just put my copy of the economic report of the president into the bookshelf.

Mark Zandi:                     Ah, yeah.

Heather Boushey:           So I was putting that there. This was the one that the president himself signed, so that's pretty exciting.

Mark Zandi:                     Oh, pretty cool. That's pretty cool. I don't think generally people know that that is a really significant body of work every year that the council puts together, right?

Heather Boushey:           Oh, yes. I mean, I think this year it was 512 pages, and we covered everything from a chapter on climate, adaptation issues, labor supply, the macro economy, a chapter on the care economy, one on crypto with a nice little box about a crypto mining tax, and how important that is, which made it into the budget and a whole bunch of other things.

Mark Zandi:                     Oh.

Heather Boushey:           So no, it's a big lift, but what it does is it helps the president understand where economics is and where we can be pushing the ball forward in terms of economic policy.

Mark Zandi:                     Yeah. And I know that CEAs every year spend a lot of energy on that going all the way back in time. So it's actually a wealth of information if people are interested. It really gives you a lot of insight as to what are topics that are top of mind and then really going into depth and really doing important work there, so really important. So before we dive in, and we've got a lot to talk about. I want to talk about the economy, of course, but I know you've been doing a lot of work at CEA with regard to climate, and the cost of climate change, and trying to bring that into the budget process. And Cris, I know you've been following that very carefully and doing a lot of work in that area yourself, but before we go down that path, Heather, can you just give us a sense of your long and windy road to being on the CEA, because you've been a fixture in DC for at least from the beginning of time, in my memory. That sounds bad somehow, but you know what I mean.

Heather Boushey:           Yeah. Sometimes I feel like that as well. I've now actually lived in DC longer than I lived in... I grew up in the suburbs of Seattle, and so I've lived here longer than anywhere else, so this is certainly my home. I wrote in my graduate school application essays that I wanted to grow up and work at think tanks, and advise policy makers on how to think about economic policy. So I have definitely been living the dream for many years, have worked in a number of think tanks in town, was able to spend a little bit over a year on the Hill, the Joint Economic Committee, during actually the beginnings of the financial crisis. I was there in 2008, so a front row seat to the crisis there, and I know you came and testified a lot. I saw you a lot that year and the years after.

                                           And then with John Podesta I co-founded an organization in 2013 called the Washington Center for Equitable Growth, where we investigated whether and how economic inequality in all its forms affected economic growth and stability, and that I feel like in many ways was sort of the platform to the winding path that got me here, but when I started advising the then Vice President Candidate Biden on the campaign trail, we were really focused on how we could understand not just the moment in front of us with the pandemic, but as he kept talking about... And that sort of morphed into the build back better refrain, what were some of the longer term challenges facing the economy? And of course, at that point, it's been almost a half century of rising economic inequality that forms a backdrop in which our economy is functioning now. What does that mean?

                                           How do we think about that? How do we address the economic insecurity that that has created. How how do we reverse those trends? And of course, the president has made that a priority as well as addressing racial inequality, but I think about climate change as connected to that in many ways that just like the issues around inequality, there are serious inequality issues in climate change, but it also really does change the landscape in which the economy is functioning. The rules, our go-to common sense notions are shifting as we work our way through this energy transition, and as we rethink what our data and models can tell us about the world around us as the natural environment is shifting. So that's a little bit of how I got here, and what I've been thinking about, but I couldn't be more honored to be a part of this administration. It's really the highlight of my career.

Mark Zandi:                     Well, it's a great CEA, and I know, I guess, Jared Bernstein is up for leading the way here. I guess he has to goes through the nomination process, but I'm sure he'll be approved here, hopefully.

Heather Boushey:           Fingers crossed.

Mark Zandi:                     Yeah, fingers crossed, fingers crossed. Yeah, he's such a good guy. In Washington Growth, that does such great work. And who's leading the way there now? I've kind of lost track.

Heather Boushey:           Yeah, so Shayna Strom is the new executive director.

Mark Zandi:                     Oh, that's right. Yeah. Yeah.

Heather Boushey:           No, it was a real challenge. So many really terrific organizations, a lot of leaders like myself went into the administration, and so it was this time of change, which can be both revitalizing but also kind of hard on staff. So I know that I've been really impressed watching her take the helm.

Mark Zandi:                     Well, great. And I should say before we move on, because the listeners may be wondering what happened to Cris deRitis and Marisa DiNatale, our hosts, our traditional co-host, they're sick. I don't know if you were listening to the podcast on Friday, but they were ill, but they kind of powered through. Turns out both of them have COVID, so they're both out today. So we're diminished as a result, but we'll plow plow ahead here going forward, but can you believe that? I thought it was over.

Heather Boushey:           I mean, I've been looking at these numbers, and they keep getting smaller and smaller, so I'm sorry to hear that, but hopefully they got the milder version and all the things, but a holiday weekends for so many too, that must be rough on their families.

Mark Zandi:                     Yeah. Yeah. I think it's a mild version. I think they're okay, but anyway, so let's dive in the economy. And you got some... Well, we all got some pretty good news, I think, last Friday, the jobs numbers for the month of March, and they felt pretty good to me in terms of still solid job growth, but moderating, consistent with the need to quell wage and price pressures, and it felt like wage growth is kind of moderating into the sweet spot, consistent with the Fed's target. A lot of other details in there, but if you kind of add it all up, it felt pretty good to me. What about from your perspective? What'd you think of the report, and what it means for the economy here going forward?

Heather Boushey:           Yeah. As we got the numbers and started looking into it, the word Goldilocks just kept coming to mind, that really hitting that sweet spot, not too hot, not too cold, still generating strong job growth, and yet not that overheating or not that blockbuster pace that we needed to pull out of the pandemic recovery. I think this is one of the things that has been as I've been watching the news coverage over the past couple of years, really interesting, right? Of course, during the pandemic, so many people lost their jobs. So many people went home for the health of us all with COVID and everything. And to pull out of that, we really needed this really fast job gains, which, of course, we saw, but those numbers couldn't go on forever.

                                           And so finding that slow down back to a sustainable pace, a stable kind of pace has been a real challenge, especially alongside all of the mismatches between supply and demand that have been leading to price shocks on the other side, the inflation that we've been seeing, but this kind of jobs report really is, I think, that sweet spot. It was the last three months we created about 345,000 jobs, which is down over 200,000 from the pace that we're creating over the three months a year ago in this timeframe, so that's good.

Mark Zandi:                     That's average monthly job growth, so the average monthly job growth was you said in the past three months, 347,000 on average?

Heather Boushey:           Yeah, 345.

Mark Zandi:                     Yeah, something like that. Yeah, 345. Yeah.

Heather Boushey:           Yeah, down from 550 something a year ag. Over the three months moving average. A slowing of wage growth, again, you're kind of seeing it come back down, but you still do see nominal wage gains, and we had been seeing... Of course, we'll get new inflation numbers in a couple of days, so we don't know what those are in terms of real wages, but up until February, you had seen real wage gains going back since the summer, so that was at least slowing growth, but still seeing that little bit of an uptick. One of the things that, of course, really popped from this month's report was that the Black unemployment hit an all-time low. We've only been disaggregating the unemployment data by race since 1972, which I guess is a really long time ago. It doesn't seem so long ago to me, but whatever.

Mark Zandi:                     Me neither.

Heather Boushey:           It's like, "Well, that was yesterday." But at any rate.

Mark Zandi:                     What was the unemployment rate in 1972?

Heather Boushey:           Oh, oh, that's a good question. I don't-

Mark Zandi:                     Yeah. I'm going to say... And, Sarah, you got to look this up too, but I'm going to say [inaudible 00:12:01].

Heather Boushey:           Six something.

Mark Zandi:                     Yeah, probably, because the structural unemployment rate was a lot higher back then, right?

Heather Boushey:           Yeah.

Mark Zandi:                     Because you had a lot of boomers entering in, a big increase in female participation. I'd say six and a half, and that probably wasn't... Okay, it was right before the recession, so probably I'd say 6.2. I'd say 6.2.

Heather Boushey:           Yeah. I mean that's pre oil crisis, right?

Mark Zandi:                     Yeah.

Heather Boushey:           So it's '68 to... But, yeah.

Mark Zandi:                     Cris, can you look that up while we're chatting?

Cris Lafakis:                      Yeah.

Mark Zandi:                     Also, go back and look up the other one, because [inaudible 00:12:31].

Cris Lafakis:                      Yeah, it was 4.7.

Heather Boushey:           Oh, wow.

Mark Zandi:                     Oh, 1972?

Cris Lafakis:                      No, no, no, 4.7 for August '06.

Mark Zandi:                     Oh. What did we say?

Cris Lafakis:                      Yeah, we said-

Heather Boushey:           We said 4.8.

Mark Zandi:                     I think I said 4 8.

Cris Lafakis:                      4.8, 4 9. I think. I think you got me five blank out of 10 Price is Right rules.

Mark Zandi:                     What about 1972? What was that?

Cris Lafakis:                      All right.

Mark Zandi:                     I think we said 6.2, 6.2.

Heather Boushey:           Yeah. Six something. Yeah.

Cris Lafakis:                      What month do you want?

Mark Zandi:                     No, the average for the year.

Cris Lafakis:                      Oh, okay.

Mark Zandi:                     Yeah, the recession probably began in '73, didn't it?

Heather Boushey:           Yeah, because the oil crisis hadn't happened yet. [inaudible 00:13:11].

Mark Zandi:                     Yeah. Oh, you're too slow, Cris. You're too slow.

Heather Boushey:           Good, yeah.

Mark Zandi:                     Yeah, man. Come on.

Cris Lafakis:                      Sorry.

Mark Zandi:                     [inaudible 00:13:16]. Okay, you're under pressure. You're nervous.

Cris Lafakis:                      5.6. Yeah, I'm choking.

Heather Boushey:           5.6?

Cris Lafakis:                      Yeah, it's around 5.6.

Heather Boushey:           Oh, okay.

Mark Zandi:                     Oh, 5.6. Okay. We're not too bad. Yeah, we're doing okay. Anyway.

Heather Boushey:           Yeah. So now Black unemployment is 5%.

Mark Zandi:                     Wow.

Heather Boushey:           So the lowest it's been since that era, super important, but, Mark, you've been around this watching recessions for a long time. One of the things that we say time and time again is that when you get the unemployment really low then lots more folks can come in. It pulls people in who don't normally get opportunity, and so you see that in people with less education being able to get jobs. You see that gap between Black and white unemployment getting smaller, and that's exactly what we see here. And so that really does speak to the strength of the labor market right now, and that's good news. I think we're all hoping that we can sustain this level or a level of continued job gains without things turning too far south. So I think what we saw last month, really good means that we are still continuing to add jobs, but of course we will see as we get the data and the months to come.

Mark Zandi:                     Yeah, I guess we're in a critical juncture here for the economy, right? Because the growth is slowing by design. The Reserve is raising rates to slow growth demand. In fact, last month, by my calculation, it was the first month since the pandemic shutdowns that labor supply was greater on a year-over-year basis than labor demand. So that means that unemployment is going to start ticking up here. And when unemployment starts to notch higher, even from very low levels, obviously, that's when the economy is very vulnerable to anything that can go on. So it feels like we're kind of... And we all knew this was going to happen. It's not a surprise, but here we are. And it feels like the next 6, 12 months are going to be be tricky. It's going to be tricky to kind of navigate through. Would you concur with that kind of perspective?

Heather Boushey:           I would concur, and honestly that's one of the reasons why dealing with the debt limit is so important, because you think about this economy, this recovery has been able to handle so many things that have been thrown at it, right? There were a series of emergency measures to deal with the COVID pandemic and what that did to the economy, a little bit of insurance built in there to make sure we had some bandwidth if things didn't get better as quickly as we hoped, a couple of different variants of the virus that got thrown at the economy, but still able to keep on truck end, still able to keep adding jobs.

                                           The energy shock caused by Putin's unprovoked war in the Ukraine that upended global energy prices challenged everything, the supply chain shocks, and yet at this moment, as you just said, where we're trying to get back to that steady job growth, again, not too hot, not too cold. Something like the debt limit really could be the thing that really does cause the chaos, that causes the challenges. So it feels a little bit more vulnerable now, and so it's just something that just weighs on the back of my mind every day.

Mark Zandi:                     Yeah, I totally agree. We've done a lot of work on trying to understand the debt limit and its impacts if we breach it under different scenarios, and we're calculating still a lot of uncertainty, but we're calculating the X date, the date when the treasury runs out of cash necessary to pay everyone on time, pay all the bills on time, mid-August. To be precise, August 18th, so it feels far there's not really been a lot of angst in markets that are focused on different things, obviously, but my guess is we come back after July 4th break, and it becomes clear that there's only a few more weeks left for Congress to do something, and that's when tensions will start to rise, and you're right, I mean, that's the same point in time when the economy is going to be dealing with slower growth, perhaps some increase in unemployment, and it's going to be incredibly vulnerable to any kind of disruption to markets as related to the debt limit. So it feels like that's a really big deal.

Heather Boushey:           I mean, especially you combine that with challenges that we've seen in the financial market, and the fact that we know it takes some months of lag for Federal Reserve policy to work its way through credit markets. It does seem like the summer is a really important time and not a great moment to be appending the full faith and credit of the United States. I think we're very worried about the chaos that that could cause, and that it could upend this so far really excellent recovery, which as we noted, is having these implications for equity, is bringing people into the labor force, helping them get jobs, creating that economic security, which is exactly what we want to see across the economy.

Mark Zandi:                     Yeah. Are you surprised that we haven't seen any kind of reaction so far in markets, or it's just too early for markets to kind of focus on what's going on? Specifically around the debt limit, had you expected more by now, or is this way too early?

Heather Boushey:           I lived through other debt limit debacles, so it does seem like there's still time. And so I think there is hope that Congress will avoid the Brinkmanship. I think there's hope that all sides can come together and do something. We do know, of course, that the current speaker, speaker McCarthy, voted three times under the last president for a clean debt limit increase. So it does seem that there's some possibility, so maybe markets are kind of crossing their fingers, whistling past the graveyard or whatever, hoping that that'll be the case. So I haven't been too surprised because it's kind of the way Washington works, but I agree with you that once we get to the summer, if we haven't already addressed it, things could get a little bit unsettled.

Mark Zandi:                     Yeah, the last time, I mean, like you've seen a lot of debt limit battles, and some or more contentious than others. The one that kind of stands out is the 2011 debate debacle when S&P downgraded US treasury debt, and this feels more like this period is going to be more like that than the other debates, and that's unfortunate in the context of an economy that's vulnerable, for sure. Yeah.

Heather Boushey:           100%. Yeah.

Mark Zandi:                     Okay. Cris, you ready?

Cris Lafakis:                      Okay, yeah.

Mark Zandi:                     What's the average unemployment rate in 2011? 2011?

Cris Lafakis:                      Okay.

Mark Zandi:                     You you want to take a crack at that, Heather? Of course, coming out of the financial crisis.

Heather Boushey:           Oh, man.

Mark Zandi:                     10% on the nose, I believe, in '09 or 2010.

Heather Boushey:           It had fallen pretty far by then though.

Mark Zandi:                     Yeah, it had. I'd say...

Heather Boushey:           I'd say eight, seven.

Mark Zandi:                     What you say eight? Yeah, I'd say seven and a half, by six, seven and a...

Heather Boushey:           Yeah.

Mark Zandi:                     Yeah. What is it, Cris?

Cris Lafakis:                      It's 8.9%.

Mark Zandi:                     Ooh, on average in 2011.

Cris Lafakis:                      Yes.

Mark Zandi:                     Oh, man.

Heather Boushey:           I was closer with eight. Wow.

Mark Zandi:                     Oh, yeah.

Heather Boushey:           It's like you just block these things out, because you can't imagine how awful it was to have-

Mark Zandi:                     [inaudible 00:20:28]. Oh, yeah.

Heather Boushey:           Well, and that was a recovery. I mean, here's one thing I will say about this recovery, just because you opened the door for me to talk about my favorite chart from the Biden administration so far, which is that we have created more-

Mark Zandi:                     That's more because it's your chart, Heather.

Heather Boushey:           [inaudible 00:20:44].

Mark Zandi:                     I'm sure.

Heather Boushey:           It's a great chart, but we've created under this president faster pace of job growth of any recovery during since I became an economist and going back to for decades, and certainly more than the great recession where it was so slow, and we forget just how slow that was, and how lackluster that recovery was, and the challenges that it left in its wake relative to this recovery where job gains were really fast, which it should have been, because it was a pandemic induced recession, so we should have been able to recover really quickly, and we did, but it does bring up a series of questions that I'm sure we'll get to, which is you were left with a situation after the Great Recession where wages were low, the wage share of national income was relatively low. You had this prolonged period of unemployment that left a lot of structural issues in its wake. So it's good to see that we've had this very sharp recovery in this sharp jobs recovery, in this recovery.

Mark Zandi:                     Yeah. So I guess the no debate about the job performance and unemployment, and I think you're right about Black unemployment, the 5%. That's a clear victory. Obviously, the problem that we're struggling with is inflation, and that's particularly hard. It's hard on all Americans, obviously, but particularly low or income Americans, because they don't have any savings and cash cushion, and of course they're focused on paying for their gasoline, and their food, and rent. There's just no give there. What's your sense of inflation? I mean, just for context, CPI, consumer price inflation, peaked at close to 9% back last June. We're now at six. As of February, as you pointed out, we're going to get another data point for March here in a couple days. Does it feel like to you we're headed in the right direction here, that we're going to get this down something close to something we all feel comfortable with, the Fed feel comfortable with in a reasonable amount of time, given what we know about the economy?

Heather Boushey:           I mean, I remain optimistic. I mean, first of all, there's been slowing of the pace of inflation, which does not mean that inflation has come down. I want to be really clear about that, but that the pace has slowed, as you said. It was over 9% in the summer. It's come down to by a third, which is certainly good news. We've also seen the abatement of gas prices around the country. So gas prices are down by $1.40, $1.50 relative to their peaks last summer, so that is certainly good news for families around the country, at least ones that drive gasoline fueled cars, and where that is an issue, but also for transportation and all the things.

                                           At the same time, we've seen some of the structural issues that led to the inflation abate. The biggest challenge, of course, was that we and the rest of the world was recovering from this global pandemic where we all learned that the shutting down of a factory in Malaysia could have implications for whether or not you could get the car parts, and make new cars, and what prices would be here in the United States. And those supply chain challenges really did upend our economy, and on top of the fact that people were at home, they weren't buying services, people wanted stuff. They wanted home offices. They wanted new things, new furniture, all the things as people were stuck at home. So all of that has really reverted, and so we've seen a lot of progress.

                                           Supply chains are up and running really well. You're not seeing the lines at the ports that you had. We're making these historic investments in semiconductor production in order to forestall those kinds of challenges in the future. We're making these historic investments in clean energy in order to address some of the challenges we've seen in energy. Again, that's over the long term, but all these things are going to make us more resilient, some in the short term, but certainly in the medium to long term as well. And then you combine that with the fact that the labor market is coming back down. It's a little bit slower, and I don't think we're seeing pressure from the job market on prices in the way that a lot of people are really concerned that we would. We're not seeing a wage price spiral. So all of that gives me hope and optimism that we will see inflation continue to come... the pace of it continue to slow, and then the Fed has taken a lot of actions already, so we need to let those work their way through the economy.

                                           I think also the banking crisis that's been happening is also going to slow down credit or there are indications that it will. So all of that I think points to the fact that we're moving in the right direction. Let me add one more thing, which is that dealing with inflation is really the Federal Reserve's job, and yet at the same time, especially given what we've seen in this economy, there were a lot of things that the administration could and did do to address higher prices, everything from all the work the president did on supply chains to the fact that focused a lot on lowering healthcare prices for families, lowering the cost of prescription drugs, lowering the price of insulin, really focusing on the specific costs that government could do something about, and so I think that too will help reduce the... The President likes to talk about give families a little bit of breathing room, but reduce those cost pressures facing families at the same time as well.

Mark Zandi:                     One more set of questions on inflation in this. I want to get to the climate work that you've been doing. The pushback on inflation is that there's a long list of reasons why inflation is high, supply, demand, they're all in the mix, and you led with the supply side kind of, supply chains and pandemic. You mentioned the Russian invasion. Others would argue it's the demand side, that it's all the fiscal support that was provided during the pandemic, including up and through the American Rescue Plan in 2021, and also energy policy. You hear that often too, because the difficulty putting rigs in the ground, and producing energy, and therefore higher energy prices adding to inflation. How do you respond to those critics, those criticisms? And I take those are criticisms, right? That's policy?

Heather Boushey:           Oh, yeah.

Mark Zandi:                     Right. Yeah.

Heather Boushey:           Yeah. So I mean, on energy, the president has made clear time and time again that there has not been as much use of the tools that energy companies and fossil fuels have available to them, so there's drilling permits they haven't used. There's been a lot of wiggle room for them to be expanding production, but at the same time, we've also seen that especially over the summer, there was a lot of profitability in that sector that we saw, that where even when prices started to come down in global oil prices, those were not being passed on to consumers. So I think one of the responses to the energy conversation is, "Well, we need to actually look at what's been happening in the fossil fuel sectors." There are indications that in the literature they call this rockets and feathers, when energy prices, they go up like a rocket, but they take a long time to come down like a feather, and we certainly saw that, but that means they're getting a lot of the profits, a lot of the rents, to use the economic term, and so adding to price increases.

                                           So there was a lot of that that we also need to focus on, and then not doing their part in terms of ramping up, refining and using all the tools they had available to increase supply, but then on the household side, I think that's a really important question. I think economists are going to be digging into this for a long time. Was the policy response to this pandemic recession the right one? Where did it over, undershoot? And here's the thing, when the president came into office looking at an economy that was creating... I remember that January, the three months before inauguration, average job creation was about 60,000 per month on average, certainly nowhere near what we needed to pull the economy out of the pandemic recession. We needed that to be increased by a factor of 10, right?

                                           We needed to see more like 600,000 a month, not 60, and there was this real concern that families were being... Because schools weren't up and running. Businesses weren't running. The vaccine wasn't out. Needed to make sure that families, communities, businesses could be made whole, so that we could weather this challenge and get back and up and running, and that's exactly what we've seen. The United States has seen one of the strongest recoveries relative to our economic competitors. They did not do the same kind of fiscal support we did, and yet we were stronger, and everybody else also had inflation. So there's a little bit of what's the goal here? I think from the president's perspective, the goal was to make sure that America got through this challenge, got through it together with the least amount of long-term damage, and we've been able to pivot.

                                           Again, we started this conversation talking about the fact that we still are seeing these good, solid, strong job numbers. I think that is because of the decisive and bold action, and maybe it overshot a little bit, but the reality is that we didn't know exactly how many variants of the virus it would be, how quickly we could get that vaccine out to people, and this gave us a little bit of bandwidth to make sure that communities had the resources they needed to cope. So I think that looked at in the larger context and the larger economic outcomes, I think this was an enormous success. And given the fact that other countries are also struggling with inflation, I think that really does point to this being a mismatch of supply and demand as consumers shifted to goods, away from services, as we learned about the fragility of our global supply chains and just in time production. There's a lot of learning there, and I think that that's, again, I look forward to the ASSA meetings next January where we can all debate this.

Mark Zandi:                     Yeah. Well, yeah, I think you make a good point. I mean, it's hard to remember back to January, February, March of 2021 when that American rescue plan was being put together, but in that time was still a lot of uncertainty with regard to the pandemic, how that was going to play out, the vaccines, the rollout, the efficacy of the vaccines. There's still a lot of concern and fear, and I think policy 101 says, if I was writing policy 101, I would say if you're in a period of high uncertainty, better to air on the side of over accommodating than not accommodating enough, because that would be very, very disastrous, not only for the American people, but also from a budgetary perspective because your economy evaporates, and it takes revenues and spending, and causes even more fiscal problems, and the cost to you would be even greater. So I think that's key to remember here.

Heather Boushey:           Well, and I'll say one more thing. The president, the leads on his economic team, Janet Yellen and Cecilia Rouse, Jared Bernstein, myself, all labor economists in some way or another, people who've spent a lot of time thinking about labor, and Secretary Yellen spent a lot of time, especially early on talking about the long-term effects of scarring from high unemployment that lasts. I mean, we saw that over the past... after the Great Recession, and we are not seeing that now, and so the productivity enhancing effects of taking that decisive action, again, time will tell, but I think we are continuing to see the benefits of that, and certainly American families are benefiting from it.

Mark Zandi:                     Yeah, good point. Hey, let's talk about climate and all the work you're doing there. Maybe you can bring everyone up to speed with regard to what work you're doing. I know it all goes back to an executive order the president put out pretty early on in the administration, did he not?

Heather Boushey:           Yeah, executive order on... I'm so bad at remembering these really long numbers, but it was put out in May of 2021, so early on, and it was on climate related [inaudible 00:33:26].

Mark Zandi:                     I bet Cris has this memorized. Do you remember the number Cris?

Heather Boushey:           I bet he does. I think it's 11040. Is that it?

Mark Zandi:                     Okay. [inaudible 00:33:31].

Cris Lafakis:                      I think it does start with 11. Mark is really putting me on the spot today.

Heather Boushey:           No, it's good. You can Google that, but it's on climate related financial risk, and it focuses a whole of government approach on how we can account for the physical and the transition risk of climate change in our economic tools and in how we think about risk across the economy. So a lot of work focusing on the various regulatory agencies, how they are defining risk and thinking about it, asking OMB, the Office of Management and Budget, to look at how those risks affect the budget making of the US government, and then my little corner of the world, and where I've certainly talked a lot to economic forecasters like yourselves, is how do we think about methodologies to incorporate the physical and the transition risks of climate change into our economic forecasts, and what does that mean, and why do we need to do this?

                                           And so that's been two years of work now. We've released two white papers. We've incorporated this into the long-term budget outlook, both in the fiscal year 23 budget, and then the fiscal year of 24 one that was just released, and we've learned a lot, and let me just give you some top lines here. When you talk about the physical damages from climate change, you're thinking about the fact that there's destruction, physical capital, there's this destruction of a bridge because of the increased prevalence of hurricanes, or something like that, or the destruction of a levy, or flooding, or whatnot, the increased fires that destroy homes across the west. You have those kinds of things. You also have the increased uncertainty. We haven't lived through a period of climate change like we're living through now, so any data set that we have is always based on past data.

                                           We don't have data that shows us exactly where we're going to go, exactly what this is going to look. So there's a lot more uncertainty about what the weather patterns will be, what the damage could be from changes in temperature, and that uncertainty certainly also adds to the risk and the economy. It adds to the risk of investment. So this is another way we think about the physical damages, migration, a whole bunch of other things, and that's something that is both in the here and now. I mean, we're already seeing these every year after year, these record-breaking amounts of physical damages from climate change, climate-related weather disasters and the like, but we know that these are going to grow over time, even if we were to stop increasing emissions now because there's so much carbon in the atmosphere, we have these damages we'll have to account for. So that's a big budget question. It's a big economic question. How are we going to pay for that? Who pays for it, and all the things?

                                           Second though is this question about the transition. And the exciting thing, of course, is that the president got over the finish line this huge legislation, the Inflation Reduction Act, and also the bipartisan infrastructure law that had these major game changing investments in transitioning us to clean energy, and that's very exciting, and the engineers have done all these models that tell us, "Okay, if we make this investment in hydrogen, or if we make these investments in electric vehicles, this is how much we can reduce emissions, and this is going to be great." There will also be economic implications of this, and the faster we make that energy transition, the more challenging perhaps those really trying to understand those macroeconomic and microeconomic implications will be. So what is this transition going to do to labor demand? How's it going to affect changes in labor demand across place? I was reading the paper this weekend, as one does on a weekend, and there are multiple articles-

Mark Zandi:                     The actual paper? You really... Wait, this is news. Did you actually read?

Heather Boushey:           I mean, this is just a little bit of a tangent, but yes, we do read the actual paper at my house. No, but we realized how misinformed we are then because I was really excited about this article about electric vehicles, and this story about Ohio and this factory closing, and it was just a really important article. I wanted to send it to a colleague. I couldn't find it because it had been released online weeks ago, but only showed up on the cover of the business section on Sunday, and I thought it was news. It was old news.

Mark Zandi:                     That's funny.

Heather Boushey:           At any rate, but so there are a lot of things that tell this story of what's happening in the automobile sector where plants are going up, and that's creating all this opportunity, but also where workers are struggling because their factory was making gas powered vehicles, and now they're not going to be made anymore. So there's effects on labor demand, effects on investment. We know that there's this significant uptick in investment in clean energy. So there's both questions, "What are we not investing in and how might that affect productivity and growth moving forward," but also, "How does this shift the macroeconomic climate, productivity implications, price implications?" So all of these are questions that we need to think about in our macroeconomic models and forecasting.

                                           And part of the reason they're so important to think about is that whether we believe that price changes today or investment changes today are about the much needed transition to clean energy to avoid these physical damages of climate change, or we think they're about something else, could affect how we react to them, how the Federal Reserve reacts, how the federal government reacts, how congress reacts, how states react. So I think really wrapping our head around why we're seeing shifts in the economy, how much of this is related to either the physical or transition risks will be a really important challenge over the coming years. So that's what we've been focusing on.

Mark Zandi:                     Yeah. No, and a lot of good work there. So just so I understand, in your baseline economic forecast, that is the basis for your budget forecast, because it's driven off of how well the economy is going to do or not do, in that baseline, do you now have explicit assumptions around climate, both in terms of the temperature rise, the impact on physical risk, both acute and chronic, and any assumptions around transition costs related to things that you've done or will do? Are they now embedded in the baseline?

Heather Boushey:           Not quite yet. So what we released this year, just a few weeks ago, was a plan to do that. And here's the thing, it's a really hard thing for the federal government to do because we need to make sure that we are using the best available methods that are road tested, tires kicked, everybody understands, and to your question, we do need to think about how all of these new things affect the baseline, but we need to integrate them, and so what we laid out in this white paper that was released a couple of weeks ago is our plan to do that, how we're going to think about reconfiguring our models. We're open to input, would love to hear from anybody that wants to read the paper. It's long. It's very good.

Mark Zandi:                     Cris Has read it. Right, Cris? Am I wrong?

Cris Lafakis:                      Yeah. No, I've read it.

Mark Zandi:                     Yeah, I'm sure multiple times. Yeah. Yeah.

Cris Lafakis:                      It just came out, so I've only had time to read it once, but I was very [inaudible 00:41:19].

Mark Zandi:                     Well, you cited a paper that you wrote, Cris, along with Juan Licari and a couple of other colleagues, right? Around macro forecasting. And I saw that in the paper it was linked to, so you should be proud of that.

Cris Lafakis:                      Yeah, and there's some other IMF and the ECB have also read our climate research as well, so I'm glad that it's going somewhere, and it's not being just shot on the [inaudible 00:41:45].

Mark Zandi:                     Well, I think one of the problems you have, Heather, obviously, is the horizon, right? Because climate risk affects the economy over long periods of time, decades. In the budget horizon, the traditional budget horizon is 10 years, so in the next 10 years, how big an impact will climate risk actually have on things like GDP, and income, and prices, jobs, unemployment, the things that matter in terms of the budget for the forecast. So Cris, if I turn to you based on the work we've done and you've done, can you give me order of magnitude? If I look out 10 years from now under our baseline assumptions around climate, what's the impact of climate on economic growth? I mean, how much lower or higher is GDP as a result of... However you want to frame it.

Cris Lafakis:                      Right. So with 10 years, the effects are going to be less than half percent of GDP, but I think what's really important, especially from the context of forecasting for the long term, and that's kind of what Heather and other federal government agencies have to do, is to understand kind of the cumulative impacts that are going to reverberate back on the economy, and especially because federal lawmakers are subsidizing a lot of the cost of living in very vulnerable areas right now, and that's through a couple different mechanisms. The National Flood Insurance Program is a huge one, and then also the disaster relief that federal lawmakers provide. If you go back to Hurricane Hugo, and that was a long, long time ago, and you measure the economic cost of all the natural disasters that have occurred since Hugo to now, and you look at the amount of federal aid that lawmakers have appropriated, that they've appropriated 47% of the cost of those natural disasters.

                                           So if we're always spending money from the federal coffers to rebuild communities, and we're subsidizing through NFIP, then no one really feels the effect of climate change. We're just dampening the impact, but it is a real macroeconomic cost, because it crowds out private sector investment. It raises interest rates. It affects borrowing, consumer borrowing. It has a whole range of economic consequences, so I'm very appreciative for Heather's efforts to quantify and incorporate climate risk into the federal government forecasting framework.

Heather Boushey:           Well, I mean, I'll just throw another one out. I mean, you said just a number of really great things, Cris. The federal government secures 65% of outstanding mortgage debt, and when you think about the fires that happen out west, and what that does to homeowners, and what risk then the federal government has to assume, then what that does to the costs of future mortgages for other people, all of that, just one other fact to add to that, but then what that also means is that are we truly valuing in the right way the expenditures that we need to make today to foster the transition to clean energy, right?

                                           So if you think about the money that we are investing as a part of the Inflation reduction Act to give subsidies to people to buy heat pumps, or to buy electric vehicles, or production tax credits to transition to electric vehicles, or clean hydrogen, or all the different things, we're accounting for that in sort of the normal way we think about budget deficits and fiscal expenditures, and yet those expenses have the capacity to really lower future costs and to make sure that we aren't taking on these risks in the future. And we don't really have a way to think about that in the budget. It's not the way that we've had to think about things before.

                                           So I think a lot of our work is starting from this question, "Well, how do we measure it, so that how can we help policy makers make good decisions about what investments are going to be the most cost-effective, not just in this year, but over the next 20 to 50 years, and to make sure that we are encouraging investment to go in the things that are going to be most productive for the longer term health and wellbeing of the planet and the economy?"

Mark Zandi:                     Not only does the budget horizon make this analysis difficult, but the other complicating factor is we live on a planet, and what other countries are doing may matter even more than what we do here, so to take that into consideration as well in your assessment of the impact of climate change on the economy and the budget, that gets really complicated pretty quickly.

Heather Boushey:           Well, let me add two things on that. So first off, the models that we use for our forecasting are a single region model of the US economy, so it's not a global model. So right there, okay, wow, we've got to rethink that. So that's in the paper we talk about that. The other thing is that so many of the models that we mostly rely on to think about the effects of climate damages were mostly developed to help people understand what climate damages could look like, and what they could cost, and so they're not actually designed to help us understand some of these questions we're talking about here in the macroeconomic context. One of the things many of them do is as they are trying to model what it would look to move to clean energy, is that they assume today we're using fossil fuels.

                                           Tomorrow and someday in the future we've moved to clean energy, and there's a transition that happens in between, but that's not really a part of the model. It just goes from one to the other, and they assume a carbon tax, and private actors will all just see that higher price on things that emit carbon, and they will just very easily transition to different activities. And I think as economists, we know that in the short to medium term, that may not look quite as smooth as it does in those beautiful models, and so that's the other challenge is how do we actually think about modeling that transition in a way that is more true to what we actually think the experience might be over the next few years. So you're right about the timeframes. The damages are way off in the future, but the transition is here and now.

Mark Zandi:                     Good point.

Heather Boushey:           And while we've had energy in our macro models for a long time, everybody knows that energy prices are really important because energy is in almost everything. We're using energy to do this web web interview, right? But we haven't thought about how you transition everything in an economy from one form of energy to another, and how you think about the cost and benefits of that over time.

Mark Zandi:                     Yeah, I mean, it's a really complicated issue. We've been doing a lot of macro modeling trying to bring climate in into our global. We have a global model and trying to incorporate it, because we do a lot of work with global financial institutions that are now being required, not here in the US, but in many other parts of the world, these so-called climate stress tests where the banks need to assess the impact on their balance sheet and income statements of different climate risk scenarios, mostly so-called NGFS scenario based kind of work. So we're doing a lot of work in the area, and we know how difficult this is, and how complicated it is. So with that as kind of a preface, if you could have one thing or maybe two, or maybe even three that would help you in your work trying to translate all of this into what it means for the economy and the budget, what would that one thing be? What would you want?

Heather Boushey:           Oh, the thing I want the most is I want the brilliant modelers that are doing all that work, all of those [inaudible 00:49:57].

Mark Zandi:                     That rules me out right away.

Heather Boushey:           Oh, no.

Mark Zandi:                     [inaudible 00:50:03]. Okay.

Heather Boushey:           All over the world who have developed these models, I want them to model what it looks like to use policy tools that are not a carbon tax?

Mark Zandi:                     Ah okay.

Heather Boushey:           So how does it look like if we use subsidies?

Mark Zandi:                     I see.

Heather Boushey:           If we use different tax incentives, if we use regulations, like how do we model that? I mean, that is really thorny. It's complicated. There's actually a new project started up by the OECD, the Organization for Economic Cooperation and Development on inclusive carbon mitigation approaches where they are trying to help different countries all over the world understand what kinds of policies can lower emissions and what that looks, so they can compare regimes across countries. And here too, we've got all these countries. They're like, "Well, I don't know. Does this policy reduce emissions?" And you look at the models, and that isn't what people have been focused on. So I think there is just a really exciting opportunity for modelers to get out there, and grab this by the horn, and do it as quickly as possible. So if I could wave my magic wand, I would have a lot of people focused on that right now.

Mark Zandi:                     That's good to hear. Yeah. In Europe, the Europeans are further down the path here than we are in terms of trying to figure out how to mitigate climate risk, and a lot of different kinds of policies have been put in place. So we are actually doing a lot of modeling in Europe to try to capture these different policy approaches to addressing climate risk. Well, this I think is really critical, kind of tying this back to your work on income, wealth, and wealth inequality. This is really critical, right? Because we've done some work where we've looked at geographies, look at the climate risk of those geographies down to a zip code or block level, and what you find.... And we create scores of climate risk for these different geographies based on how prone these areas are to hurricanes, or flooding, or sea level rise, or whatever it may be.

                                           And if you look at those scores, and then you look at the income distribution, like on the median incomes in those geographies block groups, you quickly see that the areas that are most at risk from climate change are the most vulnerable communities in our country, the lowest income communities across the country. So this is really critical, not only to broader economic growth, but very, very important to addressing this pernicious problem we have with income and wealth inequality.

Heather Boushey:           Well, there's that on the physical damages side, 100%, and then on the transition side, a lot of what we need to do is to change the things that we use, the way we power our homes, the way we power transportation, and there's some ways that this can be very distributionally neutral, like if local communities are investing in electric school buses or something, that can have a really positive effect on distribution. One of the best things about electric vehicles is that they don't smell, and they're not noisy. It's going to be a really incredible world in the next few years when we get these stinky, noisy vehicles off the street. It's going to be fantastic.

Mark Zandi:                     I mean, it's actually a little unnerving the first time you go into one, you go. Is it on? Is it on? [inaudible 00:53:34]

Heather Boushey:           Yeah, is it on? Well, and you realize that the pedestrians... Yeah, you have to, but that means there's going to be less asthma for kids that live near highways, right? That school bus won't be spewing out toxic diesel fumes at little kids. So there'll be some distributional effects there, but on the other hand, if you think about the ability of higher income families to afford solar panels on their roofs or to afford to buy... Who buys new cars? Higher income families. Those families are going to be able to adopt these new technologies faster, and that'll create some distributional questions.

                                           It's also the case that the more you get higher income families adopting these solar panels, they're going to be using less grid, less energy from the grid, and so then there's real questions we need to rethink about how we calculate the pay fors for electricity. Who pays for the grid if a lot of wealthier people are getting the net meeting, that they're metering, they're getting these benefits back from power that they're giving? So there's a lot of real thorny sort of microeconomic questions that'll come out in the transition as well that have significant distributional implications.

Mark Zandi:                     Absolutely. Well, we're at time, and I know you've got a lot going on, so I don't want to abuse this opportunity. So I want to thank you for participating. I was trying to think of one more unemployment rate question to ask you. The real question I want to ask you, and you have to be right here, is what is the unemployment rate going to be a year from now? That's the key question.

Heather Boushey:           That's hard.

Mark Zandi:                     Can you tell me that? That's hard. That's hard.

Heather Boushey:           Yeah, I wish I could.

Mark Zandi:                     I just can't look that up for you. Yeah.

Heather Boushey:           No, can't look that up. Ceci Rouse just stepped down from being chair, and the team gave her a cloudy crystal ball on her way out because we all walked around saying, "All right, crystal balls are cloudy," but here's what I hope for the American people. I hope that we can maintain this recovery. I hope that we don't do anything fool hearty that causes chaos and catastrophe across the economy, like allowing the nation to move past this debt ceiling and default on the debts that we owe. So I think hoping that Republicans can come to the table and really find a path through that. Those are going to be the key elements to keeping that unemployment rate down.

Mark Zandi:                     Excellent. On that note, no catastrophes. I'm all for it. Count me on that one. Thank you so much, Heather. It was really a pleasure honor for you joining us on the podcast. And to the dear listener, I hope you enjoyed this, and we'll be back on Friday. I don't know if Cris or Marisa will be here, but I will be come hell or high water. Cris, I've not missed a podcast in two years, and I don't plan to miss one for the next two.

Cris Lafakis:                      Amazing.

Mark Zandi:                     So with that, thank you so much. Take care now.