 wherever you are, yes. So they used to say, yes. And I'm so pleased that today we have three amazing economists to talk about where the US economy is and may go in the near future. We're very fortunate to have Brad DeLong here, visiting us from the University of California, Berkeley, and bringing California weather with him, which we appreciate. Professor DeLong served as Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995. And since then, he's been a professor of economics at the University of California, Berkeley, and is a renowned economic historian and macroeconomist. Among many other things, his academic work has helped to explain why financial market prices may deviate from fundamental values, why the Marshall Plan mattered for post-war Europe, and relevant to us today, why policymakers' memories of the Great Depression were in part responsible for high inflation in the 1970s. Professor DeLong also recently published an amazing book on 20th century economic history. It's not today's topic, but if you're interested, and you should be, he'll be speaking about his book Tomorrow over in Lorch Hall's Foster Library at 2.30 PM. Betsy Stevenson and Justin Wolffers may need less introduction to this crowd, since we're incredibly fortunate to have both of them on the faculty here. Professor Stevenson has both done extensive academic work on the labor market and has served in high-ranking economic policy positions as a member of the Council of Economic Advisers and Chief Economist at the Department of Labor. Among many other topics, Professor Wolffers has made large contributions to our understanding of unemployment in Europe and relevant to today our understanding of how people form inflation expectations. Together, Professor Stevenson and Wolffers have written a fantastic, I know because I teach it, introductory economics textbook. So with that introduction, we will get started. Perhaps it would make sense to first go around and say a couple minutes about what we think about the current inflation situation. Do you want to start, Brad? Well, I'm very tempted to say that we had a brief outburst of inflation associated with the reopening of the economy from its plague depression and associated with the supply side consequences of Vladimir Putin's attack on Ukraine. But that has passed through the economy and is now receding. And the US economy is now very, very close to achieving what we would think of as a very soft landing. That is, inflation comes down back to normal, but unemployment does not go up in the process. And that we really should not be surprised that this happens. That is, after all, we have had, depending on how you want to count, five or six previous outbursts of inflation in the United States over the course of the 20th century, one associated with World War I, one associated with World War II. The World War II one, brought under control at the moment by price controls. The World War I one, brought under control by the ending of the war, but also by very large raises in interest rates by the then brand new Federal Reserve. Milton Friedman said the increase in interest rates was A, too late, they waited too long, and B, then they moved much too far and much too fast and created a very large and unnecessary depression as a result. But the other two things, the things that happened in the 1940s as the economy rebalanced itself from a wartime to a postwar configuration as military spending shrank from 30% of national income to three, that kind of rebalancing and shift in aggregate demand created lots of bottlenecks and lots of sectoral allocation and a one year burst of inflation, after which inflation went back down without the Federal Reserve doing a thing. In fact, the Federal Reserve did not think it could do a thing. The Federal Reserve was interested then in making sure the price of government bonds stayed high, so it did not want to do anything. And then we did that in reverse in 1951 with the coming of the Korean War and the recognition the Cold War was going to be a permanent thing. We turned around and we raised spending on national defense from 3% of national income back to 10%, not 30%, but still a lot. And once again, we had a one year burst of inflation followed by a return to normal. It now looks like we've dealt with the two reopening, with the reopening shock after the plague and with the supply shocks of the attack in Ukraine in much the same way in that inflation has gone up for a while to grease the sectoral reallocations and to make everyone aware of where there are bottlenecks and thus where there's money to be made by rooting around them. But now it looks very much like things are coming back to normal. And if this does not look like what a soft landing looks like, what would a soft landing look like? Great. Great, well thank you. And thanks everybody for coming to get some macroeconomics with your lunch. I know that there is a wide range of knowledge of economics in this room. Start all the way from people who have PhDs in macroeconomics in the audience and people who've never taken a macro class. So I want to actually just start by reminding everybody what happens to put some context behind what Brad was saying, because Brad and I don't really differ that much in our views, so I can't get any differentiation there. But when we're talking about those bottlenecks that happened early on, how we got inflation was demand recovered before supply. So that meant people wanted to buy a lot of things and there weren't a lot of things available. And when you have demand exceeding supply, eyes have all taken micro, you know what happens. We get shortages. How does the market clear shortages? Prices go up. So that's how we ended up in this kind of inflationary situation. We had this fast recovery of demand. Why did we have a fast recovery of demand? Because governments around the globe tried to prevent suffering from the pandemic by making sure people didn't lose their homes, that they could keep eating, that they could put food on the table. And that cash helped families enormously. It's kind of remarkable how little suffering from economic harm occurred during the pandemic. There's a lot of suffering from the pandemic itself, but not as much from economic harm. And that's because government, both Republicans and Democrats in the United States and governments in other countries help people out with cash assistance. And what we saw was household balance sheets swell. What do I mean by that? People were not really sure what to do in the early stages of the pandemic, so they saved a lot of the extra money they were getting from the government. They saved money that they were earning regularly. They were not sure what was going to happen and that excess savings has fueled consumer demand. High consumer demand has been both a godsend and a curse. The godsend is everybody's felt confident enough to be able to go out and buy the things they need. That's great. The curse is that it's been bigger than the sellers have been able to match. And we've seen things like food prices going up, and then we've seen prices of goods. Cars went way up when people couldn't get cars. And then we see on top of this, Russia invades Ukraine and we get energy price shortages. And so these things are all interact. As Brad explained, many of those things have now started to unwind. The supply chain problems are pretty much done. We're seeing the stuff you buy, stuff you can hold in your hand, we don't really have much inflation left in that. So the open question is what kind of inflation will we have in services? I might be a little less bullish than Brad that that is completely resolved and we're done, inflation's over, because I think that that opens up the question of how much bargaining power do workers really have right now to negotiate big wage increases in the service industry? And in the service industry, wages can be 80% of the costs. So if you gotta give a 10, 20% increase in wages to your workers, they might deserve that, but it's hard to do that if you don't have big margins without raising your prices. So I think there is still some inflation to come in services and we don't really know how much that's going to be. And that's why there's this open question of does the Fed need to raise rates more? Do they, are we good where we're at? Is it gonna continue to come down? I'll draw the connection between why are so many workers striking and why do we not know what the Fed's gonna do? We shouldn't see striking workers unless we have a mismatch of information about how much bargaining power workers have. If we all know exactly how much bargaining power workers have, they should reach their agreement and not strike because striking's just costless. They're striking because there's a lot of ambiguity. How much power do they really have? The workers think they have more than the employers seem to think they have. That's the open question the Fed has as well, how tight are the labor markets? How much bargaining power do workers have? How high might wages go? And I think that's where our uncertainty sits. Let me, my job here is to try and shut some disagreement between these guys. So before I go to Josh, I wanna just highlight where they agree and disagree. So Paul Krugman wrote this week, we beat inflation. So I wanna one sentence answer from Brad, then Betsy, before we go to Josh, are we there yet, Brad? Unless some additional chaos monkeys appear in our economy, we're there. However, there've been an awful lot of chaos monkeys since the start of 2020 in the economy and there's every prospect that some more may wake up. So if nothing goes wrong, we're there, but that's not really a terribly good answer, is it? Excellent use of semi-colons, Brad. All right, Betsy. Things always happen, there's still some uncertainty. I'm a superstitious person. I don't wanna prematurely declare a mission accomplished because I wanna see the mission get accomplished. So we can't take our eye off the ball yet, but so far it's looking pretty darn good. And Josh, are we there yet? And can you, why? I think we might be there, but I'm more nervous than maybe anyone else sitting up here. I do wanna start with a large caveat, which is unlike everyone else sitting up here, I was totally wrong about inflation. So a year ago, I predicted that in order for inflation to come down, the unemployment rate would have to rise significantly. That now looks 100% wrong. So that is a caveat for everything I'm going to say. That said, I do think that we may not have seen the last of high inflation and my worries are both short-term and medium-term and I'd love to hear more of what both Brad and Betsy think about these. In the short-term, I do worry, maybe here I don't differ substantially from Betsy, about wage growth being too strong. I see strikes right now as sort of not a new, unexpected shock hitting the economy, but rather exactly what one would expect given the large inflation that we've had eroding real wages and given the very strong labor market that gives labor more bargaining power. So I think it would be quite wrong for the Fed to somehow say the strikes were a surprise if we didn't know that kind of thing would happen. I think rather the strikes are exactly what one would expect. Yeah, but if employers expect it, they shouldn't be striking. They should just be striking better deals before the strike happens. Well, people have trouble with these things. It's not so easy. I don't know. You know more about that than I do. Just to give some context there, the theory Betsy's talking about is the same theory that says couples should never fight. You know that you'll wake up and forgive each other in the morning, so why bother having to fight this evening? That's how we live our life. Yes. Yes. But I would also say that log-term by worries are that it feels to me like our politics don't look like the sort of politics that have generally been consistent with low inflation, that one way the inflation ended in the 1970s, at least the way I understand it, is that Jimmy Carter was willing to lose an election in order to conquer inflation. It's not clear to me that either political party right now would be willing to make that sort of calculation given that elections now feel like they have existential stakes attached to them. That's an environment in which I'm not sure that we are destined for consistent 2% inflation. I mean, I think the argument for Josh and also the argument for a strike is that no one understands how tight the labor market is and thus how much bargaining power different labor and management sides have on it. And if no one's certain how much bargaining power there is, people are definitely gonna wanna test it and see because you can't reach agreement, but you can't reach a consensus where there really is no information. That's exactly what I think. I mean, we look at the, it has been standard for my entire career to say we can just look at the unemployment rate, which is on the vertical axis of this graph behind you, and that tells you how tight the labor market is because there's a nice stable relationship between unemployment, which is workers looking for jobs, and the other side of the labor market, which is vacancies, which is jobs looking for workers. This thing called the beverage curve. After 1940s, some British social economists and welfare state originator, William Beverage. The idea was the economy would move back and forth along and you could look at either the unemployment rate or the vacancy rate, and that would tell you, either looking at either one, it would be good enough to tell you the state of the labor market. And then after the fourth quarter of 2000, or the fourth starting in the fourth quarter of 2009, the beverage curve began wandering all over the graph in a very unhappy and inconsistent way leading to large fights among macroeconomists in the 2010s about just how tight the labor market is, and then things going totally haywire with the COVID plague coming around. In the past, you know, say, and the March of 2022, right? We had an unemployment rate of 4%, the same as we'd had in the last month of 2000, but you know, my longtime friend, patron and co-author Larry Summers was saying look at the vacancy rate, you know, it's not the 3.7% vacancy rate of December 2000, the vacancy rate is up there at 7.5%. This is an economy that's about to explode with wage inflationary pressure, and there's no way to get that wage inflationary pressure off without a substantial rise in the unemployment rate. Now, Larry was half right with the respect that there being inflationary pressures, they were there and he certainly has me beat in terms of seeing them come. But so far, Larry's been completely wrong because his vacancies have declined, unemployment has not gone up, and this thing we were confident had at least some slope has had no slope at all. And this confusion about what's going on gives Josh forced his argument. I was just gonna add, I think the thing that Larry was not right about is the vacancy rate is not what he was right about. He was right that there was inflationary pressure, but we didn't see that inflationary pressure coming from the labor market. We have not seen wages drive inflation really much at all. I think that the problem with the vacancy rate is how do you interpret it in a world in which everybody's changing jobs and we have a surge of dynamism in the labor market that we haven't seen ever maybe or in decades? Or since as you pointed out maybe going back to end of World War II, where now everybody has to change jobs because they're not making things for the war anymore but they're gonna make things for other purposes, we really changed our consumption habits with the pandemic. We did, we did, and I'm sorry I don't have in all these graphs one showing the enormous increase in goods consumption and the tremendous fall in in-person services employment as a result of the plague. We have to pull a lot of people into new jobs, the new types of jobs that were very different from the jobs they'd had before the plague. And you gotta think that's something that's going to cause shortages and bottlenecks all over the place and if you let the market system deal with it you're going to have a bunch of prices go up. And since prices in our economy rarely go down, bunch of prices go up, no prices go down, you're gonna have inflation. But this inflation is a good thing. We had an unemployment rate that stuck itself at nearly 10% for years and years and years after the 2010 Nader of the business cycle. We avoided that this time. It's very much like complaining when you've actually managed to rejoin the highway at speed in a very short 200 yards that you've left some rubber on the road. In my mind, complaining about inflation is like complaining that, well gee, we should have gone more slowly, not left any rubber on the road and then gotten ourselves seriously rear-ended as the economy did in the first half of the 2010s. Let me try and put a little bit of structure around that. So you're both describing one, inflation's fallen dramatically from 9% to 3%. And two, this has occurred at a period in which unemployment has bumped along within half a point of its 50 year low. So it's been somewhere between three and a half and 4% for a year and a half now. So economists are not used to that. We normally think that if unemployment's low inflation is high, it may even rise further. So some call this the immaculate disinflation. So I'm gonna come back to you, Josh. What's your story? What's your explanation? What the hell is going on with the immaculate disinflation? And then I also ask you to use the words demand and supply as part of your answer. Good question and a somewhat difficult one. I think related to what Brad was saying, I think that the labor market has weakened without the unemployment rate rising as much as one would have thought. So I would partly say that in some sense, the normal story is right. Just we were wrong to think that the unemployment rate was necessarily the key indicator. And then also I think I underrated the extent to which inflation was really explained by specific supply side factors and that as those have diminished in the aftermath of the beginning of the Ukraine war, inflation has come down. So what you didn't mention, it's how fast labor supply has recovered. And so I think people did not expect labor supply to recover quite as quickly. So you can keep unemployment low as long as there are a flood of workers coming back into the labor market to take the jobs that employers want without sparing inflation. And that's not what we normally see. And there's a couple reasons why we don't normally see that. One is we had a lot of foreign-born workers leave during the pandemic. And it turns out they came back as things opened back up and they came back quite quickly. And that gave us a surge of workers. It also is the case that women dropped out of the labor force in droves. I mean, we were like at 1980s, female labor force participation rates. And everybody, including myself was like, did we just set women back for decades? But they came back in droves and to put a little human face on this, I'll tell you a story. I was at my kid's like parent teacher conference night and one of my daughter's teachers took me aside and said, I wanna tell you that in, as the, when the schools started opening up when the fall of, now all my days are mixed up, I guess the fall of 2020, our private school was trying to get kids back and her kids were in a public school and she couldn't figure out how to teach and have her kids and her kids were too young to come to the school she taught at, so she resigned. And she said, I cried on the way home because I love teaching and I didn't wanna quit my job and I didn't wanna be a stay-at-home mom. And I turned on the radio and you said, on the radio, women are having to leave to look after their kids but they're committed to the labor force and they're gonna come back. And she said, that gave me so much comfort and you know what, you were right. A year later, when I could send my kids back to school, I reapplied, I got my job back, I'm teaching again. And I think that story ended up happening across the country with women coming back. Primage female labor force participation is at a historic high right now. So we saw the fastest recovery of women's labor supply and I think that's how we got this, what do you call it, immaculate disinflation. We aren't historically used to workers coming back that quickly. Brad, I'm gonna make it harder for you. So the immaculate disinflation is why the heck did inflation come down so quickly and at all? There was another debate that we had through much of the first part of the 2020s which is transitory. Inflation is transitory, inflation isn't transitory. So I want you to use the words demand, supply and transitory. I would say that as we reopen in 2021, as we begin the vaccine rollout across the country and as people want to come back to work and people want to start consuming in-person services again and do things like fly about on airplanes. I was surprised that demand recovered that much faster than supply. That I thought they would recover more or less the same, the same speed that as people wanted to shift to more consumption of in-person services, people also would want to do more of the going to work point and people did by and large want to do more of the going to work point but rejiggering the economy to avoid bottlenecks turned out to be much, much harder than we thought it was going to be and why is I think understudied. Like for example, let me drag on your local industry, the American automobile industry because here I am in greater Detroit, so why not make myself unpleasant by dragging on your major industry? Successful and productive as it had been. Auto companies gave up their places in the line for legacy computer chips in 2020 during the plague depression. Computer chips that cost maybe $100 per car but are essential for building a $40,000 car. They gave up their place in line and then in 2021 when the economy reopened, the auto companies went to the chip makers and said we would like our place in line back and the chip makers said no, we have people who stuck with us there ahead of us in line for these legacy chips. We're producing flat out but we can't satisfy your demand for the next six months. Now at that point, the auto companies could have done two things. They could have gone to the chip makers and said all right, who's in front of us in line? We'll buy their places. We'll spend them, it's a $40,000 car, it's a $100 chip. We'll pay an extra 500 bucks to get our place in the chip line back. We don't know what they want them for but it's certainly less valuable than a key input for a $40,000 car. And they could have done that. Or they could have said, oh, all of us cut our chip orders. All of us now can't break our production commitments because we're all limited by chips. We now have a very nice oligopoly cartel going on. As long as none of us visibly breaks the line by offering to pay more for legacy chips, we all know each know how much our competitors can produce and so we all can raise our prices and get some of those fabulous profits which shareholders then rewarded auto companies CEOs by grating them 40% pay increases. Only one, only one American auto executive did otherwise. Elon Musk, who I find to be a very nasty and unpleasant person. But in 2021 Musk said we are going to make Teslas and we are going to make as many Teslas as we can and if we can't find our chips, we are going to buy our chips and if we can't buy our chips, I am going to make our programmers work 24 hours a day to reprogram the software. And so lo and behold, look at what the stock market now thinks of Teslas. These will be the American legacy auto manufacturers in terms of its assessment of which of these companies actually has its act together to be a powerful, productive and profit making institution for the next 25 years. And Elon Musk has managed to win that one. So I think that part of the bottlenecks we emerge, a great deal of it was simply reconfiguring the economy for a new, more goods heavy, more deliverator heavy, less in-person services heavy thing turned out to be a much harder thing to happen. But there also was a degree of what my left-wing friends called readflation going, that people that you always, when you have oligopolies, the keeping it from falling into a tacit cartel is not an easy thing to do and this provided a big opportunity. And so I think there is some truth in there. And then you had the attack on Ukraine, which was not nearly as bad in its long-term consequences as we thought. We thought we would have Germany freeze and we thought we would have mass famine in Lagos and Cairo as a result. And we avoided those, but we did get a bunch of inflation in early 2022 as a result. Fortunately though, it passed. And at least if you look at the producer price index, which is the index that covers things that come significantly in advance in the production chain process of the consumer price index. So if you look at the producer price index, well we really haven't had any inflation worth talking about in the PPI since April of 2022. I wanna pan back to sort of the medium run now. The thing that's striking is, I think unemployment today is 3.8% it hit 3.4% a couple of months ago. These are rates when I think any of us went to graduate school. We would have been assured by our macroeconomics professors that the US economy cannot possibly sustain. And we are sustaining it during disinflation. Now, our estimates of how much we can push unemployment down have gone from five and a half to five to four and a half to four to three and a half. How low can we go? Well, 1993 when I headed off to the treasury, my colleague David Romer at Berkeley told me make sure they don't try to push unemployment below six. I wanna give a labor economist answer to this, which is you just gave a unemployment rate. Don't let it go below six. You said 3.8. The reality is that college graduates usually have an unemployment rate of around 2%. And people without a college degree, particularly minorities without a college degree or any college at all, often have unemployment rates that are closer to eight to 10%. Well, mechanically, more people are going to school. And so we're gonna get those lower unemployment rates if we think there's something about the matching process and frictional unemployment that makes highly educated workers different, you should see the world should change because we're gonna aggregate up differently. We're also hopefully fighting the kind of discrimination that has kept the unemployment rate of minority workers much higher than anybody else. And so when you ask what is a sustainable unemployment rate, I think you gotta dig into it and say, why is it that we ever accepted the idea that our sustainable rate was 2% for white college graduates and 10% for black high school graduates? And we have to answer that question before we can answer how low can it really go and be sustainable. Josh, you're one of my favorite economic historians. You've studied this, how low can we go? I don't know. I'm struck by the optimism of Betsy's comment. I guess I would be a little more pessimistic. I would say unemployment rates don't look like there's any trend to them even though the number of college educated workers and discrimination has a trend. So the unemployment rate in the 1920s looks very much like the unemployment rate today, even though almost nobody has a college degree and there's much more discrimination. So I'm less sure that we can expect. But it's kind of weird because it's not only the workers, but the types of jobs. So if we think the unemployment rate that we need to not have inflation is really about frictional unemployment, why would we think frictional unemployment is the same across all workers and across all industries and across all occupations? When the matching function's clearly going to be different across industries and workers and over time with technology. It is a mystery. I learned much about economic history from Brad. I don't know if you have a... That's the mysterious how constant it is across time. Well, except all of a sudden it isn't, right? The people were, Robert Solo and Paul Samuelson were very, very confident that frictional unemployment rate back in 1963 was 4% or maybe 3.5%. David Romer was very confident come 1993 that frictional unemployment was 6%. I remember back in 1981, back when I was 21 years old and I guess the furthest right I ever was in my life and a very strong believer in neoclassical economics. And one day I ran into a then not so young sociologist, not old then, but not so young, named Mark Granavetter, who proceeded to lecture me for 20 minutes about how I thought the labor market consisted of people wandering around and looking at job boards and deciding, is it worth taking this job at this wage, given what's being offered? And then employers saying, what's the likely flow of people who are going to be looking at the kind of board of jobs like the board of your sublets in the Harvard Housing Office and saying, what should I offer? And so forth. And actually that's not the way it works at all. It's you know a guy who knows a guy who knows a job. And because you, it's not someone you know well, because if you know them well, you already know everything. They know about what the jobs are. It's your weak ties. It's the people you do not know well, but who nevertheless see you enough and are confident enough and think that if they recommend you for a job, it won't blow up in their face as you steal the payroll and run off. It's that kind of social network phenomenon that determines the unemployment rate and the level of frictional unemployment. And to say it's an economic wage offer and a matching function stuff is to completely mistake the process and not to properly consider that what we need is not economists with their matching functions and their utility functions, but instead we need a network sociology of the strength of weak ties and a quantitative network sociology of the strength of weak ties, which I and my colleagues are gonna construct over the next 20 years and we're gonna show you. And unfortunately Mark and company have not yet managed to construct a quantitative sociology of the network of the network strength of weak ties. And this is a very bad thing because I think by and large Mark was right and I was wrong back in 1981 and we won't make much progress until we get the sociologists actually succeeding in their tasks. But we do think that weak ties have gotten more diverse and expanded through technology. So things like LinkedIn really do matter. And things like being in more diverse social circles matter because even though there's all this online job search, it's still at the end of the day, the most likely way you are to get a job is to know somebody who knows somebody who knows somebody. I wanna come back to, I'm struck by, actually can I do a light, let's do a lightning round because I wanna move from purely economics to politics. So the lightning round is, can I have a set of economic forecasts for November 2024? Brad? I'd say the economy is gonna be growing at 2% per year and the inflation rate, the core inflation rate will probably be something like 2.5 to 3% looking back over the previous 12 months. And the unemployment rate? I think it'll be close to 4%. And if I plug that into my fair model, these standard equations that turn all of these macro data into forecasts, I think it's gonna tell me that, that means the incumbent party gets elected with a two-party vote share of about 53%. Except the fair model is grossly overfitted. I agree completely. Betsy, election day, what's it look like? I actually have exactly like Brad's outlook. I think we see growth, but it's slowing. I might even put it closer to like one and a half. I think we have unemployment that has not exceeded 4% and I think we have inflation that's continuing to come down but hasn't hit the Fed's target. And so if I'm writing Republican talking points, I say inflation has slowly drifted up for the last year and a half. Sorry, unemployment has slowly drifted up for the last year and a half. Inflation remains out of control and well above the Fed's target. The economy is slowing and we might have a recession just around the corner. That sounds like pretty good talking going to the Republicans. Yeah, I might apply for a job. Yeah, our differences here are small. I think I agree on the growth and unemployment rate parts of what Betsy and Brad said. I think I would bet on inflation being more likely close to 3% than 2.5%, but that is not a strongly held view. So I'm gonna sound the most optimistic here. I've got unemployment at 3.5%. I've got inflation down to 2%. I've got inequality having fallen for the past four years. And so the economy is the biggest tailwind of any election in my lifetime. So can I actually tell you my concern is even if you're right, I think that it doesn't scoot the Democrats back into power easily. Which leads me to the next question. Can I just add one caveat to the general optimism here? I think in some ways the aggregate data hide some of the pain in the economy. That even if real wages, the wages divided by the price level have broadly not fallen a lot over the past few years indeed have been growing recently. That hides a lot of distributional changes and you're absolutely right, Justin, that on average inequality has fallen. But I think that a problem for politics especially is that the losers feel their losses perhaps more than the winners feel their gains. And there's a lot of people out there, the price level now is about 20% higher than it was four years ago in 2019. There's a lot of people out there who have jobs, who have not gotten 20% raises. And in particular some employees who I think we really care about, and this is a real problem not just for them, but for the economy, in particular government workers. So I was looking up the wages of public sector teachers at elementary high school. Do you mean University of Michigan professors? No, no, I'm talking about K through 12. At K through 12 teachers their real wages are down 5% over the past few years. And that's a big deal, that's teachers who are already in my view not paid very much, who now don't have that vacation that they've been accustomed to taking or can't buy the car they wanted to buy. Can I add a little bit more structure around? I just wanna show up on the question and then we'll come to your bets. Professor Stevenson. So I get five press calls a week on this, you may as well. If the economy is doing so well, why are people so grumpy? And there are a gajillion surveys showing consumer sentiment is at very, very low levels. I saw a survey the other day in which 92% of registered Republicans said that they believed that inflation had moved in the wrong direction over the past 12 months as it fell from nine to three. So if the economy is doing so well, either why aren't people happier or why aren't they reporting they're happier? So Ayesha Roscoe MPR asked me this question even more pointedly which is if people feel the economy is bad, isn't it bad? So I think that there are two answers to this. One is like let's think about who the actual losers are and why I think this is actually a big problem for the Biden administration. You mentioned teachers unions, it's actually unionized workers across the board and the UAW is very symbolic of this because the UAW was so confident that the inflation had been beat that they took cost of living adjustments out of their contract in 2019. So they've just been hammered by inflation and that's true for most unionized workers. It is, I looked historically, I couldn't find any other period where the gap in how much the wage increases for non-unionized workers had risen compared to unionized workers was so big. So unionized workers have fallen way behind and that's why we're seeing so many big battles. It's also the case that it is people who haven't changed jobs and this is the real problem for the Biden administration. On a very long time if not ever to buy a house and that is directly a consequence of inflation. So people who own their houses and have a 3% mortgage have not been much affected by interest rates going up but people who are 30 years old are looking to buy a house that is really difficult right now and that is because of inflation. Right. I would say that the problem is that we macro economists have our ideas, our concepts and our assessment of what a well-performing economy is of something that's coming pretty close to making the economy in balance as a whole. And what we talk about is not what real people regularly think about and when they attempt to translate their views into our technical language things often go wrong. I remember being most struck by this I think was it one of the 1992 presidential debates when someone was asking President George H.W. Bush about what he was going to do with the deficit. And it became very clear from her question that she was not talking about the deficit at all but rather about the difficulty of the fact that real wages hadn't been rising and George H.W. Bush gave an answer about the deficit and she was dissatisfied and so forth. I do think there are three big areas where over the past 30 years or so where those of us who are supposed to be in charge of managing the American economy have really fallen down in terms of helping it actually deliver what people want and need. And I'd say one of them is our healthcare system with healthcare administrations serving as an enormous costly series of gatekeepers keeping people from getting the healthcare that they actually need in a timely fashion. The second has been the privatization of pensions and its impact on people's long run financial security. And the third is housing availability. And let me talk very briefly about this third because I just happened to include this slide in the back of the deck. That is from 1965 to 2000. The U.S. economy grew, the U.S. population grew, we grew from building maybe 500,000 single family houses a year on up to 900,000 over the third of a century. Then come the early 2000s, we have the great housing boom and housing bubble as Alan Greenspan tries to get the economy back to full employment after 9-11 and the dot-com bust by lowering interest rates. And we do indeed get a very nice housing boom for a while, build lots of houses for a few years. Then comes things go wrong with housing finance and derivatives and banks doing a little regulatory arbitrage footsie and the financial system crashes. And on the way down, the U.S. Treasury nationalizes Fannie Mae and Freddie Mac, the two big mortgage lenders that the government had sponsored and started. And I understand why the Treasury nationalized them, the Treasury staff had always wanted to nationalize them. The idea was they went around winky-winky saying we have a government guarantee, so you should buy our bonds for more and they took their extra money and they sped it on themselves and the Treasury thought this was unfair. And so in July of 2008, the Treasury nationalized those two and said a new system for housing finance is gonna come out real soon now. It never came out. We never proposed, we never, we always were going to redo Fannie Mae and Freddie Mac and housing finance in the next three years. But the consequences, the consequences were absolutely extraordinary because for a long time, no bank except for Wells Fargo really wanted to be in the business of making 30-year mortgages on a very, very large scale because everyone thought the housing finance system is going to change in the next five years and so this is not a business we wanna be leading into. And you can look at the housing. You can look at the great housing boom and bubble from 2000 to 2005, right? An extra 400,000 houses at the peak of the triangle. Triangle is what, five years wide, 400,000 houses times five years is 2 million, it's a triangle so it's 1 million extra houses above trend and then over the next, well gee, up until now, up until now, relative to pre-2000 trends, we have failed to build 7 million houses. So the US is now 7 million houses short of where it would normally be in large part because we never figured out how to redo the housing finance system. And right now, for a while, people could at least say we're paying a huge price but the mortgage payments are small since interest rates are low. Well, now interest rates are no longer low. And it's housing affordability which is hitting an awful lot of people hard and making them think, gee, we're not going to have the kind of life we thought we'd have. There's the fact that for every doctor, there's one person, every doctor now seems to have one full-time insurance handler on their staff to try to get the insurance company to pay who is matched by someone on the insurance company side whose job is to figure out a way not to pay the insurance claim. Plus finance, people's pensions being taken out of group hands and put into individual hands, in which case individuals face an awful lot of risk with their pension money that really should be pooled and aggregated away plus the fact that people really aren't very good at avoiding buying and selling on impulse. And when people buy and sell on impulse, there are other people like my brother willing to take the other side of the transaction. And so an awful lot of what ought to have been their pension money has piled up in my extended family conference. Those three major failures in building an economy in which it's easy for everyone to thrive are, I think, a principal source. The fact that consumer confidence is so low and to say that inflation is over or that the unemployment rate is low and jobs are still easy to get is kind of misses the point. I just wanted to follow up on what you were saying about housing and bring it back to what you said. I think it's a mistake for us to say the housing affordability issue is because of this period of inflation we just went through. I think that we've got really significant housing supply issues that Brad just went through and we got to address those housing supply issues and just sort of saying, oh, it's in the sun, unfortunately had this period of inflation we had to raise interest rates. It's in this caused a housing problem. It didn't cause a housing problem. The housing problem is a supply issue. It has certainly exacerbated it because we have a lot of people stuck in nobody wants to sell their house. If you're 65 years old and you're thinking about downsizing and you're gonna downsize and get rid of your 3% mortgage to take on a house at half the cost with a 7% mortgage, you don't get any improvements in your life so stay in the big house. That's gumming up the works. I think that will eventually work itself out but it doesn't solve the 7 million housing shortage. Yeah, no, I basically agree with that. I'm less convinced by the people being stuck argument because every person who's stuck and is not selling their house is also not buying another house, they might have. So I've not been entirely clear that that- Well, but we are hiring back the contractor who built the mother-in-law cottage behind our house to turn our basement into an office because we do feel stuck, we are stuck. So we're not on the supply of, we're not on the net supply of housing but we are on the net demand for construction work. There's a reason why ADUs are going through the roof. People are stuck and that's good, we have a way out. Just remind us what an ADU is. Accessory dwelling unit. So you're stuck in your house but you've got a big yard so everybody's lobbying their government to allow you to build a small little unit in your backyard so you can create a rental. It is actually great, it does expand housing supply. It's a good quarantine hut for my mother-in-law. No, but I- Totally agree. I'm not gonna say anything about my mother-in-law. Justin's like- No. Except I might send it to your house, Brad. Okay. Let's not go there, Justin. Okay. It's time to make you guys a little uncomfortable. So I noticed here a lot of optimism between the three of you and then a lot of giving government credit for the terrific economic outcomes we have right now. I also noticed we have a former Clinton economist, a former Obama economist and by my guess, a future Whitmer economist. I worked for the, I was a staff economist at this year. Oh, that's right. You were a former Obama economist. Very, very low. For all this optimism and excitement, the US economy now is remarkably similar to what it was in July, 2018. The unemployment rate in July, 2018 was about three and three quarters, roughly what it is now. The inflation rate in July, 2018 was 2.8%, roughly what it is right now. And so if you're excited by outcomes like that in 2023, I'm sure you were equally excited by them in 2018 and wanted to give the administration appropriate credit. So how would you give the administration credit for the economic outcomes of 2018 in a way that's consistent with your optimism in 2023? I'm gonna start with you, Josh. So 2018, so I don't remember the timeline clearly. Was that after Trump had passed his large tax cut? Yes, but just after. So that very much fits with my view that fiscal stimulus is good for the economy. It didn't give money to the people I would have loved to give money to, but it certainly meant the US government was running much larger deficits, putting a lot of money into the economy. That was expansionary. It led to lower unemployment. I don't know if credit is exactly the right word, but I suppose it is the right word. I give the Trump administration credit for having done that and that led the economy to be doing well. Well. Betsy. I hate that tax cut so much because it's put us in the fiscal situation we're in right now. I didn't mean to imply I liked the tax cut, but. Look, I don't, I think, here's the reality. I think presidents and governors get way too much credit when the economy's good and way too much blame when the economy's bad. They don't have that much control over it. The things they do tend to not have as much of a short run impact. The exception to that I think is a decision to support an economy that's cratering during the pandemic. And when I'm talking about that's the great thing government did. That's what the Trump administration kicked off. Trump was in office when the pandemic happened. It was, I have never seen Congress move so fast and a president signed a bill into law that quickly as they did when they went to pass out money when the pandemic first hit in early 2020. It was jaw dropping. You know, when we typically teach, you know, why it's so hard to use fiscal stimulus, we talk about the fact that fiscal stimulus needs to be timely and targeted and temporary. They got two of those three right. It was timely and it was reasonably targeted. It wasn't as temporary as we might've wanted and that's why we got inflation. But that was the Trump administration followed by the Biden administration. And if as a democratic economist, you need to hear me criticize a democratic administration, the stimulus package that Biden handed out where he was like, yeah, we're gonna send one more round of checks to everybody when he first got elected. That was crazy pants and Trump goaded him into that and he fell in that trap. And that is his responsibility for whatever that did to contribute to inflation. Although in hindsight, it looks like it was a tiny contribution. It was a tiny contribution. And I thought of it at the time as reasonable insurance. That is, what if people don't come back and don't want to spend at a furious rate? You know, the interest rate is still at the zero lower bound. The Federal Reserve can't do anything to get us back to full employment. If it's needed, another round of fiscal stimulus would be a good thing. It will get us back to full employment. And if it turns out to be too much, well, the Federal Reserve can deal with it by raising interest rates and keeping it from becoming an entrenched inflationary problem as it has. So I actually think it was, you know, timely targeted and appropriately temporary. For Trump in 2018, I'd say the credit he gets is that he hadn't yet managed to screw anything up. So there hadn't yet been enough time. You know, what the Trump administration was supposed to do was he wanted to fight and win a trade war against China and Mexico. And so boost America's exports to the moon. And also wanted to provide a big capital gains tax cut to boost investment in America to the moon. And neither of those things happened. You know, the Trump administration, together with its Republican, intellectual and legislative accolades, managed to construct a capital gains tax cut that provided zero net incentives for actually investing more in America, but only net incentives for extra stock buybacks. Which is a remarkable, it added to consumption a bit, but you know. I'm not saying it was good, but it was a remarkable, remarkable, the unprofessional thing. And as for the trade war, well, you know, there was a plan in 2016 for rebalancing the surplus from the US-China trade relationship more in favor of the US. You know, it required signing the Trans-Pacific Partnership and then having all 14 kind of countries of the Trans-Pacific Partnership negotiate with China as part of United Front. Trump blows up the Trans-Pacific Partnership on day one and then proceeds to launch a trade war with China. And China says, look, you've just disarmed yourself. How can you launch a trade war after you've just disarmed yourself of all your leverage? And of course it goes nowhere. And about NAFTA, well, you know, NAFTA was the worst trade deal in history for the United States, but the Canadian US, the North, the Free Trade, the CFIA, US that succeeded it is the best trade deal in the history of the United States in spite of the fact that there has been no significant changes from NAFTA except for a couple of things about the usefulness, about auto parts, which rules of origin for auto parts, which the UAW greatly loves. And you know, the UAW is the only significant beneficiary from Trump's trade wars. And that's still a small part of the economy as a whole. We macro economists tend to talk about the big picture, totals, averages, and so on. But of course, each of us are tracking the effects of the current state of the economy on particular groups. So I thought we should go there. I'm gonna start with Betsy, because I know she talks a lot about women and families. And while she's talking, I hope Brad and Josh are thinking about other particular groups that they would like to highlight. So you're asking me to comment on how I think women and families are doing right now. So I think that there's a glass half full story, which could also be a glass half empty story. So the half full part is that women came back to work and their labor force participation, both of mothers and non-mothers, primage women has returned and exceeded where it was in the past. And I think that this really matches an argument that I have been making, which is that in the 21st century, we didn't see a lot of growth in women's labor force participation, but we saw deepening of their participation. Their experience grew, their commitment, their tenure with their employer. And so they weren't as fickle about their labor force attachment as they might have been if we had seen the same thing in 1999, even though female labor force participation was a little bit higher in 1999 than it was in 2019. And so I think that commitment has held strong, but families are still really struggling with childcare. And I don't think I've ever been quite so despondent about how little we were able to accomplish in really bread and butter kitchen table issues for families. We didn't get a single day of federal paid sick leave. That means that a mom giving birth can't take a day off to get the baby out of her paid, which is really crazy. It also means that you're not guaranteed the right to stay home paid when you have COVID, which is really crazy. We don't have any paid annual leave in the United States. You know, every other country, you get a right to vacation, every other advanced economy. Americans find that crazy. And I'll tell you, we should stop finding that crazy that other countries get that because it's good for our mental health. And I think families are struggling with a mental health crisis where we're ill-equipped to deal with it in terms of the supply of healthcare professionals who can provide the treatment that families need. And we are about to go off a childcare cliff with federal funding drying up for childcare. So not only did we not get the sort of federal early childhood universal preschool programs that we should have gotten or even help for low-income families, but we're losing the pandemic support we got and we don't really know what's gonna happen because we don't know how families can afford to pay the extra costs if daycare centers are gonna be able to survive that. So I think families are in a precarious place. And I think the answer to that question is why people don't feel like the economy is great. They have jobs, even when the jobs are being well paid, they have this precarious life where they don't know if they are gonna be able to go to work because maybe their kids sick. They don't know what they're gonna do if they can't go to work because they're not gonna get paid. They don't, they're worried about things that Brad already mentioned, health insurance and pensions. So I think families are not in a great place and I worry about the politics that meant that at a time when these things were more salient than they had ever been, we got not one single thing done for families. Josh? I'll just highlight again what I'd mentioned before that I think a lot of workers' wages have not kept up with inflation and that this is a particular problem in the government sector and things like public education. And it's both often a real problem for those workers who may now have more trouble, in some cases perhaps literally putting food on the table. But I also think it's a problem for the economy overall that the economy really relies on having competent government that works well, a good education system, but not just that. The fact that we're now paying in many cases, our government workers much less than we were five years ago is going to make it more harder to recruit good workers, harder to retain good workers. I think that's something we should be concerned about. A pitch for paying government workers is always going to be popular at policy school. While you're talking about real wages there, Josh, I do want to add that if you look across groups who's gotten real wage gains over the past three years, it's the very rich who've actually gotten nothing. In fact, their real wages have fallen. Median wages are barely keeping pace, but it's actually those at the bottom ends, low paid workers, particularly former hospitality workers who've seen quite substantial rises in real wages. This is the first time in my lifetime as a labor economist I've seen inequality fall. It's been an inexorable fact of American life at rises. Brad, anything you want to add on distribution? Well, let me focus on two groups. Both of them are relatively small. The first of which is people who forget kidney stones, which is a small part of the economy and having a kidney stone if you've never had one, don't get one. It's not at all life-threatening, but it's extremely, extremely painful. I find myself thinking of a kidney stone patient who wound up in UCSF hospital, very good hospital in San Francisco. Problem was that while they were in the hospital, they were twice transferred from one unit of the hospital to another. And both times they were woken up at 12.45 a.m. for the transfer to take place from bed to bed in order to disrupting their sleep totally, which is the last thing you need when you're sick, simply because we've allowed the market to intrude where it should not. And if you're in a unit over a lot of two days, you get to build for both days. So why not delay the transfer from 10 p.m. to 12.45 a.m. So you can collect for a second day for the next visit. The second group, as to reassure Justin, is to look at bond traders. Our bond traders are admittedly very, very overpaid in the economy, and admittedly they have seen some loss in their relative income status over the past five years, which is good. But bond traders are still extraordinarily happy and confident for them. It still seems that all is right with the world. As you can see, if you look at the premiums, that people are willing to pay for bonds that have inflation insurance built into it, as opposed to bonds that do not have inflation insurance built into it. That is the amount of inflation that people are guarding against when they require insurance against inflation in their bonds. That's been rock solid at 2.2% per year of inflation that people expect and has been so since the recovery from the plague really started, showing that these people at least are very happy with the world and very confident of the strength of the American economy, the soundness of the dollar, and so forth. Very good. I will say whenever I talk macroeconomics with these guys, it reminds me how vitally important it is and makes me wanna learn more. So let me give a quick shout out, which is if you feel the same way, don't miss Brad's sub-stack. If you're a Ford School student, don't miss Josh's class. And while you're there, you will read from Betsy's textbook. So with that, let me thank Brad DeLong, Betsy Stevenson, and Josh Hausman. Thank you. Thank all of you.