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This week the Federal Reserve announced another big interest-rate hike with full anticipation that it will cause the unemployment rate to climb. It’s the first good-for-workers economy in decades, and the Fed stands prepared to kill it, amid a national clamor over inflation. Is politics really as simple as “it’s the economy, stupid?” Or have we built a generation of conventional wisdom around a Goldilocks situation where the economy has to be juuuust so in order for consumers, voters, politicians, and the media to be happy with it? Are we responding to economic conditions as we experience them? Or are we just following the leads laid out for us by media figures and political leaders who can always point to passing problems like high gas prices, or even good problems like lots of job vacancies, and convince millions of people that things are actually bad? Economic sociologist and leader of the Groundwork Collaborative Lindsay Owens joins to discuss how helpful “it’s the economy, stupid” is when the economy is always a mess, and whether we can sustain an economy that works.

TRANSCRIPT

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Brian Beutler: Hello and welcome to Positively Dreadful. I’m your host, Brian Beutler. I’m going to give you about five seconds. Going to pause for five seconds while you think up an answer to this question. What’s the biggest cliche in politics? Obviously there’s no more to be done with this thought exercise because it’s a podcast and you’re listening to a recording. But I’m guessing a bunch of you, maybe most of you, came up with It’s the economy, stupid. I’ve been hearing that exhortation since I was a kid. I was nine or ten when James Carville adopted it as one of the mantras of Bill Clinton’s 1992 presidential campaign. It was meant, as a reminder, a kind of disciplining mechanism to prevent Clinton and his aides and surrogates from getting swept up in distractions and to make them appeal relentlessly to voters misgivings about the economy at the time. And the idea, if I had to boil it down, was that politics is easy for incumbents if they preside over good economic conditions, and it’s easy for challengers when economic conditions are bad. Political scientists look to labor market and economic growth in the quarters before elections as evidence to back up the general. It’s the economy stupid theory, and it’s a theory that we should want to be true, at least to some extent, I think. Right. It’s it’s better if politicians have some incentive to build and maintain good economies, then if politics is just a free for all, that rewards the best and loudest shouters or panderers or whatever. But the kind of fucked up thing about it is that whatever the economy happened to be during those pre-election fiscal quarters, it has mostly sucked or been kind of meh for for my entire adult life. I graduated high school into Bush v. Gore and then and then George W. Bush’s first recession. After college, the economy was propped up by a housing bubble that burst spectacularly. President Obama brought it back to a reasonably healthy place, but slowly. And then Trump managed not to wreck it for three years, but then did fully wreck it by lying about COVID 19, when he should have been leading an effort to help us brace for the impact of the pandemic. In all that time, though, demand was soft. Unemployment was at least somewhat higher than it could have been. Workers had little inherent leverage and decreasing collective bargaining power. We’ve had stock market booms and plenty of wealth, but the last time I can recall, a rising tide lifting all boats scenario was when I was a teenager during Clinton’s second term, and even in that brief run, things were pretty bubbly. More recently, Joe Biden became president, and then things got pretty weird and and they changed very fast. I think it’s safe to say that few practicing economists have lived through an era quite like this, let alone studied eras like this systematically. Basically, Congress built a big temporary safety net from scratch during the first year of the pandemic. Then Biden came in and understandably wanted to avoid the scenario he and Obama faced where they took over a wrecked economy. They didn’t push for adequate stimulus, and then we had to muddle through for for, eight years. So he passed the American Rescue Plan, which injected a ton of additional demand into the economy right away. And it did two things. First, it worked. People had money. People spent it. The labor market boomed. We have what became known as the Great Resignation, which is a just awful term to describe people being able to quit jobs they hate for new ones that pay more. We reached full employment for the first time in decades. But this also happened extremely fast and at a time when supply wasn’t able to keep up, and worse, was constrained from catching up by the fact that the pandemic just isn’t over. And so we got inflation, jobs booming, wages growing, but prices also rising for many people faster than their incomes could keep up. And that’s all before Russia invaded Ukraine and gas prices spiked, which made the latter problems worse. And for months that the thing national media cared about more than anything was this one, two, of inflation and gas prices. Right? Every night, primetime TV news broadcasting images of the most expensive gas station in town. And people were really upset. Now, more recently, something else interesting has happened. Gas prices have gone back down again, but prices overall haven’t fallen because other sectors continue to experience inflation, except without this sort of easy to sensationalize piece of the inflation puzzle, the gas prices piece. Media has mostly moved on and so too have people. Inflation has receded in many polls as the top issue voters say they care about. But just because the public is more at peace with things now than they were back in May doesn’t mean the Federal Reserve is. On Wednesday, just yesterday, as I record this, the Fed announced another big 0.75% interest rate hike and they anticipate it and future rate hikes causing the unemployment rate to climb. So that’s a very long backdrop for this episode. The first good for workers economy in my lifetime. And the Fed stands prepared to kill it. Workers with leverage over their bosses for the first time in a generation. And people are still unhappy. Which to me raises a pretty fundamental question is it really the economy, stupid? What use is that heuristic if it’s a Goldilocks situation where the economy has to be just so in order for people to be happy with it? Are we, as consumers and voters really responding to abstract economic conditions as we experience them in our day to day lives? Or are we following leads laid out for us by media figures and political leaders who can always point to some passing problem like high gas prices or even a good problem like lots of job vacancies, and convince millions of people that things are actually bad. Are there better ways to think about and respond to an economy running too hot so we don’t make it run too cold? Or are we doomed to have all the good and overdo things about the economy we’re living in now, stripped away to ameliorate the bad aspects of it? I guess the overarching question is can the Goldilocks economy of full employment and stable prices really persist sustainably, even in a non-pandemic environment? Or do the economies of the last 20 years, the sort of stagnant, slow growth ones represent some kind of political equilibrium? Those are the questions we had in mind when we asked Lindsay Owens to join us this week. She’s an economic sociologist who’s advised some of the country’s best known progressive leaders and now leads the Groundwork Collaborative, which exists to think through these questions of how America’s vast wealth and opportunity can be shared more equitably without losing the political fights surrounding it. So, Lindsay Owens, welcome to Positively Dreadful.

Lindsay Owens: Thanks so much for having me. Really exciting to be here.

Brian Beutler: So how much of that did I get wrong?

Lindsay Owens: I mean, I think you I give you an A, A-plus. [laughter] I think you really nailed it.

Brian Beutler: Yes!

Lindsay Owens: Yeah, absolutely. I mean, I really enjoyed hearing you sort of lay out that that multidecade characterization of the economy. And I think you are spot on. We have been living in many cases in an economy that has just never really hit the mark for so many families. And I think, you know, recent events aside, you know, getting those gas prices down obviously so critical. But this inflation crisis that we’ve experienced over the last year and a half or so now ultimately really exposed this underlying affordability crisis that Americans have been dealing with for such a long time. So, you know, you got those gas prices down and down big time, right? Almost 100 straight days of falling gas prices. But, you know, the last month, the CPI numbers, the August CPI, the Consumer Price Index says, you know, rent is up big time. Food is up big time. About a third of the increase in inflation we saw last month coming from rent and food. And like, let’s just be honest, rent was already unaffordable, right? Sort of legally unaffordable. And now we’re getting higher you know, higher rent prices. So, you know, something has to give here. And I think, you know, I don’t think this is just the news. You know, I don’t think Americans are just upset about the economy because they’re hearing about inflation on the nightly news. I think, you know, we have been papering over this affordability crisis where, you know, consumer debt for so long and inflation has just made it impossible to ignore the affordability crisis that’s squeezing families.

Brian Beutler: So imagine you chaired the Fed, which you would in the Beutler administration or served on the Fed. What would you be doing or advising that differs from what the Fed decided to do this week and apparently decided to do it unanimously?

Lindsay Owens: Yeah. So the speech that Jerome Powell gave at Jackson Hole, the remarks that he gave yesterday at FOMC, he’s gone sort of full hawk. You know, that sort of fed speak is sort of hawkish on on inflation, driving up those interest rates or sort of dovish holding a little bit. You know, he’s going full boar and he’s basically saying that bringing down prices is paramount and it doesn’t really matter, you know, who bears the brunt of that, right? It doesn’t really matter how many people they’re going to throw out of work, how many people are going to take a pay cut and how much closer he brings us to the precipice of a recession. He’s got to bring those prices down. You know, I think that’s a bit foolhardy for this reason. He’s got one tool in his toolkit for taking on prices. It’s interest rate hikes. What do interest rate hikes do? They make it more expensive for businesses to borrow and ultimately result in some decrease in demand. Right, demand destruction, we call it. The sources of this inflation are not just coming from Americans running around with too much money to spend. [laugh] Right. The sources of this inflation are really complex. We’ve got, you know, still zero COVID policies abroad, making it hard to get goods from Asia to the United States. We’ve got energy volatility coming from Russia’s invasion of the Ukraine. And, you know, there’s this constellation of sources we’ve seen companies actually really contributing their fair share to these price hikes. And even as some of their costs are coming down, the sort of producer price index falling a little bit faster than the amount that consumers are paying. They’re not passing along any of that savings to consumers. Right. You know, they’re they’re taking all of the upside of those falling costs and keeping those prices high. So this constellation of complex factors driving up inflation and Jerome Powell is just hammering demand with the interest rate hikes and we’re seeing the predictable negative consequences. Right. The mortgage rates are up big time, making it harder for families to get into homes, buy first homes, and therefore more pressure on that rental market. Right. If you can’t buy a house, you’re going to rent and the rental prices are going up. So I think, you know, Jerome Powell really, I think, needs to take a more tempered and moderated approach here. Obviously, understanding he’s signaling to the markets he’s taking this seriously. But he really is, I think, stepping way over the line and into into a world where we could be a risking, not just a sort of light recession, but a but a rather substantial one.

Brian Beutler: So I want to I want to get at what a what a better or more holistic approach would look like in a second. But I see the tension and even what you’re saying about around this question of how badly is Powell screwing up or how mad should we be at him? Or is is is this so bad that it enters the realm of sabotage? Because I remember the post financial crisis stagnation period pretty well. And after the Recovery Reinvestment Act, the stimulus and a couple of other things, Congress on a bipartisan basis kind of lost its mind and made this big pivot to austerity. And so, once again, under a completely different set of circumstances, monetary policy was the only big tool available to try to get the recovery really humming. And so I think what Bernanke, Ben Bernanke at the time would issue these statements at Jackson Hole, just like just like Powell did with updated guidance. And and in those statements were these notes like, hey, Congress, we could really use some help here. Like, we’ll do what we can, but we have this one tool and you’re not helping. And I kind of feel like that’s happening in reverse where Powell and the other Fed board members, maybe at some level really do know that they’re not cut out to fix this specific inflation problem. But they can see that Congress can’t focus or legislate in any coherent way. And so, you know, they wield the other edge of the sword because it’s the the only weapon they have. And if they don’t step in and do something, no one will.

Lindsay Owens: Yeah, I think that’s right. I mean, if you look at the sort of early period of this inflation crisis, you know, beginning in the spring of 2021, you know, Powell heads to the Hill Quarterly, right. Testifies in front of the Banking Committee. He testified in front of the House Financial Services Committee. And he was quite honest about how limited [laugh] his ability to tackle these price hikes were. I mean, it was he was just incredibly candid. You know, I think Senator Warren asked him if interest rate hikes would chase food and gas prices, and he said no [laugh] you know, no. You know, he mentioned that the supply chain issues were were serious drivers here. And he didn’t have a great assessment of when those supply chain bottlenecks would be alleviated. That’s not what the Fed does. They don’t they don’t these guys don’t spend a lot of time thinking about supply chains or at least, you know, they haven’t, you know, heretofore. So he didn’t have a great assessment of that. He doesn’t have a strong analysis of COVID policies in China or Taiwan. Right. And these are not things he spends a lot of time thinking about. He also doesn’t have a strong analysis or a toolkit to take on things like corporate concentration, which are allowing some of the pricing power that we’re seeing being exploited today by corporations. We know that firms that had a lot of pricing power before the pandemic are actually the ones driving the biggest markups, the markups being the piece of the pricing that comes right on top of those costs to drive profits. And he’s been really honest with Congress that he can’t do anything about that either. So I think you’re exactly right. And, you know, he hasn’t hit the ball on this, but Congress and the administration do really need to pick up the slack here. If we don’t have a multifaceted approach, we will absolutely, as you say, be relying on that on the interest rate hikes. And he’s signaling exactly what his plans are like. He’s going for, you know, going for 2% right and not planning to take his you know, to take his thumb off the scale until he gets there.

Brian Beutler: I remember buried in those 2010, 2011 statements from the Fed. They didn’t get specific to like the level of policy, like you should pass a bill that does exactly this. But they were basically like, ideally right now, Congress would be increasing short term deficits with these kinds of ideas, payroll tax cut or whatever, and in the long run, reducing the deficit. And if they did that in partnership with what we’re doing, that would cause the economy to really boom. Powell statements Do they have any kind of specificity like that where he’s saying, look, like we might be able to make this a little less painful if Congress tackled X or Y and they have like a range of ways they could do those things. Or is he just kind of missing in action on that?

Lindsay Owens: Yeah, I don’t think he I don’t think he’s gotten into the nitty gritty of exactly what the sort of legislation would look like. I mean, to be fair, the contrast here is sort of not apples to apples. Right? Because it’s a little easier to tell Congress, like move some money out the door than it is to tell Congress, like fix 40 years of neoliberalism hitting our supply [laugh] chain. Right. Globalization, lack of geographic redundancy, no ability to make anything in America because we spent 40 years making this big bet on a high wage knowledge economy, on a low wage service economy, and said screw making anything here. Like no manufacturing necessary. You know, it’s a little harder, I think, for him to prescribe a sort of silver bullet on on the supply pieces. A little easier for Bernanke to be like, hey, put some money out there. Right.

Brian Beutler: Yeah. So let’s. Why don’t we step in and do what, what, Powell won’t or can’t do. Do you remember back in in the mid 2000s, where around when Al Gore made the An Inconvenient Truth and to sort of make the the huge problem he was warning about [?] he had that chart, it was the the wedge chart. It showed this sort of seemingly out of control climate emissions trajectory on a graph. But his point was actually, it’s not really out of our hands. If we if we bump fuel economy standards, that’s this chunk of the graph. And then and then if we switch from coal to renewables, that’s a bigger chunk. And so we just need to tackle these little wedges to get the whole curve down. Can we. Is there a wedge graph for getting prices down? What does it look like? Right. Like if policymakers wanted to attack the specific inflation we’re experiencing now in an optimum way. What would it look like as a legislative package?

Lindsay Owens: Yeah, this is a great question. You know, obviously, the causes of this inflationary moment are complex. And, you know, there’s not sort of one thing that, you know, despite the fact that macro economists like to talk about inflation as though there aren’t really these big differences by sector, the truth is each sector of the economy functions really differently. So right now, the big driver is about a third of the inflation we saw month over month was coming from rent and was coming from food. I think we do actually have a pretty straightforward, if not politically feasible at this moment. Playbook on rent, right? I mean, the easiest way to ameliorate those rent increases in the short term would be rent controls. You know, obviously, many cities have those. There are some limited federal abilities to think through rent controls. We’ve used rent controls at the federal level in the past, but that would be a short term fix. You know, is that going to happen? [laugh] You know, I don’t think so. Is Biden going to you know, is Brian Deese going to run around with a wedge chart that points to rent control like, you know, hell will freeze her before that happens? But we know what we can do on the short term there. We also know what we can do in the medium and long term on rent. Right. We have got to juice the supply of units. We need more housing. We need to we needed to start that process 20 years ago. And but we’ve got to do it today. And that’s a place where I think Congress could absolutely step in. I think there could be bipartisan support for money for housing supply. You know, housing starts for residential construction are way down. You know, folks don’t want to invest in building right now developers because of the rates. And so I think some counter-cyclical public investment in housing would be a really nice way for Congress to put their thumb on the scale. Will it alleviate rent prices in the short term? No. But will it help over the medium term? Sort of, absolutely. On you know, on gas prices, we saw this kind of, you know, huge increase in gas prices. Right. So we got down to like, I don’t know, a buck 77 in 2020 because, you know, no one was driving. We were all quarantining. And then as the sort of economy reopened, the word we used used to describe what was happening in the economy, reopening, gas prices started to increase, but that happened really slowly. And then, you know, Russia invades the Ukraine and then we got real, real sort of gas price spikes over a really fast period of time. Right. You know, over just a few months, we saw gas prices go from like three and a half dollars to five dollars. You know, now we’re back into the into the threes and we got there pretty quickly. But there still is a lot of sort of what we call upside on energy prices, a lot of volatility still there for a couple of reasons. One of the bigger reasons is we really don’t know what’s going to happen with Russia and the Ukraine over the winter. And there’s going to be increasing demand for home heating, which is going to drive up some natural gas costs. And so I think there are some things that Congress could do there to sort of guard against an upside shock over the winter. So, you know, on on sort of rent and gas, I think there are things I think there are things they can take on. And then, you know, at groundwork, we’ve talked a lot about this, this just sort of bald faced profiteering that’s going on by companies. And I think there are a couple of plays that Congress has there. You know, and the administration even one is just aggressive enforcement of the laws already on the books, right. Where there are two or three players in a market and they’re keeping these prices similarly consistently high. You know, this may rise to the level of price fixing, of collusion and, you know, DOJ, antitrust, Federal Trade Commission should take that on and they shouldn’t wait any longer. And Congress could pass federal price gouging legislation. You know, Senator Warren has a piece of federal price gouging legislation. There’s a big bill in the House as well. You know, 38 states have price gouging statutes on the books that say, look, yeah, we get that companies want to make a profit, but we don’t think that companies should make extraordinary profits during periods of crisis, during natural disasters, during pandemics. I think this moment of economic transition that we’re in really constitutes a period of of crisis. And we really shouldn’t be allowing companies to gild the lily on the backs of consumers in this moment.

Brian Beutler: Okay. So I’m going to get back to the corporate profiteering thing in a second, I promise. And actually add to that probably a couple of the things that you mentioned. But on the on the rent thing specifically, it’s the piece of this that makes me sort of I don’t know if it really raises questions in my mind about Powell per say or about the Fed. I mean, I understand that they have a dual mandate to make prices stable and to keep employment close to full employment. And their only tool to do that is monetary policy. But there are circumstances where the normal disinflationary tool the Fed has. Can actually make inflation worse. Right. And rent is one of them. I think that’s what you were describing. Right, that if you raise interest rates. You get less, you get less housing demand for purchases. People get pushed into rental properties. You also get less building because building becomes more expensive. So people are flooding into rentals. Rentals are not. The number of rentals is not growing. And it seems like if your job is to find a balance between prices and employment and this specific circumstance arises, you should actually not want to raise interest rates aggressively. Fulfilling the dual mandate is kind of counter-intuitively not to raise interest rates in this environment. And yet you say he’s gone full hawk and I’m you know, I get that he can’t control Russia and he can’t control what happens in Ukraine or international energy market stuff. But he he must see what’s happening with rents and nevertheless is adopting a policy course that’s exacerbating that. And I don’t know how to interpret that without, you know, starting to wonder about like like is he just what, like operating out of rote or is there something more nefarious going on where it seems so simple that like if you want to ameliorate rent inflation, you need to prevent big interest rate increases?

Lindsay Owens: Yeah. So I think there are there are a couple of pieces to what you’re saying that are really important to unpack because you’re hitting on something that’s actually much bigger than just about rent. And, you know, Joe Stiglitz, a Nobel Prize winning economist at Columbia, has written about this quite a bit in a moment in which a big part of the supply shortages that we’re seeing are coming from longstanding under investment, raising the cost of borrowing and therefore making it harder and less, sort of lucrative, less there’s less incentive for companies to borrow the money they need to make further investments is really counterproductive. Right. So obviously, we’re seeing sort of this counterproductive effect in rent. But, you know, what Joe and others are saying is we may be seeing more broadly counterproductive effects on business investment because of these interest rate hikes. So that one piece, I think is really critical. The second thing to understand is, you know, I think if you asked Powell this or if you asked a sort of very traditional macro economist, what they would say is that the theory of how rental prices are going to decline is that you and I are going to get so poor that we can’t afford our rent and that landlords eventually will have to decrease rent. Right. Labor markets are going to be less strong. The economy is going to be less strong overall. And therefore, the rent prices will have to come down. And so, you know, the sort of the sort of mechanism through which these interest rate hikes work is really this demand destruction rate. It’s softening that labor market, potentially bringing us to a recession that results in, you know, mass joblessness, big pay cuts, and folks reducing their demand because they’re too poor to buy stuff. And that sort of is going to flow through to the rental market. You know, we’ll see. [laugh] Okay. I really hope we don’t we don’t get to that point. Right. I mean, I think, you know, at the point at which Americans are too poor to buy a gallon of gas, too poor to buy, you know, food to too poor to afford housing. Yeah, maybe the prices will come down, but we’ll have a very different problem on our hands.

Brian Beutler: Yeah, that was like a real horror show you just depicted. It’s like. Like trickle up immiseration or something like that. [music break]

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Brian Beutler: Okay. So what about immigration or luxury taxes or corporate profit taxes, like if you were if you were just cobbling together a bunch of ideas to to put downward pressure on prices so that Powell didn’t come steamrolling the economy, the way he’s sort of promising to are those things that would help in this environment, or are they sort of neither here nor there, given where inflationary pressures are rising from?

Lindsay Owens: No immigration, absolutely 100%. You know, as you mentioned in your introduction, we’ve had this really incredible job full recovery and a contrast to the jobless recovery during the Great Recession is just so extreme, right? I mean, we we lose like 22 million jobs during the pandemic, you know, and we’re already back on line. It took six years to get back on line in the Great Recession, and we had much, much shallower unemployment. So this is really a sea change. And, you know, I mean, President Biden will definitely be remembered as a president who who took the recovery seriously and who ran a very different playbook than President Obama did. And, you know, the proof is really in those jobs numbers, but we still have a ton of vacancies. There’s a lot of need for additional labor supply. And we’re still short some labor supply because people have dropped out of the labor market. Some older workers have dropped out of the labor market. Some of that may be related to COVID. Some women have been out of the labor market, in part related to caregiving. Men are out of the labor market. I mean, we’re you know, we’re short some labor supply here. And so an increase in labor supply is absolutely going to be helpful. Of course, immigration is is is one tool for achieving that. You know, the second thing you mentioned was tax and hell yes, on tax. I mean, the only thing, you know, it’s not very fun to juice prices and bolt consumers if you have to ship your winnings to the Treasury Department. Right. We can use tax to incentivize de-incentivize some of this profiteering and also, you know, to reduce the sort of consumption power of the very wealthy. Right. We’re spending a lot instead of using interest rate hikes to reduce the consumption power of low moderate income Americans. So I think tax is a great tool in the toolkit. And I’ll also obviously move some money, you know, into the Treasury, bringing down deficits a bit. And all of that can can sort of alleviate some of the inflationary pressures. And, you know, that was a big part of the argument that economists were making. You know, as Joe Biden was passing the Inflation Reduction Act, right. Particularly the Book Minimum Tax, which is their sort of, you know, big sort of corporate corporate profits tax, took the rich tax, if you will. You know, that that bringing in that additional revenue could have some some deflationary impact. So, you know, immigration, yes, tax, absolutely. Getting that labor supply up. All very helpful.

Brian Beutler: I feel like the tax piece of that is something that would require a new act of Congress. Is there something Biden could do on immigration on his own? Trump managed to basically crush immigration like legal immigration, the kind of immigration that would be disinflationary unilaterally. And I wonder if, you know, whatever the political implications of it are, Biden could just say we’re going to help alleviate this inflation problem by letting more people in.

Lindsay Owens: Yeah, I mean, there’s absolutely stuff the administration can do on immigration, you know, with visa supply out of the Department of Homeland Security. So. Yes. And, you know, there are some there are some live fights right now there in that space as well. I think to get really, you know, not cynical but just clear eyed about the likelihood of some of these things moving, you know, the sort of lingering inflation boogeyman going into going into a midterm is like not something that a lot of the front line candidates and Senate candidates are going to be very supportive of. So there are some pretty significant cross pressures, political cross pressures from within his own party. On running a strong immigration play. You know, it would be interesting to see if that calculus shifts a little after November. I mean, I’m obviously not deep in the weeds of the immigration politics, but I think, you know, having spent a ton of time staffing on the Hill, I mean, there is nothing that gets sort of like your front liners, you know, your Abigail Spanbergers of the world, more ginned up than sort of immigration policy. And and they really believe that it has political consequences for that. And I think I’m not sure the research fully bears that out. But, you know, it’s it’s impossible to ignore had a had an you know what are we 50 days out from the midterms.

Brian Beutler: Yeah. And I mean, I take your point, like we’re trying to craft a wedge chart here on on this podcast, knowing that especially before an election, Congress is not going to do much. And even when Congress is being pretty active, they’re often off point, right? Like the Inflation Reduction Act took a year to pass and it was a good bill. But like as an answer to inflation, it’s like small and a little bit off point, it seems to me. And so assuming we’re not going to get a smart legislative package to head off the Fed at least until early next year if everything goes right. Do you think the country as a whole would be better off if the Fed did nothing like waiting to see what happened in the election and then. And then reevaluated based on what Congress indicated it might do with with, you know, whatever shakes out and who controls which house and so on.

Lindsay Owens: Yeah, I mean, I don’t think the Fed would ever veer into a world in which they let you know any of their calculus was being made, you know, based on based on election outcomes. You know, given their sort of strong need for independence and that sort of, you know, tradition of independence and the Fed, I mean, you know, that’s a whole nother conversation about whether or not that makes a lot of sense. You know, this sort of undemocratic entity with this much control. You know, the truth is, you know, over these decades, Congress has really ceded a lot of control to the Fed. Right. Monetary policy being their the primary lever for dialing up and down the economy. And because of gridlock in Congress, because of a sort of widespread hysteria and and neo liberal perspectives on spending. The Fed has managed a lot of a lot of economic activity in the 19 states for a long time. And I don’t think that’s a good thing. And I think we should really try to reroute that. But I think Jerome Powell is in a tough spot. Inflation is high. Gas prices are coming down. But, you know, year over year, we’re still eight, you know, 8.3% increases in prices. And that has real impacts on people. And what that means right now is even though this tight labor market that we’re in, that we talked about coming from the the job for recovery has boosted wages, particularly at the bottom end. Wages are being eroded. Real wages are being eroded because prices are going up faster than wages. So we have to take this inflation seriously. We really need to bring prices down. You know, many Americans cannot afford that 8% increase on top of what was already a very unaffordable life, you know, because of rental and unaffordability, because of childcare being so unaffordable. So, you know, I don’t think people can do nothing, but I do think it doesn’t have to be 75 basis points, [laugh] you know, five rate hikes this year. Right. I think there is a case to be made for a sort of more more tempered, moderate, slower approach rather than what seems to me just a really cranked up and dialed up approach. I mean, we’re now at, you know, Fed rates that are back to 2008. Right.

Brian Beutler: So to, to play devil’s advocate on his behalf, he might come back and say, well, look, I, I did one and didn’t work, and then I did two and it didn’t work and I did three. And like, now it’s maybe starting to work, but eh not, not really very fast. Four. Same. So these are large hikes relative to where monetary policy and had monetary policy had been for 15 years, but they have been staggered and he’s had time to evaluate how their effect on prices. He would probably respond to you by saying. You know, we are taking it one step at a time and we’ll look again before the next rate hike. And and if it’s not if it’s the same story as last quarter, then we’re going to do it again. And if it’s if suddenly we’re seeing a big drop, then maybe we’ll ease up.

Lindsay Owens: Yeah, I think he would say that. You know, I might say two things back. The first is, you know, this is not an exact science, right? Despite, despite macroeconomics getting on TV. You know, Larry Summers telling you exactly what the quote unquote sacrifice ratio is, what the unemployment level needs to be to get prices down, you know, 5% for two years, 10% for one year. You know, I mean, people tossing around like let’s get 10% unemployment, which, by the way, given the the racial makeup of unemployment is 20% black unemployment to bring prices down, you know, it’s not that exact of a science. We don’t exactly know how, you know, in this complex environment or really in any complex environment and society exactly how these interest rate hikes translate into into, you know, reduced demand and into lower prices. And so I think, you know, when you’re dealing with something this uncertain, you know, I would air on the side of maybe slightly higher prices for a longer period of time, but not tipping into a really severe recession. The problem here is that, like, you don’t know you’re burned until you touch the stove. [laugh]

Brian Beutler: Yeah.

Lindsay Owens: And so, like, you know, Powell is just sort of like inching closer and closer to the stove and we’re sort of all like waiting, watching, like, is that dude really going to do it? Like, put his finger on the burner? Like, is that really going to happen? You know, given the costs of a recession, given the long term costs of joblessness right, the scarring effects on joblessness for people graduating college, the scarring effects of joblessness for older workers and black workers who are going to be the first fired and have the hardest time jumping back in when when the labor market is is is sort of opening up again, you really have to think about who you know, who bears the brunt of this. And, you know, I don’t think, you know, Jerome Powell is going to save the economy by reducing prices, but crushing millions of families. Right. And you don’t save the economy by hurting people.

Brian Beutler: This is why this thing you said about it’s not an exact science. This is why I asked the question about the Fed not making decisions based on who wins and loses, but being realistic about how things in the elected branches of government work. Right. Like, I don’t intuitively understand why it would be inappropriate for Fed leaders to say, we know that the legislative environment will be different after the election. We don’t know how. But given that it might change dramatically, we are not going to take steps that we can’t undo between now and then. And furthermore, you know, just like DOJ has, has policies about not doing dramatic things in the run up to elections so that they don’t they aren’t seen as trying to affect election outcomes and their or at least they’re supposed to. Right. A similar principle seems like it would be appropriate to apply to the Fed is like there’s an election coming up. If we boost interest rates by 0.75% and and create a recession right before the election, like is that actually political independence or is that thumbing the scale of an election? And so it seems like it would be perfectly appropriate for them to incorporate without necessarily talking very publicly about how they do their punditry or whatever. [laugh]

Lindsay Owens: Yeah.

Brian Beutler: Like just to say it, just to say like we are in a holding pattern while we wait to see how things shake out on the legislative policy front and, and the and the regulatory policy front. And then we will act again when we, when we have a better sense.

Lindsay Owens: Yeah. I mean, I think that’s and this is this is a really tough, tough question. And I would say two things. The first is, you know, the midterms are, you know, 50 odd days out. We’re only going to get one more CPI print. So one more report, the Consumer Price Index about inflation index before the election. The next one comes out I think the day after the election. So there’s like one more sort of big data point here between now and the election. And, you know, I don’t think much more will happen between now and the election out of the Fed. I mean, I think that, you know, today’s FOMC, you know, this week’s FOMC meeting is, you know, one of the last times we’ll hear from Powell before the election. So to the concern about, you know, and we’re not going to be in a recession before the election. Right. You know, we’re talking about, you know, a 2023 timeline here. So I think, you know, I’m not too worried about that. I think the second question is whether or not, you know, if if the Fed did take political considerations into account, which they don’t. Whether or not we think the outlook and likelihood of Congress doing more to bring down prices increases after the election. And, you know, I think, you know, not to be the bearer of doom and gloom. [laugh] I don’t think the outlook improves after the election and the likelihood, you know, I sort of let my sort of party ID come out here in case no one has guessed it between, you know, over the last 45 minutes. But I think, unfortunately, it is likely that Speaker McCarthy is going to be, you know, holding the gavel in January. And, you know, it seems rather unlikely that a sort of McCarthy Schumer you know, we keep the Senate, you know, confab results in this sort of beautiful set of legislation to bring down prices. And so I think even if they were thinking about that, I don’t know. I mean, I kind of I’m hopeful for maybe bipartisan work on housing. So I think that’s feasible. But.

Brian Beutler: I, not to you know, not to interrupt. But like Speaker McCarthy could take the whole economy hostage. And then on top of that, basically US imposed sort of sabotage like austerity. You have high interest rates that didn’t need to be as high as they were. I mean, you understand, like like Jerome Powell knows that they did that in the past. Whether he whether he ever, like, writes it down into his notes before he goes and gives—

Lindsay Owens: Yeah.

Brian Beutler: —a speech at Jackson Hole like he knows what might happen if Republicans take over.

Lindsay Owens: Yeah.

Brian Beutler: I don’t know. It it seems like relevant information for an economic policy maker—

Lindsay Owens: Yeah, yeah.

Brian Beutler: To consider when setting policy that’s going to affect everyone in the country.

Lindsay Owens: So I think what you’re suggesting, I just want to say it out loud, because I think it’s a very interesting sort of dark arts theory of where we land.

Brian Beutler: Mm hmm.

Lindsay Owens: And that McCarthy by potentially like risking a government shutdown or or actually sort of enacting a government shutdown or taking the economy hostage in another way, maybe, you know, maybe a debt limit showdown.

Brian Beutler: Yeah.

Lindsay Owens: You know, Powell should bake in McCarthy demand destruction. [laugh]

Brian Beutler: Yes, I think so.

Lindsay Owens: Yeah. I mean, that’s really grim. [both speaking] Just like so incredibly grim. Yeah, I know. You’re right. I mean, I think that’s right. I think that’s like a that’s not outside the sort of like center of of of probability, like I don’t think that’s a standard deviation outside where we might be. You know, here I’m getting over my skis a little bit. I’ve never worked in the Fed, you know, the Federal Reserve. They have they have a lot of people who work their government affairs folks. I just don’t know a lot about how they think about about Congress. And what we do know is from the FOMC meeting minutes, which are publicly released and from, you know, we know how the Fed conducts its analysis. We know what indicators they look at. And they are really strictly economic indicators. Right. They’re looking at different and they’re looking at job vacancies. They’re looking at unemployment measures. They’re looking at, you know, the Producer Price Index, the Consumer Price Index. And that’s really where where they’re comfortable. These these are macro economists. They are not sophisticated political actors, and they aren’t even always sophisticated on aspects of the economy outside of the macro economy. And so I don’t know if I would put put any stock in wanting them to have a political analysis, because I don’t know how sophisticated it would be.

Brian Beutler: Well, they’d have to hire both of us to advise. [laughter] Okay. All right. So corporate profits, you mentioned earlier, I promise to come back to him. Here we are. I want to talk about them, but I want to get at it like this. Let’s pretend I’m a rich business guy. I manufacture and sell televisions. And one day I wake up and people are flush with money, and they come up and buy up all my merchandise. So I restock, but I am limited on how much I can build because my factory’s only so big or parts are getting hard to come by. And so in order to avoid another run on all my staff and then another outage, I try to ease up all this overwhelming demand for televisions by raising television prices 25%. So now it works. They are selling at the same pace they were before, you know, before everyone got their stimulus checks or whatever. But I’m making more money than ever. Have I done something wrong?

Lindsay Owens: So no, I mean, I think you’re right. Companies absolutely increase prices in response to shortages and part of how they are rationing. Right. Taking care of the fact that there are shortages is they’re using pricing to ration. Right. Another way to ration in the midst of supply shortages is, you know, rather than buy ability to pay, which is how you ration by price increases. You could ration by first come, first serve. Right. You could say we got 1000 cars left that go up on the market on Monday. And when they’re gone, they’re gone. Right. But but we’re going to sell them at MSRP. We’re not going to sell them at 20% above MSRP. Right. There are a couple of different ways to do things here. What we are seeing is, I think, pushing, you know, what we’re seeing in the economy right now on profits is pushing way beyond just some sort of tinkering around the edges. Sophisticated CEO rationing by price. What we are seeing and there are three pieces of data that make this case, what we are seeing is go for broke pricing. That is leading to three things. One, historically high profit margins. We had historic highs in 21, 2021. And guess what? We just got those Q2 2022 data. And we broke the record again. I mean, this is a 70 year high and profit margins. And those profit margins are not just reflecting an increase in demand. It’s not just that you’re selling more glasses of lemonade. You’re selling each glass of lemonade at a higher profit level. That’s how you’re driving those margins up. And what’s astounding about it is you’re selling that lemonade at a higher profit margin. When the price of lemons is up, the price of sugar is up. The price of the paper cup, the cup is up. The price of transporting the lemonade is up. I mean, that is bananas, right? All of these input costs are up in the margins are hitting historic highs over and over again. The second thing we know is the markups are hitting historic highs. So not only have we reached a 70 year high in markups, this is the you know, the amount the company adds above their costs right, the markup. We also got the fastest acceleration in markups in 2021. So, you know, the markups in the margins are up. And then the final way that we know this is like beyond just some simple rationing is the CEOs are telling us on these earnings calls, you know, we listen to hundreds of these earnings calls. And what the CEOs say is, look, you know, we drove up the price a little to cover our increased costs. We went a little higher because why not? And people were still buying the stuff. So we’re going to go higher still. So, you know, they’re not sort of you know, they’re not talking about their pricing in terms of sophisticated rationing. The shortages are we’re seeing alleviation and shortages. You know, the container index, which helps us understand how the supply chain is doing. We’re getting some softening there and we know that producer prices are going down. Right. So this is that this is the price index for what the businesses pay for the goods, not what the consumer pays for the goods. We’re seeing softening there. But yet, despite all of that softening, despite the fact that folks can keep goods on the shelf, the margins in the markups are increasing unabated right now.

Brian Beutler: So is there an easy way to tell where? Responding reasonably to market pressures, ends and manipulation or price gouging begins. Like to do devil’s advocate, the CEOs for a second day might say, look, the value of something is what the market will bear for it. And if people think that televisions are actually worth 1,200 dollars when they were previously worth a thousand, then that’s how much they cost. I mean, that’s how much that’s how much they’re worth and how much it’s reasonable to charge for them. You could reinterpret that, you know, a more nefarious way, which is like. People don’t really know what things are worth and running through their heads is this idea that prices are high because of inflation. And so that’s just life in and and so they’re willing to pay more because they know the other option is to go without the thing that they want. That starts to sound a little bit more exploitative. And I just don’t know where you draw the line between the two.

Lindsay Owens: Yeah, look, I mean, when we look at these earnings calls, we see the most sort of bald faced profiteering and explications of profiteering by the CEOs for necessities. And the CEOs of these companies whose sole necessities are really clear. They understand fully that they sell necessities, and they say so in the earnings call, like, look, people aren’t people aren’t going to not buy toothpaste. People aren’t going to not buy paper towels and toilet paper. People are going to buy food. You know, AutoZone, right. These companies that do car parts and oil changes, you know, people still have to get their oil changed. They say that clearly. And what that says to them is they have pricing power, right? They have pricing power because demand is relatively inelastic for those goods. And they have pricing power in many cases because they have a lot of market share. Right. For large companies. Procter & Gamble and Kimberly-Clark these two conglomerates. I mean, you know, they you know, you don’t get laundry detergent outside of Procter & Gamble and Kimberly-Clark. Right. So, yeah, I mean, and you’re right, there is some opportunistic price price level shifting here, in part because consumers expect it. And especially early on as folks were sort of getting accustomed to inflation, there was a lot of talk in the earnings calls about the fact that the Hostess CEO snack foods brand saying, you know, I think we’re able to get away with some of these price increases because everybody else is increasing their prices. Right. And so, you know, consumers come to expect it and companies know that. And that’s obviously baked in here as well.

Brian Beutler: So I guess the question is, if we if we can tell when this veers into immoral behavior or illegal behavior or exploitative behavior, what are the things that lawmakers, policymakers can do beyond the sort of disinfecting sunlight stuff that we’ve been talking about, like jawboning at them or investigative journalism to go through what they’re saying on their calls or likes, sickened the S.E.C. on them or whatever the relevant authority is to to get them to play by what should be the rules. Like you mentioned, Senator Warren has a bill. What would it look like to make this kind of behavior not happen in a in a economic climate like—

Lindsay Owens: Yeah, I mean, look, you’re 100% correct that the line between sort of gilding the lily and highway robbery, you know, is tough to kind of put your finger on. You know, some of it is intuitive, right? Like we know, I think as a society, we have decided 38 states have put laws on the books that say, look, like you can’t sell a jug of bottled water for $100 after a hurricane. Like that’s price gouging. You know, in the beginning of the pandemic, there were a lot of price gouging statutes and attorney generals cracking down on price gouging of PPE and other essentials that were in really short supply, you know, when the pandemic first hit, you know, here we have a much more generalized price increases, right inflation. This is a change in the price level across the basket of of prices. But I think there are a couple of ways to think through how to approach the dials. So one is you can look at historical price data and historical price increase data, and you could say if the change in price between March 2021 and March 2022 is five times the change in price between March 2018 and March 2019, then we think that’s price gouging, right? I mean, there are a couple of ways that we could we could draw lines. And ultimately, you know, these will be judgment calls made by policymakers that, you know, if we were to put in place a federal price gouging statute, you know, another way to do this is to say where we see price increases and markups faster in concentrated industries. We probably know that that’s stemming from anti-competitive practices from from exercising and exploiting latent pricing power that’s been built up through mergers and acquisitions and building out market share. And so there we could deploy our existing antitrust tools our our price fixing statutes our collusion. And and there are some updates we probably need to take into consideration now that we’ve seen this play out. You know, collusion isn’t always three guys in a smoke filled room. It’s not always sort of like Bill Gates and Steve Jobs on the cc line of an email with a smoking gun. There’s a way to. There’s a way to signal pricing to your competitors via these earnings calls. One thing we’ve seen in the calls is companies saying CEO saying in the calls, yeah, we actually expect some margin expansion, meaning bigger profits rate or margin recovery, meaning, you know, we were down a little bit because of input costs, but we think we’re going to recover that and then some because our costs are coming down, but we’re not going to pass any pricing back to the consumer. And then they say we’re not too worried about that, which means we don’t think we’re going to get undercut and have to change that strategy because we expect our competitors. And this is a quote, to act rationally. [laugh] What does that CEO saying to his competitors like? Hey, guys, everybody stay the course if everybody’s cool and sticks with the new jacked up prices, despite the fact that our input costs are going down, then we won’t have to worry about, you know, any changes here because we can all charge these higher prices, we can all keep our margins up, we can all keep our shareholders happy. And consumers won’t have anywhere else to turn because we’ve all decided to lock in and grind out these higher prices. You know, this is something you know, we’re seeing this for the first time. The last time we had high inflation. The economy looked really different. We didn’t have a financialized economy, a shareholder economy back in the late 1970s. We didn’t have an economy that concentrated. So, you know, we’re puzzling through all this in real time. We’re seeing how companies respond to inflation in a highly financialized, a highly concentrated economy. And policymakers will have to catch up eventually.

Brian Beutler: So mechanistically making policy that that pushback against this would it be like an excess profits tax where clawback goes into effect if inflation exceeds some number and profits don’t kind of track it nicely? Or how would you enact something that made this not worth their while to even try?

Lindsay Owens: Yeah, and I think an excess profits tax is a great option and a great tool. Literally decrease the decrease the incentives for price gouging, because you’ve got to, you know, any of the profits that are above the normal level of profits, your standard run of the mill, very high levels [laugh] of corporate profits pre-pandemic, you’re really exorbitant over the top profits during this period of of of inflation. You have to go back at a much higher rate. And there, you know, number of pieces of legislation in Congress that do this. Bernie Sanders has a bill, Ro Khanna has a bill. Sheldon Whitehouse has a bill, number, a number of pieces of legislation that would do this. Some of those exclusively applied to oil and gas and were introduced back when when gas prices were rising unabated. But some of them, you know, the Sanders bill was was quite a bit broader. So absolutely, that’s option number one. Option number two is the sort of more regulatory approach giving the giving the Federal Trade Commission, the ability to crack down on price gouging during periods of economic crisis, during periods of national crisis, during periods of economic transition. That’s what the Warren bill would have done. And there are some attorney generals who already have the statutory authority. So, you know, Tish James, the attorney general of New York, New York has a broad base price gouging statute that does actually apply during periods of economic transition. And so they actually have been in the process of conducting a rulemaking to sort of fine tune their regulations here, to give them more ability to take this on at the state level. And Keith Ellison, attorney general of Minnesota and a couple of others, have been using existing statutes to to contemplate taking some of this behavior on. But obviously, with these international companies, you know, companies that don’t reside in your state, we really should have a federal standard.

Brian Beutler: I mean, we’ve been talking about rent and gas. And obviously, people can’t just make easy substitutions when prices for those things go up. But if it’s toothpaste or beef or whatever else, why aren’t why isn’t the response to C.E.O.s trying to wring too much money or more money than they should out of consumers? Why isn’t the consumer response to be like, well, beef is expensive, so I’ll buy pork or the 50 inch TV is gone up in price, so I’ll buy a 40 inch TV. You know, I can remember being slightly income insecure when I was making intern wages and like, I was never going to be homeless or go hungry. But I remember thinking like, Oh, well, I can’t afford that, so I’ll just buy something similar that’s cheaper.

Lindsay Owens: I mean, there’s absolutely substitution going on, right? People, you know, we’ve seen some increase in profit margins in the in the generic markets. Right. People shifting off brand names, tide, hitting that hitting that generic company for for their for the good. So of course, there is of course, there’s shifting here. But, you know, there’s also minimum advertised pricing, right. Colgate and and Procter & Gamble and Kimberly-Clark tell Target what the minimum price they can advertise these goods are. Right. So, you know, we like to talk all about, you know, all price controls, big, scary thing that the government does, but all sorts of price controls in the private sector. I mean, what else is minimized, you know, minimum advertised pricing other than effectively price fixing, right.

Brian Beutler: Okay. So the substitution effect isn’t working. To put a lid on inflation, Jerome Powell is responding to it by embracing demand destruction. I guess the the promising sounding thing to me to offset that is that the suite of things Biden has done over the last year and a half could in theory offset some of that. Right. Like the infrastructure bill will roll out construction projects and the student loan, the student debt forgiveness plan will at the very least, make people less paper indebted or more wealthy on paper. It’ll make some people wealthier than they are or have more money than they currently do. Even the Inflation Reduction Act will in various ways, I think in due time, leave people with a bit more money in their pockets. So is that how we do this soft landing thing where Powell raises rates? But there’s offsetting money going into people’s pockets, making sure that the job market doesn’t totally collapse? Or is that how they end up chasing each other in this sort of escalating back and forth where Powell raises rates? The effects of the Biden agenda offset those of Powell raising them further. And we’re off to a never ending [laugh] race to higher interest rates that the Powell will eventually win because he’s he’s got all that all the time in the world and all the power he needs to win.

Lindsay Owens: Yeah. I mean, look like Powell. Powell sure is running ahead as though he wants to win that race. Right. And he’s got the tools. He’s got the tools to do it. You know, the Biden you know, the investments that the Biden administration made there in the Inflation Reduction Act. And, you know, and then the infrastructure bill and in the Chips and Science Acts, the semiconductor bill, you know, these these are not do you think demand in the short term, right. I mean, these are really about building building capacity, investing in our infrastructure in additional supply over the medium and long term. So I think that is the exact right approach for an inflationary moment. I mean, they’re not pushing out, you know, a ton of increased demand, but this is not a period of inflation being caused by, you know, Americans who make $30,000 a year having too much money and spending too much money. Right. So I do actually think policies to soften the impacts of price increases are you know, are worth considering in this moment. And I think couple of things that are left on the table, you know, that did that got jettisoned from from the Inflation Reduction Act and, you know, that were in the original Build Back Better agenda. Child care and housing. I mean, we’ve got to do those if we want people to be able to afford, you know, to live in a happy and healthy way going forward.

Brian Beutler: Well, there’s the hopeful note, and it just requires another Democratic Congress and its willingness to complete the pieces of the Biden agenda that were left on the cutting room floor. Lindsay Owens, thank you so much for spending so much time with us.

Lindsay Owens: Yeah, thanks for having me. This is great. [music break]

Brian Beutler: I began the show with this question. Is a Goldilocks economy achievable and sustainable? Can we keep the genuinely great things about the Biden economy, the full employment and the growing wages, and get rid of the bad, the higher prices? Or are we doomed to boom and bust cycles that mellow out for years at a time with weak job markets? Millions of people who want to work unable to do so. And what I took away from Lindsay’s insights is that the answer is we don’t have to throw the baby out with the bathwater. But. But, but, but. That it is very hard, politically speaking, to put in place the kinds of reforms we need to sustain it. What do we need? We need more people able to work. So that’s eased immigration restrictions and family policies that don’t also keep parents who’d like to work outside the home from being able to do so. We need capacity, which is already in the pipeline but won’t materialize for a little while. We need, or at least we should want, policies that discourage opportunistic business leaders from exploiting indications of inflation by profiteering. None of that is rocket science, but it does require a political system that’s more responsive than ours is at the moment. So what do we do about that? If this were Steve Bannon’s podcast, we’d say like foment revolution and change our form of government so that we have a parliament and one person, one vote, and just a generally more nimble, responsive democracy. I don’t think that would work out very well. But short of that, there’s goals like keeping Kevin McCarthy from becoming House speaker, changing the Senate’s filibuster rules, instituting other democracy reforms ideally, and then being crystal clear about expectations. So elected officials don’t continue with this kind of passive neglect where they refuse to use their power to make the Goldilocks economy sustainable. That’s admittedly a daunting set of conditions, but it’s not impossible. And if we expect elected officials not to engage in passive neglect, we really shouldn’t engage in it ourselves either. Positively Dreadful is a Crooked Media production. Our executive producer is Michael Martinez and our producer is Olivia Martinez. Veronica Simonetti mixes and edits the show each week. Our theme music is by Vasilis Fotopoulos.