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- [00:00]
A
You know, no one ever calls the economists when things are calm. You all should call us when, like, unemployment rate is 3.5%, inflation's 2.5, like, you know, when we have a good time.
- [00:11]
B
Okay, well, to be fair, the last economist we had on this podcast was Jason Furman. And he said, things seem to be going well in the economy. And I said to him, I think this is the first time we've ever had an economist on the podcast who said, actually, everything's just fine.
- [00:27]
A
So I should emphasize, I think at this point is that I am infamous in certain circles for very confidently predicting a recession in 2011, 2012, 2013, every single year through to January 2020, where I said actually very confidently to Jason Furman, I think the economy's going to be great this year. And Jason was like, I don't know what's happening in 2020, but everyone should sell their stocks immediately. So just caveats up front.
- [00:55]
B
As a participant in the election forecasting community, I have all this sympathy in the world. Hello and welcome to the GD Politics Podcast. I'm Galen Drouke. The last time we delved into the state of the economy on this podcast, it was fair. February 23, Harvard economist Jason Furman, Obama's top economist, said it appeared we were experiencing our first soft landing of the post war era. In other words, inflation was largely under control, the labor market was solid, and growth looked decent, too. Five days later, the United States went to war with Iran, upending the global economy. Since then, oil is up about 50%, average gas prices in the US have increased by over a dollar and and inflation has followed suit. On Friday, the inflation numbers for March showed prices rising 3.3% during the past year and about 1% just since February, the fastest rate of Trump's second term. We also have new data on jobs, not bad, economic growth not good, and consumer sentiment not happy. Plus, taxes are due by Wednesday, so we'll take the opportunity to assess the country's fiscal picture. Happy tax day to all who celebrate. And if we have time, we'll get to that alarming headline in the New York Times last week that read, quote, this is starting to look like a slow motion bank run. Here with me to do it all is Martha Gimble, executive director and co founder of the Budget Lab at Yale University. Welcome to the podcast, Martha.
- [02:31]
A
Thank you so much for having me.
- [02:32]
B
So I briefly outlined what the economic picture looked like in the US in late February. How have things changed since then?
- [02:40]
A
I think the biggest thing is just this massive uncertainty Shock energy is the, for lack of a better phrasing, lifeblood that underlies the world economy. And right now it's very unclear what is going to happen to energy supplies moving forward. We are taping this at 10:06am President Trump said that the blockade of the Strait of Hormuz was going to start at 10am I have not personally checked if they have in fact started doing it, but, you know, that takes a lot of oil off of the market. And also people just don't know what's going to happen. And I think it's important to say that uncertainty itself is a tax on economic activity because people can't plan and they have to, you know, buy various forms of insurance or hedge their bets. And so I think the real question for the economy right now is kind of what, where are we going? And we can, and we will talk about a lot of the economic data that's come out since you had Jason on. But I think it's important to emphasize that in some ways, you know, many of us looked at the cpi, the inflation report that came out and went like, all right, well, you know, energy prices, but guess we'll have to see where this goes. And so we're still kind of in a waiting game.
- [04:03]
B
Yeah. So I'm going to ask you some questions probably throughout the podcast that you can't necessarily answer with a hundred percent confidence, but we'll try to answer them down the line. Isn't that how economics works?
- [04:13]
A
Yeah, we'll just on the one hand, on the other hand, this like fully through the entire podcast.
- [04:17]
B
Okay, sounds, sounds good. I'm familiar with the strategy. So my first question in that regard is do you think that the quote unquote, soft landing is in peril? And maybe to start with, do you even agree that we were on a soft landing trajectory to begin with?
- [04:33]
A
I certainly think the potential for a soft landing was there. I was still a little bit itchy about how elevated inflation was. We still had a bunch of tariff pass through to come and hit. But I also think it's important to say that there's been a lot of the sky is falling about the US Economy over the last couple of years and the US Economy has just kept chugging along. So, yeah, I think the potential was absolutely there for a soft landing. Is it still there? Sure, anything can happen, but an energy shock is just very, very difficult for economies to handle. The US Is in a better position to handle an energy shock than say, the Philippines, but that doesn't mean that it won't have an impact on economic activity here.
- [05:26]
B
Yeah. So that inflation data that we talked about is the most recent attention grabbing data. Almost all of the increase in prices from February to March is thanks to fuel prices. If you strip that out and just look at core inflation, annualized inflation is 2.6%. Is that cause for optimism or pessimism?
- [05:48]
A
I mean, it's cause for, that's at this point outdated data and we have to see where things are going. One thing to emphasize about what you just said is, you know, you said if we strip out energy prices, and to be clear, that is what economists do when we look at core inflation, we take out food, we take out energy, because those are really volatile. That being said, it's in some ways for energy in particular a little bit of a false exercise because it's not like the rise in energy prices doesn't flow through to parts of the core inflation measure. So for instance, airfares. Right, Airfares show up in core inflation, but they're also very, very much affected by energy prices. And so we need to see how this rise in energy prices is going to flow through to the rest of the sort of consumption basket. The other aspect of this, not just from an inflation perspective, but from a growth perspective, is at some point you can get energy prices high enough that demand destruction happens, which basically means people are spending so much money on gas, on heating, et cetera, that they can't afford to spend money on other things and that slows down the economy. Are we there yet? No. Does anyone know exactly where demand destruction happens? No. Could we get there? Yes.
- [07:11]
B
Yeah, that was actually going to be my next question, which is you said that energy shocks are unique in the sense that everything in the country gets shipped from somewhere. And so at a certain point the energy costs of getting goods to people go up. Those presumably flow through to the actual goods and everything can get more expensive. It looks like at least in the month of March that didn't happen. We didn't see the cost of energy flowing through to lots of other goods at the moment. But say that energy prices just stay where they are right now. And that's a big if because at the moment they've been rising after falling some, after rising a lot. But let's just say they stay approximately where they are, which is like 90, $95 for crude oil a barrel. What would that kind of energy shock do to the US Economy in the coming year?
- [08:02]
A
We looked at this and one thing is I think people have in mind, like the 1970s, this is a very, very big energy shock. And I do not want to underplay how big this energy shock is. However, the US Economy is more resilient to energy shocks than it has been in the past because we are such a big produce. Ryan Nunn and ABHI Gupta here at the Budget Lab did some analysis on this and basically made the point that like, yes, you'll take a couple of tenths of percentage points off of growth if prices stay where they are, but it's nowhere near what you would have expected to see in like the 1970s before the shale revolution, basically. So I don't think that it's necessarily Armageddon for the US Economy. Two things there, right. One that assumes that gas prices stay where they are. You know, I should say you've started to see higher prices for some, like physical delivery of shipments. Right. It was like $150 a barrel in Europe this morning last time I checked. You know, part of what's happening right now is that traders are betting that this is going to come down, but we just don't know. And so that's affecting, you know, the headline price that we're looking at. The other aspect here is just how long this lasts. You know, the longer this goes on, the more disruptive it is and also the more infrastructure is destroyed, which then hurts production moving forward and takes the Gulf a long time to come back. I should emphasize at this point. Right. You know, I may have sounded blase about this so far. You know, a slowdown in growth is a real issue. And for countries that are not the United States, this is a very bad situation. And so, you know, the prospects for global economic growth, I think are a lot scarier than prospects for U.S. economic growth. And I think you've seen that in kind of comments from the IMF and the World bank this morning.
- [10:07]
B
Yeah, that was actually my exact next question, which is how is the rest of the global economy looking? Right. You know, we in some ways, from higher oil prices now that we produce so much energy that's contributing to GDP growth, I mean, only in one sector, so we might see declines elsewhere. But as we've learned from conversations about trade over the past several years, the economy is pretty interconnected and to some extent our economic well being depends on demand elsewhere and how other economies are doing. So how do, what's that picture look like?
- [10:41]
A
It's not good. You know, you're already seeing some countries telling people to work from home one day a week, you know, trying to do these measures to save on energy costs. There's also a real question about what's going to happen to food supplies. Let's take a step back here. Right. The thing that you have to keep in mind is that what has happened here is that supply has been taken off the market. We have lost a certain number of barrels of oil. We are losing, you know, things that you need for fertilizer, et cetera. When supply is taken off the market, the richest people, which in the global context is the United States, hooray for us, can bid. Right. And we can pay the price for the more limited supply that then trickles down and at the end of it, someone doesn't have access. And so that is the thing that poorer countries who import a lot of energy are facing is that they are going to and are already starting to just lose access to a certain amount of energy. They're going to lose access to a certain amount of fertilizer. You know, the way that I've sort of been thinking about this is there was an article, I think it was in the New York Times about how the price of raspberries is going to go up because they're a very energy intensive fruit to cultivate. That's very annoying for U.S. consumers. Right. And will slow down growth and make people frustrated. But there are people in other countries who will literally not be able to access food. And so the relative pain here is not evenly borne.
- [12:10]
B
Yeah, I mean, maybe it's perhaps ironic that this is also happening when such a big growth point in the US Economy, AI is so energy dependent. I don't know, maybe call them the raspberries of the American economy, which, which we can talk about a little bit, but. And we'll get into questions of, you know, are we in a bubble? Are we not? Are we facing a potential bake run? Are we not? But does that pose a challenge or a risk to the brightest part of our economy right now, which is AI?
- [12:45]
A
Yeah, I mean, I do think just in general, like, yes, AI is very energy intensive, but in general the economy is very energy intensive. It actually is less energy intensive than it used to be, but it's also bigger. We need a lot of energy. AI needs a lot of energy. Me sitting in my house, I use energy, you know, energy I go back to again, is the sort of lifeblood of the economy. And, you know, people have varying feelings about AI. I don't want people sitting here thinking like, oh, good, energy prices are going up. That just means that this is bad for the AI sector. Leaving aside whether that's a reasonable, you know, sort of opinion to have. This is bad for everyone and there's a real cost here. And I think there's been a rush to kind of be like, oh, well, we produce so much energy, so we'll sell more energy, so this is good for us. And you know, that cushions the impact, but it doesn't totally overcome it like on net. It's still negative for growth in the United States and it is certainly not ideal for the consumer in the United States.
- [13:53]
B
Speaking of consumers, we got new consumer sentiment data on Friday. When we discussed consumer sentiment data in February, it was showing something of a K shaped trend. So high income sentiment going up, low income sentiment sentiment going down. Here's what the latest data shows and I'm going to quote from the University of Michigan press release here. So consumer sentiment sank about 11% this month, extending a decline that began with the start of the Iran conflict and is currently about 9% below a year ago. Demographic groups across age, income and political party all posted setbacks in sentiment, as did every component of the index, reflecting the widespread nature of this month's fall. So to your point, this is felt by pretty much everyone. What do you make of that? Because I find consumer sentiment data to be somewhat murky. It's doesn't work on a 100. Only somewhat, you know, only somewhat. It doesn't work on like a 100 point scale. It's hard for me to actually tell what the numbers correlate to in terms of people's experiences. So what should we make of, you know, down about 11% this month, down 9% from a year ago?
- [15:06]
A
Yeah. So I think there's two really important things for people to keep in mind with consumer sentiment. One is that post pandemic consumer sentiment is just much lower than you would expect given the overall economic data. People are not really sure why, you know, is there general unease about the state of the world that's bleeding through to economic sentiment? We don't know. The other aspect of consumer sentiment that is really important to keep in mind is that it is incredibly polarized. So in November 2024, when Trump won election, all of a sudden Republicans got a lot happier about the economy and Democrats got much less happy. Had anything actually changed about the economy in November 2024? It will shock you to hear that. No. No, it did not. And so you see these very clear switching patterns around consumer based on political party when control of the presidency switches hands. That being said, everyone's really mad right now. Republicans, Independents, Democrats. I think one of the statistics that is kind of telling here. You know, I should say there have been some methodological changes that you have to adjust for even if you do that. Independents are currently unhappier about the economy than Democrats were in the first Trump administration prior to the introduction of COVID when everyone got really, really mad. Republicans are also not that happy. They're. They say that they are much happier than Democrats and independents, but they are not thrilled. And I find it interesting that the sort of normal political party protection that you get from certain types of erosion in consumer sentiment is not showing up in the same way.
- [17:12]
B
And we saw that during Biden's presidency. In that over time, Democrats got pretty pessimistic about the economy under Biden. In fact, something we've talked about a decent amount on this podcast is that basically from the start of Biden's presidency until 2023, prices were growing faster than wages, so Americans were losing purchasing power. Since 2023, as frustrating as inflation has been, at least Americans have been gaining purchasing power, that trend. And I should say they still haven't necessarily made up all the ground they would need to since 2019, given that prices over those, you know, four years rose by about 25%, 22%. So. But I should say the trend of wages growing faster than prices essentially stopped last month. So through a combination of higher prices and slower wage growth, earning growth, adjusted for inflation, was just about 0%. It was, you know, slight, like maybe a touch higher than zero percent, but basically flat. We saw the political repercussions of that in the last administration. Is that a flashing red light for American sentiment?
- [18:20]
A
You know, the reason I say that is, I mean, to go full economist on this, you know, one month, you need to be really, really careful on that. You know, real disposable income was also negative. But that does happen sometimes. You know, you get these kind of this volatility in the data that can happen sometimes that I think is important if that trend continues. Yes. Not ideal, but I think we shouldn't assume the trend is going to continue before we have more months of data. Now, just to go back, I will say if I'm thinking of something that would make me more inclined to say that that trend is at risk of continuing. An energy shock is definitely on that list. Right. Of things that would are likely to drive inflation up while not necessarily getting a similar protective increase in wages.
- [19:11]
B
I do want to talk for a second about maybe a reason for optimism in the US economy, which is that the US economy added a stronger than expected 178,000 jobs in March that was up significantly from months prior. Is it reason for optimism?
- [19:25]
A
Yeah, I mean, in the same way that I don't think you should overreact to one month of negative earnings or income adjusted for inflation, I don't think you should overreact to one month of to be clear, very good jobs growth. We've seen quite negative jobs growth in previous months. One thing that is making the data harder to interpret right now is we've seen sort of more volatility there. And so it's really important to look at this over three months on average, rather than just focusing in on one month. If you do that, job growth still looks reasonably solid, but not gangbusters. And I think one thing that's really important to keep in mind is the number of jobs that we need to add right now in order to keep the unemployment rate constant is lower than I think the number that many of us are used to because of the swings in immigration policy. So if you have fewer people entering the labor force, you just don't need to add as many jobs to keep the unemployment rate down. And we have fewer people entering the labor force than we did in 2024. And so you probably only need somewhere, let's call it between 0 and 20,000 jobs a month to keep the unemployment rate steady. That's not an exact number, but let's just stick with it. And the unemployment rate's been around 4.3% for a while, so that sort of suggests that we're at some kind of equilibrium maybe. But again, particularly given the volatility in that data, I would really encourage people to look at averages over several months rather than just one before going either we're going gangbusters on jobs after one month, or we're headed for oblivion after negative earnings on one month.
- [21:12]
B
Today's podcast is brought to you by you, the listeners. Without paid subscribers, GD Politics simply wouldn't exist. Your support means that we can make an independent podcast guided by curiosity, rigor, and a sense of humor, and that we can have conversations like the one we're having on today's episode. Paid subscribers get about twice the number of episodes and can join in the paid subscriber chat to pass along questions for us to discuss on the show. You can also connect your personal feed to your favorite podcast player so you get every episode wherever you listen to podcasts. Become a paid subscriber today@gdpolitics.com or we've got plenty of great stuff in store in 2026, so it's a Great time to join the crew@gdpolitics.com we hope to see you there. So this is the first tax day since the passage of the One Big Beautiful Bill act. There are always lots of estimates about how new legislation will impact the country's finances. We don't know quite for sure how it will play out in the actual economy until taxes come due. What are we seeing so far about the impact of the One Big Beautiful Bill act on the country's fiscal picture?
- [22:22]
A
One thing is we all expected the impact of the One Big Beautiful Bill Act. It's unclear to me, by the way, if we're calling it OB3OBBBA still, like
- [22:30]
B
I've been calling it ABBA.
- [22:32]
A
That also worked like the 80s music group. Yeah, exactly. That works. We knew it was going to be bad, right? It was estimated to cost trillions of dollars. One thing I do want to emphasize is that in all of the different cost estimates, including ours, but also from the Congressional Budget Office, one thing that is interesting is that usually when you do something called dynamic scoring for tax bills, so basically you take into account the impact of the tax bill on the economy. It decreases the cost of the bill because it spurs economic activity. And so you get more revenue from the increased economic activity and that offsets some of the cost of the bill. It's usually not huge, but it is there. The thing that's a little bit weird about I'll say OB3 is that basically what people found is that it has, over the 10 year budget window, functionally no impact on economic growth, which is impressive for a bill costing trillions of dollars. We looked over 30 years and we actually found a negative impact because it drives up interest costs because it does so much deficit spending. So in the long run, the interest rates are actually a drag on the economy. But in the short run, it also drives up interest costs. And so actually if you score it dynamically, it costs even more money because it's driving up interest costs. And I should say those interest costs flow through not just to the government, but it raises interest costs for everyone. So if you're planning on taking out a mortgage this year, the One Big Beautiful Bill act is putting upward pressure on your mortgage rate. On the question of what we're seeing so far, it's still early, it's April 13, people still have a few days to file their taxes, Homer Simpson style on April 15th. But one thing we have seen is much higher claiming of the overtime deduction on taxes than basically anyone anticipated. And so there's a couple questions here. Of like, what's going on? Were more people working overtime than people anticipated? Maybe. Are people confused about the types of overtime that you can claim on your taxes? Maybe. Are people committing fraud and claiming that they have overtime that is not actually overtime? Very probably. And I think this is actually like an overall important point about the one big beautiful bill act, the tcja, the Tax Cuts and Jobs Act. The bill in the first Trump administration had pros and cons, but one of the pros was it did do some simplification of the tax code. That is just true. Did it perfectly simplify the tax code? Were you able to file your taxes on a postcard as had been promised? No. But it did do some simplification. Simplification of the tax code is important for two reasons. One is it makes all of our lives easier. Again, shout out to everyone currently trying to figure out what their taxes are. But also it reduces the potential for fraud. The more complicated the tax code is, the more places you can hide income. OB3 increased complexity in the tax code. And at the same time, we have massively cut funding for the irs. And due to Doge and other factors, we've lost a lot of workers at the irs. And so Rich Rubin in the Wall Street Journal has an article about this today of just like it is easier to not even necessarily cheat, but like, do things that aren't necessarily correct, that in the past you might have gotten in an argument with the IRS about on your taxes because your probability of getting audited is just so much lower. I would like to emphasize that at this point that you should not cheat on your taxes. That is a very bad idea. You should obey the law and should pay your taxes. But like, that additionally costs us money. And one of the things that we know from other countries is that a huge advantage that the United States has is that we actually have a culture of paying our taxes. You know, relatively speaking, our evasion rates are relatively low. You know, we can get more. There's always people who are evading their taxes and we should go after them. But relatively speaking, we have low evasion. But if you create a culture of evasion that tends to perpetuate and then it is much harder to pull that back. And so that is an additional way, I think, in which this bill is sort of affecting the future fiscal picture for the United States.
- [27:04]
B
I'm laughing a little bit because my next question to you literally reads, the Wall Street Journal just published an article titled America's New Tax Mantra. The IRS isn't going to catch me the battered Internal Revenue Service shed thousands of enforcement employees, and more taxpayers appear eager to cheat. So you preempted that a little bit. But is there a clear relationship, you know, Democrats tried to raise or did for a while raise IRS funding under the Biden administration that was undone during the Trump second term. Is there a clear relationship between you hire more people at the IRS and the country's bottom line improves?
- [27:47]
A
Yes. So, first of all, I do again want to emphasize that you should pay your taxes. Please do not commit tax crime. You know, one of the things that I think is really important, there's various estimates out there of what's called the tax gap, which is basically how much money could the IRS get if, you know, there was full compliance and all these things. But it is a lot of money.
- [28:12]
B
Are we talking trillions here? Like, we're talking. Yeah, I mean, it's high billions.
- [28:17]
A
Yeah. Oh, no, no, no. I mean, it's like at least hundreds of billions of dollars. It's substantial. Like we should, we should all be going for this. I think one of the things to keep in mind is that the places where you get the sort of highest return to audits are, unsurprisingly, the most complicated tax returns. You know, like partnerships, things for high income people, et cetera. Right. If you're auditing, you know, middle class people with a mortgage and a W2, you're just not going to come up with that much. But those are also the most complicated tax cases. They take time. You're generally going up against people with a lot of resources and lawyers who have, like, a serious theory of why they're right. And so you have to be able to dedicate time and IRS agents, who you're paying to that problem. And so if you don't do that, you're going to lose a lot of money and you're going to redirect IRS resources to places where, frankly, you're going to get less for it.
- [29:15]
B
You made some reference to the idea of deficit spending having an impact on not just the country's bottom line, but folks, personal finances through mortgage rates, interest payments on other things like cars, loans, and, you know, whatever you may need credit for. And actually, the Yale Budget Lab made this a little bit more personal by launching a tool where you sort of put in how big your mortgage is and sort of showing deficit spending over time and how much like higher interest rates and more expensive borrowing can tax Americans when it comes to their finances. I mean, can you lay that out a little bit? Because I think for the Most part, people have come to feel like, okay, the country is in debt. That's nothing new. But it seems like everything just chugs along and that's the country's problem, you know, whatever. We all make up the country eventually, but that's the country's problem. These are my finances. The two may not be so connected. So how do you draw that through line?
- [30:15]
A
Yeah, I mean, I do think one problem we have is that there's been these sort of increasingly apocalyptic warnings about the state of U.S. finances and the apocalypse has not come. And so that kind of, I think, causes people to tune out the debt and deficit conversation quite a bit and then also think like, okay, well if we're going to do all this deficit spending on tax cuts for high income people, you know, why can't I take an overtime? You know, all of these things. One thing to keep in mind, right, is when you have deficit spending, the US has to borrow to do that. So then it issues debt that takes up space in credit markets, right. There's only so much money that people have to loan out and it drives up interest rates for everyone. Right. In the same way that when you take supply of barrels off of the market, it drives up prices. Right. It's like supply, demand. The way that this works in debt markets, right, is interest rates go up. It's not necessarily by a huge amount, right. But it's still, you know, it's real. So if you are taking out of 30 year mortgage right now, median home price, if you look at the cumulative effects of fiscal policy since 2015, so this is, you know, combination of things everyone's been doing, that raises borrowing costs by about $2,500 a year. Right. That's a pretty substantial increase for people buying a median home, like $400,000. It happens slowly, so you might not notice it. And there are certainly other factors that can swamp it. Right. If we go into a recession tomorrow, the Fed will almost certainly lower interest rates, that will lower mortgages, that will swamp this effect. But over time, you kind of see this upward pressure on interest rates. You know, I find it interesting in the 1990s, there was real political pressure around deficit reduction, partly because people were frustrated with higher interest rates and they wanted deficits to come down such that interest rates would come down. And we're not seeing that right now. I have no, I'm not a political person. I have no idea why.
- [32:30]
B
It's all thanks to Ross Perot. I mean, sometimes, I mean, part of it is the fact that interest rates were so high for so long and really did just become a political issue. But it also helped that there was a very quirky, charismatic guy who made, you know, reduction in debt and deficit something of his life's work when it came to politics. And you get somebody who can marshal attention enough, which back in those days was like buying up time on public access television. And all of a sudden you can create, you know, you can create demand in the political economy by sort of force of will if you're charismatic enough.
- [33:07]
A
Right. But there's no one. Like, it's not like there aren't people out there talking about debt and deficits and none of them are breaking through. Maybe what you're just saying, but they're
- [33:14]
B
not the charismatic people. Right? Like, okay, so if I was gonna
- [33:16]
A
say, like, maybe it's just because it's. It's like it's me. Right? So it's Right. It's like.
- [33:19]
B
Exactly. So it's. It's people like Rand Paul. But if you had people as charismatic as Bernie Sanders or Donald Trump really concerned about debt and deficit, you could, I think, change opinion and get people to feel as if their economic lot in life is very much tied to the country's debt and deficit. But now I think people feel more like their lot, their economic lot in life is tied just to the spending side of things. I don't know. This is. This is just my own theory. Maybe it's relying too much on the power of personal politics.
- [33:51]
A
I think this is like, approaching a little bit like the great man theory of history, which I'm always both skeptical of and drawn to at the same time.
- [34:01]
B
Well, there's. There's another reason, too, though, which is actually gets at why I even called you up to come on this podcast in the first place, which is that I saw a clip of you on C Span during your congressional testimony answering a question from Wisconsin Senator Ron Johnson about the current US Fiscal picture. And you compared it to a Hallmark movie, which is probably the better answer for why people haven't been freaking out politically about the debt and deficit. So why don't you go, I'll give you the floor, and you can sort of make that analogy for the listeners. Yeah.
- [34:36]
A
So in many contexts, not just in the debt and deficit, one, you will often have people saying, why are people still investing in the United States? Why are people still buying treasuries? Why aren't they more freaked out? Why aren't they moving money elsewhere? And my response to this has been that we are the boyfriend in the big city. At the beginning of the Hallmark movie that the heroine knows she shouldn't be with, like, it just feels a little off. He's so big spending, he's got these like crazy life priorities. But she doesn't see a better option. And she's not gonna just break up with him. But if she, you know, goes home for Christmas and meets the nice firefighter and realizes that her life can be different, then it's all over for the big city boyfriend. And what I mean by that is markets have to have a place to go. They can't just get frustrated by the United States. They have to have a place to invest instead. They have to have some other place to loan to. And there is simply no other market that functions as well, does still have rule of law, provides the liquidity, et cetera, as the US treasury market. You know, you've seen some movement, for instance, into Swiss bonds recently, but Switzerland can only absorb so much. And so until you see an emergence of an actual alternative to the United States, we're going to be able to continue on just like doing things in this kind of haphazard, non ideal way. Now the thing that's a problem there, right, is markets are very fickle. And so if an alternative emerges, they can move very, very quickly. And that's how you end up in a, you know, fiscal crisis. But until that alternative emerges, we're kind of protected from the consequences of our own actions.
- [36:33]
B
I mean, it's, it's a very interesting analogy. Caught my attention for sure. Are there other, of course, other than Switzerland, Are there alternatives emerging? I mean, do the most recent geopolitical shakeups make an alternative clearer, less clear?
- [36:52]
A
No. Like what? I mean, what are you going to do, you know, invest your money in China? Like, people are, you know, very itchy about that. Europe doesn't have like an, you know, there's a lot of discussion about we're going to do a euro bond that applies to, you know, that just never really works out. And so you just don't have an emergence of these alternatives. Particularly, you know, the United States is big. We are big. We're relatively steady. We're less steady than we used to, but we're relatively steady. That's just very, very hard to replicate. You know, I was talking to someone who works in finance in April, May of last year about this problem and I asked him what he was doing and he said, well, you know, we've moved some money to like Canada, Australia and New Zealand, but we're not that happy about it. Right. There's just there's not a clear place for people to go and that is protecting us from the consequences of our own actions. I mean, just to go back to the rom com analogy for a second, if we were a rom com, this is where the heroine's best friends would be saying to her, like, just break up with him. You can be single, live your best life. But that's not how markets work. Right. Like markets need to be in a relationship.
- [38:06]
B
Yeah.
- [38:07]
A
And so it's not like markets are just gonna go elsewhere and wait for the better alternative to emerge. They're gonna stay in the non ideal relationship until they have a clear alternative. Some people have suggested that we might eventually move to like a multipolar version where like, yes, the US is still playing some role, various European countries are playing some role. You know, maybe. I think that kind of depends on how what things end up looking like in the United States and elsewhere, obviously, but that's also the case. That's just kind of annoying for markets. Right. It's just useful that you have the U.S. treasury as like the asset that you can use to price other things against. It's just a useful thing in finance. And so reworking the plumbing is a pretty big decision for markets. And I think they'll need a clearer path before they just full panic and break loose.
- [39:00]
B
So how worried should we be about a fiscal crisis?
- [39:06]
A
I mean, the thing about a fiscal crisis is that you shouldn't be worried that it's going to happen tomorrow. I'm going to look really stupid if this comes out and then like April 14, the fiscal crisis hits. But I'm going to go on the record and say you shouldn't be worried about it happening tomorrow, but you should be worried about it happening because if it does happen, it's really, really bad. I mean, to some extent, maybe, you know, we can argue about relative probabilities. It's like saying, how worried should we be about a pandemic? Right. Like, is a pandemic going to happen tomorrow? Probably not. Is it going to happen again in your lifetime? I certainly hope not. If it happened, would it be very bad? Yes. Yes it would. We should not do that. And so similarly, you should be doing everything in your power to make sure it doesn't happen. And I think that's really the thing here is like this is all a risk game. Again, to go back to the rom com analogy, maybe we're not in a rom com. Maybe we're in a really sad HBO miniseries about the emotional stultifying whatever of suburban Living. And the heroine's gonna marry the big city boyfriend and be kind of unhappy with her life for the next 50 years. And then it is what it is. Um, like that's totally plausible. That's a plausible outcome here.
- [40:27]
B
But if you are, if you are the big city boyfriend, better to hedge your bets and start, like making some small town appeals. Maybe, maybe, maybe start going to church. Maybe like reconnect, you know, start calling your parents a little bit more. Go on church, make sure your.
- [40:42]
A
Make sure your wife doesn't want to have an affair with the gardener. You know, like, it's just you should, but you shouldn't take relationships for granted, whether it's in finance or personally. And I think that's sort of the broader thing here is like, we are acting as if. Because there is no alternative right now, no alternative could ever emerge and we could never drive markets into the arms of that other alternative. And like, that may never come back to bite us. Like, I just wanna be very clear about this. That may be fine. Like, every person listening to this podcast may live their lives and die and, like, never see the consequences of that decision. But if we do see the consequences of that decision, it would be very, very bad.
- [41:27]
B
Okay. Speaking of applying romantic content, movies, whatnot to the economy, a colleague of yours quoted Taylor Swift in the New York Times last week saying, I think I've seen this film before and I didn't like the ending. And she was referring to private credit, which the title of the piece actually read. This is starting to look like a slow motion bank run. So now we're in the portion of the podcast where we can, you know, just start freaking out. Listen, we've, we've gone through all of the current economic data. We can just start casting, casting forward and start freaking out listeners.
- [42:09]
A
Yeah, let's do it.
- [42:10]
B
And that was written by Natasha Sarin at the Yale Budget Lab. So what was she talking about? And how worried should people be about a broader crisis sparked by private credit?
- [42:20]
A
Yeah, so she was talking about private credit, which is, I should say it's not my area of expertise. It is hers, but, you know, is an aspect of finance that is much less well regulated. And we've been seeing a bunch of headlines recently about issues in private credit. Investors trying to pull money out of private credit cards, funds. And, you know, you saw Jamie Dimon, I think it was a year ago, actually start talking about, like, if you see one cockroach, there's usually more. And that was in reference to the fact that they were, like, starting to see some issues in this space. I personally always get itchy when normal people have to start learning about a new area of finance because it may affect their lives. Right?
- [43:04]
B
Like, oh, I was a. I was a freshman in college in fall of 2008 when we all of a sudden in macroeconomics class, had to start learning what, like, a credit default swap was.
- [43:15]
A
Yeah, exactly. I mean, actually, I will say ptsd.
- [43:18]
B
I remember it very well.
- [43:20]
A
I was actually taking, I think it was called Financial institutions fall of 2008, and my professor said, hey, just a heads up, I might have to cancel a few classes this semester. Um, the New York Fed said they might have some questions for me. And then we just like, never went to class ever again because he, like, kept having to go to the New York Fed to, you know, advice on issues. So, like, I, you know, I do think when you start having to learn about new areas of finance that you didn't have to even think about before, that's a worrisome sign. Now people argue about, you know, how deep are the issues, how much spillover is there going to be. You know, private credit funds have these kinds of gating mechanisms for withdrawal of funds. So it is harder to do a big bank run in some ways. I think one thing that's kind of interesting in this, just to pull it back, is some of the big investors in private credit are in the Middle east, right? So, like, Middle Eastern sovereign wealth funds have done a lot of investing in private credit. They need money now. Right. Like, they are not necessarily in as strong a financial situation as they were six months ago.
- [44:37]
B
Oh, yeah. Projections are like, you know, Saudi GDP falling like 6 to 10% this year.
- [44:42]
A
Yeah, yeah. Like, it's not ideal. Again, for the point about, like, this is not good for us, but it's worse for others. And so, you know, it speaks to the way that you have these kinds of world crises that can spill over into the economy in unexpected ways. And if we start seeing a lot of money from the Middle east trying to pull their money out because it's needed domestically, could that accelerate things? I don't know, but it's certainly a thing that I personally am worried about right now.
- [45:11]
B
Yeah. And so I guess to be a little more specific for folks who don't read the Wall Street Journal every day, which I would be curious what the overlap is between listeners of this podcast and readers of the Wall Street Journal. So essentially, it's providing debt for riskier businesses that might not be able to easily get debt from your standard bank in particular because of increased regulation after the last financial crisis. And so some of the riskier debt that maybe previously would have been held by the large financial institutions is now in private credit. So on one hand, yay, the regulation worked. Like, the biggest banks aren't directly exposed to these riskier bets. But on the other hand, it's not like there's no relationship between private credit and large financial institutions. Right.
- [45:59]
A
And, you know, Sam Hansen at HBS did a presentation at the New York Fed that was basically making the point that you've kind of pushed some of the riskier debt into this kind of private credit space. And again, the issue is not having risky debt. That's not the problem. You know, we can argue about how much you should have, et cetera, but like, we've always had risky debt. Right? That's just a part of this is America, baby. Yeah, exactly.
- [46:27]
B
Take a chance.
- [46:28]
A
You want to bet on a junk bond, Live your life again, pay your taxes, and think very carefully before you bet on a junk bond. But the issue, right, with private credit is that regulars just have a lot less insight into it. And so if there are problems that are kind of lurking beneath the surface, it is just harder to see. And I think that's the thing that's making people really stressed out is that people just don't have great insight into how big a problem this is, how many issues there may be in private credit, how much feedback there might be with the traditional finance system, and when there are more unknowns, that just starts making everyone very, very itchy.
- [47:13]
B
Yeah, I feel somewhat proud that we've made it through the entirety of a podcast about the economy and we haven't talked about AI. And I will say that we're going to do a whole other podcast on AI very soon, but it's more the politics of AI than the economics. So I do want to ask you, before I let you go, like, how you think about. I guess actually that's a lie. I did mention AI early on in talking about how resource dependent it is when it comes to energy. I mean, do you have thoughts about the American economy's relationship to AI growth right now? Like overly dependent or reason to be optimistic?
- [47:50]
A
The conversation about AI gets so complicated, Right. Because everyone has their particular thing that they focus in on. I will say the thing that I focus in on most is the impact of AI on the labor market. By background, I'm a labor economist. You're currently not seeing, frankly, a particularly large impact of AI on labor markets. And I don't think that is Particularly surprising, frankly. ChatGPT only came out in November 2022. We often talk about AI as if the capabilities of AI are the same now as they were in November 2022. They are not. It has changed remarkably over that time frame. And I think we are going to have to see where this goes and look at how much AI does disrupt the labor market moving forward and how much people do have to switch occupations and adjust how they work, et cetera. But the ways in which AI is impacting the labor market right now is much, much more around the kind of AI buildout and the AI data centers and the AI investments than it is on the labor market side. And so I think we're still kind of waiting to see what the economic impacts are going to be for you and me, as opposed to kind of on the investment data center build outside. I'm assuming that you don't currently own multiple data centers. That may be wrong.
- [49:20]
B
I don't. And I like you. I'm also curious to see how long it takes before I just have a robot hosting this podcast for me. There's a pretty large data set that we could train a model on and just say, have at it.
- [49:36]
A
Okay, but maybe this is a good sort of point to end it. But I do think that this kind of gets at an important question in AI, which is what literally can the technology do versus what do consumers want it to do? Do consumers want to listen to an AI generated podcast? Or is part of what they're interested in that they've developed a relationship with you, they developed a relationship with other hosts, they want to hear from humans. And so I think it is really important to remember, no matter. I'm not a tech person. I'm not going to get into debates about, like, where the technology is going or what it could do, because I have no idea. But humans tend to like other humans and we tend to like spending time with other humans. And we often pay to be in spaces or to be with other humans. Right.
- [50:26]
B
And it also gives the information meaning, like, you know, not to tell people not to listen to this podcast. But a lot of the information that people hear on this podcast they could get from just reading a piece of paper, probably, or at this point even maybe I'm really giving away the farm here. But, like, they could get elsewhere.
- [50:42]
A
Right. You could get the information by going to BudgetLab, Yale. Edu, and reading Budget Lab's excellent research.
- [50:50]
B
Exactly. Anyway, okay, we're going long here, but any final thoughts before we close about the entire economy that we've talked about.
- [50:58]
A
You know, just that I think the really big question is where all of the massive uncertainty that is hitting the economy is going to land us. And if it feels like you don't know where all of this is going, congratulations. The economists don't either.
- [51:17]
B
All right. Well, we're going to leave it there. Martha Gibbel, thank you so much for joining me today.
- [51:20]
A
Thank you for having me. I'm going to go see what's going on with Straight of Hormuz.
- [51:24]
B
My name is Galen Druke. Remember to become a subscriber to this podcast@gdpolitics.com and wherever you get your podcasts. Paid subscribers get about twice the number of episodes and also join on our paid subscriber chat and pass along questions for us to discuss on the show. Most importantly, you ensure that we can keep making a podcast that prioritizes curiosity, rigor and a sense of humor. Also, be a friend of the podcast and give us a five star rating where wherever you listen, maybe even tell a friend about us. Thanks for listening and we'll see you soon.