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Slate Money
The Mind the Gap Edition
00:48:10
Slate Money on a trade war with China, the wage gap, and New Zealand
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- [00:00]
A
The following podcast contains explicit language. Hello, and welcome to the Mind the Gap edition of Slate Money, your guide to the business and finance news of the week. It's a special week this week because we have Emily Peck in town.
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B
Hello.
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A
It is your title.
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B
My title is senior reporter, HuffPost.
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A
No, I mean the name of the show is your title. You came up with Mind the Gap.
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B
Yes, I did.
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A
Can you do your best London Underground subway announcer impression?
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B
I cannot.
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C
Yes.
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B
Mind the Gap. I don't know. I do not want to embarrass all of us with my bad British accent.
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A
I like. It's the cadence of it, which I like it. Mind the Gap. There's that long mind. Then the gap comes anyway.
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C
Diphthong.
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A
It's one of my best things, one of my favorite things about London. I have very few favorite things about London now that I'd never go back there because that country is dead to me, as we discussed on the Brexit edition. But Emily, welcome back. You are going to help us navigate. Sorry, I'm Felix Ham and we also have Anna Shymansky.
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C
Hello.
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A
I should introduce myself. That's only polite. For those of you who don't haven't been following along. You're going to help us navigate the news of the week, which is mostly stocks went up and stocks went down and it was something to do with China. And you're going to help me understand that because I'm a bearer for a little grain and it makes no sense to me. You are also going to help me navigate the news about. Which is coming from London, about how much women get paid in those parts or don't get paid or don't get paid. Because there is a law in London which says that corporations actually have to reveal how much women gets paid. And to no one's great surprise, in certain corporations, it's shockingly low.
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B
It's quite low.
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A
But most excitingly, we are going to have an entire segment on inflation targeting in New Zealand.
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C
Yes, we are.
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B
It wasn't my idea.
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A
This is so exciting to me. And you need to be a complete monetary policy nerd to get excited about inflation targeting in New Zealand. But trust me, we are going to make this exciting because it is a fundamentally exciting thing. So, no, we're not going to do it right now. We're going to be nice to our listeners.
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C
Just you wait.
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A
Just you wait. We are going to talk about it, but you're going to have to wait. You're going to have to listen to Stocks go up, Stocks go down stuff first. Okay. So, Emily.
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B
Hi.
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A
You work at a fast paced blog where people pay attention to stocks go up, stocks go down. So you are going to explain to me, over the course of the week, stocks went up and they went down. There was a lot of up and down which we sensible folks who don't work at fast paced blogs kind of just ignore because it's noise. But apparently there was a reason for this. Yes. Okay.
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B
And guess what the reason was. It was our fine president, Donald Trump, who more or less initiated a trade war with the Chinese.
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A
So he has stopped talking about having a trade war with the Chinese and he started actually having a trade war with the Chinese.
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B
Yes. He announced a total of $133 billion worth of tariffs or tariffs on a total of $133 billion worth of goods. And that freaked out the markets. Stop me if I'm wrong on this. And yeah, so he announced an initial 50 and then another chunk the other day and the markets went up and down accordingly because people are freaking out. But the tariffs haven't actually been implemented.
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C
Right. And I think first the big word that the markets heard that they got a little scared about was soybeans.
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B
Yes, exactly.
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C
Terrifying. Including politicians in Iowa also terrified about the word soybeans.
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A
Okay, so Anna, explain to us why the word soybeans is so terrifying. Because when I think soybeans, I just think, oh, lovely tofu.
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C
So it's one of our biggest exports to China. So if the Chinese were to actually move forward with this tariff on soybeans, it would really potentially hurt a lot of the states that are Trump country.
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A
So that was part of the Chinese retaliatory tariff.
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C
Yes, yeah. And I think what's interesting here is that it's, we don't really quite have a trade war yet. We have still negotiations in a trade war. So it's. This is one sentence I never thought I'd say, which is that Larry Kudlow came out this week and calmed the markets where there, there was legitimately a lot of potential panic that this was real, that all of a sudden, you know, the Chinese were actually reciprocating. This could be a thing. And then Kudlow came out and said, look, we, we have until May to speak with companies in the US about this. Then we have, I think, another 180 days before these tariffs will be implemented. This is really a tactic. This is just the beginning. And so the markets kind of went, who sigh of relief. But then Trump now came out, I think last night saying, I want another $100 billion and to me, this is the really concern because I agree with you. At the end of the day, one week of stocks going up and down, it's not a, it's, it's normal actually. But if you're talking about potentially upwards of half a year where there's so much uncertainty in the market about what's going to happen. And when people say uncertainty in the market, what they really mean is uncertainty at companies where they don't know what their input costs are going to be, they don't potentially know what their revenues are going to be, or they're going to have a harder time modeling that could then cause them to invest less, to spend less on Capex, which is important because that was the entire reason we supposedly had the tax cuts, was to spur capital investment.
- [06:06]
B
Yeah, I think one of the things about this move on Trump's part is just how exceedingly dumb it seems to be. I mean, not only in introducing uncertainty, but in actually addressing the problems he claims to care about, which is, you know, China taking advantage or stealing ip. Right. Threatening our economy. La la la. Things that other people, joblessness and manufacturing, et cetera, things people legitimately on all politically actually care about. The trade war won't or the potential trade war. These tariffs, they don't address those problems.
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A
And in many ways they make them worse.
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B
Yes, it's just the stupidity of it is frustrating.
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A
Okay, so Anna, walk us through this. If we put tariffs on Chinese imports, doesn't that make those goods imported from China more expensive and make domestically produced goods relatively more attractive and so improve employment in those industries in the U.S.
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C
Very unlikely, because many of those manufacturers in the U.S. have shifted to using far more machines and higher skilled labor. So it doesn't matter what happens, you're not bringing those jobs back. But what I do think is interesting about the goods that Trump targeted or the Trump administration targeted is that it often wasn't goods that China is actually current, currently a leader in exporting. There were some, like televisions, but a lot of them were goods that China has talked about becoming a leader in. So this is where you had like lithium ion batteries, robotics. And what this is really about is the Made in China 2025 plan. And there is legitimately a lot of concern, not just in the U.S. but in many countries about this plan that China came out with where they talked about not only becoming dominant in these advanced manufacturing fields, but having self sufficiency so that they would onshore the entire supply chain and essential they would be exporters to the world and Their domestic markets would be closed. So this is a real concern. But what the Trump administration is doing just doesn't make a lot of sense because it is possible they could get some short term gains. It is possible that the Chinese could be concerned enough that they could pull back on things like forced tech transfer, which actually is a big deal. That's where companies, if they want to access the Chinese markets, they have to form a joint venture in China with a Chinese company and they have to transfer their tech technology. And that's, that's a real concern because part of the way China wants to become dominant in a lot of these industries is by acquiring foreign companies, especially US Companies, by engaging in these types of practices. So if it is possible that the Trump administration could get that, that small gain, but long term like that doesn't really help the, the position of the US or allies because the way Trump is doing it is he's breaking a lot of our alliances with other countries, both in Europe and also in the, in the region. In Asia. These tariffs would not just be harmful for China, they would be really harmful for a lot of countries in Asia that create a lot of the components of the Chinese parts that we would have tariffs on.
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A
Because, because we no longer live in a world where goods are made in one country and exported to another. We live in the world of supply chains and the supply chains touch many, many countries. So I guess the obvious question is if the United States is legitimately worried about this 2025 plan that China has, what is the sort of correct policy response to that? If tariffs are the incorrect response?
- [09:42]
B
I think they already, I mean, they already screwed this up, right? We pulled out of tpp and from what I understand, that would have given us, if we had been in, been able to negotiate through that, it would have given us real leverage to make China do things we wanted them to do. You know, we would have had other countries and economies on our side sort of at the table and been able to negotiate something for modern times, as opposed to what Trump is doing, which really seems to be sort of like this old fashioned idea of how the economy works, which we just know it's incorrect. The supply chains were all intertwined. Now there's no going back. Like we can't go back and do this weird old fashioned trade war stuff like, and it's just ridiculous.
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A
So, so basically the first thing that Trump does is he destroys the solution by pulling out of tpp.
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B
I think so.
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A
And then the second thing he does is create a bigger problem by introducing these tariffs.
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C
And even if he does have any type of small gains, they're going to be very, very expensive gains. Whereas Obama, although not perfect in this arena, was far better, partly because in 2013 he met with Xi and he showed him a significant amount of evidence of the Chinese government essentially coming in and engaging in cyber theft. And as a result, the Chinese actually really pulled back on cyber espionage. It's not something that's talked about as much because Obama did it in the way that we weren't engaging in this belligerent rhetoric. And so it actually made you didn't have markets getting roiled. He got the result we wanted, but he didn't have this type of impact, which Trump just doesn't understand.
- [11:09]
A
Basically, the noisier and more market rattling the way your response to one of these issues, the less effective and less helpful it's likely to be. But of course, Trump being Trump, he wants to do everything in the noisiest and most market rattling kind of way. I have to say.
- [11:28]
B
Just to I did learn one thing about tariffs and George W. Bush apparently did steel tariffs back in 2002, and it was bad, bad news.
- [11:37]
A
It didn't last long.
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B
Yeah. And it cost, according to one paper I read, 200,000 jobs outside of the steel industry, which was more jobs than were in the steel industry at the time. And everyone who from back then regret it.
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A
Just a postscript, so don't do. Oh, never mind. My favorite little sub plot to this whole thing came just to sort of lighten things up a bit when the Chinese announced a long list of things that they were thinking of imposing retaliatory tariffs on, which included wine. And there were like two or three articles coming out quoting California winemakers saying we're going to be devastated if they imposed tariffs on wine exports. And I'm like, if you are reliant on exporting California wine to China, you have bigger problems than Chinese wine tariffs.
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C
Although I believe there is a lot of actual, like collection of fine wines by a lot of wealthy Chinese. So I could see some.
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A
They have really moved from the Bordeaux to the Burgundy. They are not collecting California wines. And in fact, one of the really interesting things you see when you travel around the world is how rare it is to find U.S. wine anywhere in the world other than in the U.S. the U.S. produces an enormous amount of wine. It consumes an enormous amount of wine. It just doesn't export wine.
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B
It's no soybean.
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A
Emily, hi. Hi. Tell me about Goldman Sachs.
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B
Well, it's a bank. It has an enormous so to pull back, the UK a few years ago decided it was going to make Companies with 250 or more employees report their gender pay gaps, which is good. We were going to do it in the US but the Trump administration killed that idea. And so this year, the due date was this Wednesday. So all the companies had to report how much they pay women versus men and by median, I think, and average salaries, blah, blah, blah, to show what the pay gaps are between women and men. And the biggest pay gaps were in the finance industry. And I think Goldman was really one of the worst offenders. The gap between women and men is like 56%. I mean, it's really ugly. And that's because mainly it's not because like Goldman is paying women and men with the same jobs different amounts of money. Although they might be, but the big difference.
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A
Claim that they're not.
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B
They claim that they're not. That's right.
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A
We've talked in previous episodes about the various ways in which that claim is mildly dubious. But it's certainly not a 56%. It's not like if you are sitting on a, you know, fixed income desk at Goldman Sachs and you're a woman, you're going to be earning 56% less than the guy sitting next to you making the same job. It's much more the fact that Goldman is just very top heavy when it comes to men. Right.
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B
So 17% of the highest paid workers at Goldman are women. Just 17%. And then 62% percent of the lowest paid workers are women. So that's pretty much what's going on. It's the glass ceiling. It's not like equal pay for equal work. It's just the men get the good jobs and the women aren't getting those jobs.
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C
I will say slightly in defense of Goldman that they have been somewhat out front, at least the US office has been somewhat out front about. They understand that this is a problem and they are actually doing things to try to address it. They.
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A
Yeah, they're replacing their like bald white guy as CEO with a. Wait, another bald white guy.
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B
But they chose him from among three white guys who are all bald. All bald, yes. So.
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C
So they do not have hair diversity, but they, Their incoming analyst class is about 50, 50 men, women.
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A
And, and it has been for a while.
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C
No, and they do under. And they've been very out front about the fact that they understand that this isn't, this isn't causing change as you move up and they get that that's a problem. And I think a lot of Banks get that this is a problem. It's just, it's not as easy of a problem to fix as I think sometimes people think it is.
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B
Well, I mean, I don't know if I always agree with that. I kind of feel like if Goldman had other kinds of problems like say the economy crashed or something, or trade war was coming, they would scramble and fix, fix what they needed to fix and do what they need to do. Like I don't think the banks see this as a real problem. I think they see it as a PR problem and they make announcements, they have their what is it? They're like 10,000 women initiative, whatever that means nobody really understands. Or it's, they don't treat it like a real problem and therefore it doesn't get fixed.
- [16:15]
C
I'm going to disagree a little bit because I know they've actually been doing a lot of the big banks have been doing a lot of very aggressive recruiting of women. And having said that, I realize that this is again talking about the kind of incoming as opposed to as you move up. And yes, it is certainly true that they should be doing more, all the banks should be doing more. Although I will also say I don't know why, I'm just defending banks today. But it's not just banking. This was the case In I believe 80% of companies in the UK that were. It was only 250 companies I think that reported but have pay gaps and fairly significant pay gaps.
- [16:51]
A
And my favorite one was actually Conde Nast where more than two thirds of the employees are women. And on every single pay level, every single pay quartile, there are more women than men and yet they still manage to pay the men more than women. Mainly because like the top five men in the company all just earn an enormous amount of money and they just skew everything.
- [17:19]
B
Yeah, and I think that's really, I mean that's what this data really comes down to. It doesn't tell you much about, you know, apples to apples, but it just tells you that men have all the best paying jobs and women don't. And I mean banks fixing their entry level classes are now 50 50. That's not the problem isn't the entry level. The problem is the top level. And getting women from the bottom to the top, moving them through the pyramid or whatever you want to call it, the pipeline I think people call it, is really difficult and I don't think enough is being done to address the problems that lead these women to drop out. Problems like sexual harassment, sexual discrimination, the motherhood penalty.
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A
And we've also talked a little bit about this finding that if you have a woman competing against two or three men for a job, she will never get that job.
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C
And there these are two things. Like one, I actually think the headhunter issue is a big issue, is that if you've ever done hiring, you will see one woman for every 10 men. And so just like probability, it's unlikely that the woman is going to get the job.
- [18:18]
A
No, but it's even less likely than statistics suggest. Like if you would think that if you had, you know, a large number of three way races where there was one woman and two men, then the woman would get the job a third of the time. The fact is that the woman gets the job basically none of the time.
- [18:35]
C
And this also just goes back into problems with hiring in general, which is that you have to get through the first stage of people liking you in order to get to the case study stage. And the case study stage is actually where I think we could like create a lot of diversity because that's where people just show what they can do, not based on who they are, their race or gender. And the problem is that it's, it's really hard for women and other diverse candidates to get to that case study stage. And so I think that's, that's part of the issue. And, and going back to what Emily, what you were saying as well, I think that if we really want to fix this, the biggest issue I think is the motherhood issue. I mean, this is what we talked about a number of weeks ago with the study in Sweden is that women before they have children are mostly on the same trajectory as men. There are issues, but mostly on the same. And then once women have children, there's a significant drop off. And this is something that I do think companies can address, but it's not an easy thing to address because I think part of it is a cultural acceptance of the fact that we probably want the species to continue. And if we do, women are going to have to continue to have children. And I don't think we're probably ever going to get to a world where it's, you know, men are doing entirely as much childcare as women. It would be great. I don't think it's going to happen. So I think companies need to allow for women to be potentially be able to either slightly scale back and then be able to ramp up, or if they do leave the workforce to have children for a year or two, that they can come. That's part of the problem. We have, we make it such an all or nothing thing where it's like either you have kids and you have to work just as hard without any help, or you have to essentially just leave your job with almost no chance of getting back in at the same level.
- [20:18]
B
I think there are other issues too. It's not. I mean, a lot of these banks have on paper amazing flex policies and they send me emails about them a lot and I ignore them. But it's not just the policies. It' sit's discrimination. It's discrimination against. Against mothers in the workforce. I was just looking into a lawsuit filed by these longshore. They're called longshoremen, but they're women out in California and basically they're being discriminated against. When they get pregnant and have babies, they're not getting to the next level in the union and they're not able to advance. Whereas, like a similarly situated man, if he gets injured, he gets these, like, credit hours worked so he can still be on the same promotional trajectory. It's pure discrimination, right? Like, if this guy gets injured, he's okay, he's still gonna move up in the union. If the woman stop have a baby, she's not going to move up. And this isn't about like some woman wanting to drop out or who has more work at home. It's just pure discrimination. And I think there's pure discrimination keeping mothers from advancing. And there's also a bias that, like, there's studies that show, like, if a woman's a mother, she gets passed up for promotion. She might not even hear about a promotion. Stuff like that that I think goes on in a lot of management's head. And we know a lot of those managers are men. It may not be they're even aware of that kind of bias, but there's a lot of that that also goes on that I think needs to be said.
- [21:37]
A
Yeah, there's definitely a lot of o. Well, you know, she just had a baby. We're not going to ask her if she wants to move to blah, blah, blah.
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B
Sally won't want that job. She's got children, right? No, never say that about Bob.
- [21:48]
C
No, and that's. And that's very true. And I'm not saying, and I'm not necessarily saying that banks should have like, you know, the mommy track program, but more just to understand that, make it. You have a, like a, a parenting program or something. The idea that, Because I think the issue is, and I think that Swedish study somewhat showed, is that even when you account for economic Necessity, you still often have more women who end up doing more of the child care and having to kind of pull back on their career slightly. And I think that that has always been the reality. And if we want to make it better for women, better for all parents, but also better for women, I think we have to acknowledge that, yes, there's very real discrimination, but we have to make it easier for women to engage in or to have real choices. Because I think right now it is a very all or nothing choice.
- [22:41]
A
And banking in particular is one of those high intensity industries where there are cultural norms about like, you should be working all the time, really high intensity, like you should be married to your job, have. And it's. And there's a large number of men in banks who would love to get away from those norms as well. It would be a great. And. But as you say, moving away is hard, but maybe some of these gender gaps will help provide the impetus to get these banks to move away from them.
- [23:18]
B
Yeah, I think the idea behind the whole thing was to shame them into action. But again, I really think.
- [23:23]
A
Do you remember that to a certain extent it works, right. When UK companies started having to report on the gender makeup of their boards, the gender makeup of their boards became more diverse. And just through transparency, not through any kind of. They had to.
- [23:41]
B
Yeah, no, I think that's right. And I think they'll start looking at root causes also and they'll make those policies and maybe there'll be more pressure to bring in more than one woman for every job slot. It won't be 10 to 1, be like 8 to 2 or something, but.
- [23:55]
A
Make sure it's 2. If you have a choice of women, then you might choose a woman. If you don't have a choice of women, you don't choose the woman.
- [24:01]
B
Isn't there some kind of token bias too? Like if you call a woman or a person of color in as a candidate, then you're like, ah, we covered it. And then you go and pick the white guy. You're like, but we're good, we did diversity, we're fine.
- [24:12]
C
Although I will say you have banks now also tying meeting diversity targets to management comp. So there, there are some real changes that they're engaging in.
- [24:22]
B
All right, we'll see, see, we'll see. We'll come back next year.
- [24:25]
A
Look at, come back, see if there's any. I think this is, this is actually the important thing, right, Is that there's a limited amount of information you can really get from an individual data point. But this is a time series. The UK companies are going to have to report this every year and it will start becoming interesting over the course of a few years to see whether directionally things are improving.
- [24:50]
B
Yeah, I think that's right.
- [24:52]
A
I get to clap because I'm so excited. We get to talk about inflation targeting in New Zealand.
- [24:58]
C
Yay. Agreed.
- [25:02]
A
Anna, what happened in 1989 in Wellington, New Zealand?
- [25:08]
C
Well, the Reserve bank of New Zealand began using an official inflation target.
- [25:14]
A
And this was revolutionary. At the time, New Zealand was the first country to do this officially. And rather than just have a bunch of men in gray suits sitting around a table and doing things which no one really understood, and then somehow there was an interest rate that was set. They said, no, no, we actually have something we're targeting. We want 0 to 2% inflation. And it worked.
- [25:44]
C
It worked quite well.
- [25:45]
A
Inflation came down in the space of a couple of years from like 7% to 2%, and it has stayed at 2% ever since. And it's not easy to target inflation in New Zealand because it's what's known as a small open economy. And it is.
- [26:00]
C
We like small open economies.
- [26:01]
A
It is open to the whims of demand from China and Australian commodity prices and the price of lamb and all of these random things. And so it turns out that even though the Reserve bank of New Zealand has much less control over the Kiwi economy than most central banks do, hey, they managed to do it. This was kind of impressive. So then what happened was that the governor of the Reserve bank of New Zealand hops on a plane, goes to the big central banking conference in Jackson Hole, tells everyone else, hey, look, it works.
- [26:37]
C
Look at this cool thing I'm doing.
- [26:38]
A
And before you knew it, everyone was doing it. It was super trendy.
- [26:42]
C
Took the US a while to have an official. But yeah, no, and it's. It really was a big change because I think if you look at the history of monetary policy, for a lot of the history of these banks, you had exchange rates that were pegged either to gold or another currency. And so that long term was supposed to, in theory, maintain price stability.
- [27:04]
A
That, that. Yeah, there was this wonderful thing called Bretton woods, which was like, after the Second World War, this is how you conducted your monetary policy was all to do with exchange rates and not to do with inflation. So this is a big change.
- [27:16]
C
Yes. And so then in the 70s, when that changed, there we had, not surprisingly, a lot of volatility in. In interest rates. And so. And also, just specifically, we had also a lot of Volatility, inflation and high inflation. We also had issues of stagflation where you have high inflation and high unemployment.
- [27:38]
B
I had no idea how New Zealand revolutionized monetary policy. This was like a huge revelation for me. I just want to inject this in here. I mean, and apparently the guy who thought of it was like a kiwi.
- [27:49]
A
Farmer, literally a kiwi farmer.
- [27:51]
B
Unbelievable to me that he was the inspiration for all this change. And I guess the reason we're talking about it now is because there was a change.
- [27:58]
A
Yeah, well, in addition. So, yeah, so this is the big move, New Zealand, which is the spiritual heart of inflation targeting New Zealand, which basically caused the entire planet to move to inflation targeting. New Zealand, where the ecb, which is the sort of state of the art central bank built by the most advanced technocrats, of course when it was created, they were going to build it all around an inflation targeting regime. Because inflation targeting is obviously the thing which works. And it wasn't obvious that it was going to work.
- [28:34]
C
No, it was very controversial.
- [28:36]
A
It was an experiment. Because of course the thing about inflation targeting is that if you have an explicit mandate for inflation, you have to ignore your exchange rate. And so what people were worried about.
- [28:48]
C
Ignore somewhat of what was happening in the real economy.
- [28:50]
A
You have to ignore unemployment, you have to ignore exchange rate. All of these things which central bankers really care about, the currency, the unemployment rate, they have to basically explicitly ignore all that and just concentrate on inflation. And then the idea is if you get inflation right, then everything else will sort itself out. But no one really believed that until New Zealand did it and now everyone did it. And now New Zealand has gone apostate a little bit. They no longer have their pure inflation targeting regime. And, and the thing that they have moved to actually looks to the, looks much more similar to the weird Kludgy. No one quite understands it. Dual mandate thing that we have here in the U.S. exactly.
- [29:39]
C
So because now they're going to take into account GDP growth and unemployment when they're considering monetary policy, they're not simply going to be targeting, they are still going to have a inflation target. But that's not the only thing they're going to be considering, which is in the US we have a dual mandate that involves maintaining price stability and trying to achieve full employment. And they're now looking for something similar.
- [30:04]
B
So I'm not a wonk on this stuff. So my question is, was the inflation target, is that 2% number still right? Isn't there some controversy now that it's controversy too low because wages aren't increasing.
- [30:16]
C
A lot of this has to do with the, what is considered the neutral interest rate rate, which is the, the rate which is also called R starred, that is neither expanding is causing neither expansion or contraction of the economy. It's the neutral rate. And this is not something that you can officially say what it is. You kind of have to assume and it used, people used to believe it was 2%. So normally you would think if you had 2% inflation, 2% real rate, you'd have like 4% nominal interest rates. Now post crisis, a lot of people, including John Williams, who's going to now be the president of the New York Fed, has said we may need to rethink this because it looks neutral rate has declined to more like something like 0.6. And when you're so close to that 0 bound, it makes it so that the central bank does not have a lot of room to cut if you move into a recession.
- [31:04]
A
So one of the wonderful things about inflation, like inflation is not always a good thing. And when New Zealand introduced inflation targeting in 1989, it was basically considered the inflation was a problem because there was too much of it. Nowadays inflation is a problem because there isn't enough of it. And so it's a very different way of looking. And when people complain about central banks missing their inflation targets, it's because they're missing them on the downside. And the reason why you want inflation is because sometimes you want these wonderful things called negative real interest rates. You want to be able to have a low nominal interest rate. Let's say your nominal interest rate is 0.5%. And then if inflation is 3%, then you have a real interest rate of minus 2.5%. And when you have negative real interest rates, what that does is it encourages people to go out and spend more because otherwise they, they're losing money. So you can't, if you have very low inflation, you can't have a negative real interest rate. And that's a problem. So you want to be able. Ideally, one of the interesting things about the inflation targeting regimes around the world is that everyone has kind of come to this consensus that the 2% number that new Zealand more or less just pulled out of a hat one morning in 1989 was too low. It would have been better if it was more like 4%. But now that everyone has agreed on 2%, it's almost impossible to get to 4% from 2%. So we're kind of stuck with 2%.
- [32:44]
B
So is this new stuff from New Zealand like a back channel to 4% essentially.
- [32:50]
C
I would actually say this more has to do with the current labor cost. Yes, just Jacinda. Jacinda Arden. The.
- [32:56]
A
We love Jacinda.
- [32:57]
C
Yes.
- [32:58]
A
So she's the new Prime Minister of New Zealand and we all love her very much.
- [33:03]
C
And she's pregnant, which is kind of awesome. Speaking of what we were talking about earlier with wage gaps, so they now, the labor coalition government has engaged in a number of, I wouldn't say populist, but like more populist policies. And I actually think this falls into a line a little bit with that, that there was some thought that the previous more strict inflation targeting was a little too kind of man in a cloaked room. And they want to make this a little bit more open and they also want it to be that we're not just focusing on inflation. If the economy isn't doing well, we want to have a little bit more flexibility. Yeah.
- [33:42]
B
So, but, but I did look up the unemployment rate in New Zealand and it's, it's low. It's fine. Yeah, seems fine. So I don't, I don't get it.
- [33:51]
A
Yeah, it's not, it's not the. That there is a crisis in New Zealand. That.
- [33:56]
B
Okay, okay.
- [33:58]
A
But it's more that they want, this is, you know, my favorite financial term. They want optionality. And this will give them a little bit more freedom, should they need it, to start supporting employment rather than simply caring about inflation. And ultimately what Kiwis care about is employment more than inflation. You would much rather have a job than see prices, you know, not go up.
- [34:31]
C
And there is a real reason why we are seeing lower inflation. I mean, initially after the crisis, people thought maybe this was a short term thing, but now because of globalization and technology, we have so many pressures keeping prices low that it just seems unlikely that we're going to see the type of inflation that we saw, you know, 30 years ago.
- [34:49]
A
If you, if you look at long term bond yields in any currency you care to mention, pounds or dollars or New Zealand dollars or euros, yen, they're all really low. And what that tells you is that no one expects inflation to appear anywhere, anytime for the next 10 to 30 years, which in turn tells you that maybe targeting inflation and considering inflation to be the big boogeyman, which you really need to worry about above all else. While that might have made sense in the 70s and 80s, maybe doesn't make sense anymore and that inflation has kind of. We don't have that problem anymore and we should be concentrating on more Urgent problems like employment.
- [35:34]
B
But my other question was, it's cool to focus on employment and people need jobs, but they also need to be paid for those jobs. And hasn't is there ever any talk of targeting wage growth? Because it seems to me that we have in the US we have was like 4.1% unemployment. Now that's the number in New Zealand, too. But wages have been pretty stagnant. And in the past, inflation has spurred companies to raise people's wages, if I'm understanding this correctly. And now it's like, what's going to get these guys to raise people's pay? How am I getting a raise?
- [36:05]
A
So I'm going to ask Anna the same question in a much wonkier form, which is, Anna, if you want an awesome replacement for inflation targeting isn't the thing to do, rather than adding in a mushy employment mandate, shouldn't they have gone the whole hog? Since, given their history of doing awesome, crazy experiments, shouldn't they have gone for nominal GDP targeting?
- [36:30]
B
Yeah, what he said.
- [36:32]
A
Okay, first, Anna, what is nominal GDP targeting?
- [36:36]
C
It's quite similar to inflation targeting, where you're targeting a specific nominal GDP rate. I mean, it's pretty straightforward.
- [36:44]
A
So GDP growth is something which we all talk about a lot. GDP growth by 1% or 2% or 3%. And if you listen to Donald Trump, it'll be enormous. But all of those numbers are real. And so nominal GDP is the headline GDP growth plus the rate of inflation. And there's little pocket of finance, Twitter, which really loves the idea that central banks should be targeting nominal GDP growth rather than inflation.
- [37:17]
B
And she's rolling her eyes.
- [37:19]
C
I don't know. I just, I think. Is there concern right now? Because, you know, who knows? Are we actually going through secular stagnation? Are we ever going to see rates? Where are we ever going to see growth rates where we saw them before? Who knows? Do we need to be focusing more on that than inflation? I think these are legitimate concerns. And I think a lot of people, people in the central banking community are talking about this, these types of things. But I do think that whatever the banks decide to do, they have to be extremely clear about what they're doing, why they're doing, and their timeframe. Because I actually think more than anything, that's been what's really helped central banks to stabilize prices is that they've been very clear about their forward guidance. And so, so do I think it's possible they could move to that type of regime and it could work. Maybe. But I think they would have to be very clear about what they're doing.
- [38:10]
B
But something has to happen, right? If this inflation target of 2% isn't good anymore, doesn't some action have to be taken?
- [38:17]
C
And they're talking about that tweaking need to occur. They're talking about either actually increasing the target. They are talking about bringing in some potential GDP targets. They're also talking about having a range. So it's the idea that if you, you have a kind of an average of where you want it to be. So if you've had a number of years where inflation's been below 2%, that means you could also have a number of years where it's above 2%. And the Hawks get very upset about this.
- [38:43]
A
And one of the problems with inflation targets historically has been that central banks don't seem to worry when they undershoot them and they tend to panic when they overshoot them. And that's asymmetrical in a bad way.
- [39:01]
B
But I can, I can get that. I mean, if I have a hundred dollars in the bank and there's a lot of inflation, I feel sad. But if there's not a lot, I still have my hundred dollars and I feel unsad.
- [39:09]
A
But that's exactly the problem. Inflation is bad for people with $100 in the bank. Now, let's say it's the other way around. Let's say that you have $100 in debts and you have no money in the bank, then you love inflation because it's inflating away. It's eroding the value of your debts. And, and if there's no inflation, you're like, my debt is not going away and it's not going anywhere.
- [39:29]
C
And so then you want to know what you're going to do. If you're a lender, you're going to really increase the rates of when you lend to people because you now your assets that you have are worth less.
- [39:39]
A
Yeah. But in any case, the point is that the degree to which inflation is a good thing or a bad thing basically is a function of how much capital you have. And if you have a lot of capital, you don't like it. And if you don't have a lot of capital, you're much less concerned about about it.
- [39:53]
C
Although I do think it is true, it is very true that the history of inflation is definitely something people who are the owners of capital are more concerned about. Having said that, these things do move into the real economy. It's not like if all of a sudden there's a ton of inflation. It's only going to affect the people that own capital. And that's not going to have effect on the real economy. It most certainly does.
- [40:15]
A
And one of the things, one of the effects it has on the real economy is that it can, can help preserve employment during recessions. That if you are employing a bunch of people and there's a recession and there's no inflation, then there's a large chance that you might have to do layoffs. On the other hand, if there's inflation and you just don't give raises, then you can keep those same people employed and save money in real terms anyway.
- [40:43]
C
Yeah, traditional economic models, that was always like, well, you know, when, when inflation increases, then, you know, you can. Or you know, if economy's doing poorly. Sorry. So in a lot of economic models, it was the idea that when the economy is doing poorly, you can cut wages, but nobody cuts wages, they lay people off. So inflation is a way to essentially cut wages and not have to lay people off.
- [41:04]
A
So anyway, we're going to go back to New Zealand in another 29 years and see how the new regime did. But until then, yeah, we should probably have a numbers round. Okay, number. Emily, what's your number?
- [41:16]
B
My number is 60 million. That is the number of workers in the private sector, not in unions, who are subject to mandatory arbitration clauses in their employment contracts, which means if they have an issue at work, they can't go to court, they can't sue, they have to go to arbitration, which is like, I call it secret court, where they're essentially screwed. And I'm talking about it now. The number is old. It's from some research from I think last year. But those researchers updated it and they found out that a higher percentage of women are subject to, subject to these arbitration clauses and a higher percentage of people of color. And that's disturbing to me because women and people of color are the ones that are discriminated against and would like to file discrimination Title VII suits but wind up dealing with them in arbitration, which is a lose, lose, I think, for everyone except for the companies.
- [42:04]
C
And that is because the industries they're in, that they're more likely, apparently.
- [42:09]
B
Yeah. And that research is on economic policy institutions or something.
- [42:15]
A
So since we're quoting think tanks, I'm going to start quoting Pew. My number is 16, which is the number of years, according to Pew, they have come out and they've gone and defined the millennial generation. Bless them. Like, I've always just gone and said, Ah, 1980 to 2000. If you're born in 1980 to 2000, that's like a nice 20 year gap. Yeah. And we can call that the millennials. No, according to Pew, they've gone and worked out exactly what a millennial is by, you know, cranking up their computers and outcomes, spitting out a millennial. Apparently, There were only 16 years, which you could be born in to count as a millennial. So it's 1981-96. And unless you were born in 1981-1996, then according to you, you are not a millennial. I feel like generations are getting shorter.
- [43:13]
C
Right.
- [43:14]
B
The baby boom. I feel like that's a 30 year span.
- [43:16]
A
Exactly.
- [43:17]
B
Yeah, I agree with you.
- [43:18]
A
And now it's like we have a tiny little 16 year span, and that's meant to be an entire generation.
- [43:23]
D
Do you think that has to do with the Internet?
- [43:25]
B
Probably.
- [43:26]
C
Or Trump? It's probably Trump's fault.
- [43:28]
A
Yeah, I blame Trump.
- [43:29]
D
Well, no, but I really think that that has something to do with it, because children who were born after 1996 became like 6, 7 or 8 in the early 2000s, and that's when, like, the Internet was a completely different beast than when, like, I was a child having been born in 1989. So I think that the millennial generation grew up learning the Internet as opposed to the generation after it, which is born into it in a way that we weren't.
- [43:55]
C
I think you're right. I think that it's. Because what do you use to define a generation? I mean, everything we use is obviously arbitrary. And I imagine part of what Pew used to define millennials had to do with the Internet. And because things like the Internet are changing so quickly, it makes sense that the. The markers we use for generations are going to get shorter because in the.
- [44:16]
A
Future, everyone will be a generation for 15 minutes.
- [44:18]
B
Exactly.
- [44:19]
C
Wait, what's the generation?
- [44:21]
B
What's the generation after 96, then? Is that Z?
- [44:24]
A
We're having difficulty naming that one. Yeah. Okay. Z so far. All right. Or Zed, if you're English. Anna, what's your number?
- [44:32]
C
My number is 3.1%. So that's the percent of Spotify shares. Ooh, Spotify number that floated the first day of their non. Ipo. Ipo? Their direct listing.
- [44:44]
A
And that's way lower than people expected.
- [44:47]
C
Very low. Yeah. And that's why. This is why the first day of the direct listing, I think there was a lot of celebration among some who are like, screw investment bankers. You know, this was a perfect. Moving on to the market. But then I think people started to look a little bit and say, hold on, we don't quite know yet that it looks like this wasn't a disaster, which is good for Spotify. However, because this float was so small, it's first of all not surprising that there was a kind of a bit of a price spike the same day because your supply was really low. But also it means we don't really know where this company should be valued because it's just, it's too little of this, of the, of the shares to really assume that this is a proper market valuation. And there's also concern that because you don't have an investment bank potentially propping things up or keeping things stable, you may have people on the side who aren't going to invest because they're concerned that all of a sudden someone who owns Spotify shares could just, you know, drop a whole bunch and then the price will plummet. And so we're going to see what happens. And nobody knows. I mean, it could end up that this won't matter. And, and a year from now, it would have been exactly as if they had done a regular ipo. I just think it's interesting.
- [45:58]
A
Does this have any implications for Indices? Is S and P going to say, if you don't have 5% of your shares trading on the market, then we're not even going to include you in the s and P500, that kind of thing?
- [46:13]
C
I don't know if they have, but they should. I mean, they really should because this is not. It's way too small. And also because it's just like anything, if you have a really small number of something, then one or two movements can really cause a lot of volatility. And so the question is, part of the reason they were coming onto market was obviously to generate liquidity, but it was also so you would have a proper valuation of this company by the markets. And we really don't have that.
- [46:34]
A
So you, you. How you think that if you have a free float that small, basically that's too small to get proper price discovery and we would need what, more like like 10, 15% before, like at least like 6%, and which, I mean, could happen within days. Like, you know, just because you don't sell in the first five minutes doesn't mean you don't sell in the first couple of weeks, right?
- [46:57]
C
It's true. I just think that it'll be really interesting to see what happens. I still am kind of dubious about whether this was the smartest move, whether the amount of money they saved, which was not actually that much.
- [47:07]
A
No, I don't think they did it to save money. I think there were interesting reasons why they did it. And maybe once we've seen the share price and the and the number of shares being traded over the course of a few weeks, we should do a little Spotify segment and see whether or not it worked. But for the time being, I think that's it for us this week. Thank you for listening. Thanks to Dan Schrader for producing, and many, many thanks to Emily Peck for coming all the way in from Westchester to podcast with us here in Brooklyn. Keep the emails coming slatemoneylate.com and we will talk to you next week on Slate. Money. Mind the gap. Mind the gap. Stand clear. The doors, please.