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- [00:01]
A
Some follow the noise. Bloomberg follows the money. Because behind every headline is a bottom line, whether it's the funds fueling AI or crypto's trillion dollar swings. There's a money side to every story. And when you see the money side, you understand what others miss. Get the money side of the story. Subscribe now@bloomberg.com. Welcome to Talking Feds One on one deep dive discussions with national figures about the most fascinating and consequential issues defining our culture and shaping our lives. I'm your host Harry Littman. Welcome to another Talking Feds one on one. And with just the man I was hoping to talk to this morning in the wake of the announcements that inflation spiked 3.8%, the sharpest increase in some three years and that the war in Iran has so far cost the country by official estimates about $29 billion. But as you'll hear, that may be very much lowball. All of this is hot off the presses as we talk, but it really portends short, medium and long term consequences, as do the continuing increases in gas prices. Is there an economist somewhere with a special gift for explaining the ongoing significance to regular people of these seemingly huge developments? You bet. It's Justin Walfers. Justin, as you know from this podcast as professor of public policy and Economics at at the University of Michigan, currently a visiting professor as well at University of New South Wales, but he's also a contributing columnist for the New York Times, prolific analyst on TV news, and not least a newcomer to the whole independent media channel on substack and YouTube with his very own platypus economics, which I see in the background. Justin, thanks so much for joining.
- [02:21]
B
A great pleasure. Why does no one call me when good things happen in their life?
- [02:24]
A
Harry, does that what would it mean for good things happen to economics? I mean you wouldn't be around, right? They call you for like long term doom, even if it's a short term good. But the economy might be overheating, but whatever. Anyway, I can't answer that perennial question for today, Justin. People are hearing this a few days after the big inflation news drop, but its significance obviously is huge, ongoing. So let's start 3.8% major spike. How significant is it and what does it mean for the sort of economy of regular people?
- [03:07]
B
Right? So people like it when you're a two handed economist, right? Because that's what I think we actually should do. If you're interested in measuring people's cost of living and a lot of people care about that, then you should look at what's called the headline inflation number. That's the entire cost of living. It's gone up 3.8%. That's much higher than we would want. If it's down around 2%. The Fed's view, and I think it's basically right, is that so low that it's hard to notice? And you can just get along in your life without having to think very much about inflation. In fact, Harry, you might remember that five years ago no one talked about inflation, no one really cared about it. And that's because the Fed was achieving its goal of low and stable inflation. And it really just wants to be so low you ignore it. Okay. The flip side though is core inflation. Now this is the answer to a different question. Some people don't like it. It's cpi less food and energy. And they say, well, food and energy is a big part of the cost of living. It is. That's why we look at headline for the cost of living. What I care about is trying to project is there an underlying inflationary momentum here? That's what core inflation's all about. We exclude food and energy not because they're unimportant, but food prices go up and down with droughts. Energy prices go up and down with whoever the hell's bombing whoever the hell at any given point in time. Neither really reflects the underlying influence, inflationary momentum or inflationary psychology. And that's still. It's a bit higher than we want it to be, 2.8%, but it's not. Tear your hair out. Terrible. And I'm gonna give you one more number. Cause everyone loves numbers, especially lawyers, right Harry?
- [04:51]
A
Totally. Bring em on. Assume a can opener. No, just kidding. Love it. Okay,
- [04:58]
B
right now, prices are rising 3.8%. Wages over the past year rose 3.6%. So prices over the past year rose faster than wages. So real wages, your purchasing power, what you can buy at the end of the week with your paycheck, has actually fallen over the last year. That might explain a little bit of the public's angst out there right now.
- [05:23]
A
And that's a point, by the way, in one of your, you're making these almost, you know, several times a week entries in platypus economics with all kinds of sort of interesting takes of that nature. And that was one that you recently did. I'm really glad you went basic here, Justin, because I want to go off script and follow up a little bit with it. You said as long as everything stays kind of small and we don't notice, it all is rosy but it's my understanding, very brute understanding, that you wouldn't want to see it below zero or deflation is a problem in and of itself. Can you just briefly explain why the sweet spot is, you know, 1 to 2% rather than even less than that?
- [06:08]
B
Yep. Okay. So the first thing to understand is, in fact, the measured rate of inflation is probably slightly overstated. You might say, wait a minute, I thought you wonks all said the Bureau of Labor Statistics gets everything right. Yeah, no, it's honest, but not perfect. So there's a lot of things that if you pull. Look, here's my phone, right? This phone costs as much as my phone did 10 years ago. This phone, though, can do a lot more than my phone 10 years ago. Quick. And so there's ongoing quality improvements, and statisticians try to capture that, but they are imperfect and as a result, fail to understand, fail to capture all of those improvements. That's the easiest one to think about. But the other thing is there's new products being invented all the time. How do you think about the price of a new product? Is it that the price went from infinity to $500 or what? Because if it went from infinity down, then the inflation rate's negative infinity percent, then we're all stuck. We don't know how to do anything. So these are very. This. There's actually very difficult issues in measuring inflation, but we think it's probably slightly overstated. That's the first thing. Second thing is, if prices were across the board noticeably falling, then you might think to yourself, should I go and buy a new shirt, a refrigerator, a car? Or why not just wait a few weeks when it'll be cheaper? And if we all do that, none of us spend our money and the economy stalls. And I want to give you, I think, a more serious, more important one. No, everything's serious. This is economics. Another thing is what matters for the economy when we talk about interest rates matter. What matters is the interest rate adjusted for inflation, which we call the real interest rate. The way to think about this is take the interest rate right now. If you take out a loan at 5% and the cost of living is rising at 3%, then in terms of real resources, you're paying the difference between those two, 2%. So the real interest rate is the rate the bank advertises less the inflation rate. Now, if inflation turns negative, but the bank can never cut its rate below zero, then the gap between those is always positive and large, which is another way. Sorry, this is so boring. No, it's not of saying the real interest rate, we can't cut it far enough.
- [08:42]
A
Got it.
- [08:43]
B
And that might sound all very hypothetical, but let me remind you, during the 2008 recession and also following the COVID pandemic, the Fed cut the nominal interest rate down to zero, couldn't cut it any further. And if the price level had been falling, if inflation had been negative, that would actually have raised the real interest rate, which was the exact opposite of what we wanted. And so to give the Fed a little bit of wiggle room, we want to keep a little bit of inflation in there. Now, let me just come back. I wanna simplify all of that and say, remember, I started by saying, look, we could get very precise about this, but it's much better to say what we want is inflation so low, you ignore it. We don't want it high and positive, and we don't want it low and negative. We just want it ignorable. And if it's ignorable, then you'll just go and make your decisions in your life as if it's not distorted by inflation. Those are probably good decisions.
- [09:32]
A
Got it? Yeah, that's really helpful. And Fed heads out there. I hope you got something from it as. Because it's something I often wondered about it also, though, your answer, Justin, brings us a little bit into the world of contemporary politics, because we know this was the squabble that has prompted Trump to go after Powell so viciously wanting him to raise interest rates, et cetera. The headline here, the one headline, as you mentioned, is real wages falling. You also had a substack that you brought in Trump and his campaign, which I'll Just as you put it, he. He campaigned on bringing down the cost of living on day one. Apparently this crusade meant starting a trade war, deporting much of the farm workplace, bombing Iran, allowing health care subsidies to expire, and it's a long, even a longer list. So, you know, we're often debating whether anything a president does actually contributes to these numbers, etc. But you would say in this case, we. Part of what's happened here is benighted policies by the Trump administration. Is that fair?
- [10:44]
B
Yeah. I learned an expression when I came to America. My, My partner used to say to me, on Opposite Day, that's the right thing. Which is on Opposite Day, you bring down prices by raising tariffs, by bombing the Middle east, by allowing healthcare subsidies to expire, by cutting food stamps, by attacking the Fed on Opposite Day, that works. Look, you gave, I think, a very, very important background, which is because I Want to reserve the right to do this again in the future? Most of the time, for most decades of my career, past ones and hopefully future ones. Someone comes, a non economist says to me, oh, the economy's doing this. How much do you blame the president? And in almost every other decade, I would say very little. Yeah. And it's because presidents have very few direct effects on the economy and they're always disciplined by Congress, both Democrats and Republicans. And so the reality is we might like to tell our stories using personalities. They make for more gripping narratives. But the reality is most presidents have been pretty boring. Now this president's different. The most obvious two things. This president stole the power to tariff from Congress. And I say stole because we now have had two tariff regimes, both of which the Supreme Court has ruled unconstitutional. I'm going to defer to you, Harry, on the law. This president also took it upon himself to bomb Iran. And you can hopefully tell me something about whether that's legal. And arguably the third and even more important thing is our past presidents have recognized the guardrails of institutional stability, the importance of the rule of law, of contract law and independent Justice Department, Department of Justice, you know, of minimizing grifts, the whole list. Right. Of minimizing the impact of the federal government on private enterprise. There's a long list of things which is made which collectively explains why the United States is one of the most prosperous countries in the world. And the President has systematically worked to undermine them. And so that set of issues is one where the the bill will come due not next week, but next decade. But the trade war and the Iran war, we're paying the bills for that right now.
- [13:24]
A
This is such a great point. I'm so glad you made it. I'm often at pains to try to bring home the broader import of the. Corruption is the right word in the administration. Corruption undermines stability and stability undermines the economy and international relations and the like. It's not simply about as important as they are abstract democratic values. Justin, everyone's here to listen to you.
- [13:53]
B
Can I say that in economist language just because you might have some bilingual people here who knows. The stability of our institutions is the foundation of our prosperity. The a way of seeing that is the genius of market capitalism. And now I don't sound very left wing right now and I understand that, but the genius of market capitalism is people compete hard to build a better mousetrap and the best wins. The problem with crony capitalism is you don't compete in the market. You compete by the Pool at Mar a Lago. So no longer does the cheapest product win, or the best product win, but the product most directly connected to the present. And that is a fundamental perversion of the idea of markets. Milton Friedman would be turning in his grave right now.
- [14:46]
A
Famed conservative economist. Okay, I was starting to say nobody is here to listen to me, but you didn't invite it. So a couple quick points. One was the Iran war. I think it's pretty clear among international scholars its inception was illegal. That seems to be almost an afterthought by administration. And that also they violated the, the War Powers Resolution, which presidents have chafed at. But we went over the 60 days, and that's why we have this odd kind of Orwellian context where the, the administration, oh, the war is over, even as we're bombing, et cetera. The big thing about the legality of terrorists, the overall point to make is they're obviously and patently trying to use any kind of port in a storm. So you're right, numbers one and numbers two were pretty easy to strike down. They think Trump has said there's a number three. But the overall point is, as he's done in other areas, he's trying to take things that obviously weren't for this purpose and just, I want to do tariffs. Find me a law. And so it's not surprising, if that's your orientation, that the best you can do might be something illegal.
- [15:57]
B
But can I pick up on that?
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A
Sure.
- [16:00]
B
Which is the president comes out after these cases and he rages.
- [16:04]
A
Right.
- [16:04]
B
He's angry, he's pissed. He says it's terrible what the Supreme Court's done. They're undermining the ability of the US to do any this, that and the other. No, the courts. Wow, look at this. This is an economist mansplaining to a lawyer. The courts never said anything about not being allowed to do tariffs. All they said is, if you've got a good idea, convince Congress. That's the. There's no restrictions on our ability to tariff 100%.
- [16:29]
A
And that's what's going on with this terrible idea now. And now. And we will go back to the economics of ballroom, which is, you know, if some, if someone is going to take responsibility for this monstrosity, it ought to be the elected representatives who face the people, as opposed to unilateral by Trump leaving his turd of a monument and then leaving town. But I digress, as lawyers tend to do, I want to. You, You've raised the war a few times now. Let's let's go there. It's one of the two things that you say have contributed to, unusually, the direct contribution by a president to the economy. I guess we always expected that the war would drive up prices. Why are we only seeing the Iran war forcefully drive up prices so much now when we've been going with this for, you know, many weeks?
- [17:23]
B
Well, I've learned from this that my lawyer friends must be very impatient if. If you feel that this is slow. So let's just get the timeline out there. We bombed Iran on February 28, so you're not gonna see it in the February data because February doesn't even have a 29th day, for crying out loud. That means we could look for effects in March and April, and now we're in May. Actually, turns out the April numbers just came out, so it's hitting pretty darn quick. So that's the thing. Actually, you saw energy prices spike in March, and you saw them spike again in April. So we are seeing it happen right now. Now, I think there's also some depth to your question, which is what we're seeing right now is energy prices are up. So as you all know, the price of gas is up. And then just think about this as a stone you throw in the pond. And then there's the ripples. The ripples exist because oil is upstream of almost everything in the economy. So the most obvious one is fuel. That went up next. Jet fuel. Jet fuel prices go up. Airline prices go up. We're starting to see that. And then you just keep following the
- [18:26]
A
ripples and everything goes up. Right. Just read this morning. Plastic bags in Japan. Petroleum industry really is everywhere, Right?
- [18:35]
B
Absolutely. My favorite version of this is that Barbie dolls became very expensive following the last OPEC oil crisis, because Barbie is basically made of oil. So you ripple out through plastics, through fertilizers, through other petroleum products, through asphalt, and a whole list of things like that. And so that's the set of ripple effects. Now, let me pause to make sure I don't overstate that. When you look at. We don't know what those ripple effects are going to be. History's going to tell us. But in order to get a sense of it, I've looked at things like the big macro econometric models used by the Fed or folks on Wall street, and they tend to say that headline inflation is going to spike and be high for a while. And that's what we saw this morning. The deeper question is, does it spread from the energy sector out to the rest of the economy? And the answer from those models seems to be yes, but in a relatively small way. And one way of thinking about that is our economy is increasingly service based, which means decreasingly petroleum based. As a result, the sensitivity of all of the non oil parts of the economy to oil is much less than it would otherwise be. But it exists because things like, you know, the delicious breakfast cereal I had this morning gets to Ann Arbor on a truck and the truck uses diesel and diesel's a petroleum product.
- [19:56]
A
Not the cereal though, right?
- [19:58]
B
No, we hope.
- [20:01]
A
All right, but, but let's stick with this for a moment because it's also the case that I think you, you've explained that they're going to stay up for a while even, and that won't be. And if they're already up, that won't actually be integrated into inflation numbers, etc. But is, is it the case that Americans can expect to be paying, you know, $5 a gallon and more for many months? And is there anything, you hear some talk by the Energy Secretary about of the pausing a fuel tax? Is there anything really that the government can do to abate the rise which so many people seem, that's the first thing they seem to feel about the war.
- [20:48]
B
Right. Okay. So first of all, everything the White House is saying about this is a lie. The White House is saying fuel prices are about to plummet. We know that it's a lie because people are already buying and selling oil in the future. Those are called oil futures. Oil, I'll pick one off because it's politically salient and so might attract your attention, is if you look at the November 2026 oil price futures, it's currently at an all time high. So what that says is our current troubles are expected to be with us at least through to election day. Now the same is true by the way of end of 2027 and into 2028, and a little bit true end of 2029. So they're saying higher oil prices are here to stay. It's actually a subtle point. So I want to explain two things are true at the same time. The thing I think is most relevant is that gas prices, oil prices, and therefore gas prices in 26, 27 and 28 are going to be higher than they would have been if we hadn't invaded Iran. So those oil price futures have risen. The thing that confounds it a bit is the effect of bombing Iran is highest today and will dissipate a little bit over the next few months. So I do anticipate oil prices falling Assuming we don't do something stupid. Not an obvious assumption. I anticipate them falling, but they're still going to remain much higher than they would otherwise have been. Which means for the folks at home, your life will be more expensive than it otherwise should have been. What can the administration do? The administration's got an amazing lever, which is it could just settle things up over in the Middle East. The Strait of. You know, it wasn't that many weeks ago the Strait of Hormuz was open. It only closed after we started bombing the Iranians. So that's the obvious lever, which is either diplomacy, war, military, backing down, figuring yourself out, you know, actually succeeding at the mission, that's another possibility. Someone should mention that. So that's the most important lever, the dumbest lever in all of America, and I promise you, next time a Democrat suggests this, I'm gonna call it equally dumb, is to get rid of the gas tax. If you think about a gas tax holiday, it will get people off the administration's back. I guarantee you some idiot's gonna suggest it. But it's basically saying, hey, here's a whole bunch of money to go and give people who are struggling right now. But it's saying, let's give money to people who drive, but not people who walk and not people who take public transit. Let's give more money to people who drive SUVs than drive compact cars. Let's give more money to people who are gas guzzlers than efficient cars. Let's give money to, you know, on and on it goes, right? Students don't drive very much, so we're not gonna give them very much. But, you know, folks commuting from Connecticut to Wall street will get a chunk
- [23:58]
A
of change and gas guzzlers besides, right?
- [24:03]
B
So just think about who deserves, who needs, who wants. And a gas tax holiday is poorly targeted policy.
- [24:10]
A
Got it. Okay. You bemoaned a few minutes ago, Justin, that people don't come to you with the good news.
- [24:17]
B
So.
- [24:17]
A
So let me throw at you things that the administration would tout anyway. Our stock market is humming along, as Pam Bondi reminded the Congress, and last month they got the administration was able to tout the job numbers. Why does that overall paint a meaningful picture that's at least, you know, glass half full? And if not, why the disconnect between those relatively auspicious numbers and the less good portrait you've been painting to date?
- [24:55]
B
Right? So it depends on the question that you're asking, because that would lead us to look at different things. So if your question is, is the US Stock market high? The answer is yes. And if your question is, does that reflect optimism about a sunny American future? The answer again is yes, if you then want to say, and therefore, that's a vote of confidence in the administration. Now, I'm going to pause you right there. So think about the stock market. Probably reflects concerns about the war, optimism about AI and other stuff. A lot of the optimism about AI, A lot of what's going on right now is driven by optimism about AI but let's say we want to figure out which, by the way, the administration's got nothing to do with, right? They've just stood back and said, do what you want. So then let's try and focus on the war part, because I think that's really important for trying to think about what the market's telling us. There's one regularity that's 100% true. Every time Trump has indulged his belligerent instincts, stocks have fallen. And every time he's looked a little like a taco and seemed less aggressive, stocks have risen. And you've seen this dance go on and on every single time. And so what that tells you is that the market believes going to war or Trump's belligerence is bad for the market, which therefore means they believe it's bad for the future profitability of American companies. In the op ed I wrote for the Times, I reported on an analysis that I did, but I'll just describe it in words, which is I said, well, let's look at the days in which Trump was more belligerent versus less belligerent. We don't actually have a good measure of belligerence, but what we do have is oil prices. And so on the days in which oil prices rose, suggesting more trouble in the Middle east, on those days, if oil prices rose 10%, the US stock market would fall by 0.9% on average. And if you want to be fancy, that's a regression coefficient. But if not, just think of it as a rule of thumb. Well, right now, oil prices are about 60% higher, maybe 70% higher than they used to be. Well, let's multiply that by that 0.9 to figure out what sort of impact whatever news caused oil prices to be 70% higher. If it has an effect of every 10% rise forces stocks down 0.9, let's multiply that, and that says stocks are 6% lower than they would be without a war. And because I'm conservative, I'm going to round down and call that 5%. Now, I remember how much lawyers love numbers. So if the average value of U.S. stocks is 5% lower as a result of the war, the value of US stocks is roughly $60 trillion. So that says we have lost $3 trillion in the value of American firms as a result of the war. So let me dial back.
- [27:49]
A
That's real money, right?
- [27:50]
B
Oh, yeah, no, no, that's, that's. Yes, that's a lot of money. That's like $10,000 per American. What that says is, yes, it's true that the market's high, but the market's high despite the war. And the war has caused immense destruction. I'm Michael Waldman, host of the Briefing Podcast. I'm a former White House speechwriter, a lawyer, and a constitutional scholar. And I'm president of the Brennan center for Justice. We work to repair and strengthen American democracy, from gerrymandering to abuse of presidential power, from Supreme Court reform to congressional corruption and more. What fun. You're going to hear new ideas in this podcast and you're going to hear about the strategies and the legal and political fights that will shape the next phase of American politics. If you care about our democracy. The Briefing is a podcast for you.
- [28:50]
A
You talk about AI and you have a really interesting in your valuable substack. What's that called again? Platypus Economics.
- [28:59]
B
That sounds interesting. Thank you.
- [29:00]
A
About how the economy grew, but AI really had a really surprisingly outsized role in that growth. Can you explain that?
- [29:13]
B
Yeah. In fact, I'm going to explain it even more. Okay, so look, there's two parts to the AI revolution. One is you've just got to build the bloody data centers. And that's what's going on right now. And these are just big rooms full of blinking lights that looks like the movie Wall E. There's hardly any people in there. They use a lot of water, a lot of electricity. They're going up all over the country because we need more computing power. And that has a direct effect on gdp because GDP includes investment. So all the silicon chips, all the bricks, all of that counts as gdp. We've been building a lot of these. And so over the last six months, something like. Sounds like you've read my work more recently than me. But something like two thirds of all economic growth can be attributed to the very small sectors. That includes AI spending, you know, software and computers and so on. So that I want to. That's the sense in which our current moment is an AI driven moment. Now realize that's separate than the Much more interesting question, which is how will AI transform our lives? That's a 10 year, 20 year question. All I'm doing is saying right now, what's supporting the economy in late 25 and early 2026?
- [30:29]
A
Totally, and in part we're laying foundations. But it's perfectly possible that as AI expands, it will, among other things, it will continue to have a huge role in the economy.
- [30:41]
B
Yeah, absolutely. I think it's going to transform the labor market. I do want to admit, I don't want people to over interpret the number I just said because if we hadn't had an AI boom, there would be a whole lot more resources free in the economy. Maybe we would have used them in other ways. And also a lot of the spending on AI related stuff is actually on imports, which don't count as gdp. So mine's a rough and ready number. But it's basically trying to give you a flavor that building data centers is a big chunk of what's going on in the economy right now.
- [31:12]
A
Got it, Josh. And this all been super illuminating and thank you very much. I did want to take a final moment to ask you about your leap into this independent media channel. I did the same thing, but your new YouTube and substack, platypus economics first. Welcome. The water's fine, but you've been really prominent in the traditional media world for many years. What made you want to take the plunge, as it were?
- [31:42]
B
Well, Harry, partly you are an inspiration. I appreciate you, mate. Partly I learned a little bit of economics. I learned about the economics of the media and you know, you want to skate to where the puck's going. And one thing I've learned is that you, Harry, can create compelling viewing with two blokes sitting in front of a zoom screen, which is much cheaper than when you go to visit CNN and they've got these gleaming towers and the black cars and so on. And I genuinely believe this is where people are. There's also a deeply democratic part of me which is I want to meet people where they are. And the answer is they're not inside the old fashioned TVs.
- [32:21]
A
They're not if they're under 70. Yeah, it's really true. Hey, thanks so much. Hope we can do it again soon. But you really have a G for distilling it. Platypus Economics, everybody. The new substack. Check it out. Justin, talk to you soon.
- [32:37]
B
Great pleasure. Thanks, Harry.
- [32:41]
A
Thank you for tuning in to One on One, a weekly conversation series from talking Feds. If you like what you've heard. Please tell a friend to subscribe to us on Apple Podcasts or wherever they get their podcasts. And please, please take a moment to rate and review the show. You can also subscribe to us on YouTube where we are posting full episodes and daily updates on top legal stories. Check us out on harrylittman.substack.com where we're posting two or three bulletins a week breaking down the various threats to constitutional norms and the rule of law. And Talking Fez has joined forces with the Contrarian. I'm a founding contributor to this new media venture, committed to reviving the diversity of opinion that feels increasingly rare in today's news landscape, where legacy media seems to be tacking toward Trump for business reasons rather than editorial ones. Rest assured, we're still the same scrappy independent podcast you've come to know and trust just now, linked up with an ambitious and vital project designed for this pivotal moment in our nation's legal and political discourse. Find out more@contrarian.substack.com thanks for tuning in, and don't worry, as long as you need answers, the Feds Will keep Talking. Talking Feds is produced by Lou Cregan and Katie Upshaw, associate producer Becca Haveian, sound Engineering by Matt McArdle, Rosie Dawn Griffin, David Lieberman, Hansam Hadranathan, Emma Maynard and Hallie Necker are our contributing writers and production assistants by Akshaj Turbailu. Our music, as ever, is by the Amazing Philip Glass. Talking Feds is a production of Doledo LLC and I'm Harry Littman. Talk to you later.