The Pandemic's Lingering Impact On the U.S. Economy

SPEAKERS

Jim du Bois, Timothy Kehoe

Jim du Bois  00:00

Dialogue Minnesota...conversations about the issues that matter to you. I'm Jim du Bois. The COVID 19 pandemic has exacted a toll on the US economy. Inflation is at a 40 year high. But there's some recent good news about the job market. University of Minnesota Professor of Economics, Timothy Kehoe, joins us with his insights on the state of the economy. Professor Kehoe is also an adviser to the Federal Reserve Bank of Minneapolis. His views are his own and do not reflect those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Professor Kehoe, welcome back to Dialogue Minnesota.

Timothy Kehoe  00:39

Well, thank you, Jim. It's good to get together with you again.

Jim du Bois  00:43

Well, here we are two years into the COVID 19 pandemic. Looking back to when local, state, and federal authorities in the US first began taking measures to curb the spread of the virus, what were your initial thoughts on the sort of aid the economy might need to avoid a calamity? And how does that initial reaction of yours look to you now, nearly 24 months later?

Timothy Kehoe  01:08

Well, we are in unchartered territories. And what that means is there's constantly new surprises. Okay, so one of them is when we have had big waves of COVID, as we did, for example, a year ago at this time, right after the Christmas, holidays, and so forth, in 2021, in the new year of 2021. That was a bit of a jolt economically to the economy as a whole. Whereas this recent explosion of COVID-19, because of the omicron variant, it hasn't had much effect at all on the economy. We see restaurants closing once in a while because some of the staff have been infected and others are quarantined. So, it's had that kind of impact. But you know, the job market is doing great. Now, I would like to get into a bit of detail on that. We see unemployment at really record low numbers. Wages and salaries, especially for lower-income workers, going up in a way that they haven't done since the 1980s. So, there are things that are going very well with the US economy. And we didn't really skip a beat. Even though we have new cases. New cases or at record high levels, or have been, they seem to be going down rapidly in the last week or two. But new cases are at high levels. In the US, we have higher death rates than a lot of other countries, because we just don't have as many people vaccinated, and we don't have enough older people who got the booster. And death rates are still kind of high. But we always have to remember who's dying or people who got their infection two or three weeks ago. That is why we can see these things where new cases are falling rapidly. And it won't be another week or two until we see that death rates are falling that quickly. But all that being said, January was a tremendous month for job creation. Almost a half-million new jobs, Jim, this is a kind of record-setting number. And it turns out that the US government Bureau of Labor Statistics has redone their job numbers for November and December, and they were higher than we thought. So, you see there are some things that are going great about the US economy. Now I said there was a caveat. And I was recently reading, one thing the pandemic has done for me is put me on social media more, on Twitter and such, although you can imagine I tweet mostly about economics. I now have more than 13,000 followers, and let me admit most of them are probably economists and economic grad students from all over the world. But a friend of mine, a labor economist with the Carlson School at the University of Minnesota, recently posted something, and it was related to an article in Fortune magazine that he was quoted in. And he was pointing out, and this is something we always have to remember is that the onset of COVID-19, and you'll remember we talked a couple of times about this really was brutal, brutal, especially for working mothers. And interestingly enough, not for working fathers, not as much for working fathers. That's how we got to, you know we're doing as a society, we're doing better and better on gender issues. But when a crisis like this hits, it's often the woman in the household who bears the brunt of it. Well, a lot of people dropped out of the workforce. You know, a lot of people lost their job, and they stopped looking for jobs. And that, things are doing better there. But we are not back to where you would have predicted in 2019 as far as where the labor market should be. We're for 5 million jobs short of where we want to be. And you know, since we have an order of magnitude more than 100 million people working, more like 130 million people, we're really talking about, there's 3%, let's say, three, maybe 4%. It's not called unemployment, because these people are not looking for jobs. And often, in the midst of a recession, we see people dropping out of the workforce. They don't look for jobs, because there are not jobs to be found. That's not what's going on now, Jim. There are jobs to be found, it's just things are tough. And once again, the most identifiable group are working mothers. It's not easy to get good childcare. But one thing that there was in the Build Back America bill that I thought was good, was support for the government to get involved both with subsidies and regulations in childcare. And what people don't remember, because, you know, people, my parents’ age, the so-called Greatest Generation, they remember these kinds of things. But unfortunately, we're losing those people. So, there's not enough people around to remember that during the Second World War, when the US labor force had millions and millions of men going into the service, and they put America's women to work. And in fact, it was in the 50s, when America women who had worked during the war, remembered that they liked doing that and wanted to get back to it. That started this trend in the United States that was way ahead of other countries of getting women to work. Well, how did all those women work during the war? The US government did all sorts of things to subsidize and to, you know, sometimes the private market works well, sometimes, with services like this, it didn't. And so, the government got involved and promoted massive childcare. Of course, that's one reason that the United States and of course, we had, we had a lot of people die during the war. But we didn't have numbers of people dying that the Russians or the British, you know, the Chinese who are allies did. And we certainly didn't have the number of people that the Germans or the Japanese who were our enemies had die. But what won the Second World War in one sense was that all the women in the United States went to work. And I remember seeing reports of what happened when the Germans were analyzing this and they said, oof, we just can't do that with our society. Of course, Germany's changed and now German women do work. But that was a big change for the United States, putting all those women to work and had a lot to do with government-sponsored or subsidized childcare. And to really get us going again, we have to think seriously about stuff like that.

Jim du Bois  09:38

Well, clearly good news in the job numbers but not such good news with regard to inflation currently at the highest level we've seen in 40-some years. Let's talk about inflation. What are some of the leading causes of inflation? I know we hear very basically, it's too much money chasing too few goods. Is that still a good definition?

Timothy Kehoe  10:00

That is a good definition. And let's talk about that in a couple of ways. One is the too much money angle. And then the other will be that we can talk about is the too few goods angle. Okay. So, people of moderately high income, you know, not the really rich people, but people like my wife and I who both have good salaries. What did we spend our money on? Well, we spent our money on a lot, on travel and restaurants and things like that. But the point I'm trying to make is we spend it on things that we classify as services. Okay. Now, what happened, of course, is with the COVID 19 pandemic, we really cut back on that. But we still got our jobs, fortunately. A lot of Americans of course lost their jobs. But people like us, my wife and I are both university professors. And we were able to keep working, using the technology you and I are using to talk now. Although I do used to enjoy when you would come to my office and get everything set up, and we do these chats, but we've learned to do a lot of stuff with Zoom. When I had my office hours this morning with my students, I do that by Zoom. And there's advantages to that. But restaurant meals, travel, things like that, you don't do that by Zoom. Those were industries--travel, hospitality industries--that were really hit hard by the pandemic, and they're coming back. They're coming back now, but we're nowhere near where we were in 2019. So, all of a sudden, you're so-called upper middle class in the United States who kept their jobs but lost the opportunities to spend the money on what they used to spend it on, they started putting into durable good consumption. Now, that's why we saw a boom in housing and especially nice condos in Minneapolis- St. Paul, for example. But you know, my wife and I, we moved from one condo to another, we did it in a good time because those places have gone a bit crazy. But then we wanted some new furniture for a new condo. We had to wait seven months to get that furniture. So, there was a big switch in spending patterns. And I'm simplifying here. But I've looked at the numbers. And what I'm saying is the basic truth. Out of services into consumer durables. Well, then we also had a series of shocks to supply chains. Although it didn't affect us much, it affected Europe and Asia a lot. Remember, we had a blockage of the Suez Canal. But we also had that we get a lot of goods, both intermediate goods for our own manufacturing production and final goods from China. And there was just a big backup at the Port of Los Angeles. And that's the name of the place, you know it's in Long Beach, California, just down the beach from Los Angeles city. There's big backup there as container carriers were trying to pull into the port, they were anchored out in the bay, you've seen all these pictures. And so, that caused big backlogs. Okay. We had a switch in demand to exactly what those container carriers were carrying, and we had a shock to the supply there. So, we had lots of money going after a reduced number of goods. Now, economists like me, and on Twitter and so forth, I got involved in the conversation on this. And I am a bit surprised how this kind of inflation has persisted. The demand's still there, but I figured oh, they'll get those supply. problems worked out, and to some extent they have. Prices aren't going up as fast. The most recent data, it shows that the prices aren't going up as fast as they were before, but they're certainly not going down. So, we have, we do have high levels of inflation. Now, what economists were tempted to say is, oh, this is what we call a supply shock. And it's something that's temporary. And it's something that the Fed, and as you know, I'm not going to talk about Fed policy, because I'm not allowed to. But it's something that the Fed should not worry about. A number of economists were prone to say things like that. I was reluctant to say anything like that because I also study a bit of economic history. And I've been around for a while. So, back during the 1970s when we had the two oil crunch shocks, I was an undergrad at first and then later, I went to grad school at the end of the 70s. And so, these were topics I was interested in, talked to people about, watched the news about. And if you remember, we had, there was a very distinguished economist named Arthur Burns, who was the head of the Federal Reserve Board. And at the beginning of the 1970s, October 1975, 76 or so. And we'd gone through the first oil price shock. He said, look, the inflation we have in the United States is due to supply shocks. This is nothing that the Fed should get involved in. This is transitory, and you heard that word transitory, they always say it means temporary. We're gonna pass through it. Well, you know, the decade of the 1970s really changed economists’ thinking about things, because that was the period we call stagflation. We had inflation, with an under-employed economy. We had high inflation and high unemployment. It's curious, there are people pushing, although, you know, Arthur Burns was a kind of conservative person politically, but we are having people push, even in the US Congress, and they're representatives of the political party I often vote for, the Democrats like Alexandria Ocasio Cortez, who I find to be a very admirable person in some ways. But she's pushing these views now which somehow get called the new monetary theory, modern monetary theory, MMT. There's no theory to it. The people there don't just don't seem to understand economic theory at all. But the view they push is as long as there's unemployment, printing money to finance government spending is going to cause no problems. Now, they had often heard the objection, especially from people like me, that yeah, but that only works if you have what they call monetary sovereignty, you kind of control the denomination of your government debt. So, a Latin American country borrowing in dollars, they can get into trouble by borrowing too many dollars to print more pesos if something happens to the exchange rate between pesos and dollars. Now, I've been working studying Latin American economic history, and there are countries like Argentina and Brazil, that went for long periods of time without doing that. They printed bonds, not in dollar denominations, but in their own currencies. And I could name what they call some of the currencies, because they had such disastrous experience with that during some periods, and they had to keep chopping zeros off. And so, they'd be constantly giving the…Argentinian peso went through a period, it was called the Austral. The Cruzado, oof, Brazil went through all kinds of names. Now they're finally on the Real, but just having control over the denomination or your debt is not quite right. And if certainly, if you can't get inflation by printing money until you have full employment, then what the heck do they think started what happened in the 70s where Arthur burns made that mistake? And Arthur Burns kept saying, oh, no, it's supply shocks. And if you hear some of these modern monetary people, I guess I should call them theorists, that's what they call themselves. But I don't see any coherent economic theory to what they're pushing, they sound like Arthur Burns. And as I said, Arthur Burns was a very distinguished economist, economic researcher, and professor and held a number of important government posts. And he is remembered as maybe the worst modern Chair of the Board of Governors of the Federal Reserve System. He was the guy who oversaw stagflation. Now, unfortunately, we're hearing people talking in Washington that way now. My views are my views only, not those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. But that's the kind of thing I'm allowed to talk about. I can't speculate with you, what government, what Fed policy is going to be because someone will think, well, he works with those people, he talks with those people. So, I'm not going to do that. But when you asked me to talk, I thought this will ring bells for people who are following the economic debate in Washington. And the debate you see on the financial pages of The Washington Post, New York Times, or the Star Tribune. We do have to get inflation under control. And let's see what happens. We're in a good situation now. We have a Secretary of the Treasury, kind of the person who controls fiscal policies, spending tax policy in the United States, Janet Yellen, and the Chair of the Board of Governors of the Federal Reserve System, Jerome Powell, who kind of see things eye to eye and get along together. And I expect us to do well. But more than that, I'm not going to say.

Jim du Bois  22:27

When we look at the stagflation of the 1970s into the early 1980s, what finally got us out of that? I remember, there were many efforts undertaken. Former President Gerald Ford had the Whip Inflation Now program, he had WIN buttons made. That failed. Then it was the Carter presidency, and it seemed like the stagflation actually accelerated during that time frame. And then Reagan elected president in November of 1980. And then, by '82, '83, another recession in that area, but then we slowly started, you know, climbing out of that stagflation? What happened to get us out in that scenario?

Timothy Kehoe  23:07

Okay. And that is, again, a topic I've looked at, and it involves the Fed, but it's historical stuff, I can talk anything I want about history, I just can't tell you my guesses for what the Federal Open Market Committee is going to decide. And for people who invest in securities, that's the kind of thing they'd like me to say, and whether my prediction would be a good one or not, it's not even one I'm allowed to think about giving you. Yeah, so what happened was, Jimmy Carter, selected Paul Volcker to be the chair of the Federal Reserve Bank during his presidency, and then Volker continued under President Reagan. Volcker decided that he and the Fed were going to stop inflation by raising interest rates until inflation stopped. He started that with Jimmy Carter. But somehow that became too painful. And I'm not sure what machinations took place, but he eased up on that. But then, Ronald Reagan was elected President. It's hard to remember but at that time, someone like me who's been a Democrat his whole life, I was so kind of disillusioned with Carter. Jimmy Carter is a wonderful human being and is maybe the best ex-president we've ever had. But I didn't think much of him as president. You remember the Iran hostage situation and so forth. So, in Massachusetts where I lived, and I wasn't the only person, a lot of people voted for John Anderson. But John Anderson was an alternative to either Jimmy Carter or Ronald Reagan. But it was Ronald Reagan who got elected. And Reagan just kind of gave Paul Volcker, the freedom to do what he had to do to get inflation under control. And he did it within two years. He kind of broke the expectations of inflation in the United States, but it was very painful. We had a, what they called a double-dip recession, because there was a little bit of recovery in that, the rules they had for calling them a recession. They call it two separate recessions, one kind of in 1980 into '82. And then another one, end of '82-83. They called that the double-dip recession. Now, I think that in retrospect, you would get economists to give you views that it might have been easier to use interest rate policies in coordination with some other kind of measures to get inflation under control. But that's not what they did. They just said keep raising interest rates. And it was painful. There were higher unemployment numbers during that double-dip inflation than there was in 2008-2009. I remember people would say, oh, the so-called Great Recession, the global recession, a part of it that hit the United States in that period, 2008 to 2012-13. The US was already recovering weakly by the end of that, although countries in Europe and so forth, weren't necessarily. That wasn't necessarily the worst economic recession since the Great Depression in the 30s. You know, the press, once they start saying that, without having anyone check on it, they keep saying it. No, in some ways, that 1981 to '83 period, the double-dip recession was worse by a lot of measures, especially job market measures. So, people don't want inflation again, because they don't want to cure it with a big recession. And I sympathized with that. And I think it was good that we whipped inflation. It wasn't Gerald Ford. Although, you know, to my way of thinking he was a fine president too, he just got tied up with the bad reputation because he had pardoned President Nixon. But finally, under President Reagan, we did whip inflation. And so, we don't want it coming back. I don't want it coming back.

Jim du Bois  28:02

Timothy Kehoe is a professor of economics at the University of Minnesota. He's also an adviser to the Federal Reserve Bank of Minneapolis. His views do not reflect those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Professor Kehoe thanks so much for joining us again on Dialogue Minnesota.

Timothy Kehoe  28:20

Well, thank you, Jim. It's good to get together with you again.