Adam Posen on a Surreal Jackson Hole in a Post-American World

The annual Jackson Hole symposium is, formally speaking, an academic conference. Economists and central bankers gather to discuss the most important, cutting edge ideas in monetary policy. But there was certainly a different feel this year because of the relentless attacks on Fed Chairman Jerome Powell coming from President Trump. The whole premise of central bank independence is becoming a live question again. And without central bank independence, almost all of the more academic discussions feel like a waste of time. That makes for a surreal environment. On this episode of the podcast, we speak with Adam Posen, a former member of the BoE's Monetary Policy Committee, who now serves as President of the Peterson Institute for International Economics. He's the author of a recent Foreign Affairs article titled, "The New Economic Geography: Who Profits in a Post-American World." We talk about the shifting tectonic plates occurring domestically and internationally, what he sees as the folly of Trump's approach to trade and international relations, and how that intersects with the discourse among Central Bankers.

Read more:
What’s at Stake in the Fight Over Fed Independence
Former ECB Chief Says ‘Illusion’ of EU as a Global Power Dashed

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.

Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots Podcast.
I'm in show Wisenthal.

Speaker 3 (00:23):
And I'm Tracy Alloway.

Speaker 2 (00:24):
Tracy, we're still here at Jackson Hall. It's funny saying
things like we're still here because we're recorded all these
episodes at the same time and we don't really know
exactly when you're listening. But this is yet another Jackson Hall.

Speaker 3 (00:34):
Up, another special missive from Jackson Hall.

Speaker 2 (00:36):
So I think there's like an element, if I'm being honest,
a certain surreality of Jackson Hole this year, because it
is an academic conference historically, and now they're setting aside
the chairman speech, which we'll talk about more. Setting aside
that speech. You know, it's a place for like talking
about important issues, and yeah, academic economics and that's great
and I love that stuff and it's super interesting and

(00:57):
all that, and yet the big story is really the
attack on the whole premise on the independent Central Banks.
And yet it sort of like feels like everything but
that gets talked about.

Speaker 3 (01:08):
I think that's right, And you said setting aside pal speech,
but it was very, very noticeable that in his speech
he could have taken it as an opportunity to talk
about things like central bank independence or things like data
integrity given what's been happening at the Bureau of Labor Statistics,
but he chose not to.

Speaker 2 (01:24):
Yeah, great point, you're right, Like he could have because
we were wondering, like, you know, this is going to
be his last speech, last time speaking as the Federal
Reserve chairman, so he could have said something really big
about reflecting on a career of being a central banker
and the importance of all these things, and he gave
a you know, macroeconomic policy speech.

Speaker 3 (01:43):
There's also this other layer, which is a lot of
what he's trying to do now, which seems to be
to focus on labor market deterioration and maybe look through
some of the upside risks to inflation right now that
only happens if you have a credible central bank that
can pin longer term expectations for inflation down. Like, yes,
the only reason he's able to do some of this

(02:05):
is because of the credibility of the social capital that
the FED has built up over decades.

Speaker 2 (02:10):
Exactly right. And the reason why we're talking about this,
just to be very clear, it's because of the attacks
from the Trump administration on Jerome Powell, also other FED
governors also, you know, the whole thing. And this is
just part and parcel of one attempt to sort of,
you know, restructure how the US does both domestic and
international policy. Because there's the tariffs obviously, and those intersected

(02:33):
with monetary policy. But then there's just also this sort
of changing relationship with other countries that gets into things
like you know, like let's get payment for security or
something like that. Like big look so many like big
hinges and pivots at one point, it's.

Speaker 3 (02:47):
I mean, I don't think it's hyperbole to say it's
an attempt at a restructuring of the global order, both
in terms of the economy via the international financial system
and also in terms of security. I think the con
using part for me is it is a fact that
America has the world's biggest economy. America came through the

(03:07):
pandemic a lot better than a lot of other countries.
We ended up having lower inflation than a lot of
other parts in the world. And yet the Trump administration
seems very very convinced that the US is somehow losing
out from the current international order, or maybe they feel
that there's just more that they could get from restructuring it.

(03:28):
So I think we should talk about maybe the motivations
behind some of this, and then what the new world
could possibly look like.

Speaker 2 (03:35):
Well, we literally have the perfect guests, someone we've had
on the pot, someone who we always catch up with
injecta hulk.

Speaker 3 (03:41):
It's becoming a tradition.

Speaker 2 (03:42):
It's a tradition. And he's literally the perfect guest because
he used to be on the Monetary Policy Committee at
the Bank of England, so as all the monetary policy bonafides.
He is currently the president of the Peterson Institute for
International Economics, and he is the author of a recent
article the New Geography Who Profits in the Post American
World that was in foreign affairs. And he's not one

(04:05):
to like sort of dance around big issues. He doesn't mean, yeah,
so this is what I said, goes to talk about
this someone. I was like, Okay, if we talked to Ediposen,
we can actually really like talk about all these things
that maybe many people are anxious to talk about. So, Adam,
thank you so much for coming back on Odelaw's great
to see you again here at Jackson Hall.

Speaker 4 (04:22):
Thank you for having me back and congratulations Tracy and
Joe on the upwards profile of odd lots ever higher.
So it's very cool.

Speaker 2 (04:30):
Very kind of you to say, are we right that
there is a certain surreality to the vibes here right now?

Speaker 4 (04:36):
Yeah? It is. As you said, there was a lot
of deliberate focusing down of chair pal speech, and there's
been a lot of self discipline of members of the
FOMC and everybody to be quite restrained at a time
when the attacks on the FED and the weaponization of
government files to attack individual FED members and so on

(04:59):
is going on. I think Tracy's absolutely right, and we
didn't script this in advance, but it is all part
of this broader context of do you keep inflation expectations anchored?
Do you have faith in the dollar? Do you have
faith in the credit of the US, do you have
faith in the US foreign policy? And those are all
things which FED officials are not supposed to talk about,

(05:21):
with the exception of the inflation expectations, and now the
inflation expectations even they are, they're reluctant to talk about
it because it can become self fulfilling if they talk
about worrying about it, then it's ours unravel, but also
to be fair, because the seeming message of the rapid

(05:41):
come down in inflation that we talked about our last
few times we were together in Jackson Hall over twenty
twenty two was due to having anchored long term inflation expectations.
At least that's one argument. But it is surreal, Joe.
I mean, I've gotten to talk to several of the
members of the committee and they are trying to get

(06:02):
on with their lives and it's hard. But I also
just want to emphasize it's not that different than their
colleagues in Washington at the Treasury, or at EPA or
at the Bureau of Labor Statistics that they also are
under attack.

Speaker 3 (06:21):
So we've done an episode on this before, but I
would love to get your take what exactly happens to
central banks when their credibility starts to come under attack,
or even when maybe on the fiscal side, you see
politicians interfere a little bit more with monetary policy, even
if that interference is just a truth social post or

(06:42):
something like that.

Speaker 4 (06:42):
Yeah, I think Tracy, the emphasis should be on the
latter part of what you said. When elected officials who
are superior to central banks in any power struggle. When
fiscal policy, which if it gets really out of whack,
has what's called dominance, fiscal dominance can overpower whatever monetary
policy is. When the context for central banking changes, then

(07:08):
it's not so much as say the credibility the central
bank per se. It's the credibility the central bank will
be allowed to deliver what it's supposed to deliver. And
I'm not saying that to make excuses for the central bank.
There are instances like Arthur Burns in the seventies where
the central bank itself is compromised and fails to deliver.
But I think that's the way to see it. And

(07:28):
where you see it is where we're already seeing it
in the US, which is you see it in a
slightly higher risk premium on long term government bonds. You
see it in weakening of the currency. And some of
this I think can be tied to the broader Again,
I sorry to keep coming back to that, but to
the broader Trump economic agendas. Both of you said it

(07:49):
is a real regime change, but we're seeing it already.
And so there's a chart in this Foreign Affairs article
the New Economic Geography I put out thank you again,
that does a simple version of something a lot of
economists academics have unemore sophisticated versions, which is basically the
correlations on the dollar have reversed that with a couple

(08:12):
interruptions in two thousand and eight, in the late seventies
early eighties, the dollar has the quality that when it
gets into trouble, more money flows into it, and even
if the US is causing a problem in the world,
people believe they're safer in the US than there was
the ultimate exact two thousand seldom example, dollar just down,
but basically treasury bond rates and dollar move and lockstep,

(08:37):
which is another way of saying they don't have to
put up the rates to defend the dollar. And it
also means that most of the movement in the dollar
day to day is just macro news, just day to
day news, and so putting in simple mindedly, there's a
correlation very strongly positive in intra day, intraweek data between

(08:59):
the dollar in the tenure treasure rate. Until April one,
April one of this year, that correlation shifts from plus
zero point eight to minus zero point four reversus sign
And what happens is when something screwy happens in the US,
like we decide unilaterally to bomb Iran, Like when we
do crazy stuff on one big, beautiful bill, it's fiscally irresponsible,

(09:21):
like when Powell is attacked in vicious terms by the president. Gee,
interest rates go up, dollar goes down, and that looks
like an emerging market. Anyway, This is not just a
data mining. You can do it in very fancy econometric ways.
You get the same result. The correlation of safety on
the dollar has reversed, and that would be a sign
of what you're talking about, Tracy.

Speaker 2 (09:42):
Our friend Karlick Center and who's been on the podcast,
always talks about's sort of the definition of an emerging
market is if your rates at the long and go
up in the recessions, right, Because you know, in times
of crisis in the US too historically you're like, oh,
there's a really bad in the US, I'm going to
pile into dollars at treasuries. This is what you're talking about,
which is that reflex has not kicked in exactly.

Speaker 4 (10:03):
We've got four and a half months of very clear data.
It's going the other way. A lot of the things
that Trump administration is doing are going to reinforce that
because they've talked about taxing foreign investors differently in the
US than domestic investors. They've talked about punishing people who
tried to switch out of the dollar. Stephen Moran, who's
been nominated to be a Federal Reserve Board governor, you know,

(10:24):
has talked about amar a Lago accord and re putting
the dollar down. There's real reason for it to behave
this way.

Speaker 2 (10:30):
Now, talk to us about like your foreign affairs piece,
like the sort of you know, this idea of like
the restructuring of the global and who profits from it,
because you also talk about this idea of like the
US is like sort of the global insurer of last resort.
But talk to us a little bit about what this
whole piece was about.

Speaker 4 (10:46):
Thank you, Joe. And this goes to what Tracy was
saying at the start about how what you think you're
achieving with this world change. So what I'm trying to
argue is that the Trump administration decided that the world
economy is playing the US for a soccer, and that
very harsh direct bilateral measures starting with terroriffts, but also

(11:11):
with other threats, Demands for investment, demands for military assaults
on social media, all these things, threats to withhold military
assistance in the case of Ukraine and others, that this
will be a rebalancing, that this will get more money
from these countries into the US and thereby make our

(11:32):
fiscal situation better, be fairer, and somehow do great things
for the US economy. This is wrong on every level,
But the fundamental point going to the insurer is I
build a mental model, not a mathematical model, but a
mental model that I think most people have found quite
apt that for the last eighty years since World War Two,
the US's main role in the world economy has been

(11:54):
to be the insurance provider. We made sure that you
could ship things through with through different oceans and get
there safely. That there was basically respect for property rights,
respect for intellectual property rights. There were some standards, particularly
technical standards, some brands. There was a dollar that you
could get in and out of and park money, and

(12:16):
it was deep enough markets and treasuries that you could
get in and out that nobody cared and it didn't
affect prices. There was stability to the US currency and
the treasuries that let you do that. Just a whole
host of things, plus military and alliance as well, obviously
for NATO allies, for Japan, for Korea and others, and

(12:36):
we charged premiums for that. We did get premiums. We
had much lower interest rates. People would put a lot
of money into US government debt and that made the
whole economy go off better. We had basically obedience from
all these countries and military alliances that they would do sanctions.
For the most part, if we want to do sanctions,
they would in Okinawa, in Rhinemind Air Base. They would

(12:58):
take our troops and support them and have them garrisoned
in their country, have our troops forward and doing it.
Whole host of things. And on the economic front, it
gave us disproportionate shares not just of the stable investment
and treasuries, but things like our standards for technology, our

(13:19):
standards for legal matters are our financial system were the default. Anyway,
this had lots of benefits, lots of benefits for them,
lots of benefits for us. It was a good business. Essentially.
What's happened is you have a beach house in Malibu
which you had insured, and you weren't going to build
the beach house unless it was insured. Fine, you're paying insurance,

(13:42):
you're getting something for it. Now there's global warming, hurricanes
are more likely, there's erosion in the beach. You're prepared
to pay a bit more for your insurance, but instead
you find your insurer has decided, no, we're going to
deny your claims. So you have to slip us something
under the table to get your claim adjusted. Nope, we're
tripling your premium and if you don't like it, we're

(14:03):
going to leave the state and you're not going to
have insurance anymore. That's what the Trump administration is doing.

Speaker 3 (14:08):
I mean, the role of insurance also acts as a
sort of like umbrella for economic development, right, because if
you have insurance on the beach in Malibu, other people
can build houses and you can have shops and things. Exactly,
maybe your house price starts to rise and you benefit
from that. So this is a slightly unfair question because
I'm going to ask you to channel someone else's thinking.

(14:30):
But what exactly is the argument from the Trump administration
here as to why they are losing out from the
current international economic or financial order, which very much seems
to have been built by the US. And as you
pointed out has a lot of tangible and intangible benefits

(14:51):
for America.

Speaker 4 (14:52):
Well, this is something I and colleagues of the Peterson
Institute have been struggling against for several years now. On
not just Trump. There are people on the Democratic side
who've had this view as well. So in the same
issue of foreign affairs, Wally Adamayo, who you know who
was Deputy Treasury Secretary in the Biden administration, has an article, Yes,

(15:12):
the trade system was broken during the Biden residency. The
US Trade Representative gave a speech in which she said
she basically agreed with everything her predecessor, Robert Leitheiser, had
said during the Trump inversation. So this has been out
there a long time. I know you want me to
answer a question, but I'm not going to try to
rationalize it. I think there are three or four things

(15:34):
going on. One is there is an excessive sense that
China has been unfair, but even more so that China
got away with being unfair and is dangerous because of
things we did on the economic side. And I don't
think this is justified. Not that I have any love
for the Chinese Communist Party, I'm on record calling she

(15:57):
an Autocrat, but just the Tom Brady and Bill Belichick
didn't win Super Bowls because they cheated in the little ways.
China did not become China because it cheated a little
bit here and there. The second thing is there was
a legitimate concern which the Biden people cared about and
the Trump people say they care about, but don't seem
to care about that. If we're too dependent on concentrated,

(16:21):
single sources for things like the semiconductors in Taiwan, that
puts US at a national security risk, that puts US
at an economic risk. The reason I say that Trump
people don't seem to genuinely care about that is because
being totally concentrated in the US in one spot isn't
any good either, because then your subject still to natural disasters,

(16:42):
to terrorism, to political problems, to corruption. You can care
about this and say we got to make sure it's diversified.
The third thing that's going on is there's a perception,
fed by the so called China Shop literature, that US
manufacturing was devastated, and this led to particular small cities
and towns in the US being devastated. There's a lot

(17:04):
of exaggerations and problems with this literature, and it doesn't
square well with the reality, including the reality of most
of the places that are cited as having had problems
had problems in the seventies, and that there's plenty of
places like Pittsburgh and Rallington, North Carolina that got back.
But anyway, there's that sense. And I think you've had

(17:25):
on my colleague Robert Lawrence with Peterson and Harvard, who
talks about the limits of a manufacturing strategy. And then finally,
and this is my own interpretation, people get mad at
me when I say this. I think there's a lot
of displaced anger. I think there are people who were
relatively privileged. They weren't necessarily rich, but relatively privileged in

(17:47):
older society, in the way the US society used to
be that I have been disrupted and offended by change
and by forces towards equality. I also think there's a
bunch of people who are understandably very angry and disappointed
with elites after the two thousand and eight financial crisis,

(18:08):
after COVID been perceptions of mishandling after the Iraq Afghanistan
invasions and occupations for twenty years that didn't produce anything,
so there's a lot of anger that's discredited that they
have discredited elites who are associated with being globalists, right,

(18:29):
But I don't think that anger is well placed. And
I'm not trying to be patronizing. I mean, we've seen
this in the US history and other history. You know,
people will stir up anger against immigrants, or stir up
anger against Native Americans or people of color or refugees
or com mythical communists in the government in the fifties
because they're angry about something else or they're scared of

(18:51):
something else. But it gets blamed on that. So that's
where I think it comes from. But I just want
to emphasize what you've said at the start, and that's
part of the point my article's trying to make. Is
there's a very clear list of benefits the US had
by running the system, and by had a good business model.
It was a profitable business model providing insurance. And like

(19:13):
you said, if you're providing insurance for some people, that
lets commerce expand and lets other people free ride, and
that's a good thing that they free ride, and because
then you get more commerce and more taxes and more
livelihood and better off people and Additionally, one thing where
the analogy breaks down, it's even more favorable for the US,
because you know, if you're chiulb Order, Liberty mutual or

(19:37):
state farm insurance, you don't really have a big effect
on the extent of risks out there by how much
insurance you give. But if you're the US and you
say I'm going to guarantee your security, you actually do
reduce the risks that are out there, and that means
you're collecting the same premiums and paying out.

Speaker 3 (19:59):
Less at the risk of carrying the insurance analogy too far.
I mean, it is true that we have insurers pulling

(20:21):
out of areas like Florida because they say it's no
longer economic to ensure these areas. It's just too risky.
It's going to cost too much to rebuild. Is there
a case to be made at all here that maybe
the Trump administration is looking around the world and saying, well,
it's riskier now than it was before, and we don't
want to be on the hook to put out a
billion fires.

Speaker 4 (20:43):
I think there is a case to be made in
the national security sphere more narrowly defined, that the US
may have overextended or needs to prioritize, and there is
a set of foreign policy thinkers out there talking about
this issue. You, I still don't think that's quite right,
because actually deterrence and protection kind of like you said before,

(21:07):
there's an umbrella effect. But let's say that the national
security part you can set aside and say there is
an argument to be had. The rest of it doesn't
make any sense because you're giving up strength of the
dollar and lower interest rates. You're giving up disproportionate compared
to your size in the world. Foreign direct investment, you're

(21:30):
giving up disproportion compared to your size in the world.
Influence over technical standards, love for your brands, spread of
your services. You're giving up disproportionate amounts of influence on
other populations. Again, it's just like looking at foreign students
coming here, which I know you've talked about in some
of your episodes, that unless you come up with some

(21:52):
absolutely mythical number of how many of them are not
only spies for the Chinese but successfully pull it off,
are undertail and take the Chinese information that they couldn't
possibly have gotten through cyber attacks and other means. Unless
you call it with an absolutely absurd number like that
all the benefits come to us from having foreign students here,

(22:13):
and that's what can be said about all these things
on the economic side.

Speaker 2 (22:17):
By the way, when you were talking about the you know,
well we had going. You know, it's like that breaking
bad speech that I've seen a good thing going.

Speaker 3 (22:23):
Yeah.

Speaker 4 (22:24):
Yeah.

Speaker 2 (22:24):
You know. One of the reasons I like talking to you.
I do feel like it's refreshing, frankly, this sort of
unreformed liberal because everyone is like post you know, everyone
sort of post liberal now and everyone. So I appreciate that.
Also two years ago when we first d you on
the podcast and you recommended as a Vogels biography of
doing Chopin to me, and then I read it the
next month and I read so I appreciate the book recommended.

(22:47):
That led me down.

Speaker 3 (22:47):
I think that's I was going to say, that's the
thing that.

Speaker 2 (22:50):
The whole we've read like fifty books about twentieth century China,
all things to you, but I want to talk about
China a little bit more because I take all your
points about about everything, however, and you know, you've been
sort of like refreshingly skeptical a lot of these ideas.
That is particularly important to have more manufacturing in the
United States, et cetera. But there is this very real

(23:11):
concern that without robust manufacturing you actually can't have a
world class military. And if you're just thinking about like, okay,
we provide this insurance role in some ways very literally, say,
with our navy through various straits around the world. And
Setiga said, whether China cheated or not, should we be

(23:32):
anxious if pure like manufacturing capacity and the technological frontier
in building things including weapons is in China.

Speaker 4 (23:41):
Anxious is not the right word, Okay. And I appreciate
you're saying about the liberal and that's the part I
didn't say. I mean, I think a lot of people
are making the case that I'm not pushing back against
the tracing you asked about, because it's seems to be
politically advanceable to say that old fashioned liberal values are
bad in the case of China. Again, there's a difference

(24:04):
between arguing in a frankly not just liberal but neoliberal,
if I can use that word way, that there is
a specific market failure to make sure we have adequate
minimum sourcing and diversified sourcing of key national security inputs. Right, Yeah,
so you know that's fine. You can say that, and

(24:27):
it's like, yeah, wouldn't it be good if the Defense
Department and the Commerce Department and the intelligence community actually
had a process by which they identified this and actually
had an ongoing commission and had a list and had
expert advice and decided, excuse me, in a non partisan way,

(24:48):
how to do that, and then actually marshaled specific money
and measures to do that. And if you could do that,
you should. That would affect, you know, some time, any
percentage of the US economy. It might be incredibly important
for having drones or aircraft carriers or whatever the right
technology is. And I'm not going to pretend I know

(25:09):
what it is okay to keep the Straits of Malacca
open or to keep the Taiwan straight open. But you
could do that. And when I was fighting against the
Biden administration on some of their national security excuses for
economics interventions in their industrial policy a few years ago,
I actually had a meeting with a senior person in
the White House, not somebody that senior, but senior enough,

(25:30):
and I said, you know, you guys have to have
a list, you have to do this. And this person
laughed and said, you got to be kidding, maybe because
no one wants to write down a list, because once
you write down a list, then you're annoying certain people
and excluding others. And if you're the Defense Department, you
want to include as many things as possible, and you
know the general dynamic of how these things go. So

(25:52):
I don't think the right response is anxiety. I think
the right response is, yeah, let's take this seriously. Let's
act like grown ups and actually set up a policy
process that deals with this, and let's do the spending.
And even to go back to the international side, go
to our specific allies and say again, it's like raising

(26:13):
taxes on a specific thing where you're tying it to
a user fee or on in the insurance I'm raising
your premiums, not threefolds and threatening to leave. I'm raising
your premiums for twenty five percent. And if you put
a fire detector in your house, I will only raise
it twenty percent. Go to Germany, go to Japan, go
to Korea, go to the Netherlands, and say, in the

(26:36):
fact i'm raising your premium I want to spend this
much more in defense. But if you chip in specifically
on this list of military sensitive equipment, I won't ask
for as much.

Speaker 3 (26:48):
Yeah, the carrots are kind of missing. There's a lot
of sticks and not that many carrots. Well, so you
touched on this just now, But I'm basically going to
ask Joe's question in a slightly different way. But are
tariffs the right way to bring manufacturing back to the US?

Speaker 4 (27:02):
No? Sorry, you want more? I mean look again, because
of the nature of terras, which are a tax, which
are a distortionary tax on a narrow part of the
tax base that has bad distributional effects. They're regressive, They
primarily either hurt small business on the corporate side, or

(27:23):
they hurt lower income people on the household side. And
they tend to lead to corruption, even if not literal bribes,
but distortions of Hey, Apple showed up in the President's
office with the gold phone and what do you know,
they got an exception to the terror. You know, tend
to lead the stuff like that in the way the
most things do. Terraffs are good for two things. Right,

(27:46):
if there is a very specific industry and a very
specific bargaining situation, not against the whole world in general,
all at the same time, one specific country with whom
you can bargain, and you can get other people to
join you in the tariffs, so it's effectively a form

(28:06):
of economic sanction that can work. The other thing is
if you are an underdeveloped country with no state capacity,
like the US in eighteen twenty or a number of
South Asian and subs Aheran, African and Central American countries today,
even they are not that many, Tariffs are a way

(28:27):
to collect necessary revenues because you can literally set up
guards at the border and make sure somebody gets the money,
whereas other more less intrusive, less regressive, more efficient forms
of taxation are harder to collect if you don't have
a good stack capacity. Those are the only two things
tariffs are.

Speaker 2 (28:44):
This is a good point because you know, you see
people like, oh, back in the old days, the golden age,
tariffs was like we you know, we didn't have like
W two forms and stuff like that. So yeah, of
course you just have to do it at the porest.
Let's go back to, like, okay, setting aside the sort
of structural issue with tariffs and the bad distribution effects,
et cetera. Like just right now in August twenty twenty five,

(29:07):
and we look at the state of US economy and
people like, how do you perceive the interaction of tariffs
with everything else that are going on right now?

Speaker 4 (29:13):
It's a fair question. We've done a lot of work
at the Peterson Stut colleagues of mine that we've published,
and others have done slightly different work, and we all
come out roughly the same place. This is the way
the Trump administration is doing it. In terms of the
short term economic outlook is it's a tax hike. It's stagflationary,
meaning it's raising inflation at the same time as slow

(29:35):
in growth. It's collecting a sizable chunk of revenue on
the order of two and two hundred and fifty billion
a year at an annual rate at this very high
level of taxes. That will probably diminish over time because
people get around that kind of tax and people choose
to produce things elsewhere and people evade it. But for

(29:59):
the moment, it's a significant tax increase that would have
been better done through more efficient means. It also is
going to do nothing for manufacturing because what it does
on net is well, there are certain industries that are
being helped. As I know you've covered in your supply

(30:20):
chain stories. You know, there are a lot of small
businesses or even big businesses that have imported inputs, whether
from China or elsewhere, and it costs them, and it's
going to be very hard to replace that, and it's
very expensive. And then you've got the issue again, which
I know you've covered, but has to be said that

(30:41):
there aren't American workers for good reason. There aren't American
workers who want to be sitting there screwing screws into
the back of iPhones. I don't mean to keep picking
on Apple, but it's just it's a clear example. So
you either have to pay them an incredible amount for that,
or you have to let somebody else do it. So
in the short term, getting back to the monetary policyly,

(31:03):
since we're in Jackson holl I think it's not a
surprise that we haven't had huge inflation yet from the
terraffs because there are a number of things that mainstream
people like us expected. People were going to be in
denial about whether the tariffs would stay and how big
they would be. People were going to have to take
time to figure out, if you're a business, whether you

(31:27):
can find a substitute source, whether that subst source is
domestic if you move it to Vietnam, does that really
get you out of the tariffs? Do you have a
good relationship? I mean it takes. As you've discussed in detail,
these supply chains emerge organically and they're not top down.
Somebody makes one decision, so it takes time to reformulate
the suply chains. If you were sunnya tariffs. Third, you've

(31:49):
got a bunch of companies that were called out by
name by President Trump, like GM or Walmart, that were
told don't raise prices because of the tariffs, and so
of course they're going to hold off as long as
they can. And then eventually, when everybody's raising prices, it
profit at the same time, they'll raise prices. And then finally,
a lot of these companies, and a lot of the
consumer goods companies had inventories, and they built up inventories

(32:13):
in the first quarter of importing goods, and they weren't
going to raise the prices until pass through the tariff costs,
until they got burnt through the inventories. So she had
four very solid reasons why it would take at least
a few months for the tariffs to really start showing
up in prices. So if I'm sitting at the Fed
right now, in my view, the tariff inflation just goes

(32:34):
up from here. First round effects probably will peak in
second quarter of twenty six. And then the debate is
and my estimate is higher than most people's. A lot
of people think it'll peak around four on CPI. I
think it's gonna peak closer a fiver a little more.
And then the discussion which Governor Waller is put out there,

(32:56):
which the chair talked about today, talked about in the speech,
is how much do you think this translates into second
round inflation effects? How persistent is this inflation? And that's
the interesting debate, And that's a good faith debate you
can have. But the tariff inflation is coming, it's on

(33:17):
its way. It's not surprisingly low, it's not surprisingly slow.
It's a tiny bit slower than I expected, but not really.

Speaker 3 (33:25):
And we're here, Well, I'm going to take you up
on the debate, tease, but where do you fall on

(33:45):
the side of the second order effects debate? Because you
can make it feels a convincing argument for either side.
You could say that while tariffs are attacks and so
they destroy demand and maybe lead to deflation, or you
could argue that tariffs perhaps give companies an excuse to
all start raising their prices together, and so you don't

(34:06):
get that competitive activity that would normally keep prices in check.

Speaker 4 (34:11):
I think you can make a plausible, serious debate on
both sides, but I think the arguments are very clearly
on the side that the second round effects are going
to be large and persistent. There's several reasons, which is
why I think it's pretty clear. The first one is
we know from what happened with the tariffs under Trump,
ian under Biden, from other countries in recent times that

(34:34):
the pass through what generally you end up being if
you're the company that ultimately buys the imported input or
the household that buys it, the pass through the final
purchaser is usually eighty five to ninety percent of the tariff.
It's already very clear from the data that the foreign
companies are not paying for any of this, So the
question is how much are the importers eating it versus

(34:56):
passing it on? And it takes a little time for
you to get to that, but generally it's a very
robust result. So even if you get less than that,
you get sixty five seventy percent on average, that's still
a lot. The second is implicit what you said, and
then sometimes in things some of the people on the
other side of this argument say is essentially the demand

(35:16):
destruction is either symmetric to the price increase or is
larger than the price increase, and there's no particularly good
reason to assume that. So you have to look at
what actually is going on. We have a pretty robust economy,
pretty close to full employment. We are about to get
though it hasn't shown up yet. This to me is
the big surprise. But we're about to get more damage

(35:39):
in a stagflationary way from migration restrictions, deportations, sudden stop
of growth in the labor force. That's going to give
American workers more bargaining power in the short term, that's
going to create labor shortages, which put upward pressure on wages.
That's going to decrease productivity and capacity. So on balance,

(36:01):
you may get some recessionary forces out of both that
and the tariff increase, but I strongly doubt they will
outweigh the inflationary impulses that there will be room for
price setting, price or increases excuse me, and wage increases. Third,
going back to where one of the things you said
at the start, anchoring inflation expectations is the game that

(36:23):
ultimately is what allows US Central Bank to say, as Bernanki, Laubach,
Michigan and I argued twenty five years ago in the
Inflation Targeting Book, you're allowed to look through the first
round effect of supply shocks if it's clear what the
supply shok is and you have anchored expectation. I think
the FED, whether they admit it or to themselves or not,

(36:44):
is publicly underestimating how much the twenty to twenty to
twenty twenty two experience de anchored inflation expectations that didn't
take us to Argentina in nineteen eighty. But anybody who
says that they're the same as they were before twenty twenty,
I think is deluding themselves. And Then, additionally, going back
to what Joe was saying about the surreal aspect of

(37:06):
this time, if the Trump administration has been as they have,
hugely attacking the independence of the FED in multiple ways,
and this is showing up in a less strong dollar,
then that's another reason to think that the expectations aren't

(37:28):
going to be anchored, and you're not going to get
an offset from the currency to the tariff inflation, so
bing bing being that's four reasons why I think the
argument is clear that we're going to get more inflation,
more persistence of inflation, more second round effects than some
people are saying.

Speaker 2 (37:48):
I have a question. I've been asking this to a
bunch of people. I'm not totally satisfied with any of
the answers I've gotten, So try again. Even before the terriffs,
even before Trump, it appeared that from the perspective of
the market that long term rates were going to be
durably higher than they had been in the decade prior

(38:08):
to COVID. How come what changed?

Speaker 4 (38:12):
So isn't there place where I'm there's a legitimate, real discussion,
and I'm very strongly on one side of it. Okay,
So I think the useful discussion. All credit goes to
Larry Summers roughly was at twenty nineteen, twenty eighteen, he
gave the speech about secular stagnation, reviving the concept from

(38:32):
Alvin Hansen, and oh sorry, that was much earlier. He
gave that speech. Then he gave the speech in twenty
nineteen which he said secutor stagnation may be end And
he made a number of points, but the biggest one
was if you're in an environment where you're going to
have sustained expansionary fiscal policy pushing up demand and meeting

(38:52):
shortfalls of demand, then the r star and the neutral
interest rate is higher. And that's pretty clear economics. And
then the reasons which he said and others of us
have developed I think are right that going back to
the insurance beffoth, the risks are higher now there's climate change.
China is would no matter whose fault it is or
whether it was a nevil or not. China is more

(39:14):
of a security threat than it was. Russia is more
belligerent than it was. People have to spend more on that.
Our societies are aging. Att are almost all the large societies,
with the exception of India are aging. I mean you
have to spend more on healthcare and more on social security.
All of these things are going to lead to sustained
increases in government spending, irrespective of whatever else you do,

(39:37):
and they are unlikely, as we've already seen, to be
fully tax financed. So that is a fundamental. The second fundamental,
I would argue that's pushing up our star is that
we don't know when AI is going to kick in.
We don't know how big an effect, we don't know
how many jobs. You guys again have had many good
guests talking about this, but I think we can all

(39:59):
agree that sometime between two and ten years from now,
there will be a meaningfully increase in the productivity growth trend.
There are a few smart people like I, Sam oak
Glue and Johnson who say no, but most of us
think interesting that there will be an increase of some sort. Now,
I don't have to go all the way to McKinsey
Global Institute and believe you know it's some enormous number,

(40:19):
but whatever it is, that number an improvement in productivity
growth trend is generally one for one should be thought
of as raising the equilibrium interest rate, because you're raising
the average return on capital. Essentially.

Speaker 2 (40:35):
There's totally counterintuitive to me. I would have thought that
a big productivity increase would be alt equal disinflationary and
rates lower.

Speaker 4 (40:42):
And well, no, it's disinflationary. But remember inflation we should
think about as a short term phenomenon, a cyclical phenomenon,
not as a structural phenomenon. So it's disinflationary in the
sense that at any gift for while the productivity gain
is ongoing, you're getting more stuff from less. But as
a structural matter, you are raising the average returns on

(41:04):
capital in the society, and so all capital that's competing
has to compete with a higher return, and so therefore
our star is hup.

Speaker 1 (41:13):
Interesting.

Speaker 3 (41:14):
So, now that we are deep in our star territory,
I'm going to ask a central banking question with your
central bank hat on. So you mentioned stagflation.

Speaker 2 (41:25):
He actually has his central bankout is a Boston rest
for those who because those aren't in the room.

Speaker 3 (41:31):
That's right. So you mentioned stagflation earlier. What exactly are
central banks supposed to do when they're faced with the
stagflationary scenario. Because we just listened to pal talk about
downside risks to employment and upside risks to inflation. He
clearly seemed to choose the labor market over the inflationary

(41:52):
risk at this moment in time. But there's clearly a
trade off. You have to make a choice here.

Speaker 4 (41:56):
Yes, And this is why you try to avoid bad
pop pellasies such as the ones the Trump administration are doing.
Which gets you into a stagflationary situation if you can. Essentially,
it's a contingent choice, and this is why the FED
is right to be putting so much emphasis on debating
over second round effects of inflationary shocks and things like

(42:18):
you were saying, how much pricing power there is? How
much recessionary effect do you get from these stack fleastion
It's essentially a balance issue if you're forced to choose
between the two goals, the two alves of the Fed's mandate,
but the two goals for any central bank, essentially you
have to go after the one that's more likely to
spiral out of control.

Speaker 3 (42:39):
Ah. So this is their argument that labor market deterioration
can be very not linear, right, it can kind of explode.

Speaker 4 (42:47):
Yeah, nonlinear is the way they think of it. I
think again, it's no reason I would take the other
side because the evidence is yes. And there's the discussion
about the so called som rule. Did you can have
these very rapid increases in unemployment. But what we've seen
is much to people's surprise but has to be taken seriously,

(43:10):
is both after two thousand and eight and after twenty twenty,
So after the financial crisis. After COVID, unemployment actually came
down pretty fast, and there wasn't evidence of what economists
call hysteresis, which is the idea that once you put
a lot of people out of work, it's harder for
them to get back into work. And so it's taken

(43:31):
from engineering. It's a concept that was very true of
Europe in the seventies and eighties that every time you
got an unemployment rate hike because of recession, it wouldn't
come all the way back down to where it was
before the recession, because there'd be a certain number of
people who couldn't get back into work. And ahead of
the two thousand and eight crisis, during it, including my

(43:51):
time at the Bank of England speeches and then Jare
Powell and others in twenty twenty during COVID, worried a
lot about this potential for permanently having rises in the
unemployment rate. But the thing is, all the evidence from
two thousand and eight and all the evidence from twenty
twenty is that didn't happen. And again it was a surprise,

(44:14):
but it's a really important and a really robust result.

Speaker 2 (44:17):
You really are an unreformed neoliberal because so many people
have accepted the opposite. Everyone almost everyone thinks there's some histories.

Speaker 4 (44:24):
And again, like I said, well I'm not in this.
It's not so much I appreciate that joke. And this
is not so much being a neoliberal as being an empiricist.
So I mean, on my staff, a colleague of mine
is Olivi Blacharden. He coined the Hystorici's concept may years ago,
and he and Larry Summers and the co author's name,
of course I forget, I apologize, did a paper in

(44:47):
twenty thirteen. It was like the first paper they did
for us after I took over at Peterson looking for
Hystoresi's effects in the two thousand and eight to ten
data and they couldn't find it. And then Powell, again
I think, with a great deal of sympathy from me
and others, talked a lot about history sis for why
they were so aggressive and cutting in response to COVID.

(45:08):
But then again, we know the unemployment came right down,
So people care about this. They're coming from a good
place to care about this. But it's not the illiberal
it's the evidence. The evidence isn't there, and so the
implication is not that you shouldn't care about unemployment. You
should have temporary measures of fiscal policy like we did
during COVID to extend unemployment insurance, to extend health insurance,

(45:30):
to make it less miserable for people who are unemployed.
But the inflation is probably the thing that's more likely
to get out of control.

Speaker 2 (45:38):
In my people, Tracy asked you a question put on
your Monetary policy had but I'm going to ask you
a question specifically with your Monetary Policy committee hat having
served at the I'm having served at the Bank of England.
Long term rates in the UK are higher than the
so called Liz Trust's moment and I asked you a
question about this last year and it was very vague

(46:00):
at the time. I was like, what's going on with
the UK? And because it always thineks like there's some
sort of mess, But now I actually have something specific
to ask, which is what's going on with the UK
in the sense that it seems bad, sir, it seems bad.
The rates are very high. What's going on there?

Speaker 4 (46:16):
I think I said to you when you asked about
this last year, Joe, that the single biggest call I
got wrong in terms of analysis and forecasting in my
career was twenty twelve at Bank of England. I and
some others on the committee at the time but I'm
responsible for me said, yeah, productivity has been lower in

(46:37):
the last few years to twenty twelve because of the
financial crisis, but it's gonna come back up because it's
been the same long term trend since eighteen fifty and
there was nothing to destroy a.

Speaker 2 (46:49):
Trend from it.

Speaker 4 (46:50):
Yeah, I don't cameer if it's eighteen fifty or eighteen sixty.
But there's some incredibly long data series we have for
UK productivity growth and even if you watch it, it's
just a straight upward line. And even the Great Depression
sort of makes a little blip, and World War Two
makes a little bit, and then suddenly in two thousand
and eight it goes flat. And I and a bunch

(47:11):
of other people said, well, it's not like the Blitz, right,
and so productivity growth is going to come back up
to trent. It never did. The UK is the one
rich economy, high income economy where productivity growth not just
went down for a while, but kept going down. And
so now we've had a dozen years of very low

(47:32):
productivity growth in the UK and at some point that
catches up with you, and I think that's the way
to look at it is you throw bregs in it
on top of that, which may be one of the
reasons why productivity growth hasn't come back, and there's debate
about that, but they have been running making less with

(47:52):
more rather than more with less for a very long time,
and wages and prices and the path all haven't dropped accordingly.
So it's not like unfortunately grease suffered through say or
Portugal during the financial crisis, and so something's out of whack.
And this shows up eventually in the fiscal policy, which

(48:14):
is what you're talking about, that they have a bunch
of really hard choices to make. If the government, the
current labor government, doesn't make lots of cuts, the interest
rates keep going up. If they do make lots of cuts,
then probably productivity growth doesn't improve. So they're just in
a really, really tough situation.

Speaker 3 (48:34):
So Joe asked you a question with your boe hat on,
and I'm going to ask something similar. Which is one
of the things that makes Jackson Hole such a big
deal is that we don't just have the FED here.
We also have other central bankers like the ECB, the
BOJ and you see them do the classic walk with
the FED chair every year when it comes to central

(48:57):
bank credibility and the independence issue. What do you think
those other central bankers are thinking here and do they
possibly use some of Jackson Hall We're still waiting to
hear from them. That usually happens on Saturday morning. We're
recording this on Friday afternoon. Do you think they maybe
use this as a platform to try to push back
against some of it.

Speaker 4 (49:17):
So, the central bankers, both publicly and in conversations I've
had with them from around the world, are shocked and
horrified that the Trump administration is doing this to the FED.
Beyond just the obvious. They're sympathetic to their colleagues from
the FED, and it's pretty yucky. Is just the fact

(49:39):
that they have taken it for granted, the entire economics
professions taking it for granted for more than forty years,
going back to a classic paper by Ken Rogoff in
nineteen eighty six, and then some subsequent when work others
did that in central bank independence is good. It reduces
inflation and reduces the volatility of inflation on average for

(50:01):
a country in a large way without reducing the average
growthroat full stop. And this is lived experience. This is
what the European Central Bank was based on. This is
why the Bundesbank and the Germans were willing to give
up sovereignty to the European Central Bank. This is the
standard practice that dozens of countries have adopted. The Bank

(50:24):
of Japan got independence over the last thirty years. So
it's kind of like with tread economists in the past,
but even more in questions it's like, you know, this
is like questioning vaccines, which of course nowadays people do,
but at one point would have been thought of as
what kind of anti scientific illiterate are you that you
would question central bank independence? So, I mean, there's no

(50:46):
way to exaggerate. That's the response at various international versions
of central bank summer camp, you know, which is what
Jackson Hole is. So the ECB has their version, which
is called the Central Conference, and this year at CenTra
every he was rallying around Jay the share Powell, and
there were public statements about central bank independence and support
for him at the BIS annual meeting, which is a

(51:10):
sort of similar thing, which this year I got invited to.
I don't usually get invite to that. I do get
the center anyway. Again, there were public statements that are
private statements that everyone's ralling around. But as we discussed,
the FED leadership seems to have decided that jaer Pale
should not mention a word about central bank independence in
his speech this year, and so this is pure extrapolation.

(51:34):
By the time this recording comes out, we'll find out,
but my expectation is they will have passed a memo
to ECB President Leguard, Bank of England Governor Bailey, Bank
of Japan Governor Awaita, who are the three big central
bank governors speaking on Saturday, Please don't talk about it.
And I think what they've probably decided is having foreign

(51:58):
central bankers talk about this would not play well in
maga Land and might just induce more problems with the
Trump people. So I think the instinct of the foreign
central bankers here would be to talk very loudly about this,
but I think they explicitly or implicitly have been told

(52:19):
not to.

Speaker 2 (52:20):
Woll This is exciting because by the time this comes out,
this will either have You'll either be very wrong or
very right. Edison always great catching up with you and uh,
we'll do it again next year.

Speaker 4 (52:32):
Thank you for having me. Congrats to both you. It's
a great substantive discussion.

Speaker 3 (52:36):
Thank you so much you.

Speaker 2 (52:50):
Tracy. I love our annual catch up with Adam. It
really he was like the perfect guest because he'd just
say whatever you say, what's on his mind.

Speaker 3 (52:58):
Well, at a time when a lot of people don't
want to talk about this stuff, right.

Speaker 2 (53:02):
Yeah, people are like anxious when people feel like there's
like recriminations where people people want to people want to
keep low. Yeah, people want to keep their low at
a time when they don't know if there's going to
be some attack on them from the White House or
you know, on Twitter, or people want to keep low.
And Adam I appreciate.

Speaker 3 (53:19):
His candor can I just say I'm always really impressed
by people who are able to organize their thoughts in
real time to be like, well, there are three reasons
actually Number one, that's right, that's right, show, But that
was a fantastic conversation. One thing, well, I guess the
thing that I still don't get and I think it
is really hard to make an argument that the US

(53:41):
has lost out from an economic and financial and in
some respects political system around the world that it has
helped to create. Right, Like, there are tangible instances where
you can say, like the US benefits in sometimes incredibly
weird ways. Like if you look at the deck crisis
this in like twenty thirteen or twenty eleven, you know,

(54:03):
this is a crisis emanating from the US, from the
United States, from US politics, and what you saw was
investors flocked to the security of US treasuries and you know,
yields actually go down, which helps with US debt. So
there are these like sometimes perverse benefits that the Trump
administration seems to want to throw away.

Speaker 2 (54:23):
You know, one thing I will say that I was
thinking about in your intro is and I go think
back to that book trade Wars or class Wars, which
I think is actually I suspect Adam almost very disagrees
with the premise of that book, et cetera. But regardless
of where you stand on some of these questions, there
is the relationship between you can't disrupt the domestic without

(54:47):
disrupting the international or vice versa. These are like inextricably linked.
If you perceive to be there some sort of inequality
in the United States or whatever, it is these things
like the trading relation ship, all of these things, they
are interlinks. So it's like one thing to say, like
you know, there's the views like oh knocking over all
of these different institutions. I think there there are linked

(55:09):
in fundamental ways, and there it sort of makes sense
that if you you know, you go after the FED
because you perceive whatever that that's part and parcel of
the whole thing.

Speaker 3 (55:18):
You can to argue their links. But I would say,
if you're trying to solve domestic inequality through international means,
that doesn't seem that it seems like the emphasis and
the focus is wrong.

Speaker 2 (55:29):
I guess what I'm saying is I'm not surprised that
it all goes to because like that was my toy
for like like that that the sort of Klein Peedies theory,
et cetera, that you know, there's this inequality in the
United States because of these winners and losers from the
international trading system, right, right, and so we fight these
trade wars, et cetera, because we're it's about something internal

(55:51):
that rectifying some sort of internal imbound right. And so
I do think, like I get so there's just gets
some all I'm saying is I'm not surprised at all.

Speaker 3 (55:59):
Goes together because I see I get yeah.

Speaker 2 (56:01):
As part of like a policy agenda.

Speaker 3 (56:04):
But it's possible that we should be looking at domestic
policy more rather than fighting with trading partners. That also,
you're not going to say that you're lying low now,
all right, I'm just.

Speaker 2 (56:14):
Saying I don't have an opinion the right way to
do it. I'm just saying I'm not surprised that this
is one way.

Speaker 3 (56:19):
Okay, shall we leave it there.

Speaker 4 (56:20):
Let's leave it there.

Speaker 3 (56:20):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.

Speaker 2 (56:26):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guest Adam Posen at Adam Posen. Follow our
producers Carmen Rodriguez at Carman armand Dash E Bennett at
Dashbod and Keil Brooks at Keilbrooks. For more Oddlots content,
go to Bloomberg dot com slash odd Lots. We have
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can chat about all of these topics twenty four to
seven in our discord Discord dot gg slash.

Speaker 3 (56:48):
Out lots and if you enjoy all thoughts. If you
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