Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / TCJA, the CARES Act, inflation, and the debt limit

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TCJA, the CARES Act, inflation, and the debt limit · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> John Hurtley: This is the capitalism and freedom, the 21st century podcast
0:46
where we talk about economics, markets, and public policy.
0:49
I'm John Hurtley, your host.
0:51
Today I'm joined by Kevin Hassetta, an economist who is a distinguished fellow at
0:55
the Hoover Institution at Stanford University.
0:58
Kevin previously worked at AEI, where he was the head of economic studies.
1:02
And he recently served as chairman of the Council of Economic Advisors in the Trump
1:07
administration from 2017 to 2019.
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And then returned in 2020 after the COVID-19 pandemic outbreak as the senior
1:14
advisor to head the economic response of the administration to COVID-19.
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He's also very highly cited in the public finance literature and
1:23
has written some of the most cited empirical papers on corporate taxation.
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Welcome, Kevin.
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>> Kevin Hassetta: It's great to be here, Jeff.
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>> John Hurtley: So Kevin, I want to talk a little bit about where you grew up.
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You grew up in Boston, and you're also quite the athlete.
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How did you first get interested in economics?
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>> Kevin Hassetta: Yeah, actually, it was outside of Boston by quite a bit.
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I grew up in a town called Greenfield which is sort of on the Connecticut river,
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where Vermont meets New Hampshire meets Massachusetts.
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Just about.
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And I grew up in a town that was previously great.
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It's right next to Turner's Falls,
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which is the largest drop on the Connecticut river.
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It's a serious waterfall.
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And so it was basically the hydroelectric center of American industry.
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And there were all these factories that used to be there when they had a huge
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competitive advantage because they could generate power with the waterfall.
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And so for example, international papers first factory was in Turner's Falls, and
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there's this really famous tool company, the Greenfield tape and dye.
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So we had hydropower that made the economy great in the late 1800s and
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the early 1900s.
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And I grew up at a place where it was basically a ghost town.
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All the factories had closed.
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Everybody was a distressed community type person,
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the kind of person that maybe Kaysen Deaton would write about and about,
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like, what happens when a factory closes?
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And so I sort of grew up wondering what happened to my town?
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Like, why is it that it went from being, like,
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the center of the economic universe for the US to being a ghost town.
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And as a metric of the ghost town by the way,
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that Turner's falls actual burnout factories were used as a set.
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Like, they brought in cameras and everything for the video game fallout.
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>> John Hurtley: Wow. >> Kevin Hassetta: Yeah.
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So you can imagine when you're growing up and you're seeing this stuff and you're
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watching your sister's friends graduate high school and not get a job and so on.
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Then when I went off to college, I was just, like, super curious about economics.
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And then I found when I took the classes at Swarthmore that the professors
3:34
were really wonderful.
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A guy like Mark Kuperberg is a macroeconomist.
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Bernie Safran, who wrote the sort of ending column in the Journal of
3:44
Economic Perspectives about what people should read.
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That's interesting.
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This month, at the very dawn of that journal.
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And so I was surrounded by incredibly talented economists, and
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it really lit a fire under me.
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And so I went one of those people that don't exist anymore.
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I went straight to grad school.
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So right when I graduated from sophomore, I went to the university to Pennsylvania.
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>> John Hurtley: Wow.
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It's amazing that you've seen the China shock and
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the effects of automation up close in your own hometown.
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So after graduating from Penn,
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where you were an Auerbach student, you were faculty at Columbia.
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You worked at the Federal Reserve Board of governors.
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You led economic studies at AEI.
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And you're also chair of the board of academic advisors at
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the Economic Innovation Group, or EIG, where you helped conceive of the idea of
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opportunity zones, something that would later be written into law in the Tax Cuts
4:40
and Jobs act, which was passed while you were there.
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I want to get a little bit.
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While you were CEA chair in the early Trump years.
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I'm curious, let's get into the tax cuts and Jobs Act a bit.
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Can you tell us a bit about what it was like, the conception of it?
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Notably, cut the corporate tax rate from 35% to 21%.
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Some of your most well cited work analyzes the impact of
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corporate tax rates on investment.
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How did TCGA come together, and
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what do you think its legacy is here five years out?
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>> Kevin Hassetta: Sure. Well,
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basically what happened was that we had a group that included at the time,
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Gary Cohn and Steven Mnuchin and myself and Mick Mulvaney
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were the main sort of economic team in the White House at that time.
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And we put together working groups to develop ideas and
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to model, what if we do this?
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What if we do that?
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Presented the president with options and
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then began negotiations with people on the Hill.
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And we could sort of say, we want this and this, and they would say, well,
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you can't have that, but what about this thing?
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And the negotiations were pretty complex.
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Like, in order to get Marco Rubio's vote, we had to expand the child credit probably
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more than we wanted to at the beginning and so on.
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But the thing evolved in the political arena.
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But it began with a lot of careful study.
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And as you mentioned, that a big chunk of the study was on the impact of
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the corporate tax cuts that we were advocating.
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And the impact especially of those tax cuts on American workers, which is
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a literature that I think really kind of began with a paper that Aparna matter and
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I wrote a while ago that showed that corporate tax cuts help blue collar
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workers.
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And President Trump actually really embraced the result from our paper,
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which was that corporate tax cuts lift blue collar wages quite a bit.
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And we did a lit review at the CEA when we put out our estimates of what
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would happen if we passed the tax cuts that said that the typical
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wage would go up in three to five years by four to $8,000.
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And President Trump at this point at least,
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there's one time in his life where he was being cautious.
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He said, let's not take the high number, let's take the low number.
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He went out.
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And you might remember that the $4,000 improvement in wages was, like,
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one of the main points selling points that he cited over and over in speeches.
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And it was attacked by a lot of people who thought the effect seemed too large but
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hadn't actually read the literature to see that it was an empirically based thing.
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A lot of false things were said.
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One left wing economist said that we are only citing papers that weren't peer
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reviewed.
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And then we went back and put a star next to the peer reviewed papers.
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And I think there were like a dozen of them or something like that, that had the.
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Anyway, but if you go back and look at what happened afterwards,
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we basically had two presidents, Bush and
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Obama, where there really was almost no wage growth whatsoever over that entire.
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Period.
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And the wage that we targeted and did the $4,000 estimate for
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increased by a little more than $6,000 up until right before COVID,
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and then if you look, when President Trump left office,
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then the increase, even after the COVID recession was north of 4000.
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And so I think the tax cuts works about the way that we expected.
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There was a big increase in their ratio of investment to capital stock,
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and that fed through to productivity and
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wages, just the way economic theory would say it would.
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Critics in the empirical evidence from what you wrote in the early nineties as
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well, with Jason Cummins and Glenn Humber looking at past tax reforms prior to that.
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Right, so it's very, very similar to the response of previous tax cuts or
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the economy to previous tax cuts.
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So again, there was an old literature that I participated in,
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which we could talk about, if you'd like, and then there's a modern literature where
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people use a narrative approach to find the effect of tax cuts on the economy.
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A narrative approach.
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>> John Hurtley: It's like the roman wrong.
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>> Kevin Hassetta: Yeah, the way to think about a narrative approach is this goes
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back to my dissertation.
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That when I started studying corporate taxes when I was in grad school,
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then everybody believed that the cost of capital, which is the channel through
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which taxes affect corporate investment, had no effect.
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Everybody thought the estimate of the effect of the cost of capital was zero.
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And the Brookings papers were filled with papers that documented that that was true.
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But when I looked at what they were doing,
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it struck me that what they're doing is fundamentally wrong,
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because what happened in post war history, beginning with John F Kennedy,
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who's really underappreciated, brilliant supply side president, by the way.
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>> John Hurtley: [CROSSTALK] >> Kevin Hassetta: That's right and
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the point is just that he introduced the investment tax credit back then,
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which sort of became accelerated depreciation or expensing.
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>> John Hurtley: [CROSSTALK].
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70% until Reagan cut it again and I think there's another book,
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JFK conservative, too.
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>> Kevin Hassetta: Yeah, he was a great man and a terrible loss for our country.
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So anyway, so that what would happen would be that we'd have a recession, and
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then people would basically take a play out of the JFK playbook and say, well,
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we should have an investment tax credit.
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And then we'd get out of the recession and then they'd say, well,
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we don't need it anymore.
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And so what would happen would be in recessions,
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we actually had tax policy that stimulates investment.
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And outside of recessions,
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we had tax policy that doesn't add extra oomph to investment.
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And then if you take, if you're like naive 1970s macroeconomists writing for
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the Brookings papers, then you just run the regression.
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You just correlate tax policy and investment, and you find that you get
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the wrong sign that investment tends to go up in times because investment goes up.
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If there's a general economic boom and goes down in a recession,
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it tends to go up in times when there's no tax subsidy for it.
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And that was the puzzle that I sort of set myself with my co authors when I was
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in graduate school, is like, how do we solve that?
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And what we did back then is that we decided that sort of endogenative policy,
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the fact that it was responding to recessions,
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surely is like a big effect for the aggregate number.
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But there's a different cost of capital for every type of asset that depends
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on its asset life and depreciation rules and so on.
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And so the cost of capital for
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a car will be different than the cost of capital for a power plant.
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And that our identifying assumption was basically that the cross section
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difference in the effect of a tax reform on this asset versus asset that asset,
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was, like, too mathematical for it to be endogenous.
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Because the politicians surely wouldn't understand what effect they were having
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through all the formulas that Alan Auerbach and I derived.
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And so therefore, we can actually look at the correlation and
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it would be meaningful.
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And when we did that,
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in a series of papers that have now been cited the whole bunch of times.
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We found that the effect of the cost of capital on investment was about
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what the basic fundamental economic theory model,
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the Cobb Douglas production function, would predict.
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And that was that literature.
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Subsequently, Ricardo Caballero at MIT tried it a different way,
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found about the same effect.
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But then there was this really innovative literature by Christie and
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David Romer, started by them, but
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then absolutely expanded into numerous papers by authors from all over the world.
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Where they basically said, well, one way to tell whether something is
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like an endogenous policy or exogenous policy is to look at the floor debate, and
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what does Congress think they're doing?
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And so if you pass a tax cut and then everybody's saying, we need to do this
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cause we're entering a recession, then you would call that an endogenous policy.
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But if they're passing a tax cut because somebody just ran for president arguing
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for tax reform or something, then maybe that's an exogenous policy.
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And they find a that when they look only at the exogenous variation.
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So they're fixing this effect that I noticed when I was in grad school,
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then they get about the same estimates that we got.
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And so I think that when you've got replication,
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like Caballero doing it a different way, and
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then the modern narrative approach doing it a different way.
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As you do something, lots of different ways that each have a plausible story
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behind them, and you get the same answer, then you should start to have a great
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deal of confidence in that answer as a scientist.
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And for me, like the disappointment of the economic debate at that time is that so
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much of the economics profession is just basically a pure partisan
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democratic profession now.
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That even though the literature quite decisively said
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that the effects would be what CEA was reporting,
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that we were being attacked in an ad hominem fashion often by economists from
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all [LAUGH] over the country who hadn't clearly read the literature.
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And that was a disappointment for me, because I think that it's really
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important for economists to read the literature and then give it honest take.
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And the fact that there are papers in the last four or
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five years in the very top journals, the American Economic Review and
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the Quarterly Journal of Economics and so on.
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That confirm our results from way back when, and
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that we were actually citing papers from the top journals and
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then being accused of being [LAUGH] unprofessional.
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And so I suggest that our profession runs the risk of going
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off the rails the way the rest of society has and
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becoming divorced from science and unconnected to data.
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>> John Hurtley: And it's just so fascinating.
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You were there at the very beginning of the credibility revolution.
15:02
Your papers with Glenn Hubbard and Jason Cummins looking at tax reforms
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as natural experiments, looking at the effects on investment,
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and sort of testing this hypothesis about Q theory of investment.
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That was written even before the card Kruger famous minimum wage paper,
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I think, around that same time.
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So I think it's fantastic work, and I certainly
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have my own biases toward well identified studies.
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But I feel like there was a very very early in this,
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what has since been a tidal wave of complete change in the profession
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from sort of not well identified theory and empirical work.
15:50
Certainly in macro and in public finance to a field now,
15:55
and labor economics and public finance are almost entirely.
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Entirely heavily well identified applied micro fields, and
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I think you helped set that scene change.
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>> Kevin Hassetta: And thank you.
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And I would actually like bring in another paper too that I wrote with Jason Cummins
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and Steve Oliner.
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That is a completely different story, but
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I think that it highlights sort of the evolution that you're talking about.
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And it's another case that I think is a nice example for people in graduate school
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who are thinking about, how do I come up with an idea of a paper?
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So basically, if you look at a paper then wonder why the result exists,
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then the thing that made me go into the natural experiment paper and
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develop natural experiments was that ultimately a prior belief that
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could be wrong, that the responsiveness to tax policy for companies can't be zero.
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And the reason I thought this was actually that, I think that for human beings
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that you could have a tax policy that does this or that to our labor income.
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And then we could respond to it the way homo economicus would,
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the way a purely rational economically trade person would, or
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we could respond to it the way a mentally ill person does, or somewhere in between.
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And there's nothing that's going to make us not exist anymore.
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And so humans, I sort of came into it with almost like a belief that I'm never going
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to study consumption behavior because I don't necessarily know that economics is
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going to be helpful for understanding what people do,
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because people aren't put out of business if they don't do the right thing.
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But a business, suppose you have two businesses, one that responds rationally
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to tax policy the way economists model it, and the other one that doesn't,
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then the one that doesn't should be run out of business.
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And so if we're looking at businesses,
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then it ought to be that sort of darwinian forces make it so
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that they act in response to the tax cuts the way I sort of believed that they did.
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And so I started to wonder, well, if it's not zero, what are they getting wrong?
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And that's where we got the story that you and I just said.
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But there was another one of those that basically became a paper.
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It was published, peer reviewed paper in the American Economic Review,
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that's also been, I think, maybe even more influential than that paper that
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was coauthored with Jason Cummins and Steve Oliner.
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And it was very much related because one of the things that people did,
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in addition to looking at tax policy is that they looked at Tobin's Q.
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And Tobin's Q, for those who haven't studied it, is just if you take the market
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value of the firm and divide it by what it would cost to rebuild the firm.
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Then if the market value, as in like what it's worth, if you could buy
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it in the stock market, is way above what it would cost to build such a firm,
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then somebody could come in and replicate that.
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So suppose a firm, you could buy a hot dog stand for $1 but
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you could sell it on the market for $2.
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Then you would buy hot dog stands and sell them until you basically got,
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so that the market price was equal to what it cost to buy a hot dog stand, right?
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So it would get back to market price, had to be driven down to $1.
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The way that would happen is we'd have a lot more hot dog stands.
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The hot dog salesmen would be competing with each other,
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their profits would go down, and so that's the Tobin's Q.
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Well, at the same time, when I finished the cost of capital thing, and
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I really understood that, okay, now, I think the cost of capital mattered.
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And by the way, it's incredibly controversial at the time,
19:22
took an enormous amount of abuse from other academics who we could talk about
19:26
that as well, that they really invested in the old way of doing things.
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So in this case, I'm thinking, okay, well, if the cost of capital matters the way I
19:33
say it, so firms are responding rationally to that.
19:36
Well, there's this other end of the literature, completely different thing,
19:40
where people look at the effect of Tobin's Q on investment, and
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we just talked about why it should have an effect.
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If Tobin's Q is way bigger than one, then there ought to be more investment.
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And yet they were finding zero coefficients on Tobin's Q, and
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why is that?
19:54
And then I looked at it and basically decided that there's a problem
19:58
with the measure that people were using for Tobin's Q,
20:02
which is just that the stock market has a lot of noise, right?
20:07
In fact, Bob Shuler won the Nobel Prize for talking about how there's excess
20:11
volatility in stock markets because they respond to things other than fundamentals.
20:16
They could get panicked today about maybe the risk of a new bank failure and so on,
20:20
and then everybody goes down 5%, and then they go up 5%.
20:23
And so if you try to predict the investment behavior of a typical company
20:27
with the stock market, which is fluctuating wildly.
20:30
Then unless investment behavior of companies like their property,
20:34
plant and equipment investment fluctuates wildly,
20:37
then you're gonna find that the Tobin's Q has no effect.
20:41
And so, what we did in the paper was, we say, okay, so
20:46
we got to come up with a way to basically sift out
20:49
the measurement error fluctuation in the stock market, and
20:54
then estimate the impact of Tobin's Q, basically controlling for that.
21:00
And we got the very clever idea,
21:02
which actually was kinda given to me in an econometrics class when I was in grad
21:06
school by a brilliant econometrician named Robin Sickles.
21:10
And the idea was that the stock market value of the firm is basically
21:14
a discounted present value of how much money we think that they're going to be
21:19
able to pay shareholders of the future present discounted value of dividends.
21:24
Which is related, in a way, to the present discounted value of earnings or
21:28
profits that they make, because in the end,
21:30
they're going to pay the profits out to shareholders.
21:34
And so, that's the thing that the market is supposed to be estimating.
21:39
And our idea was, well, we have all these analysts that follow stocks,
21:42
and then they tell you what their future earnings are going to be, and
21:45
they give you a great deal of detail.
21:46
They give you, like, the next five year of earnings, and
21:48
then they tell you what the long run growth is.
21:51
Estimate the present value of earnings, or dividends, really, for firms,
21:56
based on what analysts say, and then you actually observe the expectations.
22:01
So you don't have to do any fancy rational expectations, econometrics, because you
22:05
have, like, the expected future profits, which is what should affect investment.
22:09
And we found that when we did that, this is the really cool thing,
22:13
that not only did we find, like, a Q effect that was,
22:16
like, far away from zero, but it was almost exactly the same effect we got
22:21
from looking at the natural experiments for tax cuts.
22:25
And so then, once again, I became very, very convinced that, okay, so
22:29
we're doing it a different way.
22:31
So we've talked about two other different ways, ow we've got another one where we
22:34
did it with Tobin's Q, and we also found that it worked for that.
22:37
And so I'm highly confident that the analysis that we put in to designing
22:42
the corporate tax cuts and the Tax cuts and Jobs act was based on enormous
22:47
amount of very careful science that's been peer reviewed and widely cited.
22:52
And, you know, I'm not surprised that what we saw in the data afterwards
22:56
was exactly what we predicted, because it was based on so much hard evidence.
23:01
The one last thing I'll say, without filibustering is that there are people who
23:06
say that the investment effect didn't happen, you've seen that.
23:11
And so maybe some of our listeners have been exposed to those arguments.
23:15
And I just want to respond to that.
23:17
Just anticipate that someone might be saying that if we were taking questions,
23:23
that basically what happened was that, and this was actually my doing because I had
23:28
been studying all these other tax reforms, that there's a problem that if I say,
23:33
okay, I'm going to have an investment tax credit in January, and
23:37
it's October, then what can happen would be everybody's like, okay,
23:42
well, I'm going to wait till January to invest.
23:45
So I get, like, a big tax credit, if I do it in January, right now, I get nothing.
23:49
And so what you need to do when there's an uncertain tax policy that might happen in
23:54
order to not kick your economy potentially into recession,
23:58
because everybody waits to see.
24:00
Is you need to say, okay, well, if we have expensing,
24:03
which is like investment tax credit, then it'll be retroactive to today,
24:08
the day that we announce here's our bill.
24:11
And so therefore, there's no reason for you to wait till January when the new tax
24:14
law might come in and so you're not doing some kind of weird massive distortion.
24:19
And so, one of the things that happened, though,
24:23
is that we made the expensing retroactive to October or
24:27
maybe September, I forget which month.
24:31
But the corporate tax rate reduction,
24:34
which was at the time originally a proposal, was a 20% rate reduction,
24:40
was not backdated to the first time we announced it.
24:44
And so, everybody expected, especially once the bill was passed,
24:50
that the corporate tax rate would drop quite a bit in January.
24:57
And so the thing then is that if you buy a machine and you expense it, then the value
25:01
of that expense is you subtract it from your profits before you pay tax.
25:06
And so if the tax rate is 35%, which it was, then if I buy a dollar a machine,
25:11
then I get 35 cents of a tax benefit.
25:13
But if the tax rate is 21% and I spend a dollar on a machine,
25:17
then I only get 21 cent tax benefit.
25:20
And so we have this quarter where people got a much bigger tax benefit, actually,
25:24
before the tax cuts technically happened, because they were looking backward and
25:29
the rate was coming in January.
25:31
And so what happened in the fourth quarter right after the tax cuts passed,
25:35
is there's this incredible investment boom because of this.
25:38
Because people saw that they had like a timing advantage to whack it
25:41
into the fourth quarter while they could deduct it at 35 instead of 21.
25:45
And so you got this big surge in investment, and then it stayed,
25:48
I thought it was gonna go down in the first quarter, and then we're going to
25:51
have all these news stories about how our tax cuts failed because the newspapers.
25:55
This is too complicated, in effect, for the guys who cover the economy.
25:58
So, I thought for sure that was gonna happen, but actually it stayed high.
26:01
And in the models that Alan Aurebach and I developed a long,
26:05
long time ago about how to think about the effect of taxes on investment,
26:09
that what happens is the level of investment jumps.
26:12
And so you get much more investment than you need to offset depreciation of
26:15
existing capital.
26:17
And then the capital stock gradually grows up to be consistent with the new level
26:21
investment, and for the investment to capital ratio equal to depreciation.
26:26
And so investment jumps and
26:27
then it stays there is what the model says should happen.
26:29
And so what happened was that in the fourth quarter, we got the investment
26:32
jump, and then it kind of stayed there and grew a little bit from there.
26:35
But because the jump was in the fourth quarter, you see a lot of, like,
26:38
partisan democratic economists say that there wasn't an investment effect because
26:43
they treat the control group, they add the fourth quarter to the control group.
26:47
And say, well, let's look before and after the tax cuts and
26:50
then they date the tax cuts inaccurately to January 1.
26:53
But the argument I've seen that the tax cuts didn't have an effect,
26:56
which I've even seen, by the way, at places you wouldn't expect,
27:00
like the American Enterprise Institute,
27:02
which used to actually care about free enterprise as far as I could tell.
27:05
But at these places that they tend to make mistakes like that,
27:10
like to do the control group inaccurately.
27:13
>> John Hurtley: Fascinating, and I mean, it's so
27:15
interesting to hear just about all the evidence that sort of goes into
27:21
showing the effects of corporate tax reductions on investment.
27:26
And talking about the narrative approach and talking about Tobin's Q and
27:31
use your cost of capital and using past actual reforms as natural experiments, all
27:36
early part of the credibility revolution, and you were a key part of that.
27:41
It's amazing, and I think very few scholars, I think,
27:45
get to both write seminal work in some field like you have in public finance and
27:51
actually gone into policy and implemented that.
27:55
Thinking about, like Ben Bernanke, for example,
27:59
who just won the Nobel Prize this past year wrote a lot about depressions and
28:05
the Great Depression and a lot about finance and the macroeconomy.
28:10
And he certainly was there to apply a lot of his academic wisdom as Fed chair.
28:15
So, I think it's almost analogous in the case of public finance with your career.
28:21
I wanna talk a little bit about some of the other aspects of TICJA, or
28:24
the Tax Cuts and Jobs Act,
28:26
which was passed just at the end of the first year of the Trump administration.
28:29
When you were chair of the Council of Economic Advisors,
28:33
what do you think the legacy is so far of opportunity zones?
28:37
We saw a lot of other things in the legislation as well,
28:41
there were some changes in personal tax rates,
28:45
some changes in capping the mortgage interest deduction.
28:49
But I think the opportunity zones were one of those things that was really new and
28:54
certainly something that you had helped conceive while before
28:58
certainly tax reform was being considered.
29:01
And before we even sort of knew Trump was president when the economic innovation
29:06
group was first conceived.
29:09
But I'm curious looking sort of five years on here,
29:12
what do you think about state of opportunity zones?
29:16
>> Kevin Hassetta: Yeah, so, Jared Bernstein and I, way back in the day,
29:20
wrote the first paper on opportunity zones.
29:24
It was published by the Economic Innovation Group.
29:26
And Jared Bernstein,
29:27
who's now the nominee., >> John Hurtley: Or
29:29
soon to be the new chair of the Council of Economic Advisors
29:32
under the Biden administration.
29:34
>> Kevin Hassetta: And a genuinely,
29:35
authentically good person who I disagree with on some policies,
29:38
obviously agree with him on others, like opportunity zones.
29:42
But he and I are viewed that there's a PhD candidate right now named Harrison Wheeler
29:47
at University of California, Berkeley, that has a paper on opportunity zones.
29:53
And in the beginning, he basically says that Jared and I invented it.
29:56
And it's sort of pretty much true as an academic matter,
29:59
although we had other friends that were helping us think about what to do.
30:03
But the original thought was based on game theory, and I know we
30:06
wanna talk a little bit about the debt limit struggle at the end of this.
30:09
There's a lot of game theory there, too, but
30:12
I spent a lot of time playing with game theory, but
30:15
didn't find a lot of applications for it, really, until the opportunity zone paper.
30:20
But they had in the past, Jack Kemp pushed the idea of, like, an enterprise zone.
30:25
The idea was that if you had a tax benefit for putting business in
30:29
a distressed community, then maybe you could get businesses to do that.
30:35
And he, Jack Kemp was absolutely beloved in the African American community because
30:40
he obviously, he made the number one focus of, like, helping underprivileged folks or
30:45
know people who are discriminated against with economic policy.
30:49
But the enterprise zones didn't really work.
30:52
And so, it's very similar to, well, wait a minute, it seems like they ought to work.
30:57
And so is, first, is the evidence wrong, and then you look at the evidence, and
31:00
the evidence looked right.
31:01
They really didn't work, and so I did with the Tax Cuts of Jobs Act,
31:05
an opportunity to say, they just got the econometrics wrong.
31:09
They actually do work, but no, the enterprise owners really didn't work.
31:13
>> John Hurtley: Now, what opportunity zones, like, how are they different?
31:18
So, the idea is that it's essentially a tax break for
31:22
real estate developers if they develop.
31:24
>> Kevin Hassetta: Or not real estate, anybody.
31:25
>> John Hurtley: For anybody who invests.
31:27
>> Kevin Hassetta: You and I wanna start a brewery,
31:28
I know we talk about that a lot [LAUGH].
31:30
Given our beer consumption, we could probably fund it ourselves.
31:34
>> John Hurtley: As long as that is built-in that brewery, or
31:38
real estate construction project occurs in one of these lower income zones.
31:43
>> Kevin Hassetta: Yeah, so basically, the idea is that when I invest or
31:48
when you invest, for the most part, what I do is I put my money in vanguard and
31:55
index funds and things like that cuz I'm an economist.
32:00
That's what economists do.
32:01
But the way to think about the way a typical human being who wants
32:06
to invest is that they give their money to a professional firm.
32:11
Is it a private equity firm or a mutual fund company or something?
32:15
And then, they go out and invest.
32:17
And so, Jared and I decided that the problem with the sort of
32:21
old-fashioned approach to this was that you could,
32:25
put a tire store in Anacostia, in DC, and get an enterprise credit.
32:30
But then, you got a tire store, and then, what are you gonna do?
32:36
And if you sold the tire store and then didn't, put the money in a gas station in
32:40
Anacostia, then you'd have to get the tax credit back in some cases, and so on.
32:45
And so, it's very, illiquid.
32:47
And so, the first thought that we had was that what we need to do is make it so
32:52
that I can put my money in a fund like the Vanguard Index 500, but not that,
32:57
like a private equity fund that invests in distressed communities.
33:02
And, the fund can build a business in Anacostia and then sell it,
33:06
and then build a business in Camden, New Jersey, and then sell it, and
33:11
then go to North Philadelphia and build it and then sell it.
33:14
And, it's not a taxable event until I take my money out of the fund.
33:20
And that was the key idea is that you have qualifying investments,
33:24
which are investments in distressed communities, and
33:29
that you have qualifying funds which basically do the qualifying investments.
33:35
And, the incentive is for individuals to put their money in the funds and then for
33:40
the funds to go around and invest.
33:42
And, it radically reduces the complexity of
33:45
encouraging the flow of capital to distressed communities.
33:49
So, we had the view that that could be a game changer,
33:53
because if you look at poor places versus rich places,
33:56
the big reason poor places are poor is that they don't have enough capital.
34:00
And if we could get capital to flow to these places, then we could potentially
34:04
really change a whole bunch of lives of the most distressed people in America.
34:07
And so, that was the idea of opportunity zones.
34:10
And, I said game theory before I referred to it, is that I think
34:14
the problem with the enterprise zone is that it had a bad equilibrium,
34:19
where what happened is that I was thinking about putting a tire factory at Anacostia.
34:26
But I would really, if I was the only one who did it, then it would still
34:29
be such a distressed community that I'd have all sorts of problems with crime.
34:33
And I just, and so I would really wanna do that.
34:36
If you would wanna do it, too.
34:38
But the, if you look at how treacherous the incentives were, and
34:41
sometimes, for example, you had to, the workers who worked in your
34:45
tire factory had to be in the distressed community, too.
34:48
And so, if one of your workers moved across Pennsylvania Avenue to over
34:52
near RFK stadium and get outside of the distressed community,
34:56
then you would lose your tax credit.
34:58
There was all this kinda stuff.
34:59
And so, there was a bad equilibrium where I didn't go because I kinda knew you
35:03
weren't gonna go.
35:05
And, what we wanted to do is create a positive equilibrium where everybody's
35:09
going, because everybody knows everybody else is gonna go.
35:12
And, to do that, we thought that this fund structure would do that, and
35:15
it's really proven to be true.
35:17
And I think the best paper on this is this paper by Harrison Wheeler.
35:20
It hasn't gone through peer review yet, because you have to understand,
35:24
the data is very, very new.
35:25
The opportunity zones weren't really finalized until almost 2020.
35:28
And so, that we need data through probably 2024 or 25 to really do science.
35:34
Although I got to say that what Wheeler's done is really impressive.
35:37
What he did is he went around, and basically said, well,
35:41
we can't really look for effects necessarily on employment yet,
35:46
necessarily, because if you're gonna build a.
35:49
You and I are gonna put a brewery in someplace, we gotta get all the permits,
35:52
we gotta build the building, and.
35:54
>> John Hurtley: Home prices to some degree, I guess.
35:57
I know there was some very early work that was done, I think, by Ed Glazer and
36:01
David Wessel, that found that there weren't any home prices, home
36:04
price increases in opportunity zone areas, but only looking one year out, I think.
36:09
>> Kevin Hassetta: And, probably a year before they were even in effect,
36:12
which is another thing we'll talk about, Wessel, at the sort of extremely,
36:17
I would say, idiosyncratic, anti-opportunity zone sentiment amongst
36:22
America's left, where they're basically dying to show they don't work.
36:27
So much so that there are all these people that have written premature papers saying
36:31
they don't and then had strong conclusions based on incomplete data.
36:35
But the point is just that if you look at permit activity, where we can get data
36:39
that's really almost real-time, then we find really big effects of these.
36:43
If you also, like the funds themselves, report how much money they've raised.
36:48
And, I think this year, it's pretty likely we're gonna cross $100 billion,
36:52
has been raised to invest in America's distressed communities.
36:55
And so, if you're social justice warrior inequality, dude, I'm kinda Rawlsie, and
36:59
I care most about people at the bottom, which is why I work so
37:02
hard on opportunity zones.
37:03
You say, where did that come from?
37:04
Well, it's cuz I grew up in the place that was used for the set for Fallout,
37:09
the video game of post-apocalyptic America.
37:12
And so, I really.
37:14
>> John Hurtley: China is kinda shock.
37:16
>> Kevin Hassetta: It wasn't the china shock that killed us.
37:18
It was like it was electricity spreading.
37:20
So, you didn't need to have a waterfall or electricity.
37:24
They had an electricity advantage cuz of the waterfall of hydropower.
37:27
>> John Hurtley: So, technological disruption.
37:29
>> Kevin Hassetta: Technological disruption is what sort of really harmed
37:32
our community.
37:33
But, yeah, so I think that in the permitting activity,
37:37
you could see big effects.
37:39
You could see that already.
37:41
I think there's 50 billion headed towards distressed communities, and it's got to
37:45
climb into about 100 billion this year is an estimate, whisper estimate that I have.
37:49
And so, we're starting to get evidence that
37:51
a massive amount of capital went there.
37:52
And the thing I got to say, is that if capital goes to a distressed community,
37:58
it wasn't gonna go there.
38:00
If you actually look,
38:01
the whole problem is that these places are starved with capital.
38:03
So, if we can identify that much capital is going to the community,
38:07
that if you're gonna say that it has no effect,
38:10
then you've gotta have a pretty complicated story for why.
38:13
First, why would smart investors do it if it's not going to have a positive return,
38:17
which requires basically that you improve those neighborhoods?
38:21
And then, how is it that you can go to places where the marginal product of
38:25
capital, as we economists call it, should be pretty high?
38:29
Cuz there's not a lot of capital, and then you send 50 billion in capital to these
38:33
places, and then it doesn't have an effect.
38:35
As soon as you're finding a result like that, if you're an honest scientist,
38:40
start to wonder, jeez, why is it that doesn't have an effect?
38:43
It seems that's so contrary to what I would expect.
38:47
But the thing is that, I think I know why people like Wessel do it, and
38:51
I don't have a very high regard for his book.
38:54
It is that Trump did it?
38:58
It was part of Trump's tax cuts and Jobs Act, because it turns out that Trump
39:02
really did care a lot about distressed communities and
39:05
basically giving people a second chance,
39:08
letting people out of prison, sending capital to distressed communities,
39:12
that he did a lot of stuff that normally people on the left would embrace.
39:15
But since he did it, and he's such a controversial character,
39:18
then they just have to hate it because he did it.
39:21
And if you look at the things that Trump did that Biden has reversed,
39:24
it's kinda like if Trump did it, they've reversed it.
39:27
And so, I think that these troubled political times that we're in have
39:31
had a big effect on the opinions of people who should try to return to being
39:34
scientists and scholars and stop being partisans.
39:37
And I think the opportunity zone space is one of those spaces now.
39:41
But that being said, as I said before, it's like 2024,
39:44
probably before we have it updated so that we can form firm conclusions,
39:48
given that these things are relatively new and
39:50
given that if you go to a distressed community, there aren't a lot of, for
39:54
example, buildings that are gonna allow you to build a business.
39:58
And so, you're gonna have to knock stuff down.
39:59
Down and put stuff up and get the permits and so on.
40:02
And so it could be they don't work.
40:05
There's like, now, I think, evidence that suggests,
40:09
like the permit data that they are having an effect and
40:12
also just the data that just adds up how much money is in the funds.
40:16
But maybe it ends up not having a big positive effect on the lives of
40:19
these people.
40:20
But if that's true, though, I would say, and
40:23
this is the thing that I don't know, it's something that one should
40:28
consider when one looks at the vehemence of the critics.
40:32
The intent of the policy is to go to the places in America with the most distress,
40:36
where if you're a kid born there, Raj Chetty has shown us that you've got a very
40:41
low likelihood of achieving the American dream.
40:44
And to fix those places, to help those places by sending much needed capital and
40:49
jobs and so as to those places.
40:52
The Joint Tax Committee estimated that the total cost of opportunity zones
40:57
would be $1.5 billion over ten years for taxpayers.
41:00
So imagine if I told you, for 1.5 billion of taxpayer dollars over ten years,
41:06
I can get you 50 billion in capital flowing to distressed communities.
41:12
Would you take the trade?
41:14
And who wouldn't?
41:16
And so these people who are indignant and angry about opportunity zones, you know,
41:21
need to get over it and need to get a life because, you know,
41:24
it's an attempt to help the people who are most in need in our country.
41:28
And if they don't work, then we should make another attempt,
41:32
not condemn the attempt.
41:34
>> John Hurtley: Those are excellent points on helping those least among us,
41:38
which I think the, certainly the intention of opportunities.
41:43
I wanna fast forward just a little bit to COVID and
41:46
the Trump administration's response to COVID.
41:49
So you left the White House in 2019 after you finished
41:54
two years as chair of the Council of Economic Advisors.
41:59
But then you returned in 2020, right after COVID had started or
42:04
reached the US, and so it was spreading like crazy.
42:09
And you joined the White House as a senior advisor to head
42:13
the economic response to COVID.
42:16
And that included a lot of things like scrambling to pass
42:21
these coronavirus relief bills, the CARES Act,
42:25
which is sort of the broader economic support relief that was passed.
42:31
That included a lot of things like these economic impact payments,
42:35
a couple thousand dollars, stimulus checks.
42:37
>> Kevin Hassetta: I was running the team that moved ventilators.
42:40
I mean, anything that was data driven,
42:43
that wasn't involved in basically epidemiology.
42:48
So we weren't in any way guiding Tony Fauci, but anything that influenced
42:53
moving ventilators to here or there, anything that was really data dependent.
42:59
Our team working with Palantir, actually,
43:02
we built a massive data operation to manage that.
43:08
I didn't intend to do this.
43:10
It's not like that I've always had the ambition of there being an national
43:14
emergency and me being in the White House.
43:16
In fact, I was in the outback in Australia and
43:18
got a call from the White House that the President and Jared decided that.
43:23
Jared Kushner, that because we had worked so well together,
43:26
when I was at the CEA and it was such a national emergency,
43:29
they asked me if I would drop everything I was doing and come back.
43:32
>> John Hurtley: Australia.
43:33
>> Kevin Hassetta: I was in the outback of Australia.
43:34
>> John Hurtley: You got a call.
43:35
>> Kevin Hassetta: I got a call, yeah.
43:37
And I flew back from the outback and
43:40
went right to the White House and started right away.
43:45
>> John Hurtley: March 2020.
43:46
>> Kevin Hassetta: It was March in 2020, early March, yeah.
43:48
And, yeah, it was a very, very difficult time.
43:52
But I think that we made a lot of under extreme distress, really.
43:57
We made a lot of good calls.
43:59
And Jason Furman had a really interesting tweet.
44:02
And he's really upped his game lately in the sense that I got to say that his
44:06
analysis is really always worth looking at and
44:09
sometimes worth agreeing with, but always very thoughtful.
44:14
And he basically said, if actually look at GDP, what we forecasted GDP for
44:19
GDP today before COVID, that we've kind of returned to the trend.
44:24
And so we had the biggest drop since the Great Depression and GDP, and
44:28
we've returned to the trend.
44:29
Granted, we've got a lot of problems going forward, like the debt, which you and
44:33
I will talk about a little before we're done.
44:35
And that was debt financed in a way that was necessary given that we
44:39
shut the economy down.
44:40
But the economic policies that, if you had told me when I did the first estimate that
44:45
GDP growth in the second quarter was going to be -32% you can remember me saying that
44:49
on tv before the number came out because it's based on a lot of math.
44:54
I was terrified that that was gonna cause a financial panic and a Great Depression.
44:59
And the fact that we were able to go from there to we're back on trend.
45:03
Here we are just a little bit later, I think is one of the great economic policy
45:06
accomplishments in economic history.
45:08
And I can finally say, too, that it's one that is nonpartisan,
45:12
that Ron Wyden at Senate Finance and his staff worked really closely with us at
45:17
the White House to make sure that we had, like, thought carefully about
45:22
the emergency and what the right economic response to it would be.
45:26
And then that there was bipartisan support,
45:29
I don't think that a single Democrat or Republican voted against this thing.
45:33
So imagine President Trump's a pretty controversial guy,
45:35
I guess that's not a controversial statement.
45:37
And he's even getting impeached, and
45:40
he passes all these stimulus bills with 100% support from Democrats.
45:45
And it was because basically Democrats and
45:47
Republicans in the emergency worked well together.
45:50
And the credit for getting back to trend is not just ours from our team,
45:55
but really everybody.
45:56
And that, I think, is, again, one of the great economic policy
46:00
accomplishments of our lifetimes, that we could turn off the economy,
46:05
have a -32% quarter, and then not have the whole thing unwind.
46:10
>> John Hurtley: Well, I suppose one other question here.
46:14
So in this period, we have this massive relief.
46:19
We had first this massive pandemic which stopped the world in many respects.
46:26
We had a significant drop in GDP in the US and
46:30
many countries around the world, in fact,
46:35
most in the first few quarters of 2020.
46:40
And then there was this significant surge of stimulus that occurred,
46:46
or relief, depending on how you sort of look at it.
46:49
In the US, it amounted to things like very generous unemployment insurance,
46:55
things like the Paycheck Protection Program, PPP,
46:59
which were forgivable loans to businesses, ideally smaller businesses.
47:06
There were the seamless checks that we mentioned, this whole gamut of stimulus.
47:10
And then there were sort of successive iterations of different
47:16
bills that would either send more checks or fill up PPP.
47:20
Or in the case of sort of the more recent sort of Biden administration,
47:26
things like the ARP, for example,
47:28
which also gave $200 billion to public pension funds.
47:33
And certainly there's been a lot with.
47:37
Also on the environmental side, with the so called Inflation Reduction Act and
47:42
producing or creating electric vehicle tax credits.
47:45
I'm curious, just with all this stimulus that has occurred and
47:50
the return of inflation, we've seen inflation in the US peaked at around 8%.
47:56
It's fallen to around 5%.
47:58
Now. This is just a headline measure.
48:00
We're starting to see inflation sort of subside a little bit around the world, but
48:04
it's still very elevated.
48:05
To what degree do you think that all that spending over the period of a couple
48:11
of years post pandemic is related to this uptick in inflation versus,
48:16
say, other sort of leading stories, largely supply chains or monetary policy?
48:22
>> Kevin Hassetta: I think that what happened, and this is, I think,
48:26
underappreciated by people, especially partisans, who want to rewrite history,
48:32
is that there was bipartisan agreement that I think intellectually
48:38
was led by our team, that no one knew what was going to happen.
48:42
So you could look back at COVID and say,
48:44
I knew it was gonna be this I knew we were gonna have ten waves and stuff like that,
48:48
but Fauci and Birx were saying in March that we needed 15 days to stop the spread.
48:52
And then Italy went up and went down and so then they were saying, okay, so
48:56
we're gonna be like Italy, and let's try to get to the end as fast as possible.
49:00
So they basically were saying that the thing was gonna go up and
49:05
it was gonna go down and it wasn't gonna be that eventful.
49:09
And in fact, Fauci,
49:10
I can remember telling us in the oval that the thing would be gone by summer
49:14
because it's gonna be like the flu season if nobody gets the flu in the summer.
49:18
No, he's gonna get COVID in the summer he absolutely 100% said that
49:22
in the oval to us, but we didn't really know a lot of uncertainty, and so
49:27
what we agreed to with the Democrats was, well,
49:30
we know we're gonna be shut for the next month or mostly shut.
49:33
So let's do a bill that gets us through the next month, and then let's talk like,
49:39
are we gonna do another month or are we better so that we right size the response?
49:45
And so I think if we go back and count, like the sort of interim measures that
49:50
we had five bills, I think is by count, but I might be wrong, might be four.
49:55
And they were timed so that we did something that would,
49:58
like build a bridge to the other side, you heard me say that on tv all the time, and
50:02
then we got to the other side, and then we'd say, okay, so
50:05
where do we got to build a bridge to now?
50:07
And so I think that what happened is that by December, after the election,
50:13
that we had basically about right sized the response that we had filled the hole,
50:19
you could see that because GDP growth was up enough so
50:23
that we pretty much recovered the 32% that we lost.
50:28
Inflation hadn't taken off when President Biden came into office, inflation was very
50:33
low but President Biden had a challenge and the fog of war is a nasty thing.
50:37
And they had a serious fog of war problem in that January that must be for
50:42
their economic critics, must be paid attention to, and
50:46
that is that there was like, the new variant cases were skyrocketing.
50:51
We had more cases, I think, in the January that he took office than we had had yet
50:55
in a month or it was close, we could pull up the charts and look, and he basically,
50:59
at one point I was on tv and somebody said, well,
51:02
do you think we're gonna need another stimulus?
51:04
And I said, well, yeah, if you look at how bad the cases are right now,
51:07
I guess one could expect that there might be more lockdowns and so on,
51:10
forget about whether lockdowns made sense, but just they're probably gonna happen.
51:14
And so probably you need another stimulus, and President Biden, one of the first
51:17
things he did when he was in the Oval Office is specifically cite me by name and
51:21
say, Trump's guy who manages for him says, we need another stimulus.
51:24
And at that point, I didn't think so but then what happened was that we found
51:29
out that the vaccines were making it so that it wasn't as big a health issue,
51:34
it was a milder variant, and it takes Congress a long time to do anything.
51:39
And so by March, it was clear that what we feared in January wasn't gonna happen,
51:45
and moreover, it was clear that the bill that they were pursuing
51:50
was not guided by the bill to bridge to the other side.
51:54
Let's go a month or two at a time but rather it was guided by, like,
51:57
you got a new president, the Democrats control Congress and
52:00
they wanna have a Christmas tree, just like everybody of every party does.
52:03
Like, once they get to do everything they want because they control Congress and
52:07
the White House, then they put in everything they always wanted to do,
52:11
like the big green subsidies and so on.
52:13
And so they passed this thing that was way too big, and they did so
52:17
on a partisan basis, and so think about it like,
52:21
President Trump passed all these bills with unanimous consent from Democrats.
52:27
President Biden comes in promising to heal the country and
52:30
instantly has a Christmas bill that doesn't get a republican vote, and it was
52:35
humongous it was way too big because the January spike had gone back in January.
52:40
He was right to start to devise a stimulus, but in March,
52:44
they were wrong to pass it that's what set off inflation,
52:48
because if you dig a hole that's a shovelful deep, and
52:51
then you put the shovel full back, then the hole's gone.
52:55
And that's why we were going a little bit at a time we didn't know,
52:59
we didn't know how much dirt we're gonna have to put back in the hole, but
53:04
they knew that they didn't have to do any more shoveling.
53:07
They were on the other side, and they used it as an excuse to inflate the economy
53:12
that's one of the big policy errors, I think, of our lifetimes,
53:16
because we're gonna pay the price of higher inflation for a long time.
53:20
>> John Hurtley: I'm curious what you think about the whole so called transitory
53:25
inflation narrative that was being promoted by largely the press.
53:30
I'm curious, like, let's think about this counterfactual world where,
53:36
say, President Trump was reelected and was serving in 2021 and
53:41
experienced the same inflationary uptick that President Biden,
53:47
that President Biden did in May of 2021 and successfully increased.
53:52
Do you think that the response from the media would have been different
53:58
had that inflationary uptick had occurred during a hypothetical transit?
54:03
>> Kevin Hassetta: Of course yeah, that's right, yeah, of course it would have been
54:07
Trump's irresponsible spending destroys America, or something would have been.
54:12
>> John Hurtley: Rather than supply chain.
54:13
>> Kevin Hassetta: Mister Henry, transitory supply chains yeah,
54:16
the transitory supply chain you got to understand that what happened is that we
54:21
mailed checks to people that were printed the money was or
54:24
mailed money to people, and the money was printed by the Fed.
54:28
It's like a helicopter drop and so that kind of thing always causes inflation
54:32
that's why John Cochran and I wrote right at the beginning, right as the bill was
54:37
being passed in Biden's first few months in office, the inflation was going up.
54:41
I said back then it was gonna be probably at least 7% this year based on some math I
54:45
did, it was sort of right about then that that year.
54:48
And it was based on the following simple analysis
54:53
that suppose that I'm an economy and
54:57
all I do is I make apples, and I've got ten apples a year,
55:03
is what I get out of my apple tree, and they sell for
55:08
a dollar apiece, and so I've got $10 and ten apples.
55:13
Suppose that I don't have time to plant a tree because it takes a while and
55:17
then the government says, you know what?
55:19
To make people better off, we're gonna spend $11 on apples this year but
55:23
you only have ten apples, so the supply is constrained because you don't, you can't,
55:28
like, it's gonna take a while for an apple tree to grow.
55:31
And but if so, if you spend $11 on apples, then what's gonna happen is that
55:35
the price of the apples is just gonna go up you could have inflation, and so
55:40
if you could have a massive increase in spending, then you have to have some
55:44
reason to expect that supply will be able to respond.
55:48
Now, one way supply could respond is if you have like, a large share of the things
55:52
you buy is like, from the global economy, and you're just a little country and
55:57
so on and so you're not necessarily gonna get the full.
56:00
11 apple effects, we could call it, but
56:02
it was really easy to do the math that would show that supply couldn't possibly
56:07
keep up with the demand that they were pushing through, cuz there was so much.
56:11
And that's where really the Cochrane asset
56:14
article about how inflation's about to lift off really came from.
56:19
I was from simple math that anybody who took a first semester macro class,
56:24
undergraduate macro class, should have been able to do.
56:28
And again, to his credit, Jason Furman did this right at the same time we did and
56:33
said the same thing that we said.
56:35
And has been an honorable former CEA chair who goes out there and
56:38
sort of says what he thinks the truth is, regardless of the partisan impact.
56:43
And I really respect that a lot.
56:45
But when you're in the White House and you just passed this bill that's a big
56:50
mistake, then it puts everybody who's a messenger into a difficult spot.
56:54
And I think that probably a lot of people thought that it was transitory, for
56:59
reasons that I'm not sure, I don't understand, but
57:02
I don't think people were lying when they said that they thought it was transitory.
57:07
I think that they did.
57:08
We know that people at the Fed thought it was transitory at the beginning,
57:11
cuz they moved way too late.
57:13
And I don't think they're being partisan.
57:14
>> John Hurtley: [CROSSTALK] media in part, or there were certain people who
57:17
were trying to hold water for the Biden administration.
57:20
>> Kevin Hassetta: For sure, that's true, too, right?
57:22
Because the point is, just, again, to go back to your question,
57:26
if I had beten at CEA and I came out when we saw inflation at 7%, and I said,
57:30
don't worry, it's transitory.
57:32
Then there would have been, and I used to do the White House press conferences and
57:36
be, but chairman has it, but chairman has it.
57:39
No, no, wait, wait a minute.
57:40
Me, me, that's what would have happened, right?
57:43
Yeah, how could you say that?
57:44
And then they would have found the Democrats and say, you know what,
57:48
this Nobel Prize winner says, it's a permanent negative shock.
57:51
But that's democracy, that's what democracy should be.
57:55
I love it when that happens and you're a Republican in the White House,
57:58
because that's where democracy comes from, is,
58:01
people should say harsh things about you all they want.
58:03
They should be able to question you as hard as they want, and
58:05
you should answer them.
58:06
But we've got an administration that's in denial,
58:09
the press allows them to be in denial, and a president who's hiding in the basement.
58:12
And so, we don't really have an honest conversation about all these things.
58:16
>> John Hurtley: But group think matters though,
58:18
in the sense that you had this narrative about transitory inflation that was so
58:24
deeply ingrained in that economic policy community at the time.
58:29
And so much so that I think it influenced forecasting,
58:34
which I think was certainly no longer based in really any kind of
58:39
econometric models, but just sort of looking at this point by point.
58:45
Sort of CPI sub components of,
58:48
look at used car prices that are skyrocketing, and so forth.
58:52
And I think that sort of justified this pause or
58:57
not raising interest rates on the Fed side of things.
59:03
Ultimately, until March of 2022, a year later after
59:08
the uptick in inflation was first showing signs, but
59:13
by October of 2021, it was very clear that shelter prices were going up.
59:20
This was not just a used car story,
59:22
that there was something that wasn't transitory.
59:24
And now there's still debates over to what degree spending versus supply
59:29
chains were responsible, and often there isn't a monoclosal reason.
59:33
But it's interesting how strongly people like to deny any kind of
59:38
influence from spending at all, it's very interesting.
59:43
Speaking of spending and debt, I wanna get your take here on the debt limit.
59:48
There's currently a big debt limit debate in DC right now about whether or
59:53
not there should be a clean debt limit increase.
59:57
That is, the debt limit being increased without any other considerations or
1:00:04
anything else to change the future path of debt.
1:00:08
These debt limit ceilings have been part of law for quite some time.
1:00:16
Typically every time we near them, they get raised.
1:00:20
And ten years ago there was pretty significant debate around
1:00:25
a similar deadline ceiling standoff that resulted in S&P downgrading us debt.
1:00:32
Many argued that it wasn't really a justified thing, but they did it.
1:00:39
And I remember it caused a massive market sell off in US equities at the time,
1:00:44
and it actually caused US treasury to rally, which is somewhat
1:00:49
counterintuitive, given that S&P was down grading US debts.
1:00:54
We're in this new sort of debt limit ceiling standoff, and
1:00:59
CVS prices on US debt are higher than what they were even ten years ago.
1:01:04
So the probability, or what the market thinks about the probability of there
1:01:07
actually being some form of default is actually higher than it was ten years ago.
1:01:10
Now, you're not in favor of a clean debt limit raise,
1:01:14
unlike some other Republican economists who say this is wrong,
1:01:20
there should be a clean debt limit raise, just like the ones prior to it.
1:01:26
I'm curious if you could speak to your position on how we should approach
1:01:30
the debt limit.
1:01:31
>> Kevin Hassetta: Yeah, and first you have to understand that the debt limit,
1:01:35
it goes actually back to the 19 teens.
1:01:37
It used to be, by the way, going back all the way, the revolutionary war,
1:01:41
that every time we borrowed, then we had to say it was for a specific project and
1:01:45
that had to be approved by Congress.
1:01:47
Let's say we're gonna borrow money to build a bridge,
1:01:50
then we borrow some money to build a bridge, and then Congress would have,
1:01:54
they borrow money to build a bridge act.
1:01:56
And then what happened is in the 19 teens, they decided this is getting out of
1:02:00
control, and so let's just have a debt limit.
1:02:02
This sort of applies to everything.
1:02:04
And subsequently, the debt limit has had to be increased a whole bunch of times.
1:02:10
And you have a history of debt limit political negotiations,
1:02:15
and there are clean debt limit increases and dirty debt limit increases.
1:02:21
And a clean increase is one where it's only the debt limit, and
1:02:26
a dirty is one where it includes policy compromises.
1:02:30
And the majority of debt limit increases in US history have been dirty.
1:02:36
There's a Congressional research service study on the history of these,
1:02:40
which I commend people, if you Google it, you'll find it right away,
1:02:45
that shows basically what happened each time.
1:02:47
And if you look at it, the majority of debt limit increases that passed
1:02:52
with a Democratic Congress and a Democrat in the White House were dirty.
1:02:58
President Biden, when he was in the Senate, voted four times for
1:03:02
debt limit increases that were tied to spending cuts.
1:03:05
There was one dirty bill only that he voted against, and
1:03:09
he gave a floor speech explaining that he was voting against it because the debt
1:03:13
limit increase wasn't tied to bigger spending cuts.
1:03:16
And so President Biden's position right now that we shouldn't negotiate,
1:03:22
we shouldn't include other policies is ignoring a long history of
1:03:27
this being basically a vehicle by which policy compromises are made.
1:03:32
And so the debt limit has been a really good thing because it's helped constrain
1:03:35
the growth of government and
1:03:37
introduce good policies like the cigarette tax came and a debt limit increase.
1:03:40
And so, the position that you should have a clean one is really, if you think about
1:03:45
it, what the debt limit does is it gives the minority party a little power.
1:03:50
Because if you don't pass it, it doesn't go up, and that's a really bad thing,
1:03:53
you gotta pass it or you're in default.
1:03:55
And so the majority party gets a little bit of power, and so
1:03:57
what's happening right now is you got all these Nobel Prizes.
1:04:00
Surprise, guys.
1:04:01
And surprisingly, again, like people at AEI saying you should have a clean
1:04:04
debt limit, but the clean debt limit position is really that, okay, so
1:04:07
the Republicans have a little bit of power.
1:04:09
They should give it up for free, even though the Democrats would never do that.
1:04:13
And so it's basically like, I don't want Republicans to have a say in what policy.
1:04:16
So it's astonishing to me that that's
1:04:17
the message of the American Enterprise Institute that I used to love so dearly.
1:04:21
But that's their message.
1:04:23
But it ignores history.
1:04:24
But it also sort of blames Republicans if something goes wrong, which is sort
1:04:29
of illiterate economically in the sense that the game itself is fully symmetric.
1:04:35
And so you've got the things you want, say if you're Biden White House.
1:04:38
I got the things I want if I'm Mr. McCarthy.
1:04:41
If we don't agree to something, then it's terrible for financial markets.
1:04:49
But if we don't agree, then it's not McCarthy's fault.
1:04:53
It's not Biden's fault.
1:04:54
It's both of their fault because they didn't agree,
1:04:57
they didn't come up with something.
1:04:59
And so the idea that it's McCarthy's fault if you default presumes that
1:05:04
the virtuous thing to do is to pass a debt limit with no other policy changes.
1:05:09
But the majority of time Congress has attached policy changes to it.
1:05:13
And moreover, the policy changes that have been attached to debt
1:05:16
limit increases have been virtuous.
1:05:19
And so I think that it's just the conversation.
1:05:22
I understand politicians posturing.
1:05:24
You gotta allow for the fact that there's gonna be extreme positions taken because
1:05:28
they're negotiating and they're gonna come to a deal at the last minute,
1:05:31
that's what always happens.
1:05:33
But the idea that it's irresponsible or demented to negotiate over the debt
1:05:38
limit and to ask for policy changes to come with it is just not defensible.
1:05:43
And yet it's the position of most of the media and
1:05:46
many think tank inside Washington people who basically don't
1:05:51
want Republicans to have any power at all, apparently.
1:05:56
>> John Hurtley: Fascinating, well, thank you so much, Kevin, for
1:05:59
these amazing thoughts on so many topics,
1:06:02
from tax policy to the Covid-19 stimulus response, the debt limit.
1:06:07
Thank you so much for joining us.
1:06:09
>> Kevin Hassetta: Thank you.
1:06:12
>> John Hurtley: Our guest was Kevin Hassett,
1:06:14
a distinguished fellow at the Hoover Institution at Stanford University and
1:06:19
former chairman of the Council of Economic Advisors.
1:06:22
This is the Capitalism and Freedom in the 21st Century podcast where we talk about
1:06:26
economics, markets and public policy.
1:06:28
I'm John Hartley, your host.
1:06:29
Thanks so much for joining us.
1:06:31
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