INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by one of my two trusted co-hosts, Cris deRitis. Hello, Cris.

Cris deRitis:                      Hi, Mark.

Mark Zandi:                     Where's AWOL Marisa? Where is she?

Cris deRitis:                      I think she's taking a well-deserved vacation.

Mark Zandi:                     Oh, is that right? Okay, good for her. Okay. She deserved it. She certainly deserved it. I need a vacation, Cris. I need a vacation. I've had a very stressful week. It has nothing to do with the debt limit. It's like computer meltdowns everywhere.

Cris deRitis:                      Oh, yeah.

Mark Zandi:                     Yeah. I mean, I had a whole day without my computer. I haven't had that happen to me for 35 years. It was really hard. [inaudible 00:00:59] was really people.

Cris deRitis:                      Well, this podcast is like a vacation.

Mark Zandi:                     It's kind of like a vacation. You know what happened to me this morning? My charger doesn't work. My charger, for some reason, it broke. And so I'm sitting here, I came down to Florida for a few days and I have no backup. So I see my power running down. I go, "I have this podcast, my thing's running down." So I send my wife out to Target and I said, "You got to drop whatever you're doing, go get me a charger." So she gets me a charger, and she comes back. It's one of these universal chargers. So I'm ripping it open because I'm literally running out of power, and you know how they have those little charger knobs for each different computer.

Cris deRitis:                      Oh, yeah. Yeah.

Mark Zandi:                     So when I was ripping it open-

Cris deRitis:                      It slides across.

Mark Zandi:                     It flipped out and I didn't see it, and I'm going, "Honey, I can't use this thing." So I was ready to send her back out, and well, anyway, I'm good. I'm set, but anyway. And we got a guest, Ben. Ben Harris. Good to see you, Ben.

Ben Harris:                       Thanks, thrilled to be here.

Mark Zandi:                     Yeah. Well, have you had a better week than I have?

Ben Harris:                       Well, I mean I've got my chargers intact.

Mark Zandi:                     You've got your chargers.

Ben Harris:                       I guess so.

Mark Zandi:                     Yeah. It's great to have Ben. Ben is kind of on vacation, right? I mean, you left your position at Treasury a few weeks ago. You were the Assistant Secretary of Economic Policy and you left, and now you look... Actually, you look pretty good.

Ben Harris:                       Oh, thanks. I'm not sure my wife would agree with you. I intended to be on vacation, but the debt limit impasse happened, and it's kept me just as busy as I was before. I mean, I testified up on the hill a few days ago, on Wednesday. I gave a keynote address at an MBR meeting yesterday. And I've just been doing a lot of discussions around the debt limit. So I haven't had the break that I anticipated, and I know we're going to get to this later on. My hope is that Congress reaches a deal with the White House, and I can take a few more hours off each week.

Mark Zandi:                     Yeah, and we are definitely coming back to that. And today, just to level set for everyone, it's Friday, May 26th. So we're coming up on the X date here, because I know people will listen to this at different points in time. And prior to your Treasury stint... And can I ask, what was kind of your broad remit as Assistant Secretary for Economic Policy at Treasury?

Ben Harris:                       So I had a very different role, I think than prior assistant secretaries. And there's a long history of really talented, honestly just brilliant assistant secretaries before me. I felt like I was just trying to play catch-up and live up to their legacy. We had people like Rich Clarida, who served in that role. We had Jan Eberly, Karen Dynan, Alan Krueger. Actually I had three former bosses work in that role.

                                           And so people of both parties, Phill Swagel, who's now CBO director, just a terrific economist. And so my remit was broader than usual, in part because of how I came in. I mean, came in, A, as one of the few close Biden advisors at Treasury. So I had been Biden's chief economist when he was vice president, and stayed in that role all the way through the election. I was a economic advisor for the campaign.

                                           I think similar to the role you played with Senator McCain's campaign, Mark. And so I kind of understood where the President wanted to go with economic policy. We also had a bare bone staff. The prior administration had really sort of gutted the career staff and the Treasury Department, particularly on the economic policy side. I'm not trying to come in with this negative point, but usually within economic policy, there are three deputies that's happened.

                                           They didn't hire any deputies for my role. So I came into this very... We didn't have a lot of political appointees when we came in the middle of COVID. We were working remotely. So when I came in, I was play the role of speech writer, the title, Assistant Secretary for Economic policy, also as the Chief Economist, the Treasury Department. So we're trying to think through all of the macroeconomic stress we had at that time.

                                           I played a big role in the policy side of things. So much of 2021 for me was spent trying to build back better through Congress. Of course, in October we got it through the house, and then we came up one vote short in the Senate. And the other thing that was really interesting about my time at Treasury, which is atypical, which was that I played a big role in capping the price of Russian oil. And so usually people in my role, it's a purely domestic role, but in part because Jay Shambaugh hadn't been confirmed yet as Under Secretary for International Affairs.

                                           And in part because my team was doing a lot of the analysis around what was happening with the Russian oil trade. I spent a lot of 2022 after Russia invaded Ukraine, thinking through this new, really novel sanctions regime. I made more trips to Europe than I could count. I went with Secretary Yellen to Indonesia to the G20 meeting. So I got kind of this very cool, different remit then, that I think is standard for people in that role.

Mark Zandi:                     That is cool. I didn't know that you were one of the architects, if not the architect, behind the oil price caps. Congratulations, they seem to be working, right?

Ben Harris:                       Yeah. It was such a ride. It was definitely a team effort. Liz Rosenberg at Treasury played a big role. Obviously the secretary and the deputy secretary, but I play the role of sort of point person on this. And it was really interesting because it started actually before Russia even invaded Ukraine. And we had rumblings, we knew this could happen. And NSC had asked us to do some economic analysis as far as what it could look like for markets.

                                           And we initially were worried that what happened to European gas markets would happen to world oil markets, was that Russia would effectively weaponize, not just natural gas, but also crude oil and refined product. But then we realized, Russia doesn't really have the leverage to do this, Russia needs this revenue. This is not a well-diversified economy, they're fighting a war. They have a war chest, but they might blow through it.

                                           And we kind of realized, even before the invasion that we actually have some leverage here. And then what happened in June of 2022, was that Europe went ahead and put in place, it was the six sanctions package. And part of the six sanctions package effectively said that western companies, Europe moved first, the U.S. would've likely joined them, was that western companies couldn't participate in the oil trade. And the reason that we were concerned was because there's so many Greek tankers that carry Russian ships.

                                           There were so many insurance companies from the UK that insured ships that carried Russian oil. And so our worry was, look, I mean, this is a really well-intentioned sanction designed to reduce revenue. But what might happen is that you could have oil at $150 a barrel and we could kick off a global recession, because you're getting so much oil shut in into Russia.

                                           And so we wanted to tweak to the six sanctions package. And the tweak was, "Look, you can still carry Russian oil if you're a Greek tanker, you can still insure it if you're an insurance company based in the UK. You can still finance it if you're an American bank, but you can only do so if it's below a certain price." And I cannot tell you how many people told me that I was an idiot, personally, on Twitter, called out the Treasury Department, called out the Biden Administration, "You don't know how commodity markets work."

                                           The first time we went to Europe, I don't think that they were terribly enthusiastic about it, in certain countries, but it worked. And you have people like Dan Yergin, who's just a force in these markets, has come out and said, "No, it is working." And it is working, but it is driving down Russian revenues from the oil trade. Global markets are stable. I mean, we have a landmark war in Europe involving a supplier of oil that supplies roughly 10% of the global oil.

                                           And the markets are incredibly stable right now, and Russian revenue is falling through the flow. I mean, it's completely dried up, but that wasn't an option. We needed them to still trade the oil. We just need to do it really cheaply. And so we have kind of pulled this off. We've done it in an incredibly coordinated way. The G7 joined us.

                                           The Europeans became our colleagues on this. And actually it got to the point where we spent so much time working with our G7 colleagues, largely over Zoom, that when we saw them in person, we actually would hug each other. And so it was also, I think a move that reinforces solidarity amongst the G7 against this sort of aggressive action that Russia took. So I think it was a really powerful move. And honestly, if I look back over my career, it's probably the thing I'm most proud of.

Mark Zandi:                     Yeah, it's so cool. I mean, I was just looking at a chart, believe it or not, I had to give a presentation to a big global bank this morning. And we were talking about oil, and threw up a chart of Russian exports of oil. And it's the same today as it was the day before Russia invaded. Obviously who's buying oil has shifted, the European Union's buying.

                                           We're not buying anything, and it's all going to India and China and some others unknowns. But yet the revenues that Russia is getting is much, much lower because of the price cap. It's really incredible. And I wasn't the guy saying nasty tweets, Ben, I wasn't doing that. But I was definitely skeptical of the whole thing. I go, "Really? How's that going to work?" But it's working. It's pretty amazing.

Ben Harris:                       Yeah. And we may have kicked off a whole new way to do sanctions now. We'll see. I mean, it is novel, if nothing else.

Mark Zandi:                     So let me ask before we move on, and we're going to talk about the debt limit, and I do want to talk about a couple of other things that you worked on. One is on what you call modern supply-side theory, and then also you wrote a book with Martin Baily. Martin, he was formally... Is he still Brookings?

Ben Harris:                       Yeah, he's still affiliated with Brookings,

Mark Zandi:                     Yep, still affiliated with Brookings. And on retirement, and how to address all of the issues with regard to the increasing number of people in retirement. But before we do that, how did you become Chief Economist for President Biden, how'd that happen?

Ben Harris:                       So I had been at the Council of Economic Advisors, first under Austan Goolsbee, and then Alan Krueger. And I got along really well with both of them. I mean, I have tremendous respect for both of them. I mean, Alan, of course, tragically passed away several years ago. But actually I didn't know how I got the job. And I was actually out with former treasury secretary, Bob Rubin, out in Stanford, we're doing an event on water rights, of all things. And I got a call from Steve Ricchetti, who had been the Chief of Staff at the time, and he said, "Do you want to come in and interview for this job?"

                                           And I mean, the answer was of course, "Yes." And so I came in, and really hit it off with President Biden, and they offered me the job, not quite on the spot, but after a couple of days. And so I spent the last two years of the Biden Administration with him and formed, I thought a really nice working relationship. I really enjoyed being his chief economist. But I never really knew... This is sort of a sad story. So I never really knew how I had been nominated for that job.

                                           And it had been sometime in 2017 or 2018, there was an event at the state theater, which is in Falls Church, where former Obama Administration folks got together. And I don't know who paid for it, I think maybe Jeff Zient's had sort of rented it out or someone. And we all came together, and Alan Krueger was there, and I was talking to Alan, I was so happy to see him.

                                           And he said, "Well, you know how you got the job with Vice President Biden?" I said, "No." He said, "Well, I called him and told him that he had to hire you." And I was so thankful. So I had, on my to-do list, I had send Alan a bottle of bourbon to say thank you, and then he passed away, and I never had a chance to do that. But for me, the fact they got a servant role that he served in, and I really just honestly tried to honor him, do it my way, in honor of his legacy. So that's why I got nominated.

Mark Zandi:                     Alan was such a nice man.

Ben Harris:                       Yeah, he was.

Mark Zandi:                     At a couple of our conferences, and I remember going to Washington, he'd show me around. And he was so proud of his office when he was chair of the CEA. "Look at the view I have, Mark." He was so nice and so brilliant. Such a brilliant man.

Ben Harris:                       Such a brilliant man.

Mark Zandi:                     Yeah. Great. Well, that's good background. Let's dive into the topic that's top of mind, and that's the debt limit. So it feels like we got some good news sort of over the last 24 hours. There was a press report at New York Times. I saw something in The Post, saying that there might be a deal coming together here. I know you follow this very carefully. Maybe you can describe what the deal, well, the reported deal is, and what you think of it and how do you handicap this actually getting across the finish line before the so-called X date?

Ben Harris:                       Yeah, so let's start by talking about what actually made it through the House a couple of weeks ago. So what made it through the House was, they raised the debt ceiling, but likely only through March of next year. So not through the election. That was part one. Part two was really steep cuts in discretionary spending. Now, they weren't specified, these were just caps on discretionary spending for the next 10 years. On the whole, the bill cut deficits by 4.8 trillion, which is a really big number, but most of it were through these caps on discretionary spending.

                                           So of that 4.8 trillion, 3.2 trillion came from the caps, that would completely decimated discretionary spending. Another trillion or so came from two different items. One was a rollback in the student loan forgiveness program, and the second was a rollback in the clean energy tax credits that were passed through the Inflation Reduction Act. So those two things made up another trillion or so. So that gets you to 4.2 trillion, and then the remainder was essentially savings on interest.

                                           And then you also had this trade of about 120 billion, where the Republican bill saved 120 billion through extending work requirements on Medicaid, food stamps and TANF, but then lost another 120 billion by rolling back the higher funding for the IRS. And so, okay, so that's what they passed through the House. And then what's the deal that the New York Times reporter, Jim Tankersley, reported? I should say this isn't public, I mean it's public in a sense it's reported by Tankersley, but they didn't come out, I haven't seen a statement.

                                           And it has a few different elements. One is extending the debt limit past the election, which was I think a necessary condition for the administration. You couldn't have it expire prior to the election. The second thing was just two years of caps, rather than 10, and you have defense spending and spending on veterans grow at the level that President Biden had proposed. And then basically, after you talk about certain sort of accounting issues, you basically have flat spending in 2024 for non-defense, non-veterans discretionary spending.

                                           Then both grow by about 1%. So a cut in real terms and inflation adjusted terms in 2025. Then you also have, of the 80 billion in extra IRS funding, which was put through by the Inflation Reduction Act, you pair back 10 billion of that. So about 12%. And then say I've heard other people speculate that work requirements need to be worked out. I mean, I was texting with Tankersley last night about this and asking him, it seems like this is reported in the New York Times, that it seems like work requirements and permitting may or may not be on the table.

                                           And those details are still being hammered out. So relative to this big $4.8 trillion debts reduction bill that the House passed, this is pretty small. And so you asked me to handicap it. I mean, there's no way that I think you're getting a big part of the more extreme version of the House voting for this. This doesn't feel like a win for them. For any sort of moderate, I think it feels like a big win. And for those that have businesses in their district that are really concerned about what the cuts might mean, perhaps that's also a win.

                                           I think the pressure from businesses has come, not in the public as it has in the past, but more behind the scenes. I think you'll get some democratic votes, if there are work requirements included, I think you're losing a decent share of the Democratic Caucus. They can't vote for work requirements for Medicaid.

                                           But in general, I think you're going to see basically a hundred votes from each party coming together and pass this to the House. I think the Senate, they'll sail through the Senate. The Senate understands the consequences of a debt limit impasse in ways the House does not. But I'm not sure that this is done. I'm not sure that McCarthy can get this through his caucus, and so we're not out of the woods yet.

Mark Zandi:                     Yeah, I'm with you. It doesn't feel like it gives the conservative Republicans the freedom caucus enough to really... They're not going to, well, maybe I guess McCarthy's figuring that he's not going to get their vote anyway for almost anything. And he's got to get something through the house eventually. So if that's the calculation, then maybe just try to get enough votes in the middle on both sides and you get this done. Maybe that's the calculation.

Ben Harris:                       Yeah, I mean, this is kind of where I thought we would end up, but I didn't think we'd end up... I didn't think it would happen this way. I thought we would see a market freak out, like we did in 2011, and I thought we might see a decline in equities of about 10%. I thought we might see credit markets exhibit more stress than they have. I mean, we are seeing points of stress, as you know, but it's nothing like 2011. And so this is kind of the deal I think you get on June 6th maybe, till I think the 25th.

Mark Zandi:                     Right. Okay. So it feels like you're saying, "Okay, great, this sounds good. I'll take it, but let's just see how this plays out." I'm not so sure. This may be a head fake.

Ben Harris:                       It may be a head fake. I mean, I don't love what it does to non-defense discretionary. It's not a catastrophe, but it's not great. And if we get work requirements included, I mean it's a pretty small... Work requirements raise about 120 billion in the original bill, but I don't see how you're going to get the democratic votes you need if you include work requirements for Medicaid. So you're talking about TANF and SNAP.

                                           For the people who are affected, which I think are older, it'll likely just be an extension of the work requirements that are already in place. So we're talking about older workers being subject. It's not like there're no work requirements in these programs, it's just a slight extension of the work requirements that are in there. For those people, there's real cost to this. So I don't love this, but if this... And I also, honestly, fundamentally, I don't love negotiating over debt limits, just as a principle.

                                           I worry about a lot what this means in two years. Does this mean that whose ever in the White House has to give up all of these legislative gains? I mean, is this what we do now? And I think when we had in 2011, just to remember what happened. In 2011, you had a similar situation, but in 2013, we got to another debt limit impasse, and it was not politically advantageous for the House at that point. President Obama was in the White House, Republicans had the House.

                                           It was not politically advantageous of them to engage in another set of negotiations. And I think because there was debt limit fatigue. I mean, they tried, but they didn't end up getting a deal. They ultimately ended up raising the debt limit. So my hope is the country, I mean, maybe we do this once every 10 years, maybe that's the lesson. But I worry a lot about policy uncertainty if we have this hostage taking every two years.

Mark Zandi:                     Yeah, I'm actually debating someone from Cato this afternoon. They have this, I don't know if you've ever done Intelligence Squared, the debates, it's really a lot of fun, if you like debates. And I'm three and O, I really like debates, but I'm debating. And the debate is, should the debt limit be abolished? And I think the argument, and I don't know what she's going to say, but my guess is the argument is that, "Well, this is the only way we get real fiscal reform, is through this process where we go through the drama and come right down to the wire and there's a deal." How would you respond to that? I mean, because the argument for abolishing in my mind is pretty clear, and you expressed it nicely.

                                           I mean, the drama creates all kinds of uncertainty, it weights on the economy. If we ever breached we can go talk about that. But the economic cost would be very serious. And at the end of the day, my view is we don't really accomplish a whole lot. It's on the margin. We're not solving any long-term fiscal problems and you can't, given that you have a few days, a few weeks, and the cauldron of the debt limit drama. But her argument might be, and yes, you can see I'm prepping for this debate. The argument might be, "Well, this is the only way we get things done." We get the Budget Control Act of 2011, what was it? The Budget Enforcement Act of 1990. How would you respond to that?

Ben Harris:                       Well, I think the proof is in the outcome here, and our long-term fiscal problems, and we do have long-term fiscal problems. It's not non-defense discretionary spending and work requirements. So if your argument is, "This is how we solve problems," and yet we've just gone through all of this, and really get no solution at all. I don't see how that argument holds water. I mean, what we would really need, we need to come together and we need to address health spending in particular.

                                           We need to have higher revenues. Revenues were not part of this. And in fact, by cutting the IRS spending, it was only a little bit, we actually will probably end up with less revenues than we would've had before. So if you accept that any big fiscal resolution needs to include something on entitlements, and needs to include something on revenues, we got neither in this package. So I don't really see how you can argue that this is how you get to get to the necessary outcome.

Mark Zandi:                     Going back to the current debt limit battle, one thing that I've been perplexed by, and you mentioned it, is the lack of any reactions. I mean, I would've thought at this point in the drama, the fact that the X date's coming up here in a week or two, we'd see more of a reaction from investors. There's some reaction. I mean, one month treasury yields are higher than they typically are because of some concern about a investor not getting paid on the other side of the X date. CDS spreads are up. But broadly speaking, the stock market's fine. It's shown no sign of any ill effect from the drama. I don't get the sense that business people, trade groups or anyone else is pounding on lawmakers doors and saying, "Hey, do something." Am I characterizing things correctly? And if so, what do you think is going on here?

Ben Harris:                       So on the reaction from the business community, I felt like in 2021, and I spent a lot of time working with treasury and White House colleagues on this. When we got that resolution, I felt like the turning point was when President Biden and Secretary Yellen went on TV with Jamie Dimon, Jane Fraser, the CEO of Raytheon, and the CEO of AARP, Jo Ann Jenkins, these are people who don't usually dip their toe in political waters. And they went on television in a very public way with the President and the treasury secretary and said, "Look, you..." Then it was in the Senate, it was Leader McConnell. "You're really causing problems in the business community right now. You guys should knock this off."

                                           And that was a bad look for Senate Republicans, having such a public display from business leaders. And we got resolution pretty quickly afterwards. Business leaders have been quieter this time, but I don't think that means they've been silent, I think they've been using back channel routes as far as what I've been told. They're calling the members, they're just not making public statements. But the business community can play a real role in making sure this doesn't happen again.

                                           A, public statements are really important, and B, I mean, the irony is, is that you kind of need a market reaction. And we sort of talked about this earlier to show how bad it would be going over the X date. And so I'm never rooting for stress in markets, but it would've... I do think that some stress would help reach a resolution. I mean, the way that I would characterize stress to date is, it's been really minor. As you mentioned, there have been some treasury auctions. We saw the highest rate for issuance on a 28-day bond, but it wasn't that high.

                                           I mean it was I think 5.8% or something. And that's an annualized rate. And over a course of a month, it's really kind of mostly inconsequential. You didn't see a ton in the secondary market. People seem to be really confident that coupon payments would still be made. There are two reasons why I think markets didn't really freak out. The first is that I think there's a faith that there would be some resolution reached, and they would be right if you look at the historical record, and we always reach a resolution for the X day.

                                           The second was a notion that... And I think this was a little bit mistaken, and I've been honest with the financial sector. I've had a lot of conversations with them about this. There's this notion, largely based on this 2013 transcript, that was a meeting at the Fed when Bernanke was chair and they're talking, it was kind of a retrospective as far as what happened in 2011. And the Fed was looking forward and saying, "What are our options?" And there was this memo written by these Fed staffers, I think it was Bill English and Simon Potter as far as 10 different actions the Fed could take, if we went over the X date.

                                           And as part of that conversation, they referenced some thinking that Treasury had been doing around 2011, as far as how they would handle payments. And I think the financial sector looked at that transcript and said, "Oh, Treasury will just prioritize. They'll firewall P&I, [inaudible 00:29:27] discuss it, and we'll make due on payments. And my point has been that was a 2013 Fed talking about their interpretation of what treasury would do two administrations ago. And this is really, there's only one person who knows how they would handle prioritization, and that's Joe Biden. I mean, that's a POTUS level call about whether or not you're going to choose to make P&I payments or social security payments, and that was... So Biden has [inaudible 00:30:02]-

Mark Zandi:                     But Ben, let me put push back a little. Because I find it very unlikely that if we actually breached, that the Treasury would not pay bond holders first. I mean, they had the technical ability to do it. There's the fed wire payment system separate from the payment system used for paying other bills. So it's not like there's inability to do it, the Treasury can do it. Because if Treasury doesn't do it, that would be immediate in my mind, chaos. Right?

                                           Because you'd get credit rating downgrades, and that's what the credit rating agencies are saying they're going to do. They'll do that. And then you get downgrades across all the other entities that are backstop by the federal government, implicit or explicit, think J.P. Morgan Chase, Federal Home Loan Banks, Fannie Mae, Freddie Mac, municipalities, we'd descend into chaos immediately, it seems to me. I have a hard time thinking that Treasury would do that. Am I just wrong about it?

Ben Harris:                       Well, my point is it's not Treasury's call.

Mark Zandi:                     No, of course. Of course. But okay, Secretary Yellen calls up the President or the President calls up the secretary and say, "Hey, what should we do here?" Do you think he's going to say, "Don't pay the bond holders."

Ben Harris:                       Well, one thing that was sort of fortunate about this particular impasse, was that the way that social security and coupon payments were scheduled, it doesn't seem like they're really in the cross-hairs. The big social security payment for old age beneficiaries goes out on the second Wednesday of every month, which is June 14th. But you could imagine a situation where you have a big coupon payment, and a big social security payment falling on the same day, just because that's how they line up. And what does the President do? I mean, just as implausible as not paying bond holders, is not paying social security beneficiaries.

Mark Zandi:                     Okay, okay. That's interesting. You're right. That is an interesting scenario, if that were to happen. Well, let me ask you this, and Cris, I'm going to stop and let you ask Pepper Ben the questions here too. But, am I right, or do you think my characterization of what would happen if we didn't pay bond holders, complete chaos? Do you think I have that correct, or am I wrong about that?

Ben Harris:                       Well, I think it's certainly in the realm... I think it's likely, but not certain. I mean, there's a world in which bond holders start to bifurcate bonds by those that are in the cross-hairs, and those that aren't. And so if you think with certainty this will get resolved in a month, if there's a bond with a coupon payment in April or May, I mean, you're good.

                                           And so what I was worried about was we started having these toxic bonds based on when the coupon payments were scheduled. And would the Fed come in and provide liquidity and swap out those bond payments that have coupon payments in the summer with those that don't? I mean, would that happen? The other thing that I think people discount too much, is the potential for a failed auction. So the Fed has all these regularly... Not the Fed.

                                           The Treasury has all these regularly scheduled auctions. They go off in incredibly smooth ways. These are pros who do this. You have these big primary dealers, these big banks that are bidding on them, but then you also have non-banks that bid on them. Banks are supposed to bid their share. So you've got roughly 24 primary dealers, and each is supposed to bid around 4% of the amount that Treasury wants to auction.

                                           So if Treasury wants to auction $100 billion, they basically say from the primary dealers, "Look, we expect that you're going to put in bids for 4 billion or so, of this amount. And then you get bids from others. And so usually you get, I don't know, roughly 200 or so percent of the bids for the amount you want to auction. So if you're auctioning off 100 billion, you get bids totaling around, I don't know, 200 billion or so, with some variance.

                                           But we've had circumstances, even going back to the great financial crisis, when primary dealers did not bid their pro rata share, some of them didn't. And it looked like, I mean, we flew a little close to the sun on some of this where we didn't get... We only got a little, really cleared the amount that we needed in bids by just some, I don't know exactly how much, but maybe if Treasury is auctioning $100 billion, maybe we only got 110 billion in bids. Now if you don't get that full $100 billion, the auction doesn't happen.

                                           And it's not like you get 90 in bids, you sell 90 billion, you sell zero. And if we get a failed auction, even one, it's game over, because then there's no money coming in to make any payments. And then you might not even be able to make coupon payments. And so this is all... It's very precarious. And I think the bond market just had a little too much confidence, and it's all working out. Bond market's usually right, so I'm probably the one who's wrong here, but I've been a little perplexed by how much confidence there's been.

Mark Zandi:                     That's interesting. Well, like I'm Moody's, the bond market, and I've been always under the, maybe the false impression that was at least initially you pay the bond holders. I guess the other issue is, okay, the Treasury pays the bond holders, that means everyone else is going to sue, right? Because why are they getting the money before me? Forget about the politics of it, just it's the legal aspects of it. And that by itself is going to create all kinds of... It's not like there's any easy solution here. Prioritization doesn't solve any problems, I'm not arguing that, but boy, not paying the bond holders upfront, that would be chaos. The economy would evaporate very quickly. But anyway.

Ben Harris:                       I agree with you.

Mark Zandi:                     I do want to get to the game, but Cris, any other questions on the debt limit that you wanted to pose? I'm sorry, I've been monopolizing Ben.

Cris deRitis:                      Yeah, no, I would just say, so it sounds like we're in the dark side here. So what about the alternative approaches, 14th Amendment, platinum coin? Do you have any views on how those play out or enter into the calculus here, if indeed we really go down to the wire?

Ben Harris:                       So I think in general, you have two different categories of alternative measures. We need a word for them. We've got this great term, extraordinary measures, but that refers to something different. And so I think you've got two categories. The first are measures that effectively abandon the debt limit. And so citing the 14th Amendment, using a trillion dollar coin or depositing at the Fed, those are pretty unlikely. I think of all of those, the 14th Amendment is probably the most likely, but I think it's if they're problematic in part because it doesn't really solve your problem.

                                           I mean, it allows you in the short-term to continue making payments, I guess. But every auction that was performed after you have cited the 14th Amendment, would be done under this cloud of legal uncertainty. And I don't know what the interest rates look like on a bond that was purchased, and you know there's going to be a legal issue coming down the road. I think the chances of a failed auction are very high in that circumstance, and it doesn't really solve the problem. Then you have this other class of measures that are things like selling gold bars in order to raise some cash to get a little bit further.

                                           Now this doesn't basically absolve us of the debt limit, but what it does is it helps us get to a date where we can kind of deal with it. We have some more time. And so in the current impasse, it's interesting because it's not like there's an X date, and then everything is awful for forever. If you get to June 14th, then we start getting these estimated tax payments coming in, because June 15th is the date for the quarterly estimated tax payments. And that revenue should get you definitely to the end of June.

                                           And then we have another big, extraordinary measure where we can use a government pension. Accounting games are typically played to create about $145 billion in headroom. So between this extra revenue and this extra story and measure at the end of June, this gets us well into July. And if the theory of the case is, look, debt limit fatigue provides Democrats with a bit more leverage, I think it is interesting to think through Treasury may be taking some extra extraordinary measures to get our country past this June 14th, June 15th date. And I'm not sure that's totally off the table at this point.

                                           I mean, I think that you've got folks who are just trying to present options to decision makers in the White House. And so when people are like, "Well, are you going to invoke the 14th Amendment?" It's like, that's a question for President Biden." And to my knowledge, he hasn't made that decision yet. In part, it depends on what House Republicans are demanding. So are we going to cite the 14th Amendment? I mean, again, I can't climb into Joe Biden's brain, I don't know, but what would the President do?

Mark Zandi:                     If anyone can, you can, Ben. You can.

Ben Harris:                       I mean, it really depends on what his alternative is. And we don't know, is it the bill that passed the House, or is it the compromise that the New York Times reported? We just don't know at this point.

Mark Zandi:                     That's great. From a mountaintop perspective on the whole thing. It's so fascinating, isn't it? I mean, the whole thing is just on every level. I mean, it's scary and it's very uncomfortable, but I mean, just the economics of this, the politics of it, all the moving parts, the legal aspects, it's an incredible thing, actually.

Ben Harris:                       Yeah, it's great drama if-

Mark Zandi:                     Great drama, that's what it is.

Ben Harris:                       If the consequences weren't so high. But I guess maybe high consequences make for great drama.

Mark Zandi:                     Yeah. Go figure. Hey, let's play the game, the statistics game. And the game is we each pick a statistic, and we're trying to break this up a little bit because it's been pretty heavy. We're going to get back to some more heavy topics in a minute, but break it up a little bit. We each pick a statistic. The rest of the group tries to figure that out through questions and clues. Deductive reasoning. The best stat is one that's not so easy, we get it immediately.

                                           And Ben, you got to watch out for Cris, he's very fast on the draw. He's really good. And not so hard that we never get it, but that happens, to be honest. And if it's apropos to the topic at hand, all the better. And we've got a lot of topics at hand, some of which we haven't gotten to, so that gives us a broad remit. So I'll go with you, Cris. I mean Marisa is usually tradition has it, but she's AWOL, so we'll go with you first, Cris.

Cris deRitis:                      Yeah, yeah, I'm the substitute. So I have a triplet for you.

Mark Zandi:                     Uh-oh.

Cris deRitis:                      So positive 1.3%.

Mark Zandi:                     Okay.

Cris deRitis:                      Minus 2.3%. And then negative 0.5%.

Mark Zandi:                     Oh, my gosh.

Cris deRitis:                      This should be really easy. I'm afraid it's too easy for you.

Mark Zandi:                     Is it related to the... It feels like the economic data that came out this week.

Ben Harris:                       The GDI?

Cris deRitis:                      Yep. The GDI is one of them.

Mark Zandi:                     You got it?

Ben Harris:                       This is GDI, GDP, and then the combination of the two.

Cris deRitis:                      The average. Exactly. You got it.

Mark Zandi:                     Oh, Ben, gosh, darn it, he beat me to it. Oh, my god, that is unbelievable. Okay, explain.

Cris deRitis:                      So GDP 1.3%, perhaps weak but positive, right? That's one way to calculate that.

Mark Zandi:                     That revised up a little bit, didn't it? I think. It was 1.1 To 1.3.

Cris deRitis:                      Yeah, that's right. GDI, which is our alternative approach to measuring alpha, we've discussed this in previous [inaudible 00:42:24]-

Mark Zandi:                     Gross domestic income, right?

Cris deRitis:                      So kind of all the income that's reported, well, that was down 2.3%. So negative. And then the average, which we view as perhaps a more stable, more accurate depiction of what reality is, also down 0.5%. And that is the second consecutive quarter of negative output growth.

Mark Zandi:                     In terms of GDI?

Cris deRitis:                      GDI was down 3-

Mark Zandi:                     I mean the average you're saying is down.

Cris deRitis:                      The average was down as well.

Mark Zandi:                     Oh, I didn't know that. For two quarters in a row. Okay.

Ben Harris:                       Are we in a recession?

Mark Zandi:                     Yeah, what do you saying [inaudible 00:43:05]-

Cris deRitis:                      A good question. Last year we pointed at the GDI because it was telling us different signals, "Oh, no a recession." Now though, we have these two consecutive cords of GDI. Should we be concerned here, is that GDP number going to get revised down?

Mark Zandi:                     Well, what's your answer?

Cris deRitis:                      Concern. I think they're slowing, clearly. But are we in recession right now? No, I don't... The other signals don't-

Mark Zandi:                     We're still creating 250,000 jobs a month. How can we do that?

Cris deRitis:                      Right.

Ben Harris:                       Consumption's on fire. The labor market is red-hot. But we're contracting. It's a very peculiar situation. I agree.

Mark Zandi:                     Well, a big part of the weight was just reduction of inventory, right? Or less, well, actually inventory's actually declined, I believe.

Cris deRitis:                      Declined, yeah. [inaudible 00:43:55].

Mark Zandi:                     On GDP, that subtracted over two percentage points. So it sets us up for a little bit of growth in the current quarter, in Q2. But that was a good one, Cris. A very good one. Ben, do you want to go next?

Ben Harris:                       I do, but I will say I didn't pick one that was necessarily pertinent to today's conversation, but I'll give it to you anyway.

Mark Zandi:                     Okay, fair enough. Fire away.

Ben Harris:                       Okay. You'll probably get this right away. I maybe have made it too easy, but 4.7%.

Mark Zandi:                     4.7... Oh, is that the... Well, that's the core consumer expenditure, deflator inflation year over year, is 4.7%.

Ben Harris:                       So that's not the one I was thinking of, but good answer.

Mark Zandi:                     It is, I'm telling you, it's 4.7%, I'm pretty sure. I'm pretty sure. Am I right, Cris?

Cris deRitis:                      Core PC was 4-

Mark Zandi:                     Core PC, which by the way makes me nervous. But we can come back to that. But that's not what we had in mind.

Cris deRitis:                      It's not a great [inaudible 00:45:00] today.

Mark Zandi:                     Okay. That's not what you had in mind. Is it an economic statistic?

Ben Harris:                       It's an economic statistic.

Mark Zandi:                     Okay.

Cris deRitis:                      Did it come out this week or recently, or?

Ben Harris:                       It describes the current situation. So it's the most recent release, but it didn't come out this week.

Cris deRitis:                      Okay.

Mark Zandi:                     Okay. Oh, interesting. Is it a government statistic?

Ben Harris:                       Yes.

Mark Zandi:                     Okay. And is it inflation related?

Ben Harris:                       No.

Mark Zandi:                     Is it labor market related?

Ben Harris:                       Yes.

Mark Zandi:                     Okay.

Cris deRitis:                      [Inaudible 00:45:33]. No.

Mark Zandi:                     Is it average hourly earnings growth, is 4.7%, [inaudible 00:45:39] 4.7%.

Ben Harris:                       [inaudible 00:45:40] a lot of 4.7s, but this again, not the one I'm thinking of.

Mark Zandi:                     Okay. But you said close. The average hourly earnings, is that-

Ben Harris:                       Oh, no, it's not related to earnings.

Mark Zandi:                     It's not related earnings. Okay. It's in the labor market, though. Interesting. Well, I'm thinking job. Is job growth related somehow?

Ben Harris:                       It's not related to job, to growth and payrolls, it's from the household survey.

Mark Zandi:                     Oh. Is it the growth in household employment year over year, percent change?

Ben Harris:                       No.

Mark Zandi:                     It can't be labor force.

Ben Harris:                       Can I give you a hint?

Mark Zandi:                     Oh, is it like unemployment rate for some demographic? Like black, is it black [inaudible 00:46:35] rate?

Ben Harris:                       Yes, you got it.

Mark Zandi:                     Oh, okay. Okay, very good. That's a good one.

Ben Harris:                       That was good.

Mark Zandi:                     Yeah, well see [inaudible 00:46:41], that was not as graceful as I would've liked, but we got there.

Ben Harris:                       But you got there, and I will say, I mean, the reason why I picked that one, was during the campaign, we were giving then candidate Biden regular economic updates every week or so, twice a week. It was a rotating cast. But usually Jared Bernstein and Heather Boushey were on, and there were a few other folks which would join.

                                           And I remember this very well because my family had rented an RV, my wife and I and our three daughters, because we just had to get out of the house, and we're driving across the country. So I'm sitting in the back at the table advising President Biden with the dog barking and our kids are on iPads. And in May of 2020, the black unemployment rate was 16.8%.

Mark Zandi:                     Wow.

Ben Harris:                       Now, that's not a high, but it's kind of a high for me as an adult. And we were so worried that the President, well, we were hopeful that Biden would become President, but were worried that he would come into the presidency in the middle of something that looked like the Great Depression.

                                           Not even the Great Recession, we're talking about the late 1920s. And when you have a fifth of people in a certain demographic that are unemployed, I mean, that's what we're worried about. It was, I mean, 16.8% is bad, 25% is much worse. And here we are today with 3.5% unemployment overall, 4.7%, a low for black unemployment historically, far below the historical average. It just feels very fortuitous, and it could have been very different.

Mark Zandi:                     Yeah, that's an amazing statistic, it really shows the-

Ben Harris:                       The strength of the labor market. I mean, just incredible strength.

Mark Zandi:                     And resilience. And that goes back to my fundamental reason for optimism. I mean, hard to imagine. You go in recession... I mean layoffs are so low, and the business is so reluctant to reduce their payrolls. It's just without that, it's hard to see a recession. But anyway, but 4.7%, Cris would point out, 4.7% core PCE inflation. That's a problem too.

                                           Okay, I got a statistic, and this is related, I'm going to give you a big hint right upfront. This is related to the topic that we're going to go to in a few minutes on retirement security. And I'm giving you a hint, because this could be a little difficult. The statistic is 23.6%. Its labor market related, it goes to the discussion around retirement issues.

Ben Harris:                       Is it related to retirement accounts?

Mark Zandi:                     No, it's labor market related.

Cris deRitis:                      Is it a participation rate?

Mark Zandi:                     It is a participation rate.

Cris deRitis:                      65-plus?

Mark Zandi:                     Oh my god, see what I tell you, Ben-

Ben Harris:                       This is amazing.

Mark Zandi:                     Unbelievable. I'm telling you, isn't that unbelievable?

Ben Harris:                       Yes.

Mark Zandi:                     I gave him too much of a hint. So the participation rate for people 65 years and over is 23.6%. That's as of April. Pre-pandemic, it was 26%. So that kind of gives you the sense of the decline in participation by older Americans. And of course the overall participation rate is down, but right now it's only down by, I don't know, six, seven tenths of a percent, not this. So one of the reasons why participation hasn't come back is, older Americans have left the workforce and they're not coming back. The participation rate has not come back. And that's going to be a real problem going forward.

Cris deRitis:                      That's a good one. If you go back a bit further though, go back to like 2015. It's actually where it's 23, it's right around where it is today. Is the anomaly actually today that it's so low, or was 2019 just a-

Mark Zandi:                     No, I think though that just reflects boomers, because 65 and over is a big cohort, right? And the participation rates fall very rapidly when you're over 65. And then because you have all these boomers coming in, their participation rate... Because you're at 65, 66, 67, you're just going to push up your participation rate. In fact, the fact that it's down even more now is understating how big a deal this is. Because it should be steadily rising. The trench should be steadily rising. Because all those boomers coming into that H cohort. You see what I'm saying? It's just some arithmetic.

Ben Harris:                       In addition to higher participation within an age category. So I mean, I agree with your assessment as well. And we just expect people 70 to 75 to have higher participation rates, conditional on how many of those people are in the economy. I mean in particular with Zoom and other ways that make it easier to get into the labor market. I mean, I think that BLS projections show higher age specific participation rates over time as well.

Mark Zandi:                     Yeah. Hey, this is a good time then, let's dive into your book. Tell me about your book. And I'm a little curious about the backstory, how you teamed up with Martin Baily, and why you wrote the book, and just any context you can provide would be great.

Ben Harris:                       So Martin, I sort of came up in economics in the 1990s, and anyone, particularly if you're sort of more affiliated with the Democratic Party. And Martin Baily was chair of CEA, I mean he's this titan in economic policy. And we had received a bunch of grants to do work around retirement policy when I was at the Kellogg School of Management out in Northwestern, and he was at Brookings.

                                           And we put together all these different proposals, and we commissioned different proposals from various economists around retirement security. We did a bunch around working longer, which is pertinent to our discussion we just had. We had a bunch around annuities, reverse mortgages, long-term care. And then we decided, "Look, we've got a lot of good material here, let's just put it into a book." But the crystallizing idea behind the book was this, it was that we've got a retirement system in this country, which needs to be fixed.

                                           We never described it as catastrophic. There's a lot of good things about our retirement system. Some people come in and say, "Oh, it's entirely broken. We need to redo the whole thing." Our point was, "Look, it works really well for some people. It works kind of poorly for others." But the fundamental system is A, it's actually working pretty well, and B, it's not politically feasible to just redo the whole thing. I mean, you're not going to have individual accounts and social security. That's just not happening.

                                           You're not going to have a system where we demand that every employer provides pensions to workers. That's a thing of the past. So the idea was let's just take a very realistic look as far as what's possible, propose a series of tweaks which collectively, actually really changed the retirement system. But this is designed to be overall politically realistic.

Mark Zandi:                     I'd like to go through some of those tweaks. I mean, in my mind's eye when I think about retirement security, and what it means also for the federal budget, because of course the government has to play a big role in providing that security. The real problem here is some degree of social security, but that feels like a problem that can be solved relatively quickly, and I'd be curious to hear your thoughts on that. But really it's Medicare and Medicaid, but that's really where the crux of the matter is. Is that a fair characterization?

Ben Harris:                       Well, I think that it's a bit problematic that social security is now maybe more than a bit, social security is projected to go bankrupt in 2033. And by bankrupt they mean exhaust the trust fund. After 2033, social security, if there are no other changes made by Congress, can still pay out 77% of its promised benefits. The trust fund for Medicare is expected to become exhausted in 2031. And actually, I use the term bankrupt, and I probably shouldn't have. Bankrupt sort of suggests that it can no longer operate.

                                           That's what we associate with the term bankrupt. I mean, it can operate, it's still paying out roughly 80% of benefits for Medicare. The date is two years earlier, 2031, after which point it's projected to still pay out 89% of benefits. The disability insurance trust fund, which is more volatile, but that is on solid ground for the next 75 years, as of today.

                                           CBO in 2015 put out a report where they proposed 36 different reforms, tweaks, however you want to characterize them to social security. Many of these bought you five or 10 years just by themselves. I think almost none of them would be described as radical. And so with social security, I think we can get a series of sort of common sense, moderate forms, which will buy you at least 10 or 15 years, which is progress.

                                           On Medicare, I mean, in the Biden budget, Biden added 25 years to solvency of the Medicare Trust fund by addressing prescription drug price growth, and by having a 1% point increase in the payroll tax rate for upper income Americans. I mean, done, those two reforms buys you an extra generation of solvency. So I think it's a matter more of congressional will than coming up with some sort of brilliant fix here.

                                           But the real problem with... This is the heart of the book. So if I wanted to characterize the American retirement system, it has two big characteristics. The first is that, as you mentioned, Mark, there's enormous government resources devoted towards old age wellbeing, and that's a combination of social security, Medicare, and about a third of Medicaid. The second is that we offer about $250 billion in tax incentives every year for retirement savings.

                                           And about half of families take advantage of that throughout the course of their lives and accumulate enormous sums of money in retirement accounts. We have $31 trillion today in savings in retirement accounts. And then people of course have vast sums of wealth in their homes. It's very typical for older Americans not to have mortgages and have a fair amount of housing equity. So we have a system where you've got the government support, you've got a ton of resources, particularly across the top 60% of the income distribution.

                                           But we have no real way of translating all of that wealth into security. And the biggest problem with retirement is that we have no idea how long we're going to live. And so you've got like a 60-year-old woman has about a one in 10 chance in dying in the next 10 years, and has about a one in 10 chance of living past 95, and then an 80% chance... How do you deal with that uncertainty?

Mark Zandi:                     Yeah, right.

Ben Harris:                       It's impossible. And what people do is, it's pretty rational, is they hold onto their assets really tight, just in case because no one wants to be 95 and poor. And one, it's a problem because people can't enjoy their retirements because they're holding onto their assets. Two, it's a problem because people have to save so much during their working years and sacrifice. There's really no way to sort of deal with this uncertainty. And there's other uncertainty. There's inflation, there's market return. If you own a home, there's lots of uncertainty in the price of the house, but there's no real way of translating all of that wealth into security.

Mark Zandi:                     Yeah. Just to reiterate, just so I have it right. On social security, if we put social security over here and Medicare over here, that's for older Americans. Social security, that seems like that can be largely solved by just taxing earnings above a certain level. So right now the cap is I think 130, $140,000 a year, that rises every year. But if you start taxing folks that make, their earnings' over 400K, that really doesn't solve the problem forever, but it solves it for an extended period of time. Is that fair?

Ben Harris:                       Yeah. So you could, for example, I mean what the Biden campaign proposal was, we went ahead and said, "We're going to raise a bunch of extra revenue by taxing wages over 400,000." Right now, as you noted, the cap is 147,000. So for social security, you and your employer each pay 6.2% on any wages up to 147,000. And you pay zero on anything above that into the Social Security Trust Fund.

                                           Now economists generally think the full 12.4% is ultimately paid by workers, or most of it. But now the share of wages that are taxed have been declining over time, because the wage growth has been going up more than whatever the cap is indexed inflation by. So initially we thought, "Look, about 90% of wages will be covered now." I think it's in the low 80s. So one thing you could do is say, "Look, we just want 90% of wages to be covered." And whether that means rising the cap from 147,000 up to, I don't know, 165 or something.

                                           Now that would violate a Biden campaign pledge where he said we wouldn't. So you could, what we did in the campaign was say, have this donut hole where you say, "We're not going to touch any wages between 147 and 400, but then we're going to go ahead and assess the payroll tax on wages above 400." But you can also do things on the benefit side. You can make tweaks on the benefit side as well. But the point is, it's not like you need to jack up the tax rate necessarily to get yourself out of this.

Mark Zandi:                     Well, and I think when social security was put on the planet in the '30s, it was like 90% of earnings were being taxed. And as you say, because of the skewing of the income and wealth distribution, in part were down to in the low 80s. So if you have that earnings above 400K, having to pay the payroll tax, you get that back up to something closer to that 90% where we started off in the beginning of time. And now on Medicare, just so I have that right, you're saying, if we continue to reform prescription and drug pricing, allow the government to negotiate with the prescription and drug companies over prices, and we have an additional 1%, as you said, 1% tax, did you say?

Ben Harris:                       I think, yeah, it was a 1.2% increase. So Medicare is a little different. You pay a tax on all your wages in Medicare, there's no cap. And so the Biden budget, I believe took it from 3.8% up to 5%, as far as the tax rate on Medicare. And then also allow the government to negotiate over more prescription drugs, which raised about 200 billion. And then there's also in the IRA a provision that said, if drug companies raise the cost of certain drugs too fast, they pay a rebate back to the government.

                                           And there was a moderate expansion in that, I think to more drugs that were subject to the rebate, or maybe the rebate got paid earlier. But the combination of these three different reforms, negotiation of prescription drugs, more claw back of the rebate, and boosting the tax rate on Medicare at 5%, buys you an extra 25 years of solvency.

Mark Zandi:                     25 years. Okay. All right. Okay, very good. Hey Cris, anything you want to bring up here before we move on to the last topic at hand? Because this is already getting a little long in the tooth.

Cris deRitis:                      Yeah, let's move on.

Mark Zandi:                     Let's move. Okay. Modern supply-side theory. Now did you come up with that name, Ben?

Ben Harris:                       So Secretary Yellen, I've got to say, I don't know if you know her. She's the most wonderful, brilliant person. I mean, I just loved working for her. And she was giving a speech at Davos, and early on there was a period in which I would do a lot of speech writing along with David Lipton, who you probably know as well. And she was giving a speech to Davos, and we had to pitch these different ideas.

                                           And the folks that were working on the speech, Dean Masansi, who was also the Chief of Staff, we would usually come up with three different ideas, three or four different ideas. You'd have a half a page on each for a speech. And so I had put together, along with David and Dean, and other people, different ideas. And one of them was progressive supply-side economics. And she really liked the idea, but the name, her husband, George Akerlof said, "You know what, you should make this Modern Supply-Side Economics," which was 1000% right. And so we renamed it, Modern Supply-Side Economics. And she gave this terrific speech. It ended up, I mean because it-

Mark Zandi:                     Can I say on the name, I particularly love it. Well, the way I thought about it was you were marrying this very conservative supply side theory with a very progressive modern monetary theory. And you're saying this is a synthesis of the two, that's the way I took it. Is that wrong?

Ben Harris:                       Maybe that's what George intended. I mean, the way that I think about it, it was just a contrast with traditional supply-side economics.

Mark Zandi:                     I see.

Ben Harris:                       And say that both have the same objective, which is expanding productive capacity, basically making the economy's ability to produce greater, but through very different routes. I mean, traditional supply-side economics says you want ultra low tax rates on capital, which will generate more investment, and also widespread deregulation.

                                           Modern supply-side economics says, we want to expand the labor force, and we want to boost productivity, largely through public sector investments. And we also want to incorporate underutilized resources, largely people and communities that don't participate to their fullest. But they both have the same objective, it's just a very different way of getting there.

Mark Zandi:                     And so my interpretation of modern supply-side theory, and I thought the speech she gave at Davos was very well articulated. It's just I'm focused on the supply-side of the economy, which made a lot of sense in the context of the shocks of the supply side. We were experiencing the pandemic and the Russian War, and the years of lack of investment and infrastructure in the labor force. But this is instead of focusing on incenting through lower tax, investment in capital, we're going to focus on labor and trying to improve the productivity of labor, and of course on public infrastructure. That's kind of sort of the idea.

Ben Harris:                       That's exactly right. And it's very much fitting with the Joe Biden vision of the economy. I think I was told he really liked her speech. I know that a lot of the cabinet had read it, and you see it incorporated it even in speeches today. So I mean, what I was surprised by was it kind of trolled people who've defended traditional supply-side economics for so long. I mean there was this Phil Graham op-ed in the Wall Street Journal. It wasn't intended to do so, I will say, it was not meant to be a sort of thorn in the side of people who believe in traditional supply-side economics, but I think it really frustrated a lot of folks. But that wasn't intentional.

Mark Zandi:                     Right. Can I ask on the Trump tax cuts, have you seen any research that's come out to say, "Hey, this really worked in terms of lifting investment longer term?" I haven't seen a whole lot, but what I've seen from IMF and from Brookings would shed a lot of doubt on that. Has there been any academic research in that area?

Ben Harris:                       Yeah, I don't think there has been academic research. So some people observed that there was an increase in investment. I mean, one of the unfortunate things about... There are a million unfortunate things about the pandemic. One of the less severe ones was that it didn't really allow us to study the full economic impact of the TCJA. It's passed in 2017, we just had those two years, and you have to discount anything that happens in investment on a macro scale.

                                           But if you look at those first two years, Bill Gale has a really nice summary of the research. I think if you're getting anything beyond just observing the certain types of investment increased, which of course would never meet an academic standard, you'd have to approve some sort of causal relationship. Once you get into the causal space, I really haven't seen anything.

Mark Zandi:                     You haven't seen anything either. Okay. I want to thank you, you've spent a boatload of time with us and I know you got a lot of other things to do. Let's end the conversation this way, because I'd desperately like to know, do you think we're going to be able to avoid a recession or not? You are Assistant Secretary of Economic Policy, you must have a view on that. So what do you think, are we going to be able to navigate through?

Ben Harris:                       All right, so before we get to that, I've wanted to inject this compliment to you and your team, and I should have done at the beginning. So yesterday I gave this talk, the lunchtime talk, at this NBR group. And it was a bunch of academics, and basically the thrust of the argument at the end was, how they can be more impactful. And the lesson was, be more like Mark Zandi and his team.

                                           And my point to them was, you've got to be comfortable being forward-looking, like you cannot just live in the past and academics do that. And I said, "You've got to have the courage to look forward. And I know it's uncomfortable, but if you want to impact the world, you have to do it." And I said, "It can't just be Moody's leading the charge on the economic impact."

Mark Zandi:                     Yes, it can be. Come on man. Hang on.

Ben Harris:                       And the other thing I'll say is that you can... I testified at the house budget committee on Wednesday, and you came up. And when policymakers start talking about you in your absence, I think that's a real sign that you're making an impact. So congrats to you. I know you're not doing it alone, you've got a great team, and I just wanted to let you know that.

Mark Zandi:                     Absolutely. Well, you're very kind to say. So, see how he avoided that?

Cris deRitis:                      Yeah, that's nice. A little political.

Mark Zandi:                     "Let me suck up to him and I won't have to answer."

Ben Harris:                       So I think that you have to think in probabilistic terms. I mean I spent several years working for Bob Rubin. I mean he thinks in probabilities. I learned from him. And so I guess Goldman's at 35% chance of recession, and Larry Summers is at a 70. I think that's a reasonable range. I think you can reasonably be in there. If you're below 35 or if you're above 70, I think you're just misreading the data. I'm closer to Goldman, in part because you have, U.S. consumption has just been remarkably strong.

                                           You're not seeing real cracks in household balance sheets. You've got a labor market which is red-hot and shows no signs of stopping. And the hotness of the labor market allows people to continue to spend with a fair amount of confidence. You've got a housing market which looks much healthier than it had in the past. You've got energy markets which are not contributing to the volatility we've seen in the past. And there was a world in which we thought the price of rent, we said this earlier, was $150 a barrel.

                                           Now I mean I used to check this five times a day. The last time I checked it was in the 70s. And so you have the groundwork laid, and you also have a Fed that has ammunition to deal with fighting back in any... I mean it can initiate rate cuts when it needs to, we're not at zero anymore. And so it's got 500 basis points of cutting that it can use to ensure a soft landing. So I'm more in the golden camp around 35% chance of recession. I think it's certainly below 50, but there's always a chance.

Mark Zandi:                     Well, all I have to say is thank you for the kind words. You're right, I have a fantastic team. But sometimes they can be wrong. They can be wrong. Right, Cris? Cris is more at the 70%.

Cris deRitis:                      Not quite 70-

Mark Zandi:                     I'm with you, I'm with you-

Cris deRitis:                      That's really up there.

Mark Zandi:                     Yeah.

Cris deRitis:                      Yeah, yeah, yeah, for sure.

Mark Zandi:                     You can come on anytime you want. Sorry Cris, go ahead.

Cris deRitis:                      No. Yeah, absolutely. There are a lot of good things going on, but things can turn on a dime here.

Mark Zandi:                     Ben, this is why I get so nervous. Because Cris and I have been working together for I don't know how long, and we have these dollar bets every once in a while. I'll have to say, I have not won a single bet, not one bet. It's scary.

Ben Harris:                       If we're going to take two minutes, what's the one thing you guys are looking at that you think will pretend, that most crystallizes your views around the likelihood of a recession?

Mark Zandi:                     For me, the single most important statistic is the conference board measure of consumer confidence. Back to your point about the consumer, because at the end of the day, a recession is a loss of faith by consumers. They lose faith that they're going to hold onto their job and they run for the bunker. And the conference board is much better, much more prescient historically than the University of Michigan, for lots of different reasons we can't go into.

                                           But that's rock solid, and it's exactly equal to its long run average. But I focus on that. If that starts falling sharply month two or three, consumers are packing it in, they're running into the bunker, the firewall's coming down and we're going in. But right now, rock solid. Rock solid. What about you Cris?

Cris deRitis:                      Yeah, Michigan came out this morning, it happened to fall.

Mark Zandi:                     What happened? What did it do?

Cris deRitis:                      59.2 bell, over four points.

Mark Zandi:                     Oh, it keeps falling. It's incredible.

Cris deRitis:                      Yeah.

Mark Zandi:                     Is that your [inaudible 01:13:34]-

Cris deRitis:                      That doesn't fit your narrative, so let's-

Mark Zandi:                     No, come on. It's not fair. Anyway, Ben, it was really a pleasure to have you. Thank you so much. Incredible to have your insight, and a very thoughtful discussion. And best of luck at whatever your next endeavor is, but I can't wait to see it, I'm sure it's going to be great.

Ben Harris:                       Thank you, it was a pleasure being on.

Mark Zandi:                     Looking forward to it. Take care now.