Whats Happening in Economic See Saw ? Update from FSU Professor Joe Calhoun

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00:03

Hello, I’m Charles Musgrave, host of the answers that count podcast. Thank you for joining, and welcome back to the show. This is going to be another great show we’re going to have an economic update from our favorite Professor Joseph Calhoun, an economics professor at FSU. Dr. Joe, thank you for joining us today.

00:23

Hey, it’s great to be with you. I tell you there’s so much excitement on campus. Last Monday we’re just bursting at the seams with students, we got a record number of freshmen coming in. I’ve got a real heart for freshmen so life is really great right now. Oh good,

00:37

I want to get an update on that. But before we get started, please hit the subscribe button, you’re going to want to subscribe to our channel that helps gets the word out so we want to make sure that as many people can see this as possible so thank you for doing your part II in the subscribe button and also hit the bell for notifications so you’ll be notified when we upload the next podcast. So Professor Joe and FSU things are bustling. You’ve got new freshmen on campus so hey is it. Give us some good news to start off the show so are people. Now, on campus, they don’t have to do all of the virtual. Yeah,

01:13

yeah, I’ve been walking around campus as much as I can, I’m trying to get out because it is so refreshing and exciting to see a normal level of students walking around, I mean that the line at

Starbucks wraps around the building the lifestyle of the line and Einstein Bagels is about 50 people long, students are just crawling all over the place. This is the way we should look and I almost forgot what it should look like because it’s been 18 months since we really had much of any activity on campus so I’ve just had a big smile on my face the whole week is so exciting to have students back to have my colleagues back in the office and in the classroom and so far things are going really smoothly. There’s always a few bumps to get the semester started, but we’re really off to a great start here in Tallahassee.

02:03

Joe, that is great news and I love to hear that and hopefully the campuses across the US are experiencing the same type of bustling of students on campus so what we’re learning is we’re gonna have to live with this COVID virus so it’s, we gotta get back to. I hate to say, We gotta get back to normal. We got to live life we can’t, we can’t shelter. So glad to hear that and glad to see that you’re part of the excitement of the FSU campus looking forward to football season as well so that’s a, that’s some great news that we’re starting to show off with today so let’s talk about the economy, you know, the economy is in the news, we’re all seeing what inflation does so let’s, you know, we’ve talked about inflation, a lot, we started talking about this really put it on the top burner the front burner back in, in January of this year we kind of had an inkling that it would start to heat up and it certainly has.

03:02

Yeah, we’re seeing levels that we haven’t seen in many many years and for some people that’s a little frightening but, you know, let’s also be a little optimistic here, you know 5.4% is certainly not what we want, we want something closer to two, on an annual basis, but in the grand scheme of things it could be a lot worse. I mean you know we’ve seen other countries in different historical periods have, you know, double digit inflation for those members of your audience who remember the late 1970s We were at about 10% inflation. I mean, those are times where you know things really get terrible so yeah we don’t like 5.4 And I’m not trying to sugarcoat that but in the grand scheme of things we’ve seen a lot worse. It could be a lot worse. So let’s try and be as optimistic as possible. And there was a little bit of good news lately. The July monthly figures came in at a little lower rate than what the June figures did, so we still see inflation but the rate of the increase is actually coming down a little bit. Now it’s only one month so you can’t get too excited about one month. It’s not a trend, but there was a little bit of good news there.

04:11

Yeah, you’re always, you always take that over the, the other side of that you don’t want to see it keep increasing at higher rates so at least the increase was at a decreasing rate so that that is

good news. So, if 2% is the target for the annual inflation rate. How do you see your wins, I guess the first question is when do you see us possibly getting back to that annualized rate of 2%.

04:37

Well, that’s a really tough question to answer because we have so many factors that are in play right now you’ve got government spending, which is putting money into the economy, you’ve got the Federal Reserve with their monetary policy that continues to buy a high level of bonds and mortgage backed securities, which is putting money into the economy, you’ve got a host of supply chain issues and you know if you’re trying to buy almost anything these days. It’s not as easy as it was before the pandemic started and it’s everything from lumber prices tripling to bags of m&ms I mean my mom lives in Northern Illinois she goes to the grocery store she couldn’t even buy m&ms The whole, the whole candy aisle was cleared out, wow, you know, just all kinds of things out there, You know if anybody’s tried to order an appliance lately you know that sometimes you have to wait six months so, so we’ve got so many factors that are in play, and it’s going to take a while for all those to really kind of settle down and for the economy to really absorb those new changes, of course whenever show what’s gonna happen with government policy and I know we’re gonna get to it in a few minutes with the, with the new budget bill that was passed by the House. So that’s going to be an ongoing issue to see how that evolves. We pretty much have clear direction from the Fed. But then, you know, we don’t know what’s going to happen with the supply chain issues. You know when Southeast Asia is going to ramp back up to pre pandemic levels so that we can get things much faster and how are those issues going to be resolved. There’s a whole lot of uncertainty, so it’s really impossible to say hey you know what everybody just sit tight for three months and then we’ll be back to normal. We just don’t have that kind of predictive power.

06:19

I totally agree that it is probably safe to say that we’re not going to see it get back to that rate in the next few months.

06:26

No, absolutely not. I mean, my personal guess is going to be six to nine months before we start to settle down a little bit, you know, if you think about a manufacturing facility, you just can’t get back to normal in two months, you know, I don’t care where your facility is whether it’s the United States, or whether it’s in China or Thailand. You know you’ve been shut down for a while, you probably have to get a bunch of new workers because all your previous workers aren’t always going to come back to you, right, and just be able to go back to what they were doing before you might have to retrain a bunch of people and get them some skills that they didn’t have before.

And then, even if you do your part, well, it’s called a supply chain purpose right because there’s several others. There’s a lot of rights in order to get from point A to point B. So even though one one link might be working perfectly well. If the other links aren’t working, then you don’t have a fully functioning supply chain so you know we’ve got container issues we’ve got shipping issues in terms of getting the goods from point A to point B. You know I’ve heard some rumblings about the railroad industry is having some capacity issues as well. So once the stuff gets to the United States, you know, we got to ship it around. So we’ve got a lot of different things that are going to have to get resolved before we can really say hey we’re kind of back to normal.

07:49

Yeah, well, you know, we’ve talked about our favorite Chairman, Chairman Powell. Now these are my favorites. In historical terms, but he’s our favorite, that we’re living with right now so he was in the news recently so let’s Powell says Fed could start scaling back stimulus this year and we’ve talked about before on how he, he has to be really nuanced and in the language that that he speaks about the economy. So, again, he’s being very nuanced in this conversation, in this in this report and hinting that they’re going to stop spending the money as you mentioned before, and I guess is really one of the last bullets in the gun is they may have to raise rates.

08:32

Yeah, and this is also part of Chairman Powell, just trying to get the markets to anticipate some things because, you know, nobody likes surprises but the financial markets really hate surprises. So, Chairman Paul is trying to get them to start thinking about hey you know what you might see some policy changes so that when those policy changes actually do occur, it doesn’t catch everybody off guard and it doesn’t send any kind of panics through the financial markets so he’s, he’s been smart here in terms of laying the groundwork, trying to set some expectations, so that when the Federal Open Market Committee, which is the group that actually sets that federal funds rates, and then all the other interest rates follow makes it a policy change, he’s not going to catch people off guard and rattle the markets. So it’s a very nice move on his part. Right, he’s kind of preparing the markets for that and I guess one of the things you like to see is when, when the chairman speaks and there’s not a big move in the market, then the market already had baked in what he said. So that’s really, that’s really what you want to see so that, as you said, the market is not caught off guard and then there’s no surprises so you don’t want to have surprises that come out of the mouth of Chairman Powell because that throws a lot of things in panic. Yeah, so basically what, what you want the markets to essentially say, after some big announcement is, yeah, we knew that was coming, no big deal. Like you said, we’ve already baked it into our expectations. We’re already acting as if that actually was announced, because he gave us fair warning, it’s when Chairman Powell or any other major policy maker comes out and surprises people, and the markets, I didn’t know that was coming and then you got all kinds of panic. Right.

So when is it just so we could put it on our calendar because I know a lot of people out there keep track of this so when is the next big meeting that Chairman Powell is going to have. So for those of you who are nerdy like me, you’re going to put this on your calendar September 21 and 22nd so Tuesday afternoon is when the statement is released by the committee, and every major newspaper, every major news outlet cable and everything else we’ll be following this very carefully. So, for those of you in the stock market, you’re going to want to pay attention to those two dates September 21 22nd. Whenever the announcement is there’s going to be a reaction, hopefully it’s not a violent reaction but that’s when the next new information will come up from the Fed will good we’ll talk about and we’ll have another show following following that meeting that they have in late September so let’s go to the next headline, US household income jumped in July as spending slow so I think the spending still increased but it increased at a decreasing rate , so income is consistent with with the other numbers that we talked about which, which is a good thing so if inflation, taking off, households, absolutely want their incomes to take off in at least that same proportion if not a little bit higher, because what we call the real rates for their, in this case the purchasing power that their real spending means that we’ve accounted for we factored in inflation so for example if inflation was 5.4%, and you had a raise of 2% Well good for you but you’re actually behind. Still 3.4% behind. So in real terms, worst case scenario, we want households to equal inflation so that their purchasing power isn’t decreased. So, this was again relatively good news that yes, inflation is taking off and household income needs to at least keep up with it, so that they’re not falling behind. So, historically, though it’s been very difficult for household income to keep pace when when inflation goes up like it’s doing this year is that typically gonna run ahead because from a just a very public matter, employees, usually get an annual review and an annual raise right so you know you can anticipate inflation, and saying, Okay, I think it’s going to be 2% next year so I need 2%, plus some more, but typically households are going to lag behind, so I like to think about it is we’re right on track and inflation is always a few steps ahead of me and hopefully it’s only a few steps hopefully inflation isn’t a whole lap or two in front of me, but almost always the household income is going to lag inflation a little bit. We don’t have a slide on this but when the news is still coming out that although the unemployment rate is, is improving it’s going down, that there’s still a lot of jobs, a lot of people in the in the look out there available to be hired and there’s still a high demand for women across the United States. Yeah, again, we’ve been talking about months and it really hasn’t changed a whole lot you know, three months ago, when you and I weren’t together we took a drive up and down some of the major commercial roads in Tallahassee or over there 38 Studios, and almost everybody seems to have a help wanted sign out as much still the case today, right that business is are doing all kinds of things they’re yelling and screaming as they come work for me and hiring bonuses and all kinds of things I think are pretty dramatic change over the next month. The Federal excessive increase in the unemployment benefit is going to expire if you remember part of the stimulus package they added a bunch of stuff that wasn’t already there so we’re going to go back to quote, normal level of benefit. So that excess stuff is going away, which is then going to call an incentive for people to go back to work and fill those jobs that the businesses are advertising for

right now. So I think September can be a big adjustment month. Yeah, I think if you look at the next headline that we’ve got this is this is an else that may drive more people back to work, is that the moratorium has now been, the Supreme Court has ruled once again and said, You can’t do that so the moratorium is the eviction so before people were willing to not pay their rent, and they couldn’t be evicted so that, although that was for those that were renting the landlords. It was coming out of there. So, as you’ve said so often it’s a zero sum game. There’s not two winners and there’s a winner. There’s a loser, the winner was the renter, the loser was the landlord.

15:19

Because, you know, if you’re a landlord you’re really stuck here you got people that you can’t evict, but also people who aren’t paying rent so your income dries up. Expenses are still really high, you still pay the mortgage, you still have to pay whatever electricity bills, whatever else was built into the contract, so your costs are exactly the same, your revenue goes to zero or some very small amount. And you really don’t have any recourse, there’s nothing you can do there. So from my point of view that’s really a property right issue, you know, has the right to the home, normally we say well the landlord has the right to the home well during this moratorium we essentially swap that property right and we essentially gave it to the renter saying Well it’s really yours now. I mean we’re not legally going to change it but in effect we did by saying, Well, you don’t have to pay rent, but we also can’t kick you out for not paying rent. So the house basically became the renter’s house not the landlord’s house anymore.

16:22

Yeah it’s, and we’ve talked about this where it’s, it’s, unintended consequences, where you’ve got a government. In the normal business practices the normal markets and the unintended consequence here is maybe the new UI intended to help the renter to keep them in their house since they may have been unemployed. But it really, really was a property seizure from, from the government that basically took those rights of that property away from the property owner.

16:51

Yeah, yeah. And to my knowledge, there was no special program put together for landlords you know a lot of other businesses had some kind of government program, you know, again we don’t call them a bailout because the businesses didn’t do anything wrong and then we just gave him a bunch of money, but you know all the different stimulus packages you know small business loans that were then turned into grants and, you know, none of that was directed at the landlords. So they, again they had no recourse, they just had their income stream dried up, and they really couldn’t do anything about it.

17:28

Yeah, I think some of the banks may have done that on their own where they, they extended a three or six month deferral of the of the mortgage payments and put it on the back end of the mortgage so it’s not that it went away, but it gave those land of landlords a break for a short period of time but that went away, they still owe the money so yeah it’s, I’m glad that that that’s going to correct itself. And I think we’re gonna see the ripple of that through the economy I think that’ll add to the incentive for people to get back to work so you’ve got the end of the federal unemployment, additional benefit of going away that $300 A couple leave it was that goes away, and now you’re going to have the the eviction moratorium. Go away. So, those are two big incentives that should push people back into the job market.

18:16

And you’ve heard me say this many times people respond to incentives and very predictable way so if you’re sitting around going, Wow, I’m either gonna have to move or pay the rent and my unemployment benefits are gonna expire, you know what those are two very powerful incentives to go get a job,

18:32

they are, and I’m a believer in that fundamental principle in economics that incentives matter because it drives behavior.

18:39

Yeah, it really does, it really does. I mean, and as a social scientist, it drives behavior in different ways. You know Ryan can tell you how people are going to respond even before they start responding with the right incentive structure.

18:54

So let’s look at the last headline that we’re going to have here is, and I guess it’ll be to get your take on this on the incentives, related to what may happen if this bill does get passed it’s been passed, it’s been passed by the House Democrats the house, led by the Democrats, so now it goes over to the Senate and you know the Senate is in a virtual deadlock so what’s going to happen there. If it does pass. I don’t even know if, if you know if I don’t know. I don’t know if those that are voted or that are gonna vote and they understand what’s in this bill, so who knows what the incentives are for that but it’s a lot of money that’s going to go back into the markets.

19:34

Yeah absolutely, it’s a lot of money and depending on your perspective, what’s good and bad about that kind of spending is it’s very directed by government officials. So government officials are saying, we’re going to spend money here and here and not there. Now, for some people that’s very appealing because they can say well we want to help that industry or we want to help that certain group of employers, and direct government spending is a good thing. Other people say well you know what we should really let individuals choose we should let the market allocation process be the dominant factor here. We should just generically put money into the economy and let people spend it where they want. Maybe we don’t want that kind of industry propped up, maybe we’d rather spend our money over here. Well, if you allow the market forces to do that then the money will flow to where there is greatest need, right, however, a government entity says no, no, we’re not going to do it that way we’re going to say, this is the industry that we’re targeting, we’re going to help this kind of company or these, This group of companies. So it’s just different political and economic philosophies, but clearly what you have in this Ville is a lot of very directed spending swords by certain groups.

20:54

So what is yours? I’m gonna put you on the spot with this question. So, what, as an economist, as somebody who’s nerdy, they study the economy, the economics, what without, without knowing how that money is being directed inside of this bill if he didn’t know that if he just had the price tag to say there’s a price tag of 3.5 trillion to this bill. What would the economist in you say is good for the economy, or is that going to be that government intrusion that’s going to be bad. So what’s the, I mean there’s so many aspects to that inflation, directing the thing to picking winners and losers, so what, what is the economist and you say,

21:42

Well, it’s really hard to say good or bad and I and other economists don’t really think in those terms or those terms in terms are good and bad when we think about trade-offs in choices and opportunity costs. So the cost is what’s, what did you have to give up in order to do that. So for example, let’s suppose that some of that bill is spent on industry, and I don’t want to pick on one so let’s just be generic and call it industry, a group of companies that are doing similar kinds of things. Well, an economist, of all, is going to say well what’s the next best, what else could we have done, and let’s call it a million dollars just to keep the math relatively simple here. So the government says in this bill we’re going to spend a million dollars on industry, a, an economist is always going to say, well, that’s fine, you’re going to do some good there I mean you can’t completely waste the million dollars you throw a million dollars anywhere a little bit of benefit is going to happen. But the real big issue is, where else could we have spent a million dollars and then maybe done more good. In other words, on the margin the additional benefit that we could have given to Group B

might have been more than what we’re going to give to perfect so again the cost is a million dollars. The question is, how much benefit, Are you going to create? And maybe you could have created more benefit by redirecting that money to be as opposed to a, so an economist is always going to think about opportunity costs and the next best alternative. And then we’re also going to think on the margin, okay, an extra million dollars here might not do a whole lot of good if your million dollars somewhere else might actually get all kinds of benefits. So we’re going to think about the margin in terms of decisions. Now the unfortunate thing is, politicians only ever think that way. Right. The first rule of economics is to think about opportunity costs. The first rule of politics is to ignore the first rule of economics right so politicians rarely, rarely think about things on the margin, they rarely think about opportunity costs, they just see their pet project they see what they think is a desirable thing, and they rarely think like, so it makes for a rating conversation.

24:08

Does the economist also look okay if the government is going to spend some dollars? Where is that coming from, because they have to take, if it’s, if they’re gonna spend it, then they have to get it from somewhere.

24:23

Yeah, it’s SEO, the very important thing is in quoting, Professor. Oh gosh, I totally forgot his name half so excuse me for that but it was a professor once said that, what’s involved in the government giving his government taking. So in order for the government to give a million dollars is to take it from somewhere so it either comes from us today in the form of taxes, or it takes it from us in the future in the form of debt. So if I’m the government, and I don’t want to take it today, I go to the US Treasury, I offer a bond, and I get the money today and I enter into a legal agreement that I have to pay it back, 20 or 30 years. So then, why do I do it? Well, when the government bond comes to you, then I’ve got to tax those people then. So, I’ve got to have do I take it now or do I take it later. And everybody needs to understand that there is nothing free, anything from the government because the government has to take it from you now, or you later, before it can give it to somebody or maybe it gives it back to you first. Yeah that is for McCann, sorry, sorry for the brain cramp there Tibor McCann was formerly at Chapman University is famous for saying

25:47

That is such good information. I mean, that just makes it so simple and it really puts it into, I think, a person can understand that. And, you know, we’re, I want to mention this one thing and, and we don’t have a lot of time to go in depth but I know that we’re reaching the budget or the deficits, again, so there’s gonna have to, we’re gonna our Congress.

26:12

Yeah, we’re gonna have to raise it, there’s is no way around it I mean the Democrats and Republicans can find what they want, into the day they’re going to have to raise it, there’s no way that they can do what they want to do with this stimulus and with that but, by not raising the debt ceiling so you know we can basically ignore fighting because we know what the conclusion is going to be, we’re gonna raise it.

26:34

So, what is it going to be 30 to 33 trillion is that what we’re up to, or approximately,

26:39

You know, I actually forgot the exact number. That sounds about right. But you know hey when you’re spending 33 trillion. You’re off by a few billion in the rounding no big deal right yeah

26:49

and we’re about to spend 10% of that on this one bill so we’re talking about this gig. When you say a trillion that was, that was just kind of out there crazy type numbers now it’s just part of the everyday vernacular when you’re talking about meals and programming has been spent in the last couple of years or 18 months so it’s a bit scary. I would like to come back to that for a future show because, you know the, we keep saying we’re kicking the can down the road and they can just gets bigger and bigger and we’re looking at another raising of the debt ceiling and when does it end when does that ever start to reverse I think we’ve looked at a chart before the number of years that we’ve seen spending less than what we take in is, is few and far between.

27:38

Very few and far between. I mean it’s almost like looking for a needle in a haystack in terms of looking for a year, the federal government spent less than it took in revenue, very hard to find those years. Yeah,

27:52

It’s a runaway train. Joe, we’re going to end it there so the good news is we talk about it at the beginning of the show, scores back down here at FSU. A lot of people are running around on campus so there is a lot of excitement that  people are back in person. Going to the class so that’s a good thing to hear. Thank you so much for doing what you do on the FSU campus, an

for the answers that count podcasts. I love doing it and it’s great to be with you today. Awesome, tune in again for another exciting show of answers. I’m your host Charles Musgrave. Have a great day. Have a blessed

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