Fixing the Economy with Jason Furman

- [Announcer] Welcome to the Wiener Conference Call series. These one hour, on-the-record phone calls feature leading experts from Harvard Kennedy School, who answer your questions on public policy and current events. Wiener Conference Calls recognize Malcolm Wiener's role in proposing and supporting this series, as well as the Wiener Center for Social Policy at Harvard Kennedy School.

Mari Megias:

Good day, everyone. I am Mari Megias, in the Office of Alumni Relations and Resource Developments at Harvard Kennedy School and I'm very pleased to welcome you to this Wiener Conference Call, which is kindly sustained by Dr. Malcolm Wiener, who supports the Kennedy School in this and so many endeavors. Today, we are joined by Jason Furman, Aetna Professor of the Practice of Economic Policy at Harvard Kennedy School, and at the Department of Economics at Harvard University. He served for eight years as an economic advisor to president Barack Obama, including as the 28th chair of the Council of Economic advisors, where he was the president's chief economist and a member of the cabinet. Previously, he held posts at the Council of Economic Advisers and National Economic Council during the Clinton administration, and also at the World Bank. He was director of the Hamilton Project and senior fellow at the Brookings Institution. And his research interests include fiscal policy, tax policy, health economics, social security, technology policy, and domestic and international macroeconomics. Given his expertise, we're very pleased that he's agreed to share his thoughts today with the Kennedy School's alumni and friends. Jason.

Jason Furman:

Great, thank you so much to be here. And always honored to do anything associated with the Wiener family. Just amazing, amazing, amazing people and amazing contributions to the school. And glad supporting this, among so many other things. I've spent the last 14 or 15 months thinking about almost nothing but the pandemic, its impact in the economy, but also as we transition out of it, what's coming next. In early March of last year, I wrote an article in "The Wall Street Journal" calling for a large fiscal stimulus and response to what I thought was gonna be a big problem. I've worked both publicly and privately with Congress and the administration, a little bit, even, with the Trump administration, much more with the current one on these issues. At the same time, prior to that, a lot of my work had been about rethinking budget deficits and fiscal policy. And broadly speaking, we're in the middle of a big course correction to what I think was an overly austere approach to fiscal policy, an overly hawkish approach to monetary policy, and an overly concerned with incentives approach to economic policy. There's a question, though, as to whether the pendulum is shifting too far, or whether some people will keep the pendulum from swinging too far, and it'll end up in the right place or too little. And I don't know the answer to that. So I'm gonna share some of my thoughts with you but I'm also gonna share some of my uncertainty with you as well, and look forward to talking about all of it. To aid in that discussion, have a set of charts here. And the most important is the first one, and that's the big picture. It's a comparison of the United States to the other six G7 economies, plus the Euro area. The blue bars show the GDP shortfall in 2020:Q4. So this is actual data. And you see the shortfall in the United States was on the smaller side, relative to other countries. The U.S. economy was very badly affected by COVID, but less badly affected than the U.K., Italy, Euro area, France and Canada. The really remarkable difference, though, is projected to emerge. And what I'm showing you are forecasts from the OECD. If you looked, IMF forecasts are similar, and many others are as well, at 2021:Q4. So don't treat this as data. This may or may not happen. But the forecast is for the United States to be, according to the OACD, a tiny bit above what they expected the United States would be at at the end of this year. Others have it a tiny bit below. The point is, roughly the same. And if you look, U.K., Italy, Euro area, France, they're all three, four, five percentage points below where they were expected to be at the end of this year. So I think the United States has, broadly speaking, done something right. And what that something has been is... Oh, and by the way, these are the latest data, they came out this morning, on GDP. It's for 2020:Q1. We don't have it for the other G7 economies, so I can't compare it. But you see an economy where good spending was actually above its previous trend, residential fixed investment was above its previous trend. And the big thing holding back the economy in Q1 was services. Of course, Q1 still in the midst of the second or third surge of the virus. So a lot of what enabled this was common across countries. And that was a fiscal policy that did something we've never seen before. We can't afford to always do it at the same scale we did it, but it was very good and very important, nonetheless. This graph shows two things. One is real GDP growth in 2020 and the second is income growth. Income is real, personal, or household disposable income. Now, how does income differ from GDP? This includes transfers. So if you get a check from the government, you get unemployment insurance, that doesn't show up in GDP. At least, it doesn't show up directly. It does show up in disposable income. And you saw a terrible year for GDP everywhere. But you saw actual increases in real personal household disposable income. And the largest increase in any country was in the United States. That's the reason that households were able to buy so many consumer durables in Q1. Things like car sales were through the roof because people got money. And even though the economy was hurting overall, pocketbooks weren't hurting nearly as much. Now this is an average, there's... Conceals a lot of heterogeneity. If you look in the United States, at least, incomes grew more at the bottom of the income distribution than the top. That's because people at the bottom were more likely to lose their jobs but also benefited more from the support of things like unemployment insurance and the checks. And so, we did a quite progressive response that did a decent job protecting people. Now, too many people fell through the cracks. People whose immigration status meant they weren't sent the checks. People who didn't file for UI because the system is complicated. People that were eligible for a check but didn't get one because the government couldn't track them down and they couldn't fill out the paperwork, et cetera. So there was a lot of suffering, a lot of heterogeneity, but on average, we did quite well. And even in distribution, we did quite well. Well that quite well came at a cost. This is the size of the fiscal response in different countries. There's a lot of difficulties measuring and comparing these numbers across countries. So I wouldn't... There are five different sources for this. They give you five different answers. I'm synthesizing them, relying on what I think is the best, and it tells roughly the correct story which is that the United States is a decent amount bigger than everyone else. Now that's, in 2020, we were closer to Germany, Japan, and the UK, but where we really differed was in 2021. We continued to add a lot more support for the economy at a time that others didn't. Now, the United States, this orange bar is the automatic stabilizers. That's what happens automatically with no one passing a law. You'll see that's smaller in the United States than most everywhere, except Japan. Europe, much more stuff happens automatically to help people in bad times than is the case in the United States. So we needed to actually pass laws to a greater degree than they did. This is also far and away the largest fiscal response we've done. This is the one I was involved with, or at least the second two bars there in the Obama administration. First one as an economist engaging in public policy. This is what we did now, to compare. So we've done a huge amount compared to what we've ever done before. We've done a huge amount compared to any other country. And it does look like it's gonna work and that we are on track to having GDP back to where it was at prior to the pandemic, by the end of this year, back to the trend line that it was on. It'll be back to where it was in the second quarter. So what's to worry about? Well, a lot of the debate has been around the question of how much slack is there in the economy. How much more room is there to continue to bring workers in and to expand out? The signals here, I think, are more confusing than people admit. In March, 2021, the unemployment rate was 6.0%. That compares to 3.5% before the pandemic. That's the standard measure to look at when thinking about how much slack an economy has. And when you look at the unemployment rate that says not a lot of reason to worry about inflation, a lot of room to expand the economy by bringing more people back from the sidelines, and a lot more room to run. The labor force participation rate tells a confusing story. Prior to the pandemic, about 63.5% of people were in the labor force. Those are people who are in jobs or looking for jobs. Now it's more like 61.5%. And what's particularly striking is the unemployment rate has come down steadily. Pretty much every month it was lower than the last. Labor force participation has been flat. And in fact, labor force participation rate now is a little bit lower than it was over the summer. You have never really seen that before, that the unemployment rate falls steadily and the labor force participation rate is flat or if anything, falling. So what's that telling us? One thing it's telling us is maybe the economy is not good enough to convince people to come back into the labor force. And so, there's a lot more slack. And once we bring all those people back into the labor force, there's a lot more room to run. That's the optimistic narrative. A middle narrative related to that is then you need to control the virus, 'cause people are afraid of the virus. You need to reopen the schools, 'cause people, especially mothers with children, have seen even larger labor force participation declines than I've shown here. There's another story that people are getting more money from being unemployed than working. The majority of the unemployed are getting more from being unemployed than working, that they don't wanna come back. That some people retired early and they're gonna stay retired. And some people have just been scarred in some way and aren't gonna come back to the labor force. But this says lots of slack. This says, not clear if it's supply or demand, people that don't wanna work or people that do wanna work. There's two other measures that are interesting that an economist would often look at to ask how much slack there was in the labor market. And that looks at the flows data. The openings rate is a record high. There are lots and lots of job openings, the likes of which we've never seen before. And this was in February, by the way. There may have been more of them in March, although more people took jobs in March. Another one is the quits rate and the quits rate is a near record high. These numbers are what a labor market looks like when it's quite tight, when people feel confident that there's another job for them, so they're willing to quit their job, and when lots of jobs are open. If this is telling the correct story, then labor markets were tight in February. They're even tighter in March and probably gonna get a lot tighter in April, May and June. And so if you believe these numbers, you're gonna be quite scared. Personally, I place more weight on the first set I showed you, especially the unemployment rate, than I do on these flows. We're opening up the economy in all sorts of weird ways with mismatches between supply and demand, between sectors, between what workers are available. But, I don't have the confidence in that slack and in that lack of inflation that some have. But Federal Reserve Chair Powell yesterday, in his press conference, wasn't really angsting about pictures like this. He saw every piece of data going one way. I think different data are going different ways, and keeping an open mind is important. So partly summarizing and partly adding some to this part of the discussion, which is about, really, the short-run outlook, the U.S. economy in 2021 and 2022, the big questions are how much will supply increase? I'm an economist, so I'm obligated to frame everything in supply and demand. So, how much will supply increase? Will workers wanna return to the labor force? I hope so. I think so, but who knows? We haven't gone through something like this as a country, at least in this form. Will there be jobs for them when they return? One fear is that employers don't need to bring back as many workers as they used to have. Wages have stayed quite high for people who have been employed in the pandemic, that may make employers reluctant to increase hiring. And more automation, more working from home, et cetera. And then when we come back, will the economy have higher productivity than it had before? A lousy restaurant went out of business and a wonderful one took its lease, and so now we have better businesses than we used to, creative destruction? Or will there be scarring, missed out on a year of investment, a year of R and D, and the like? All in, I'm mostly optimistic on this, but I'm not sure. The second question, how much will demand increase? If we had the normal multipliers we associate with fiscal stimulus, the economy would be several percent above its potential by the end of this year. Could easily be 5% above its potential at the end of this year, if you had the normal multipliers. Now, there's a lot of stories one can tell about people saving the money and not spending it, people spending it on imports so it doesn't overheat the economy, pent up demand. You tend to see that in the good sector, not the services sector. You don't go and get twice as many haircuts in 2021 'cause you missed all your haircuts in 2020. So pent up demand is more a, you didn't buy a car last year so you buy one this year. The main thing people missed out on was services. But do they take extra vacations? Do they eat out more frequently? We don't have any evidence to go on. Your guesses are probably as good as mine. So if supply increases less than demand, that could mean a decent amount of inflation. So you need to be basically optimistic that supply will recover, people will go back to jobs and there will be jobs for them or there'll be higher productivity. And you need to think low multipliers. And if you're optimistic about supply recovering and you think the multiplier is low, so you don't get a lot out of your fiscal stimulus, then things will be okay. I think either one of those individually is the more likely assumption. I think both of them collectively is decently likely, but it's an unprecedented experiment with expansionary monetary policy, expansionary fiscal policy, and a positive supply shock in the form of vaccines. And so, we'll have to see. Right now, the market expectations are in a pretty good place. This is reading the market's expectations for inflation off of tips. Partly this reflects risk premium, and one would need to adjust for that. If you look at the expectation of inflation over the next five years, so this is 2021 to 2026, that expectation has gone up a lot. Some of that's a risk premium. So the true increase in expected inflation probably doesn't go up as much as that line shows you, but it certainly goes up, even adjusting for that. The five-year inflation rate that the market is expecting, 2.5%, is decently high, but it's not inconsistent with the Fed. This is the CPI. If you look at the measure the Fed tracks, it's about 20 basis points lower than this measure. What's comforting right now is I don't think we should care very much if inflation is high for a year or two. What we should care about is if inflation expectations become unanchored, if people start to expect much higher inflation in the future, because that can have a self-fulfilling, self-reinforcing dynamic. And that's something that could be very costly for the Fed to try to correct. If there's one number I'd look at for inflation expectations it would be the five-year, five-year forward inflation rate. That's basically the inflation rate that the market expects from 2026 to 2031. Again, with some risk and other technical issues. That's telling a perfectly fine story. Inflation at around 2%, which is the Fed's goal. Inflation expectations similar to where they've been over the last 20 years. And yes, those expectations have gone up, but they haven't gone up nearly as dramatically as the expectations have for the next five years. You can look at a range of other indicators, and indeed, the Fed looks at a composite that's 21 different measures of inflation expectations and it tells a similar story that's closer to the blue line here than to the orange line. So, I think there is more of a chance of inflation than many think. I think there's more of a chance of higher interest rates than many think. But I still think the modal scenario is that we get lucky on supply adjusting, we get lucky on demand not rising too far, and so we end up with this scenario. Let me now pivot to thinking about the medium and longer term. A lot of what I've been talking about was what happened, what's likely to happen in 2021 and 2022 as a result of the fiscal stimulus we've already passed. The concern there, I'm not concerned about the debt associated with what we did. I am concerned that it might be too much debt all at once for an economy that can't handle it. Or too much demand all at once, to speak more precisely. That is, I think, a separable issue than the medium term. This is the medium term outlook for the federal debt held by the public. World War II, we ran up a lot of debt in the United States and then it went way down. Here, we ran up a lot of debt in the financial crisis, we ran up a lot of debt with COVID and it's not expected to go down. It's expected to level off. How worried should we be about how high this is? How much of a problem is it? I am relatively dovish on that. If you told me the debt was gonna stabilize at 125% of GDP, possibly even at 150% of GDP, I'd be pretty serene about that. And the reason I'd be pretty serene about that is that interest rates are so low. Interest rates have fallen steadily for 40 years. Interest rates are projected to rise by CBO. The market is expecting them to rise, not quite as much as CBO. I think four is perfectly conceivable for the ten-year treasury rate, but even that would be relatively low in historical perspective. And these low interest rates are telling us a few things. One is, from a macro-economic perspective, these interest rates are dangerously low. This is why the Fed keeps ending up at zero interest rates, why monetary policy has had a hard time doing as much as it needs to to support the recovery, the financial crisis in this time. And so, we'd actually be better off with more debt and a higher equilibrium interest rate. That would be a healthier mixture for the economy. The other thing low interest rates are telling you is that the debt is more sustainable. Larry Summers and I have written a paper where we argue the right metric to assess the debt is not looking at debt as a share of GDP, but looking at debt service as a share of GDP. A mortgage is affordable or not affordable based on whether you can make the monthly mortgage payments, not based on the total face value of the mortgage. The United States doesn't need to pay its debt all in a single year. We can pay it off over time. And the ease or difficulty of doing that depends on the debt service. Well, here's where we are right now. Debt service, this looks very different than the debt picture I showed you. This is a much more optimistic picture, because debt service is quite low. The debt's gone up, but interest rates have gone down. It's expected to fall further and then start to rise again. Now, I don't think we have infinite fiscal space. This will keep rising and rising and rising. So adjustments are gonna need to be made. There's only a finite amount that we can do. And so, in my judgment, we have more fiscal room now but we don't have an unlimited amount of fiscal room. And so you have to ask really tough questions about how much can you pay for things, and what do you wanna prioritize? And I'll end on this last slide, the Biden agenda going forward. And I'm happy to talk more about it in the Q and A. Which is, first thing to notice is that his spending over the next 10 years exceeds his tax increases over the next 10 years. I'm fine with that. I think we have enough space for a trillion dollars of additional debt over the next decade, provided the money is being used well. And I think some of the money is, and some of the money isn't. But this is, by the way, $1.2 trillion over a decade, that is much, much smaller than the $5 trillion we just did over the last year, $3 trillion of which is this year. So all the overheating inflation, I wouldn't worry about it with these numbers. This is over 10 years, it's basically $100 billion dollars a year. Tiny compared to the $2 or $3 trillion we did this past year. So the first thing to say is, I think there's room. The second thing to say is, I'd be happy if he got all of this. Well, I don't love all of it. I don't love all the manufacturing money. I think the green investments, some of them are good. Some of them are windfalls to subsidies for me to buy an electric car that I was gonna buy anyway. But a lot of it's good. I think, to me, the poverty and paid leave and the education, which were announced yesterday in the American Families Plan are the ones with a higher economic return, a more guaranteed economic return, more sort of idiot-proof in the way they're implemented, in that it's hard to go wrong with them. The infrastructure, you can go right with, but you can also go wrong with. We can talk more in the Q and A, the corporate tax increases, towards the high end, but are, broadly speaking, I think, fine. Would bring our rates above where partner countries are, but not well above. And there'd be some international mechanisms to allow the difference. The tax enforcement proposal, incredibly exciting, incredibly important. Capital gains, I think the rate should certainly go up and step-up basis at death should end, and other individual, the biggest one there being just raising the top rate to 39.6%, I think is perfectly fine. So this is an agenda that I think we should evaluate less in terms of inflation, overheating, and deficits and more in terms of are these good, high-value investments or are these wasteful and unnecessary investments, or are they counterproductive? I think most of it does pretty well on those scores, but not everything. So that concludes what I had to say. This was very American-centric, other than the opening, there. Happy to also talk about the situation in other countries. A lot of what I said, I think, applies around the world. But some of it, there are some differences.

Mari Megias:

Great, well, thank you very much. Now we're going to open this session up for your questions. To ask a question, please use the virtual hand-raising feature in Zoom. And, in true Kennedy School fashion, keep your question brief and end it with a question mark. Also, make sure to unmute yourself before you ask your question, and let us know your name and your Kennedy School affiliation. So I'm gonna start things out by asking a question that was submitted earlier by Helena Garcia, MPA/ID, 2010. And that question is, although many recovery plans are toted as resilient, green, just, et cetera, in reality, we don't see a big shift from business-as-usual intervention. How can we effectively leverage economic recovery packages to meet our climate change ambitions, especially given the fact that the next big crises will arise from climate change impacts?

Jason Furman:

That is the single easiest economic question to answer and the single hardest political question to answer. A carbon tax is 85% of the economic answer to your question. Carbon tax isn't everything. We still would want to invest in R and D. I think there's still a role for technology forcing regulation, and the like. But a carbon tax sends a message to everyone: figure out how to use less carbon, figure out how to invent things that use less carbon, figure out how to produce electricity that uses less carbon, et cetera, et cetera, et cetera. Politically, that right now is not in the cards. There's a disappointing half to that, which is Democrats believe in climate change, but many of them have come to believe that a carbon tax is some type of neoliberal, market-based, terrible solution and it won't solve the problem. That's a mistaken idea, and quite unfortunate. And then Republicans, if you look at elite Republicans, economists, former secretaries of state, those types, they support a carbon tax. In fact, the American Petroleum Institute supports a carbon tax. Too low a level, but it supports one. Elected members of the Republican Party, though, to a person don't, and to a person are... Or, not to a person, but are generally skeptical of climate change also. So I think what we have to do is make progress in any way we can. The Biden proposal I'm most excited about is what's called the Clean Energy Standard, which would require, ultimately, I believe, in 2035, zero emissions from the power sector. And it would do it through a cap and trade carbon tax type of system. They haven't fully spelled out how it would work. That's really important. It's tricky to do that politically and to do that under the reconciliation rules in the Senate, but I hope that's a top priority. I think some of the regulations and subsidies would help, but I agree with the thrust of your question that they wouldn't help nearly enough relative to the problem that we're facing. And so, I'm hoping that attitudes change on this as quickly as they changed on the topic of gay marriage, and what went from unimaginable one year, within two or three years went to obvious and the law of the land. But this might be harder.

Mari Megias:

Great, thank you. Let's go to our next question. I think it looks like Daniel Cunningham is up next.

Daniel Cunningham:

Yeah, Dan Cunningham, MC/MPA, 2016. Two questions, professor. By the way, a great presentation, I enjoyed it very much. Capital formation, as long as I can remember, has not really been a problem. There's been a lot of talk about, well, we've gotta do capital formation to support that. And it just seems like another never-ending course of that, but it's been getting a little bit fainter until a few days ago. So I don't think capital formation has been a big problem. But with the tax proposal, unfortunately, it's not completely explained, but 44%. Are we gonna be having a capital formation problem, a big problem with capital formation, over the next, say, in five or 10 years? And I'm also, since you were giving opinions and they're very thoughtful, one question I have is, how important, in your opinion, from the presentation today, is it to think through what we're going to do so that we get the best return on public investment before we move forward and use, basically making large investments on possible technologies going forward as a form of stimulus? What are your thoughts of that yin and yang on that?

Jason Furman:

Great. First question, private investment, cost of capital has not been a constraint on private investment. The main constraint on private investment has been, are there profitable opportunities to invest in? And so, tax measures like the Biden proposals that raise the cost of capital, I don't think will have a particularly large effect. I'm aware of three estimates of them. Two were done by conservative groups, the Tax Foundation and some economists at a university in Texas. And the third was done by the Penn Wharton Budget Model, which is a excellent set of modelers at Penn. They all find that the proposals would reduce the growth rate by less than one 10th of a percent per year, the tax proposals by themselves. So instead of getting growth of 2.1%, you'd get growth of 2.05%, and you would never really notice it or know the difference. Those are people who were prone to find large effects. I'd do some things to tweak them on the business side. I'd be happier if we added expensing and made that permanent as an extra incentive for businesses to invest. And if the capital gains rate ended up lower than what they're proposing, but higher than where it is now, I think that would be a perfectly fine place for it to end, as well. In terms of public investment, there's not a short answer to your question, except you have to keep asking your question every time you're doing anything with public. And some of it is, we had a proposal I liked in the Obama administration that some your highway funding would be contingent on setting up a state cost benefit office and using the cost benefit analysis and allocating the money. That some of their money is contingent on land use reforms, which I think are quite important and quite good. Some of their proposals are really thoughtful. Undoing some of the highways that have bisected our cities and destroyed neighborhoods. We've already done that in Boston, very expensively, over a long period of time with the Big Dig. And there's a racial justice angle to that, as well, that the administration has rightly emphasized. That was a proposal that I wish we had made and thought of. I was doing our infrastructure policy in the Obama administration and I hadn't thought of that issue. So I think a number of other things are thoughtful. The emphasis on rail is good. But infrastructure, buses are often better than trains and maintenance is often better than building new stuff. But everyone loves trains and new stuff. So there's a set of biases, too.

Mari Megias:

Great, thank you for that question and answer. Let's next go to Susan Irvine.

Susan Irvine:

Hi Jason. This is Susan Irving. I've been everything at the Kennedy School except an administrator. My question has to do with, as you know, at GAO, we've been ranting about the unsustainable fiscal future since we were worried about deficits in three digits, small three digits. But my concern, my question for you has to do with the use of debt service as a share of GDP as the measure of fiscal space. I understand the concept, but given the size of our debt, our relatively small change in interest rates on federal debt could have a huge hit on the federal budget. And it is, after all, the only thing that does squeeze out anything else, we pay it first, at least assuming we have any sense. So I'm wondering, then, how you think about that, if you completely give up debt to GDP as a measure or whether you look mostly at the rate of increase of debt to GDP, along with debt service, it's that interaction has me a little concerned about using only debt service. Thank you.

Jason Furman:

Great, and it's great to hear from you. That's a fair question. I would give you a few answers to it. One is, I am 100% sure that using debt to GDP and using the way that we used to think about the numbers is wrong. I'll give you an example from Europe that I think is even clearer. They came up with the Maastricht Criteria. In 1992, they were released. And in 1992, they said the debt couldn't be more than 60% of GDP.

Susan Irvine:

Yeah.

Jason Furman:

When they came up with those criteria, the interest rate was 9% in France. Now the interest rate is basically 0% in France. The interest rate may go up in France, but it's not gonna be, or it's unlikely to go up to 9%. And so, Europe needs a higher number than 60%. It should not be trying to get back to 60%. So if what you wanna make of my observation is that you're still gonna look at debt to GDP, but you're going to periodically update the threshold at which you start to get worried, that's fine with me. Second thing I would say is, Larry and I were of the view, based on looking at a lot of countries, not just the United States, that we wanna make sure this stays below 2%. And there's a lot of margin there. The interest rate could be 4% instead of 3%. We're actually in this simulation, even as we-

Susan Irvine:

What stays below 2%?

Jason Furman:

What?

Susan Irvine:

I'm sorry, what?

Jason Furman:

GDP.

Susan Irvine:

Debt to GDP stays below 2% or-

Jason Furman:

Interest payments, sorry. Oh, I know what you're looking for, interest payments below 2% of GDP. And so, there's a lot of room still for higher interest rates, for growth in the future, et cetera. So I'd be conservative about how I approach the threshold. And then the last thing that I think is a good thing about interest payments as a share of GDP as a metric is they force you to be iterative, rather than thinking there's a timeless truth. If the market's telling you to be more worried because interest rates are higher, it forces you to do more to be fiscally responsible. If markets are telling you, actually, there's a really big problem with low interest rates, it gives you more permission to move in the other direction. So I think some freedom-

Susan Irvine:

Oh!

Jason Furman:

In the system, in a way, is good, but you definitely need to smooth it, be conservative, look forward and do all those things, 'cause you make a valid point.

Susan Irvine:

Because my concern has been less the level of debt to GDP, although we make a big deal out of the World War II number, then the fact that the idea that it constantly increases, that is, by definition, it shouldn't increase faster than the wealth supporting it. But that's not the same as picking a target. I mean, I've carefully... Luckily I work where I'm not allowed to pick a target, so I don't have to.

Jason Furman:

I now am looking at the chat and seeing that you're in the original MPP cohort. So that's-

Susan Irvine:

Well, I was in the fourth, the fifth year.

Jason Furman:

Well, good for you.

Susan Irvine:

There were 25 of us. And, no insult to you, but my economics professor was Tom Schelling.

Jason Furman:

Excellent.

Susan Irvine:

But my husband, it was the year before, got Howard Raiffa, as well. So, what can I say?

Jason Furman:

Yeah, so I guess I'll say one last thing and then I'd love to even talk to you more about this, which is just, yes, the debt needs to stabilize. The problem is that doesn't answer the question, does it need to stabilize at 125% of GDP?

Susan Irvine:

No, I get your point.

Jason Furman:

200% of GDP or 500% of GDP? We need some way to answer that question and debt surface helps us answer that question.

Susan Irvine:

Great, thank you.

Jason Furman:

Thank you.

Mari Megias:

Thank you, yes, thank you, Susan, for that question. Next, we're going to go to Frank Weil, if you are on the line? Yes, you are. Hell, Frank.

Frank Weil:

Can you hear me?

Mari Megias:

Yes, go ahead.

Frank Weil:

Jason, your colleague, Larry Summers, whom I assume you speak to with some regularity, has somewhat of a different view, as you know, about risks of too much inflation. Assuming he's right, which I do not, necessarily, I'm closer to your thoughts than his, but it happens, what's the remedy?

Jason Furman:

Good question. First of all, it depends on whether it's a transitory increase, in which case we don't need to worry, or a permanent increase, in which case we might be more worried. There's one view, which is that the Fed can engineer a soft landing. Larry's overstated his argument that every time they've tried to do that, they cause a recession. There are several soft landings, of which, 1995, '96 was one and, arguably, in the middle of the last decade, too. So I think they can... I think they have room. I'm not sure they can do it. I think they maybe can. But it would make me nervous. I'd rather not be there. My own view is that the inflation target is too low. That we set the inflation target at a time when real interest rates were a lot higher. And so, nominal interest rates were a lot higher. It's unhealthy how low nominal interest rates are. And so, we'd be better off with an inflation target that was more like 3% than 2%, or an inflation target that was arranged, arranged like 2% to 3%. And so for myself, the Fed has said they're gonna update their framework in a major way every five years with public content, et cetera. If inflation got up to 2.5%, 3%, I'd argue maybe keep it there rather than try to bring it down. Now that raises a challenge once you've raised your goal from 2% to 3%, will people believe that you're not gonna raise it from 3% to 4%? And then if you raise... Will people now believe it goes to 5%? The Fed is way more credible than it used to be. I think it has decades of hard-won credibility. I don't think it gives that up overnight. Finally, possibly there could be a fiscal solution, raising taxes or cutting spending and net deficit reduction but I'm extremely skeptical that Congress would or even should be the body that tries to control inflation.

Frank Weil:

Leaving politics aside for a second, it seems to me, it might... A larger world who's not able to sit in on sessions like this would benefit from a discourse between you and Larry on this point. I think an awful lot of people are quite confused, that I talk to.

Jason Furman:

Yeah, no, Larry and I talk a lot, as you as supposed. And I think he's an important voice in this debate and I worry that there's just too many people making the same points. And some of those points, I think, are correct, like the unemployment rate is high. And some of those points, I think, are neglecting important data, like ignoring the openings rate that I showed you. And so I think collectively, we'll get a better answer if we have an ecosystem in which people can raise questions and raise challenges. And I think, this is just a separate lament in general, that we are in a world where if you say a certain type of thing, you get rewarded, you say another type of thing, people come down on you like a ton of bricks. I don't know that Larry's minded the attention, but very few other people would want to endure the amount of abuse he's gotten from making his arguments. So I don't think he's... I think he's probably not right, but I think it's really important to create a space to look at, have all sorts of dissents so that a better truth can emerge. And I worry we're shutting some of that off in our universities, in general. But that's a another rant I won't do for now.

Frank Weil:

We agree.

Jason Furman:

Great.

Frank Weil:

Thank you.

Mari Megias: 

Yes, thank you very much. Now let's go to Matthew Marinaro.

Matthew Marinaro:

Thank You, and thank you for your time, Dr. Furman, very good presentation, privileged to be with you. I'm an MPA, '20, so a recent grad. My question is whether you think, or whether you'd think there's merit to the rebuttal, that raising capital gains taxes runs the risks of either stymieing innovation or entrepreneurship in a way that sort of erodes at the American innovation aspirations over the next five to 10 years, let's say. Thank you.

Jason Furman:

Wait, I'm sorry, that erodes what? Sorry, could you explain that a tiny bit? I should...

Matthew Marinaro:

Yeah, apologies. Sorry if I lost you. My question was just around capital gains.

Jason Furman:

Oh, yeah, okay.

Matthew Marinaro:

A lot of the people that push back say something like, "It's going to stymie innovation."

Jason Furman:

Okay, got it, innovation, yeah.

Matthew Marinaro:

Yeah.

Jason Furman:

Okay. So there's been two debates about capital gains. One is, when you raise the rate, you get more revenue. Now, for most taxes, the answer is easy. If you raise the top individual income tax rate from 37% to 38%, I'm very confident you get more revenue 'cause people don't change their behavior that much as a result of that. Capital gains taxes, people do change their behavior. They don't realize gains. They do more like-kind exchanges. They do other things. A lot of that you can do because you get step-up basis at death. And so, I think if you raise the capital gains rate by a percentage point, you get more revenue. I think if you did no reforms to capital gains and you raised the rate to 43%, you'd potentially lose money because you'd tax gains at a higher rate, but there'd be fewer of them because people would avoid making those gains because they wanted to avoid paying the taxes. Now, Biden is proposing a really important reform, which is at death, you don't get step-up basis for your capital gains. Instead, death would be treated as a realization event. That greatly reduces the incentives to shift gains from... To delay realizations. And so I think his proposal would raise more money. And in fact, the career staff at Treasury have estimated it, and those are people with impeccable credibility. And I can tell you from experience, they could care less what the political people want the answer to be. They give the answer they think is correct. So you get more revenue. Then the question is, at what cost do you get that revenue? I think it's a bit of a cost. There's a benefit, by the way, getting rid of step-up reduces lock-in of assets. So that's actually a good thing. But the higher rates will discourage some investment, will discourage some innovation. I don't think they'll discourage a lot, especially if the rate doesn't end up going all the way up to what it's been proposed. And so then the question is, do you use the money for something good? If you use the money for something great, then it's a great thing to do. If you waste the money, then we just caused a small problem for no good reason.

Mari Megias:

Great, thank you for that. As a reminder, if you'd like to ask a question, please use the virtual hand-raising feature. So I'm going to ask a question that Susan Baker, MPP, 1994 has submitted, and that is, our post World War II debt to GDP went down because of growth. Beyond 2021 and 2022, do you see that kind of growth? Are you seeing trends and productivity that would support stronger growth? Once kids are back in school, could the telework step change for workers help drive higher productivity growth?

Jason Furman:

Great question, and would separate out two things. I think it is very... You are right that after World War II, we brought our debt down as a share of the economy. We did it without running budget surpluses. We continued to run budget deficits, but our growth rate was so fast that we outgrew our debt. None of the forecasts envision that happening. It would take considerably higher GDP growth. And if we got higher GDP growth, we'd also probably get higher interest rates. And so, I don't think we're gonna get enough growth to grow out of our debt. But I think we might get more growth, for the reasons you said. What we've learned about teleworking, how we've learned to be more efficient, and the like. Now, I'm not positive whether that's a good or a bad thing. I think it's probably a good thing 'cause it means we can have a higher level of output. It also means we can have the same level of output with fewer people. And so, it might be that businesses don't wanna hire as many people back. And we end up with an economy where people have higher wages but there's fewer of them employed and they have higher productivity. And so, they're producing at a high level. And that is a scenario that I'm a bit nervous about. I think the solution to it is things like investments in education, not trying to not have the productivity growth. Although, I'll always take a productivity growth when I can get it. But that'll be one of the big questions to watch over the next couple of years.

Mari Megias:

Great, thank you very much. So one question that had been pre-submitted earlier was what impact do you expect the extremely expensive monetary policy will have on future inflation for the U.S. economy?

Jason Furman:

Yeah, so, to some degree I've addressed that, which I think you said it was submitted in advance, so the person wouldn't have known that. But I'll summarize. My expectation is that we could see inflation of, and I'll put numbers on it, 2.5% over a year, then 2.3%, and taking a while to get all the way back to 2%. That would be my modal expectation. What I think, though, is that there is a huge amount of uncertainty around that. And anyone who's giving a confident forecast is somebody that somehow managed to live through a huge pandemic, huge fiscal stimulus, and a huge shift to a new dovish framework for monetary policy, and studied it carefully so they know what's gonna happen. Which is to say, no one knows the answer to it. And I think there's probably more risk that inflation goes too high than that inflation is too low. And then the question is, can you deal with that relatively costlessly, or not? By the way, I see another question in the chat, which was from Steven. So I'm happy to-

Mari Megias:

Yes, yeah, go ahead and take that one.

Jason Furman:

Okay, great. Which, Steven asked, for the participation rate, does it include people on unemployment? If so, could the extended and increased benefits help explain why the rate is flat? So the answer is, theoretically, you can only get unemployment insurance if you're looking for a job. Now that requirement has been waived to a decent degree, but that's how it's supposed to work. So in theory, the people on unemployment insurance should count as unemployed, not out of the labor force. I think in practice, your hunch is probably right, that some of the people who are out of the labor force are out of the labor force 'cause they're on unemployment insurance. And these benefits expire in early September. And so, if they don't get extended or don't get extended anything like the level they're at now, then it might be that people are spending the summer not working and they expect there'll be lots of jobs still in September. That's probably a good bet. And they end up getting them and this was an uncomfortable couple of months, but it all works out fine. I would rather have us have done a lower unemployment insurance benefit and tapered it so people had a predictable thing. $300 this month, $200 next month, $100 next month, then $50, and so know that you have this incentive to get yourself back into a job sooner. But it might be that everyone will eventually end up back in one, who wants one.

Mari Megias:

Great, so we have time for one more question, and we're gonna call on Tony Morris, now, if you could... Yes, unmute yourself, thank you.

Tony Morris:

 Hi Jason, thank you for your remarks. They're thought-provoking. I wanna ask a tax policy question, because it was stimulated by an earlier one. Some people believe that economic returns in the U.S over the last three or four decades have disproportionately gone to capital versus labor, leading to some of the inequalities that we're seeing now. My question, first of all, would you agree with that? And second of all, are there ideas that you would like to suggest or plant with this audience about thoughtful or maybe doable ways to rebalance that, the return, so that labor participates more appropriately, as I would argue. I do believe that the case is that returns have been disproportionately split. So that's my question. Is it true, do you agree? And are there some ideas to plant with this audience about how to deal with that? Thank you very much.

Jason Furman:

Yeah, great question. So there is been a large increase in inequality, where high-income households have gotten a lot of the benefit of the growth, and middle-income households are better off today than they were 30 years ago, but at a much slower rate than the improvements were before that, and at a much slower rate than the improvements have been for high-income households. So I broadly agree with your premise. I'd have a tiny thing that I'm a little bit less hung up on labeling it capital and labor and a little bit more on high-income versus middle and low income, in part because there's just a lot of ambiguity around people's businesses or a high-income person, or as a CEO, is that capital income or labor income? So it's hard to put labels on the capital labor income. There's a lot of debate and measurement issues around it. But the high income versus low income, which is, I think, the important point, anyway, I completely agree. Ideally, I'd like to reform the tax code. And some things we could do could increase efficiency and growth, like depreciation, expensing, and the like. Some would have some small trade-off for economic growth, in terms of how the revenue is raised, but then we could use it for something that was really positive, like investments in children. The Biden proposal is not really a tax reform, it's more of a, here are eight different ways to raise taxes. I think that's fine. That's fine with me. It would be my second choice, but it's way above the bar. And then there's what you do with the money. And for me, almost anything that has a child attached to it is going to be good. I'm happy to have a debate as to whether that should be a child tax credit or preschool or childcare or children's health or housing vouchers for families with children or nutritional assistance, et cetera. Probably the answer is we should do some combination of all of those. And other things, like expanding the earned income tax credit to give people more of an incentive to work and more of a reward for work, as well. And a lot of those ideas are also in the Biden Families Plan. I think these ideas really draw on what a lot of economists and policy analysts have been working on for a long time, including at the Kennedy School.

Mari Megias:

Great, thank you so much. And thank you to everyone who called in to listen to this Wiener Conference Call. Special thank you to Jason Furman for offering his expertise to everyone today. So join us for the final Wiener Conference Call of the academic year, which takes place on June 9th with Sandra Susan Smith. She will discuss criminal justice policy in the United States. Thank you to everyone, and have a great rest of the day.