Transcription
It's been an especially eventful 25 years, from Y2K to the great financial crisis to the pandemic, giving us a lot to adjust to and learn from, starting with profound changes in the economy. Our colleague Michael McKee starts us with an economic overview.
- We are fortunate to be alive at this moment in history.
- Unemployment was low. The economy was booming.
- Never before has our nation enjoyed at once so much prosperity and social progress with so little internal crisis.
- Trees don't grow to the sky, and, at some point, there would have to be a reckoning.
- We're in the midst of a serious financial crisis.
- Everybody's house was probably overvalued. Anybody who had a mortgage might have a mortgage problem coming up.
- Today does mark the beginning of the end.
- By the time we got to the American Recovery Act, it was a question of what would it take to get people spending again and businesses investing again?
- The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected.
- We got to 2015, and you still had problems because we had a manufacturing recession then brought about by the collapse in oil prices.
- The wealth of our middle class has been ripped from their homes and then redistributed all across the world.
- A lot of Americans suffered because the factories went away, the businesses went away, and that gave rise to the MAGA movement.
- Make America great again.
- In 2019, things had started to look better. The unemployment rate was very low. Growth was picking up, which is the irony of the pandemic.
- Today, I am officially declaring a national emergency.
- COVID did shut down the economy and it shut it down very fast. And we saw that in the largest unemployment rate since the Great Depression.
- First is providing checks in pockets and shots in arms.
- Inflation started to take hold, and then an inflation psychology started to take hold.
- We're very strongly committed to using our tools to get inflation to come down.
- It is a situation now where everything seems to combine to make people feel more nervous and more unhappy about their situations.
Westin: When it comes to the economy, we always start with the numbers. And for the numbers, we often turn to Torsten Slok, chief economist at Apollo, with the help of people like Harvard's Jason Furman to interpret those numbers for us. The first 25 years of the 21st century have been eventful for a lot of us, but particularly for economists. Looking back at the year 2000 now and where we are today, what's the biggest change or surprise you've seen?
- See, the thing I'm most surprised about is that the interest rates are so low, despite the budget deficit and the debt being what, to my 2000 eyes, would have been unimaginably high.
Westin: So what accounts for that, do you think? What do you think we got wrong and what we would have anticipated?
- Look, in 2000, I was working in the Clinton administration. We balanced the budget 3 years in a row. We were on track to fully pay off all the debt. At the time, I believed in that and thought that was good and important. Turns out, I think we had a lot more room for borrowing than we ever appreciated at that time.
Westin: We're certainly spending when we need to spend it. Are we saving it when we need to save it?
- Yeah, look, I think we spent too little in the financial crisis. I think we spent too much in COVID. Those were both hard calls to make in real time. It's a much easier call that we shouldn't be running $2 trillion deficits in a year when the economy is growing perfectly fine.
Westin: We have seen a growth in income and wealth inequality. To what extent is that attributable to some of the things we felt we needed to do to stimulate the economy? It tended to go, I think, to the people who had capital and not to people who did not have capital.
- I put the last quarter century in context of the last 3 quarter centuries. And if I had to rank them, the best one in terms of inclusive growth, strong economic growth, broadly shared, was 1950 to 1975. The worst was actually 1975 to 2000, where we had much slower economic growth and an enormous widening of just about every way to measure inequality. The story from 2000 to 2025 is a little bit more complicated and nuanced. There were some facets of inequality, like wealth inequality, have risen. Other things like wage inequality has actually been falling for more than a decade now. There's been stronger wage growth for the median household than there was in the 25 years before. And so the story is actually a little bit more positive for the last quarter century than it was in the quarter century before, just not as positive as it should and could have been with the right policies.
Westin: Torsten, looking back over the first 25 years of the new century, let's talk about some major themes, one of which is inflation. We thought it was all gone away and then it came back.
- Well, for a very long period, the whole research agenda and also the statements from the Federal Reserve was that inflation was not quite at two percent. It was 1.8, 1.7, and so much time was spent in financial markets thinking about how can we get inflation up by that 0.1, 0.2 percent more. And obviously that changed dramatically when we found out that inflation was not dead in 2020. So what is a very important feature of what has happened in the last 25 years is that inflation can come back under certain circumstances. And this becomes very important when we look into 2026, namely, are the circumstances still here for inflation potentially to begin to move higher next year?
Westin: Which leads us to what were the larger forces that kept inflation down and have they gone away?
- Well, a very important force that was keeping inflation down was globalization. It was the case after China entered the WTO 25 years ago that goods were coming out of China and was holding goods prices down. At the same time, immigration globally also went up. That also meant that the cost of labor and wage inflation was also held down. So those forces were weighing on inflation for literally two decades after 2000, because we saw inflation, therefore, simply not move much away from 2 percent. COVID again has, of course, been moving upward pressure on goods prices. And now, more recently, when we've had restrictions on immigration, we've also begun to see more upward pressure on wage inflation. So that's also, therefore, beginning to become an issue looking into next year.
Westin: De-globalization and restriction of immigration could drive wages up. On the other hand, artificial intelligence seems to be on the brink of really making a difference the other way.
- That's true. So AI is, of course, also a very important development over the last 25 years. We have certainly seen some very significant technological advances. We've not quite yet seen that show up in wage inflation or even in the unemployment rate. So therefore, there's a lot of discussion about data centers, AI, large language models, voice recognition, etc. But, at the end of the day, we're not quite yet seeing the productivity gains in the dramatic way that is holding inflation down.
Westin: One of the big developments in the last 25 years has been ways that the U.S. and European economies have diverged. Stephanie Flanders, Bloomberg's head of economics and government, explains just how differently they've developed.
- At the beginning of the century, you would have said the big project that the European countries were embarking on was the single currency and a much broader single currency, a much broader collection of countries joining the euro than had previously been anticipated. And there were lots of risks in that. And we can talk about how they managed that. But I think it's fair to say that ended up being a lot of other things on their plate. And we saw this financial crisis. We saw COVID. And these were crises that in different ways, I would say the European governments did not always respond too well. But they did, you know, as one senior policymaker said, you know, European governments do the right thing when they're all on the window ledge looking down.
Westin: The euro was a very big move. It came under a lot of siege over the last 25 years. I mean, certainly the great financial crisis put everything under stress. But then we also had the... I'll call it the Greek crisis when there were people literally speculating the euro might not survive.
- I would say in the first few years of the euro, there was a kind of false calm and a sense of great, you know, achievement on the part of European leaders that turned out to be also complacency. They were all borrowing at the same rate almost not taking into account those differences. And ultimately, the imbalances that were caused by that was why you had not just the crisis in Greece, but actually a broader Eurozone crisis. But I would say it's a game of two halves, because the second half, the years since the global financial crisis and the Eurozone crisis have been, although they were very painful for countries like Portugal, Greece, Spain, Ireland, they've also... that period of crisis and adjustment has produced some convergence.
Westin: Are you moving toward something beyond convergence, into really coordination on the fiscal side?
- Very slowly, David, I would say we are moving in that direction. And we've seen a little bit more flexibility on that front from German governments in the last few years. But, boy, that has been a very slow process. And I think it is still an area where the politics has yet to really catch up with the economics.
Westin: The history of the EU has been getting bigger for the most part for a good long time, with one notable exception. It got smaller in the first 25 years with Brexit. What has that done to the economy of the UK and of Europe?
- The deal the UK actually negotiated with the EU turned out to be actually a lot worse than I think any of us would have reasonably expected. We wouldn't have expected such an extreme version, a hard Brexit, as they call it. That has ended up, I mean, the estimates range from 5 to 7 percent of GDP hit at a time when, as you know, all European countries and certainly the UK have struggled to have very much growth. I would also say it's affected the capacity of the UK to respond and move forward in other areas, because so much effort and political energy was absorbed by that long period after 2016, after the referendum, trying to negotiate and then trying to pass a deal with the EU.
Westin: Looking forward to the next 5, 10, 25 years, what's the best case for Europe, if not entirely catching up, getting headed in the right direction in terms of closing the gap with the United States? And goodness knows, China.
- So, I mean, obviously, in recent weeks, we've had talk of, you know, civilization erasure, I think was in the Trump administration's national security strategy. I think we could probably dodge that. But I do think there's a serious kind of question of governability in some of the core economies. In terms of growth rates, I think your best case is sort of, you know, certainly no more than 1 percent, probably more in the kind of half a percent a year range.