[Music] Hello everyone. Thank you for joining us today. My name is Behzad Mortazavi, I'm the Dean of the College of Arts and Sciences at Syracuse University. I want to welcome you today's- to today's Arts and Sciences' Alumni Academy. Uh, the College of Arts and Sciences offers these Zoom talks as a way of letting alumni know of the great research and scholarship being done in the College, and in today's case, by our alumni. Today we're pleased to present Shocks, Crises and False Alarms: How to Assess True Macroeconomic Risk, and our presenter today is Paul Swartz. Paul is a senior economist and executive director of the Boston Consulting Group Center for Macroeconomics. He graduated from SU in 2005 with degrees in economics, accounting, and finance. Paul serves as the chair- as the vice chair of the College of Arts and Sciences' Dean's Advisory Board and I've enjoyed getting to know him in this capacity. Paul is co-author of Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk. I know this book has been a labor of love for him and I'm excited he's here to speak to us today. His work has also been featured in Time, The Wall Street Journal, Harvard Business Review, the World Economic Forum, Fortune, and others, and Paul frequently speaks about global macroeconomic developments with leaders, investors, and policy makers. I know we're all excited to get to today's presentation so with that I'll turn it over to Paul. [Paul} Thank you, Behzad. It's a great pleasure to be with all of you, um, friends and family and uh, fellow alumnists of- of Syracuse, and to talk- talk about a topic that's um, quite uh, near and dear to- to my heart: um, macroeconomics. So I'm going to show up uh, some slides that I'm going to walk through, uh, and for the next uh, half hour or so I'd like to sort of hit on three major- major themes that we we'll sort of walk across. First we'll take a tour of uh, what has happened over the last few years as a bit of an exercise in considering what we all have to go through digesting the narrative of macroeconomics. Then uh, pick up a tool set which is really the- the- what I call the "how" of our book um, of three good habits to try to better equip ourselves to engage with the dialogue about the macroeconomy. And then sort of put those tools to the test by picking out three case studies, uh, one which is more backwards looking, one which is more contemporaneous, and then a third which is a bit of a- a tactical and strategic conversation about where we see the macroeconomy going from here. And then there'll be some time for for Q&A. So to begin, um, I- the- the first section as- as I said is a bit of a look back. Where have we come from over the last few years and what have we had to digest? So we dial the clock back to 2020. The narrative was of a great depression. Uh, even in- as- as 2020 passed and the recovery started to take hold, stories of a next Great Depression were commonplace. Yet despite that, uh- the breadth, uh, speed and uh, completeness of the recovery was overwhelming. We move on to 2021. Uh, a new narrative take- takes hold of the return of 1970s-style inflation. Of a structural inflation that could deliver things like stagflation, uh, very high interest rates, uh, low asset- asset price valuations. Um, yet what happened was inflation soared and then came back down in a relatively healthy way. By 2022 monetary policy has tightened materially, in part because it- because of this story of inflation, and a new story has emerged: that we're on the cusp of a cascade of defaults, particularly in the emerging market, because higher interest rates are going to mean sort of a series of crises as a global economy laden down with debts is unable to- unable to cope. But what happened was the emerging markets actually outperformed developed markets, if I look at- on a currency basis, because the backdrop was different. How they'd handled um, things from a policy perspective were different than certainly the late 1990s. So again, a story of doom that didn't transpire. Um, what about 2023? The last- better part of the last two years: a consistent story of quote unquote "inevitable recession" was commonplace. There could be no soft landing because there was no way to bring down inflation without delivering recession. There'd be no soft landing because it was not possible to raise interest rates this quickly without the labor market cracking. But again, it was a very different reality. It was one of labor markets that stayed unusually healthy um, and the unemployment rate stayed very low despite a very meaningful softening in um, wage growth, a very meaningful softening in- in job openings, that allowed a soft landing to be largely accomplished if not all the way done. So if this is the world that we all have to live- live through of uh- a- of an incremental narrative that shifts from focusing on one crisis to the next and yet consistently not delivering - not because there aren't risks, but because it's sort of chasing the headlines - how can we better engage with something that matters to all of us: the state of the economy and how it- how it transpires? Well, our argument is: headlines aren't going to be your friend and forecasts aren't going to be your friend. Um, the chart on the right is- is worth taking a little pause on just to consider that if you said, 'okay, I understand the- the media has- has a bias for sort of salacious- salacious headlines, um, I need to focus on perhaps what the professionals say,' well, the professionals on- on Wall Street predicted a recession consistently over the last two years, in that every quarter was anticipated to be a sharp slowdown in growth. Despite that, you saw consistently strong growth, even accelerating growth, and it took almost two years for finally those forecasts to start to be updated. Um, so if neither of these things can be sort of your friend, what can you do? Well, obviously we- we think you should read the book. Um, we think there's a much more sort of pragmatic - a rationally optimistic take - for how to engage with macroeconomics; that is sort of a rec- a reclaiming of your own judgment, because these aren't sort of precise scientific things where you need a lot of technical expertise to deal with, you need a little bit of contextual knowledge and then a very broad-based um, and sort of open-minded approach to apply your judgment. So what is our- what is our sort of suggestions? We open up the book with three habits. Uh, first what we call "Reject Master Model Mentality." Second: "Discounting Dooms- Doom-mongering." And three: "Embrace Economic Eclecticism." Rejecting master model mentality is really an argument that you want to understand that the economic system is so dynamic, so radically uncertain, that it will never be predictable in a- in a- even with the most sophisticated of models. And um, rather than sort of anchoring on any one simple thing, or even one very complex thing. And we like to point out that this is not something that's been- that we're not- we're not inventing this. Um, a litany of- of very uh, well-known economists have argued this uh, for a long time. Keynes said "economics is not homogenous through time;" Von Mises said "there are no constant relations in economics;" and Hayek said "outright error to imitate the- it's an outright error to imitate the successful physical sciences." Economics um, has been sort of pulled towards a formulaic approach and then it spills out into the public dialogue as if- if you can tinker with a machine, when it's a really much more complex, much less um, prescriptive dynamic. And we like to tell a story where uh, when Hayek won the Nobel Prize in 1974, the Nobel Prize for Economics was a relatively new creation. And he came and gave this- this rather amusing speech where he said, 'well if you'd asked me, I would have told you- you should never create this prize. Because the prize will confer upon an economist more authority than any economist should project.' And I think what he really meant by this was, well, the person who wins the Noble Prize in Physics is not going to be asked about housing policy, or tax policy, or uh, any other- you- or financial markets, or interest rates. Um, but economists will be pulled into almost every um, every discussion - for good reasons - because their tool set is- is applicable when thinking about tradeoffs. But to anoint them with sort of a prestige of- of- sort of a- of- of the Nobel laurates, Hayek was arguing a sort of a mistake. And he said, 'okay, well maybe if -if we can't take it away, we can- we can make them all ascribe to an oath of humility.' Um, I don't think the oath of humility has taken off in economics, either, but we can be aware that when we see the prestigious um, accolated, very smart, economist on the TV, their knowledge is very particular or very narrow. Um, and what they're suggesting, or the topic they're talking about, is probably well outside of- of what they've been sort of awarded academic honors for. This is useful in thinking: 'okay, all of this stuff is idiosyncratic. All of this stuff is a one round game. And I'm in a place with- with a, you know, with a reasonable amount of knowledge to make judgments and sort of question this, rather than just accept what they're saying.' Well, our second good habit is is discounting doom-mongering. And you've already gotten a little bit of a preview on this angle from- from the headlines in- in- at the beginning of our discussion. And our argument is: okay, in reality, uh, whatever dimension we're talking about, there's a wide distribution of potential outcomes. But the conversation, particularly in the public discourse and in the media, tends to live at one end of the distribution and put an inordinate amount of focus on what could go wrong. There's some reason for this in the sense that you care about the things that could go wrong more than perhaps other pieces of the distribution, whether you're thinking about financial markets or whether you're thinking about sort of the- the consequences of when things go wrong. But our argument is that you shouldn't just focus on the possibility that something could go wrong, but rather you should think about what it would take for these things to go wrong and at the same time, you should consider the full distribution both on the upside and on the downside to have a more balanced perspective of risk. And it- I like the saying sort of: 'if you're not spending at least as much time-' or, 'if you're not spending a chunk of time considering how everything could go right, your imagination has been collapsed into a very narrow portion of the distribution.' Well, both of these first two habits are 'don'ts.' What do we suggest one should do? And this hasn't been seated this is- this is our argument, but in some sense this is a- this is just an endorsement of a liberal arts education. It's that you need to be well-grounded across the whole bunch of things and be aware that in any particular environment, you're going to pull from a different set of knowledge. And then within each environment, you understand that it sort of works in different ways, that there's no singular rule that it's going to work that way all the time. Um, but a good economist is going to be part historian, part finance strategist, part politician, part scientist, um, part mathematician. And it's that combination, and an awareness of that combination, with an overdose- with a- with an overlay, uh, a healthy overlay of humility that I think builds up what we are trying to describe as economic eclecticism. So how can this be applied? How can we- how can we put this into use? Here's where I want to take two really- two case studies and then uh, shift into a more of a- a tactical and strategic outlook um, in a- in a- in- in more of an application. Um, first is a little bit of a preview. The book is organized um, to try to give both a conceptual overview of the "how" that we just talked about, but also scan the landscape of macroeconomic risk across three dimensions: the real economy; the financial economy; and the global economy. And this picture kind of gives a- a a pretty- uh, pretty close approximation of- of the chapters in the book and the types of topics that we're- we're covering. Uh, as a first case study, I'd like to pick from the real economy and look at recovery dynamics. How do e- economic recoveries work? And this really brings us back to 2020. In the depths of COVID, when everything was going wrong, how could we look at what was going wrong and think about what the recovery was potentially likely to look at? A common approach um, was to look at the unemployment rate. To say, 'like, okay this many people have lost their jobs. This- that- that spending power has been sort of sucked out of the economy. Um, when unemployment rates fall, they tend to fall in this pattern.' Um, and that sort of fueled a rather pessimistic outlook um, even by the mid- the middle of um, 2020, that it would be a long time before we got back to unemployment rates similar to what we saw at the tail end of the 2010s. Which was suggestive of uh, very pessimistic um, prospects that we were really going back to a repeat of a very slack labor market, which would likely mean uh, very modest real wage gains, and probably modest productivity growth, all adding up to weak economic growth. Um, not to mention that that's at a- at a- at a person level, that means a- a lot of people struggle to find work for a long time. Fortunately, what actually happened was the unemployment rate came down extremely quickly, um, and continued to come down until you got back to something that was very, very similar to what you had in 2019, arguably even more overheated. So what- what went wrong from an economics profession perspective, and how could you have looked at this and seen something- um, something different? Well, a very simple way of looking at this - and we're sort of illustrating one of the 'don'ts' here of don't- don't use the master model - but that idea that, okay, well, unemployment- unemployment rates give me an idea of how bad the economy is, how bad this recession has been, and they tell me something about how long a recovery should take. Uh, historically the relationship is from- from a macroeconomic perspective actually relatively decent, and if anything, the outlier was 2008 where the recovery was unusually long relative to uh, the peak in the unemployment rate, so there's a- there's a question in the- in the modeler's mind of: 'does this mean very elevated unemployment rates mean even longer um, recoveries?' Well, if we just stretch this out and say: 'well, given the peak in the unemployment rate in COVID, how long would it have taken?' Um, again, sort of doing what we say you don't- you shouldn't do, taking that master model approach, you're talking about a 10-year recovery. And I think that, while not in this simplified form, that mentality fed into that expectation that this was going to take a really long time. What actually happened, again, was a very fast recovery that took you back to a very tight labor market in about a year and a half. So, what could have we done differently? Well, instead of just looking sort of at a- at a data first approach and you said, 'well, what is it that drives recoveries?' And - this is our framework in- in chapter four of the book - to say that a recovery, an economic recovery, is really about what happens to the supply side of the economy, what happens to the- the ingredients of potential output: labor, capital, and productivity? And are those impaired? And if those are impaired, then I should expect a relatively weak recovery. Um, but if those are not impaired, I should expect a recovery that comes back to my pre-existing trend uh, in reasonably short order but ultimately back to that trend. And it's nice to use the global financial crisis from 2008 as a case study of testing this because you can say- you can compare three different countries, in this case Canada, the US, and Greece, and look at how the recovery- the recovery looked and then consider why or where it was coming from. Um, here we- we- you- you see Canada looks what we call like a v-shape um, and I- and I should pause for a moment and say, we have somewhat of a different approach for thinking about recoveries, because rather than talking about the speed or the timing, which gets a lot of attention, um, and in some sense I think is very difficult to forecast, we think there's a lot more value in thinking about what the ultimate recovery is, and whether you recover to that trend, um, and we think that's actually more forecastable, and ultimately, more important, because that gap between the trend and what you actually did is the ultimate um, loss potential. So even if it's a big draw down uh, if it recovers to that pre-existing trend, the- the total economic loss is relatively modest. Canada had a has a relatively v-shaped recovery in 2008. Why? Because there's no overhang in terms of a housing crisis that cripples household balance sheets, that breaks the financial system, um, so they're able to go back to this sort of old production function in short order. In the US, household balance sheets are crippled, small business balance sheets are crippled, the banking system sort of uh, uh, particularly credit intermediation um, of non-banks, shuts down. That leads to a recovery, but basically a shift down in potential output. A very weak recovery in- in our lens. And then it- it can be even worse where, if you have a- a downgrade in uh, fiscal capacity, in the case of Greece where you had a sovereign crisis, not only do you sort of see a shift down in output, but you- when you get a recovery, it's weaker than your pre-existing growth rate. Um, and that- that's sort of the worst- case scenario. So what did COVID look like? Well, COVID wasn't a crisis that need- necessarily needed to leave these types of overhangs and household balance sheets on the banking system. Um, and for that reason, you can see if we line up uh, for the US data here COVID and uh, the great financial crisis, you get two very different natures of recovery. One is essentially complete and one is essentially, you get um, a U- shape, it's we're fudging a little here and bending the U, but you get a U- shape where there's a big downgrading capacity. This was um, ultimately not really a judgment about economics, but a judgment about politics and political willingness and ability to bridge the gap so that healthy households and healthy firms would be able to restart when we got past the the most difficult parts of the pandemic. And that's largely what happened. We wrote about this in- in uh, early 2020 uh, for Harvard Business Review uh, so we like to say this was not hindsight. Um, but I- I- I don't want to make too big of a deal of that in the sense that economists are always going to get it wrong. You should not anchor um, with any extraordinarily- extraordinarily high level of confidence that they know what's going to happen. You should sort of pressure test whether you think what they're saying makes sense and have a framework to- to test it against. And that hopefully is what we're doing in the book. Well, the second case study I'd like to use is from our second pillar, financial risks, and about debt. A very popular question uh, there's too much debt. Uh, perhaps the most popular question I get is, 'when is this going to be a problem? When are we going to get a crisis, particularly on the on the fiscal side uh, with very large deficits and very large debt levels?' So, we like to use this as an example uh, and we use this in the book of, with every year the indebtedness of the US government goes up and with it interest charges on the US budget, which in turn raises the deficit even further, sooner or later confidence in the American uh, in America and the American dollar will be undermined and some observers consider this practically im- imminent. Um, all of this could have been said yesterday um, but it was actually said in 1986. Um, the problem with this is that debt levels themselves tell you shockingly little about the risk that comes from the debt, particularly sovereign debt. Um, so obviously debt levels are much, much higher now, both nominally and and relative to- to incomes. So what should we be thinking about when we consider um debt dynamics and debt risks? Again, of course, there's no magical formula. But there's a better framework than just thinking about interest expense or the level of debt in aggregate, nominally or as a percentage of income, and we argue: think about it in the context of what are nominal growth rates - nominal GDP growth rates - and nominal interest rates. And if you're living in a world where nominal growth rates are higher than nominal interest rates, the debt is self- financing. And what I mean by that is that if growth - GDP - is higher than interest rates, you could pay all of the interest expense with new debt and the debt ratio would go down. It's a very healthy environment um, that suggests the debt stock pile poses relatively little risk. Now, um, um, you don't want to take it for granted um, and the US certainly sits in a position of unusual strength because of its position as a- as the reserve currency issuer uh, because of the US Treasury being sort of the the primary asset within the global financial system. Um, and I- I have a paragraph in the book that I like to call the "I'm not Dick Cheney" paragraph um, where we say just because you- we're arguing that debt risks are not particular elevated because debt dynamics are not primar- problematic is not the same thing as endorsing um, fiscal policy that's well out of line with what a sort of a healthy uh, a healthier fiscal policy would be in the context of a strong economy. Um, we wrote this op ed in "The Hill" earlier this year where we said, 'look, this potentially is an environment where you could put the foot on the break from a fiscal perspective and take the foot off the break from a monetary perspective um, and you would be just better off, stronger economy, better fiscal position, lower interest rates, lower mortgage rates, uh, and you'd be sort of healthier across the board.' Obviously the politics of that are- are challenging um, but the- the mantra of "debt levels are high, that therefore must be a problem" is skipping a few steps and is often used as sort of a- a worry that um, I think a lot of people have. So I want to spend a few- a few minutes sort of pivoting from the book a little bit to just talk about the general macro environment: how we see it today, looking at it tactically, where have we come from, how does- how was the soft landing delivered, and conclude on a more structural outlook which I perceive is very positive um, if very challenging um, that I think is often overlooked. Um, so how did we get to where we are today? Well, the last few years, I suppose we've all heard the story of a soft landing. This was what was underneath the hood for the- the inevitability of recession. It was that the the recovery from COVID had delivered a labor market that was so strong that wage growth was inconsistent with a 2% uh, inflation rate. And historically speaking, you've never been able to bring down wage growth and and job openings - as a very elevated level of job openings which was fueling that wage growth - without a material increase in the unemployment rate. And whenever you have a material increase in the unemployment rate, nearly by definition, that's a recession. Except in 2022/2023, we were in an remarkably unusual environment um, where a lot of people were coming back into the labor force, firms were adapting to- to work with less labor, um, the- the backlog of openings uh, was sort of being worked through, that you were actually able to cool the labor market - the bottom half of this char - the job openings rate fell dramatically and the unemployment rate has ticked up um, but even here the tick up is is more deceiving than it seems because it's not that there are fewer jobs, it's that there's a lot more people participating in the labor market. Part of this is an immigration story. Um, but it's also a story of very strong labor markets that are pulling people in. Um, so even that tick up, which is- which is not recessionary in magnitude, um, is- is better than it seems. So, I have- I have just painted a relatively uh, optimistic uh, or rosy picture here, and I think it's fair for people to push back on that and say, 'well, it doesn't feel that way to me,' Well, part of what happened, part of what we've gone through over the last few years, was incredibly unusual because everyone took a pay cut in real terms because inflation was very high. The joke here is that uh, - bear with me for an economics joke - um, a recession is when your neighbor loses their job, a depression is when you lose your job. What happened in 2021/ 2022 was no one lost their job, but we all took a real pay cut of- of a meaningful amount. So we were all grumpy, but we were all willing and able to continue to spend. Why wasn't there a recession if the- if spending power was curtailed, or why do I say that we were- we were willing and able to spend? Well, because spending from a macroeconomic perspective is not about the individual. It's about the sum of individuals. And the number of people who were receiving these paychecks was growing at a prodigious rate. So, um, that covered up - and the combination of that you see on the right - that covered up um, the effect uh, um, on- on real uh, real spending power and basically allowed the economy to grow in a very healthy manner. Now- now things have shifted back. Um, the number of people who are getting new jobs has slowed materially but real wage growth has- has returned in a- in a pretty significant way. So spending power has been maintained. Spending power has- is actually in a pretty comfortable position. Um, and that spending power is sustainable, whereas spending power that comes from creating new jobs is, in the long run, not sustainable because you run out of new people to hire. Well, again, I think people are reasonable to push back on me and say, 'well, again this doesn't feel that good to me. You're telling a story that feels too uh, too positive.' And I think there's something worthwhile here to- here to- to clarify. Economists are kind of weird. We think about inflation only in terms of price level ch- prices changing, so the the $10 burger which became the $16 burger, if it stays at $16 over the coming year, economists would say, 'well, inflation has in improved materially, we're in a better place.' Um, I think most- many people - reasonable people - would say, 'no, it's a $16 burger, this is still terrible.' Um, and that distinction is, I think, in part a big part of the frustration. We- we like to illustrate this sometimes with uh, chicken prices and computers and if you combine those things you get an index that looks a lot like um, overall inflation. And to say, 'look, households have lost purchasing power with respect to chicken and groceries, but they've gained purchasing power with respect to other things, um, that drives economic growth. But it's also reasonable to think- to- to believe that that also drives uh, sort of frustration um, amongst uh, households. So while it's true that real spending power is up, it's also true that it may not feel as good as it- it seems like it should or sounds like it should. On this slide it's another piece of that consumer story where people have highlighted oh, well, consumers have are starting to finally run out, they're starting to hit a wall, we're starting to see weakness. In the middle here, sort of fast food was one that was pointed at uh, commonly. And we pushed back on this and say, 'well, maybe it's not that consumers are hitting a wall, but consumers are just reasonable and they kind of go where they see value.' And what you see across this is groc- when grocery prices soared, grocery consumption fell. Um, when fast food prices finally rose above - on a relative basis, relative to where grocery prices had been - that's when the weakness in fast food started. It's more about consumers trading off where they see relative value than it is a signal to me about an- about a particular weakness on the consumer side. And we complement this with the picture on the right of saying, 'there pockets of the economy which never saw too much inflation. Prices, roughly speaking, were falling before COVID struck, um, basically stayed flat and then started to fall again, where demand has been through the roof and then just continued to grow again, and when prices started to fall, re-accelerated.' To me, I view this as a story of consumers who are able to spend. When you see weakness, it's a question about willingness and about sectors and industries who pushed price too far and the household sector is going elsewhere. And that kind of reconciles uh, the story of confidence um, the- the story of pockets of weakness, with- with ultimately a story of continued relatively strong growth. Ultimately, um, we're shifting from a phase of uh, the economy where monetary policy makers were keeping an aggressive foot on the brake to try to slow the economy down, to where they now feel comfortable enough that inflation is close enough to the target that they're going to- they're going to release the foot on the brake. Um, I- we've all seen in the press, you know, the Fed cut 50 basis points, um, a little bit more than markets were expecting um, but there's expectations for many cuts from here- here on out. Uh, policy makers tend to view this a little bit more slowly than markets view it. Um, this does lead to lower rates, but there's a few things that are worth highlighting as we wrap up this tactical conversation. The shifts that have occurred in the economy um, have delivered inflation that's above the policy target. And I would argue is likely to persist above the policy target. Not in a- in a huge way, but there's a really material difference between two and two and half, and one and a half and two. When you were living below the target for much of the 2010s, monetary policy was persistently accommodated. Always with its foot on the gas, always trying to get a little bit more demand in the system. I think the shift in the economy is likely to deliver a world where inflation is a little bit higher - not particularly problematically higher - but high enough that monetary policy persistently lives with its foot on the brake. That's a challenging world. It means higher interest rates than we were used to in the 2010s. That means means higher mortgage rates, it means higher corporate borrowing rates. Um, not as high as we've seen over the last perhaps uh, 18 months/ two years, um, but higher than- than what we got used to in- in uh this big portion of the 2010s. Um that's a challenge. It's challenging for firms, it's challenging for households, but it's a reflection of an economy that's operating- it's operating its potential. It's a reflection of an economy that's relatively strong. So that gives me sort of a nice transition into what- uh, what I want to wrap up with as a structural view of the economy. And we like to call this a quote unquote "era of tightness." All we mean by this: this is a very colorful chart, but all it is is the unemployment rate relative to a neutral level of employment. So if you're below zero, that's quote unquote "tight" with very low unemployment rates. Um, I- I think an I think a nice conceptual way of thinking about a neutral level of employment is when does- when does labor- when does the worker have a little more ability to kind of push for a wage increase, for- for a salary bump? When do they feel comfortable doing that? If- if- if people feel comfortable doing, that you're probably living in a tight labor market. If you don't feel comfortable about doing that, you're probably in a slack labor environment. And for much of the last um, 40, 50 years, we've lived in a slack labor environment. I think firms, in some ways, have gotten used to this and they think of firm- as- as labor as an available and- and um, somewhat cheap input. Um, but this - I think this has changed, potentially changed in a durable way, and it wasn't a change that just came with COVID, this was a change that happened before COVID, that this era of tightness had begun. Um, you saw a little bit of an era of tightness in the late 1990s, um, but it didn't last as long- as- as long as one might have hoped. But if this is where we're going to live, what does it- what does it mean, what does it deliver? Well, there's a few things that are happening that are actually quite good. One: in eras of tightness you tend to see stronger - materially stronger - real wage gains. So it's good for consumers, good for workers, getting a little bit a bigger piece of the pie. Um, you also tend to see stronger capital investments from firms. Their ability to scale their production function with you- you know one piece of capital, one piece of labor has been constrained on the labor side, both because the worker isn't available and the work is more expensive. So they invest more on the capital side. This should drive stronger economic growth, and really is- is a- is a piece of the fuel to deliver stronger productivity growth. And productivity growth is sort of the- the magic elixir of macro. Um, that delivers higher uh, per capita real incomes, higher real GDP growth without uh, constraining or pushing on inflation. Um that- that's- that's really what you'd like to see. Um, well a lot of people say - I kind of get excited about this and say, 'oh, yeah this must be a story of AI - new technology that's- that's going to deliver productivity.' And there's an element of truth to this. Um, but here, I'm actually going to be sort of damping expectations because if we ste- take a step to the side and say, 'well, what is productivity from a macroeconomic perspective?' Yes, it's fueled by technology, it's fueled by reinventing, reorganizing, transforming the production function, how firms work, um, how we deliver services and goods. But big macro productivity shifts are really about reducing costs, not about new user experiences. And we like to use the example of Uber and- and a taxi ride, and say the production function of- of transportation, the- the service of transportation, hasn't changed in a material way. There's one car and one driver. Sure, it's nice I can- I can pay for it with my phone and I can- r- rather than yelling, I can and sticking out my hand I can- I can use a um, use an app. But that hasn't materially changed productivity. Um, maybe marginally, around the edges, there's a little bit better matching, um, but it's also added a bunch of cost in terms of the- the technology stack. Um, and why do I feel comfortable saying there sort of no big productivity shift? Because when you see big productivity shifts in a sector of the economy, you see prices fall, and there hasn't been a price fall in the service of transportation. Sort of a curiosity: it's- it's usually cheaper to hail a yellow cab um, but it's just more convenient to- to pay for- pay for the Uber. Um, what gives- and then my last point that I want to wrap up on is I think it's fair for people to say, 'well, this is this is a relatively nice story, um, but why- why do you believe that an era of tightness will- will persist?' And here's a- here's a clarification: a recession - it ultimately will come. I- I don't think one is likely in the near term, um, but one will come. Uh, but it doesn't take a normal recession to unwind or break down the era of tightness. In the late- in the 60s, which I like to use as an analog, there were many recessions. But you usually find yourself back in a- in a- in an environment where the labor market is relatively tight, and you have real wage gains, and you have productivity um, as you work your way through the recession. In contrast, the eras of tightness that we see over the last 120 years all end when you see a particular type of- two picture- two- two types of recession. Both I describe as more structural in nature. These are very, very bad recessions. Either they come from systemic banking crises, which cripple the banking system, stop credit intermediation, and lead to very long hangovers - uh, the Great Depression and the Great Recession of 2008 come- are, are the two break points in our sample. Or, they come from a structural break in inflation like you saw late- late 1960s, early 1970s, where inflation went up, stayed higher, fed through to um, long-term inflation expectations which means long-term interest rates go much higher, and then you enter a period of stagnation with high inflation, high unemployment rates, um, weak productivity, weak investment um, in a- in a variety of ways. And neither of these things- I think the structural inflation argument um, is not likely to come. Why? Because I think we've- we've seen a monetary policy, we've seen the authority of the Fed, be willing and able to push back against inflation in a material way. Um, it's- it's interesting to remember and note that the largest inflation in uh, the 20th century was after World War II. Um, I- I like to say, you know, 'no one remembers that' and usually it is tossed back to me that yeah, no one remembers that because we weren't alive. Um, but, uh, it's kind of forgotten in- in the historical record because it didn't leave a a durable macroeconomic footprint. The 1970s, while smaller in terms of annual inflation, left a significant and damaging economic footprint. Um, and in the case of the financial system, there's- certainly there are risks, but there aren't things that you can point at where you can say, 'well, if that were to stop, we would see a material breakdown in credit intermediation that would lead to some sort of break in balance sheets.' If anything, um, the- the one of the few silver linings of of the global financial crisis and Great Recession, was the banking system is uh, more strongly capitalized, uh, has better funding um, and is, is, is in a better position, not because there is no weakness, um, but it seems much more challenging to get sort of the systemic type of crisis that would undermine and end uh, what we see as a very positive uh, backdrop. So, with that, it's been- it's been a pleasure uh, and and quite an honor to- to speak with my fellow alumnus um, and I'd be happy to take- to take uh, question questions and I'll- I'll drop the slides. [Dean Mortazavi] Thank you so much, Paul. That's a fascinating presentation. Um, with that, I'd like to open it to questions. Um, you can enter questions in the chat box and I'll read them to- for Paul, or if you'd like to raise your hand, we can call on you. Um, so um, happy to take any questions. Perhaps while the qu- go ahead. [Paul] I say, while the questions queue, I- I hung up uh, the- the Paul- my Paul Volcker picture, which- which has followed me around my- my career. Which I got while I was in undergrad at Syracuse. So Syracuse- Syracuse has followed me and is quite near and dear to my near and dear to my heart . [Dean Mortazavi] We are so very proud of your accomplishments and- and the great book and- and the wisdom you bring. And so maybe, I- you know, as I think about what you were mentioning, I do wonder um, why do these false alarms persist in the culture and- and why is it so hard for us to get away from them as opposed to... You know, it seems the problem is distinguishing genuine risk and overblown concern, but they have an element of persistence in the culture, so why is that? I think there's a couple- a couple- a couple drivers here. One- one- my career started out in the hedge fund world, I'll call the hedge fund- all hedge- particularly macro hedge funders are looking for the next big short. Um, they're- they're like fascinated by when, when things go wrong you make 10x. Um, so you're- it's not that you necessarily want things to go wrong, but you're fascinated by the potential for the opportunity to be well positioned when things go wrong. So for some players, sort of the- the- the over-focus on the potential downside um, is- is driven by what I- I'll call a 'financial consideration.' And then they- they tell that story and that story gets amplified. You know, hedge fund person X thinks there's going to be a- I mean after the global financial crisis it was Canadian housing was going to be the next thing to go, and then it was China's going to implode, and the banking system in China's going to fall over the place. And that they sort of pop from well, could this break or that break? And that- that's one of many what I'll call 'underlying seeds' which get fed into a media ecosystem which rewards brash, outlandish, um, 'the world is going to end.' So we- we call this in the book sort of like the 'pass the microphone.' You- you get passed the microphone if you're going to pound the table and say the world is on fire and it's about to, you- it's about to explode over here. And the person who says, 'well, um, that- that could be true, but I don't think that's true,' which usually me um, either doesn't get a lot of attention or or doesn't- doesn't really get the mic. We try to encourage people to take that and say, 'well, rather than tell me the probability that this thing goes wrong, um, tell me how it goes wrong and what are the the sort of the steps along the way?' And- and we've often found it to be useful to consider, well often it's the case that there's a reaction function, particularly from the policy side, um, which is going to step in to stop some of these things. And ask yourself 'why wouldn't that happen' and 'why would it be allowed or permitted or sort of escape um, the pol- the ability of policy makers uh, to respond to this?' And I think that helps calibrate it. But it's, I think, it's a- it's a media dynamic um, which we're all sort of 'news is entertainment' um, is an affliction that- that is- is not just related to- to macroeconomics but certainly impacts macroeconomics. Thank you for that. Christina is asking if there's a way for ordinary educated person to fact check some of these doomsday-saying articles or headlines? Or how would you advise us to go about that? Yeah. So I- I genuinely think that the- the macro world is accessible. Um, and so the- the ordinary person hat um, I think there's a sort of... you should, when you see the uh... the- the- the famous economist on CNN or something. One: you should keep in mind that economics by its nature is not- not a hard science. So what they're telling you is not the product of special knowledge. Um, it's really the- it's really their own judgment, which has some context to it, but if- if you sort of educate yourself in- in an area to it, particularly - I'm- I'm very much a fan of history - particularly with history and you have sort of analogies in your mind that you can bring back and compare with - and hopefully our book does this well, of giving you sort of frameworks to apply drivers, rather than um, just considering the possibility that something goes wrong - that's- that's I think how you start to stress test um, these types of things. But a healthy- a healthy place to start is simply being aware that when you hear the forecast, when you hear the sort of the- what I'll call the 'scroll bar' along CNBC that- that is- that is a forecast that that has no shelf life. Um, and when they say that, they don't really mean that as 'I- I have high confidence that this is going to happen,' they mean it as sort of 'okay, this is a this is my baseline that this could happen.' And until you understand sort of how you get there, um, you're not going to have sort of the broader whole picture. So just discount- start out with a healthy amount of- of skepticism for almost- almost everything. Um, Waylan asked are you concerned about the recent jobs report revisions indicating not as strong of a labor market as previously thought? Yeah, it's an interesting question. Um, so the revisions, um, there's a few different sources of uh, of job numbers um, from- from the- from the US. Uh, in particular the- the household survey, the establishment survey, and for those who aren't familiar with this: one has sort of an estimate of um, the-... All of them - and- and this is another- another thing to keep in mind - whenever you see economic statistics um, it's not that they're made up, but there's a healthy amount of assumptions and estimations that come in these process- processes. These are not measurements of a physical reality. So the US statistical agencies are first grade, first class, really excellent at what they do. Um, and they- the two different sources had been showing a different picture for a long time. One was revised down in a particularly material way. I do not view that - even- even if I take- if I had just seen um, the revision and I had never seen the original number, I wouldn't feel any differently. Um, in fact, I'm willing to sort of venture a little bit further and say I might even feel better, because what makes me most nervous now or in the- with the old days what- what kind of made you nervous was just this persistent deceleration, and you hadn't seen it sort of stabilize. With the revised data, yes, there are less jobs, but I don't think the- that doesn't feed in through sort of, okay, those jobs didn't go away, they were never there, I just didn't measure it correctly. But what I now see in the data is: it sort of decelerated and started moving sideways. Which suggests that I'm actually in a healthier place than I otherwise would have thought. Um, and this was really just a measurement problem, not an economic problem. It's very easy to sort of muddle uh, I mean, it was, you know, there's a million less jobs. Well, no, there- there aren't a million less jobs, I just measured it incorrectly before and now I'm measuring it correctly. So, no, I don't- I don't- that has not concerned me, right? Thank you. Richard is wondering why these doom-soothing fears create their own reality? Why- why aren't we- don't have the counter alternatives taken hold? Yeah, so I- I forget who said sort of the, um, you know, 'a li- a lie can make it around the world before the truth can put its pants on.' Um, there's something about: it's more exciting to click on that story about how the world is about to, you know, fall off the edge of a cliff. Um, it's - and I'll admit, there's there's something- there's something interesting to it. So, and we talked about some of this is sort of that, you know, a- a sort of business of media thing, news is entertainment that plagues not just economics but I- I think a much broader spectrum of things. Um, I think the- the- the- the soothers, why the soothers don't get the microphone, is in part a reflection of: okay, they don't- they don't generate the same type of- of business for the- the media folks. And, it's harder work. Um, it's not just that it's um, sort of news is entertainment, um, it's it's easy to be like: 'ah, debt's high! That's gonna be a crisis. You know, Washington is broken, that's- fiscal problems.' It's a lot harder to think about um, okay: debts are a challenge, uh, it's really about interest rates and the nominal growth rate. Nominal growth rates are driven by these factors. Interest rates are driven by these factors. It's the interplate of those two things. This requires work. Um, and while I think our book is very accessible, that's also a book that um, uh, is probably not a beach read. You- you got to kind of sit down with your desk and um, maybe- maybe even do some underline- underlining. It's- it's a more thoughtful thing. And that's- it's, you know, why do we reach for the M&M's instead of, like, you know, the apple? Um, it's- it's a little bit harder um, even if it- even if ultimately, I think, it's- it's healthier. Um. In a lot of the data that you showed, you didn't um, reference the stock market or maybe I missed it, but you didn't reference the stock market at all, um, but yet that's what most people are familiar with as a measure of economy. Where does that configure into this discussion and what- how should we be, as outsiders, reflecting when we think about the stock market and its role? Yeah. So most of my career has been on- on the investing side of- of things. Um, ah... so it's, it's interesting to put these two things together. Um, yeah, there's certainly a connection between the stock market and the economy. Things- if you get a recession, almost- almost certainly the stock market is down materially. Um, stock market valuations are- are driven in part by sort of the riskiness of the macroeconomy, particularly um, what I would describe as an anchored inflation regime where long-term inflation expectations are well anchored. That feeds into and leads to what I'll call 'low risk premiums,' which is just a fancy way of saying high equity market valuations. Um, but the linkages are not nearly uh, as- as tight as you might first assume. Um, let's- let's just dial back to 2022. The equity market was down 25ish percent. Uh, pretty big selloff. Uh, that was primarily driven by interest rates going up very, very quickly. Um, why did interest rates go up very, very quickly? Because the economy was - well, it was inflation, but it was about inflation combined with a very, very strong economy. So there are instances when these two things are not tightly tied. Um, and the- the flip side of this- this equation is um, and often a question I'll get is, well the equity market feels a little frothy um, I usually say, 'yes, it's rich, but there's probably a lot of good reasons that it's rich.' Um, and then the following question is, 'well, if it, you know, if it gets sort of knocked and- and reset, if that richness comes out, what does that mean for the economy?' And I like to point- like, if you think of 1987 as- as a really, almost as- as close as you get to like a natural experiment for the stock market and the economy, you see basically a third of the stock market value wiped out in a couple days. Um, the- the- the real economy, at the headline level, this never shows up. It just keeps plodding along. Um, under the hood you see some sort of weakness in consumer durable, some uh, fixed investment from- from a firm's perspective, where you see a little bit of hesitancy, a confidence hit, and I think that's real. But I think it's a very nice case study to say that wealth effects that come from the stock market, um, even if they're very large, have relatively modest effects on the macroeconomy. So yeah, the macroeconomy feeds into the stock market, not a super tight link but there's certainly a link. The risk that is posed by a, like say a stock market unwind to the real economy: if that's all that's going on, I think is relatively modest. Thank you. Well, I think we're almost out of time, but um, uh, Christine had a very point- um, remark which is to thank you for your earlier shout out for liberal arts education. And- and I think that's um, what the mission of the College of Arts and Sciences is, and- and you've deliberately and- and beautifully shown how, you know, it takes just besides finance, maybe history, and economics, and other disciplines for us to really appreciate um, the complexity of this world and- and your uh, example is a- is a great one as a reminder for us and our- our students. So thank you for that. Um, uh, let me thank you again for speaking with us this afternoon. Um, you know, great discussion and- and very interesting and I want to thank everybody for joining us today. Stay tuned for more invitations to future presentations and we hope to see you again soon. Um, I'm going to ask now Liz to close the Zoom meeting. Have a great rest of your day. Thank you, Paul. [Paul] Thank you. [Music]