We have hit a hinge moment in the economy. For the past few years, there has been one problem on policymakers’ minds: inflation. But in mid-September, the Federal Reserve called an end to that era when it cut interest rates by half a percentage point. Inflation, it was saying, is no longer the problem. It has come down from around 9 percent annually to around 2.5 percent. But unemployment is creeping up again. There are some signs of economic stress. Having spent the past year cooling the economy down, the Fed now feels it’s both safe and necessary to heat it back up, at least a bit.
The fact that inflation is over as an economic problem does not mean it is over as a political problem. Prices remain high, and people remain angry. And the inflation crisis, as we talked about in a past episode with Annie Lowrey, focused attention on the long-building affordability crisis: the cost of homes, of child care, of health care.
And so the 2024 election is still about the cost of living. But that’s not all that the next administration will have to deal with. What does it mean to fight the next economic war rather than the last one?
Jason Furman is an economics professor at Harvard Kennedy School and a former chair of the Council of Economic Advisers for Barack Obama. He’s closely tracked the inflation crisis over the past few years — and we talk about what he has gotten right and wrong there — and he’s deeply knowledgeable about the ins and outs of how economic policy is made. So I wanted to see what he thought the next administration would be dealing with and what he thought of some of the big policy ideas that Kamala Harris and Donald Trump have proposed.
This is an edited excerpt from our conversation for my podcast. For the full conversation, listen to “The Ezra Klein Show.”
Ezra Klein: Kamala Harris just released a lot more detail on her housing policies. A bunch of different credits for building certain kinds of affordable homes, usually, or homes for new buyers. A tax credit for people who are buying a new home for the first time that is a bigger tax credit if your parents didn’t own a home. A $40 billion grant program for cities that have a plan to change regulations and construct housing, and if you can persuade the federal government that what you’re going to do here might work, they give you money for it. What have you thought of her policy announcements? Do you think they add up, in a plausible way, to the three million new homes promise she’s made?
Jason Furman: I haven’t quantified it, so I can’t tell you whether I think it hits the goal or not. On balance, it moves in the right direction. I think the bully pulpit can help with zoning reform. I think $40 billion can help even more, and that type of money could really catalyze some bigger changes in this space. I’m very excited about that.
The home buyer tax credit, I am less excited about. First of all, if you know the person has a home buyer credit, you’re going to raise the price of the house. And so some of this will make housing more affordable, but some of it will also increase demand and drive up house prices. Moreover, it’s a very expensive credit, and they say they’re only keeping it for a couple of years, but it’s hard to put these in place for a couple of years and then not continue them. So, to me, that’s a much lower priority that could even be counterproductive.
And then finally, there’s a whole set of things on antitrust and restraining private equity in the space and the like. Some of those I like, and some of those I’m less sure about. I like what the government is doing now on basically price fixing in some of these automated algorithms. I think that could really be real and is worth really bringing to court and exposing and seeing whether that’s the case.
Private equity is big, but it’s still really small compared to the size of this market. It’s still really not a very concentrated market. And by the way, they can help with the supply. So when you’re cracking down on them, I get it. I’ve read some of the horror stories. I’m worried that that might get more in the way of supply than it does to help bring the price down.
There are a number of tax credit proposals in there to try to incentivize the building of new housing directly, particularly housing for new homeowners, housing that might be affordable. What did you think of that side of the policy?
I guess I’m skeptical of that too. When I’ve looked at studies of the low-income housing tax credit, an awful lot of it ends up going to developers. There’s not huge evidence that it’s going to the people you want it to go to. So I think it’s much easier, if you want to help lower-income people, to give them a larger child tax credit, give them an E.I.T.C., give them something where I’m 100 percent sure that every dollar you’re sending to the person is basically showing up in their benefit.
I’m a pretty big housing guy, and I guess I felt mixed. I have been very excited by how much bully-pulpiting Vice President Harris has been doing here. To see her putting a three-million-home pledge as, I think, the first bullet point on her first policy announcement, that was great. To hear her talk about that every time somebody says, what are you going to do to bring costs down? I think that’s great. I think this stuff actually really matters. Moving its salience to the center of the agenda feels like an important thing.
And then the policy just struck me as really underpowered. The reason I ask you that question about three million homes is that I don’t think this policy is going to get anywhere near there. The housing experts I’ve spoken to don’t seem to think it’ll get anywhere near there. And I was particularly struck by how targeted everything was. Credits to build these homes, but only if the person who buys them has never owned a home before.
Well, how is the home builder supposed to know that? And don’t we just need more homes? And isn’t it OK if somebody moves into that home and then opens a home they’ve been living in for a first-time buyer? I’m all for affordable housing, but there’s just a lot of, you know, you got to submit your tax receipts and show that you’ve been paying your rent for two years and, in the tax credit for buying a home, show that your parents didn’t own a home. And it struck me as this way Democrats endlessly overcomplicate policies in order to show they’re helping the right people and none of the wrong people.
And then finally, the best part, to me, is this $40 billion grant program. But the federal government gives a lot of money to states and cities already, and you can tie that money to things — to whether or not they are seeing housing starts go up, to whether or not they have ended single-family zoning. You don’t need 40 billion new dollars. You can also use some of those tens and hundreds of billions of dollars you’re already using. It felt to me like a place where the rhetoric is outpacing the policy solutions.
You might be right about that. I guess I’m just so excited about the rhetoric that maybe I let myself get a little bit carried away. And you can talk me down.
One of the first times you’ve been more excited than I’ve been about something.
So maybe you’re talking me down here, Ezra. But all the different rules and all those tax credits and everything, I guess it seems to me like you’re talking about how the portions are too small and we need to decide if the food was good or not. If that food was good, then all those different rules are a problem. On the other hand, if you think a bunch of that was misguided and will show up in higher prices because it increases demand and doesn’t do anything for supply, then all of those rules might actually contain the cost and frustrate some people along the way.
There are two types of these tax credits. There’s a $25,000 credit for people to buy. But then there are a bunch of tax credits for people to build. And the build tax credits also have a bunch of rules on them. That’s sort of what I’m pointing at, which surprised me.
But even then, there’s this question of: Who’s the beneficiary? Would the house have been built anyway? What’s the bang-for-the-buck cost per house? Etc.
Trump does not have a detailed housing plan that we can look at. My Times colleagues talked to the Trump campaign, and they were told that the theory is about stopping “the unsustainable invasion of illegal aliens which is driving up housing costs.” This is something, by the way, that JD Vance has talked about in terms of Haitian immigrants to Springfield, Ohio. And they’ve also talked about pushing the Fed to bring down mortgage rates. What do you think of those two arguments?
On Donald Trump’s first argument about immigrants, if a lot of immigrants move to an area really quickly, that could increase housing costs in that area. Now, part of why it’s happening in a place like Springfield is Springfield is an increasingly economically attractive place. So even without immigrants coming from other countries, if your manufacturing starts turning around, you’re making more stuff in your place, you’re also going to see house prices and rents go up.
Over the medium and long run, though, and in a lot of cases maybe even in the short run, just look around. They’re building a lot of houses, they’re repairing a lot of houses, they’re installing a lot of stuff, and so you’re getting both demand and supply.
And by the way, in a place like Ohio, the issue is not land. There’s enough land. There’s enough space for houses. And the issue is who’s going to build those houses. So I think the immigration housing thing is almost a complete red herring.
On the Fed, if you want the Fed to lower interest rates, do some deficit reduction. Part of why interest rates aren’t going back to where they were before Covid is that the debt isn’t going back up to where it was before Covid. And when the Fed sets interest rates, it has essentially this upward pressure on what economists call the neutral rate, which is coming from debt.
So if anything, one of the bigger housing differences between the two candidates is that Donald Trump is proposing a lot more deficit increases. No matter what he does to the Fed — yelling at them, screaming at them — that is going to result in higher long-term interest rates and higher mortgage rates and will make the housing issues worse, not better.
If people tuned in to the presidential debate between Harris and Trump, they heard talk about the trade deficit and who’s responsible. “Trade deficit” is one of those terms I think people hear in politics and have some kind of hazy ideas about, but it doesn’t get explained that often, or at least its implications don’t. So how do you explain the trade deficit and what different levels of it might mean?
Right now, the United States imports more than it exports. By itself, that is neither good nor bad. Imports are a wonderful thing. We all love buying them. And by the way, we still export an awful lot.
There’s this notion that somehow the trade deficit is taking our jobs, but that’s just false. We had a trade deficit a year and a half ago, and we had a 3.4 percent unemployment rate. We still have, in the grand scheme of things, quite a low unemployment rate.
And it’s not like the unemployment rate moves up or down with the trade deficit. In fact, if anything, it’s the opposite of what you’d think. Times when the unemployment rate goes down, Americans buy more stuff, and the trade deficit goes up, and vice versa. So for almost no economist is the trade deficit the thing they’d look at.
Something you will hear from the JD Vance world of Republican economic theory is that it’s much worse than it looks because we import goods, we import things people make, and we export a lot of money and financial services. So there’s this sense among, I would say, the Oren Casses of the world that we are importing real things and exporting fake things. How do you think about that?
This idea that the stuff you can weigh is real and the stuff you can’t is not is just nuts. Look at how most of us spend most of our money. Most of us spend most of our money on services, not on goods. There’s just a limit to how many cars you want to buy. There’s a very steep limit on how many refrigerators you want to buy. But eating out in restaurants, traveling, all sorts of services, there’s much less of a limit on. So as we get richer, that’s what we want. That’s what we like.
In terms of jobs, once upon a time, not only were there a lot of manufacturing jobs, but they were among the best-paid jobs in the economy. Those statements are just not true anymore. There’s a lot fewer jobs. And outside of people with graduate degrees who are helping to set these factories up and run them at a high level, they’re not actually much better paid than many of these service-sector jobs.
So, I think it is just fanciful nostalgia. Maybe a plan for 1 percent of Americans to get better off at the expense of higher prices for the other 99 percent. But there’s not a plan here to help 10 or 20 or 30 percent of Americans, let alone all Americans.
Trump’s tariff plan, depending on when you hear him talk about it, is a 10 percent or 20 percent tariff on all imported goods. When you get to China, it becomes much higher, I think, in the 65 percent range. How do you think about that in theory? When are tariffs a good idea, and when are they not? And how do you think about that particular plan?
In theory, I, for the most part, never like tariffs. The British got rid of the corn laws not as part of a trade negotiation but because they recognized that they were making the prices that British people had to pay to eat corn much higher, and they were doing it for the benefit of rich landlords that had nothing to do with foreigners.
So I’m a low-tariff guy pretty much across the board. Where I would make a very, very limited set of exceptions is national security, with a high bar for what counts as national security. So should we have drone factories in the United States because in the event of war, we want to be able to repurpose them and make military drones? I think the answer is probably yes, and it’s possible that tariffs would be part of the tool kit for that.
As a legal matter, if you’re responding to another country’s tariffs with your own, I think you’re probably hurting yourself more than you’re hurting them, but at least there’s some limiting principle and legality underlying it, and it doesn’t lend itself to a spiral. So I guess I’m OK with it, in a case like that.
President Trump — what is completely nuts is there’s just no theory around it other than just enthusiasm for tariffs. It will go on friends like Germany and Australia. It will go on products that we don’t have any plan at all to make in the United States and have nothing to do with our national security. Like ballpoint pens. If you’re genuinely convinced that the foreigners are paying the money and not the Americans paying the money, why would you even ever end these? Why would they even be a negotiating tactic? They would just be a permanent part of the arsenal.
And when it comes to China, I think this administration rhetorically had it exactly right when they said we want to have a high fence and a small yard. The small yard would be the way you protect all the things that are vital to our national security. And you don’t just do a small tariff on them. You basically ban trade in them. You ban the export of them or whatever it is you want to do. Every single thing made in China — toys, clothing, furniture — why would we want to raise the price of those? To what end?
So here’s the end, I guess: Oren Cass of American Compass, who’s been influential in this argument on the Republican side, wrote a piece for The Atlantic defending this, saying the economists are not telling you all the truth about this. And he says basically the tariffs address an externality: “The basic premise is that domestic production has value beyond what market prices reflect. A corporation deciding whether to close a factory in Ohio and relocate manufacturing to China or a consumer deciding whether to stop buying a made-in-America brand in favor of cheaper imports, will probably not consider the broader importance of making things in America.”
And he goes on to argue that those decisions add up to a collective set of questions. And those are about, partially, national security — that it increases our national security to make things here. Partially innovation — we innovate more if we make things here.
And there are things like semiconductors, where I think we’ve really come to realize that and are now spending a lot of money to try to onshore the supply chain and the manufacturing. And there’s just better spillovers from having more manufacturing domestically placed. How do you think about that?
First of all, I don’t think you get any more manufacturing from tariffs. So when you put a 10 percent tariff on everything coming in from the rest of the world, Americans aren’t going to need to buy as many euros as they used to. They’re not going to need to buy as much renminbi from China as they used to. And that will lead those exchange rates to get weaker, because there’s not as much demand for that currency. So the dollar-euro exchange rate will change. What that means is it will be more expensive to export other stuff. Europeans will have to pay more euros in order to buy an export from the United States.
The second step is other countries aren’t going to stand still. They can place tariffs on us, as well. The third thing is our intermediate goods that are used in other sectors of manufacturing. So you raise the price of steel in the United States, and all of a sudden, it’s much harder to have a competitive car industry in the United States. And there’s just huge linkages throughout the supply chain.
So I’m not at all convinced you get more manufacturing if you follow all of the advice that’s here. And even if you did, I’m not convinced that that would lead to more spillovers in innovation, except in some very targeted places like semiconductors.
I’m not exactly sure if this is true for Donald Trump himself, but when I talk to other people on the Trumpian right, there’s a feeling that America got sold a bill of goods on China and the economists all said: This is going to work out totally fine.
David Autor, who is probably the leading economist known for his work on the China shock about how much more damage the movement of manufacturing to China did than people predicted. And they look around, and now China owns a lot of the renewable energy sector, and we don’t really like that. And the Biden administration is putting huge tariffs on Chinese electric vehicles, and we’re worried about that. And our semiconductor industry is gone, and we’re trying to bring it back. And you can go down a list like this. But even some really celebrated economists will say the deals we made had a much more significant and negative effect on a lot of communities in America than we were told.
What’s your answer to them? And how does that affect even what Democrats believe now?
So my views probably haven’t shifted very much at all. And I’m much more unapologetic than what you just laid out.
Let me just go through a few things. First of all, there was a really big increase in inequality from 1980 to 2000. Since 2000, depending on what data you’re looking at, inequality has been up a little or down a little bit, but it’s much less of an increase than before 2000. And that’s important because there wasn’t much of an expansion of trade with China until 2000.
Second, most of the expansion of trade with China was not about the W.T.O. and lowering the tariffs. It was that they’re a big country and they grew. Third, if you do the full distributional analysis, you want to look at the impact it had on inequality in the United States, which even in David Autor’s numbers aren’t that many people relative to the monthly job loss. This was a period of generally quite low unemployment in the wake of this China shock.
And most important, the biggest, most progressive thing that much of this analysis misses is that lower-income households spend a higher fraction of their spending on imported goods and imported goods from places like China. So it’s mattered the most to them.
Now, in terms of what I’m worried about, I am worried about microchips. But we didn’t lose microchips to China. Microchips became a global supply chain, and we’ve lost part to the Netherlands and part to Japan and part to Korea, part to Taiwan. And by the way, that’s a good thing. Every one of those countries I just said is a friendly country. But you don’t want 90 percent of the world’s advanced microprocessors coming out of an island off the coast of mainland China. So the chips program has been a terrific thing. It goes against the standard economic recommendations, but there’s a good national security reason.
I think, so far, it’s working quite well, but the microchips is not a China issue. The solar panels, I’m thrilled about what China’s done there. Cheap solar panels, bringing down carbon emissions, electrify everything. We’re closer to that goal today because of China.
Do you think that the democratic consensus on trade has moved too far in the Trumpian direction?
Yes, I think it certainly has. If you look at the Harris 80-page policy book, it doesn’t look that different from the Obama book or the Clinton book. But trade does look different. So I think Democrats have gone too far. And if anything, insofar as there was a China shock — which there was, by the way — it’s one that was 15 years in the past. It’s not continuing in the present. So if anything, we’re in a very different place right now.
This is a place where I feel very unsettled and feel like there have been some very big moves that feel like they have trade-offs that are not being well articulated. The Biden administration put a 100 percent tariff on Chinese electric vehicles. So on the one hand, we want this huge transition to happen really, really rapidly on electric vehicles. And on the other hand, we have these very cheap Chinese ones, which we are functionally going to make impossible for people to buy — or at least to buy cheaply. And there’s a lot of things like that happening right now that seemed to pit a view of national security or just our competitiveness against the climate threat and the difficulty of having a low-cost rapid transition. How do you think about where the Biden administration has ended up there? And how do you think about that in theory?
I’m not sure what I think about where the Biden administration has ended up. I don’t like a lot of the way it’s discussed publicly and, frankly, even privately. Because yes, I think this is all really difficult trade-offs. And if it wasn’t a difficult trade-off, the answer would be really obvious.
If you come to me and say we’re going to place limits on Chinese solar panels and because of that, Americans are going to figure out how to make solar panels, and our solar panels are going to be way better and cheaper than the Chinese ones ever would have been, and so it’ll be much cheaper to deal with climate change because we did this, and we’re going to get emissions reductions, more jobs, etc., I don’t think you’ve done the analysis right. I think you’ve gotten the sign wrong on one key part of it, and so I don’t really trust your benefit-benefit analysis. You’re not going to persuade me that way. You’ll only persuade me if you go through the cost-benefit analysis. And for the most part, I haven’t seen it. So I don’t know where you get to with the correct reasoning. I don’t think it’s where we are right now. It certainly isn’t where Trump was, where you’re putting tariffs on washing machines and all sorts of things that have nothing to do with national security. But I don’t know what the right answer is.
You just gave this speech that you called “In Defense of the Dismal Science,” which is, in this case, economics. And you described what you think of as the liberal vices on economics and the conservative ones. The liberal vice you described is that there’s a growing tendency to deny trade-offs. I’m curious how you think this question of trade-off denial has evolved and what you think of as the leading and growing conservative vices.
Let me just state what I think these two vices are with the caveat that lots of liberals and conservatives don’t suffer from these vices. And some of them cross and suffer from the opposite vice.
On the liberal side, it’s getting the sign wrong. It’s taking something that may just be even a small cost and thinking instead that it’s a benefit. So dealing with climate change, dealing with inequality, dealing with national security, whatever it is, that’s the smart thing to do, and it’s going to help the economy. For conservatives, I think the vice is getting the magnitude wrong. It’s taking whatever regulation you’re going to do to deal with climate change or poverty or whatever it is and thinking that’ll kill growth, kill jobs and the like.
When you’re suffering from the liberal vice, you think all good things go together, and so you’re going to not do cost-benefit analysis; you’re going to do benefit-benefit analysis, and the whole point of your analysis is really just propaganda to get done what you wanted to. When you suffer from the conservative vice, you’re just going to do cost analysis because the costs are infinite, and that, too, is propaganda.
Now, if the liberal vice were simply coming up with arguments that aren’t totally true for something that’s a good idea, then there’s no reason to be overly bothered by it. I think it does lead to some real problems. First of all, if you did your analysis right, you would actually rule out all sorts of things. During Covid, for example, part of the argument for shutting things down at some point was that you were saving lives, even if you were doing it at the expense of the economy. And if you weren’t willing to do some things at the expense of the economy, you actually weren’t going to be saving enough lives. Second, I think you often end up getting the analysis wrong and contorting yourself. But finally, a lot of things end up not happening. If you don’t recognize that your policy does actually create some losers, those losers will come out of the woodwork and stop your policy from happening.
I have two questions about this. Let me start on the liberal side, because I do think I have seen culture change here. You described it as getting the sign wrong — you’ll be talking to somebody, and they’ll be telling you about why we need to do X on climate and also telling you that’ll be really good for the economy. I buy that.
The bigger thing that I see is denying that there are costs to things at all. And maybe this is me talking about the things I’m thinking about in my book. I’ve called this, at times, “everything-bagel liberalism,” where you layer on a lot of goals and don’t admit that having all those goals or all those processes all at once will make it harder to do something, make the thing more expensive.
I see this a lot in infrastructure. On the one hand, we want infrastructure to be fair, and we want it to be fast, and we want to have a lot of community input, and we don’t want to be too expensive. But we want to make sure all the jobs it creates are really good, and it’s either union work or prevailing-wage work. And these things don’t all work.
I think there’s a bit of a denial about, say, how bad infrastructure cost has become under Democrats. My view is that because it’s become harder to pass legislation, people want to do more things in any individual project. You can’t pass a big bill that changes, say, the laws around union organizing. So instead you put a lot of union laws and union regulations and rules into any given project, which is sort of a different idea.
I’m not really sure what the answer is, and I’m curious, sociologically, what you think it is.
I think you have it exactly right. I do think your everything bagel is incredibly memorable, even if many people have pointed out that everyone loves everything bagels. So what are you complaining about?
I think child care in the CHIPS Act is a good example. The administration went out and announced they were including child care in the CHIPS Act, and their argument was: Oh, if these factories have better child care, they can attract more workers, and then they can make more microchips, and they’ll do the whole job much better.
With all respect to people in the government, they don’t know. These factories, if they could set up a child care facility and that was going to help them attract better workers and make microchips, I think they’d do it. If some amoral consultant came along and told them to do it, maybe they had missed out on something, and they’d learn about it so they could do it.
If the government, which is extremely biased and cares deeply about child care, comes along, I don’t trust that prescription at all. Now, if you said, “They should do child care. We’re going to raise the costs on them. We’re going to get fewer microchips, but it’s worth it,” then, again, we could have the conversation. In that case, I think you’d have a very, very hard time persuading me because, as important as I think child care is, people will only remember the CHIPS program for one thing: Did it increase the production of advanced microchips in the United States or not? And no one’s going to look back and say it revolutionized child care or anything like that. It is this goal. And this goal is hard enough won on its own, not to add extra things.
Now, in this case, I think the good news was it looks like that was more rhetorical than reality. So it didn’t get in the way of the program. I think there are other rules, though, that do. And you have to look hard at infrastructure in this country. This administration put a lot of money into infrastructure. The cost of infrastructure has gone up even more than the money they put into it. And the answer is you have to look at how much it costs to build stuff, not just how much money do you have to put into the building.
So let me ask you about the conservative side, because what struck me when you said that is I would almost describe it the opposite way. I think there was a long time when conservatives would tell you that the cost of any liberal program would be infinite. I don’t get the sense they even pay attention at this point to the cost of liberal programs in any real way.
Now, it’s that the magnitude of anything they’re doing is almost infinite. The hallmark of Donald Trump’s rhetorical style is: If we do these tariffs, you’ll never see an economy like this. If we kick out all the immigrants, you can’t believe what will happen.
The right seems to have moved into a place — I mean, it’s just not a place of policy analysis whatsoever. I think there’s a time you might have said that the right was about overstating the harms of liberal policies and then overstating the benefits of tax cuts. But I think one of the difficult things about policymaking right now is I don’t know there is a policy process at all that holds water on the right.
There’s a question as to whether “conservative” is the word we use for whoever happens to be the current Republican nominee or whether it’s a coherent set of ideas. I don’t know the answer to that, and we’re probably not going to settle it right now.
But when it comes to regulations, increasing corporate taxes, increasing capital gains taxes, the Republican political system does describe those in almost apocalyptic magnitudes, relative to anything else. That’s what the academic literature — whether that’s a conservative reading of the academic literature, a liberal reading of it — would have you believe. So I do think that’s there.
But then the flip side of that — and I agree with you, especially with Donald Trump, in his first budget, when he was president, he forecast 3 percent growth, which was even lower than the 4 percent he was talking about at a time when every private sector forecaster was at about 1.5 to 2 percent. And the gap between what private sector forecasters were saying and what his budget was saying was the largest that I found in any budget going back to Ronald Reagan. So he just was really disconnected from at least professional opinion — I would argue reality, as well — in those numbers. And that was in a budget where the numbers were much smaller, in terms of the claims, than even he was claiming rhetorically. So, yeah, analysis doesn’t seem to be the strong suit right there right now.
You can listen to our whole conversation by following “The Ezra Klein Show” NYT Audio App, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts. View a list of book recommendations from our guests here.
The post The Economy Is at a Hinge Moment appeared first on New York Times.
