Adam Posen Thinks Things Could Get Very 'Messy' for the Fed

28:57So Mervyn King was actually the leader of the inflation targeting movement, long before we wrote our book. He's the one who in 1992, when the British pound fell out of the exchange rate mechanism, and there was basically a crisis, we don't, we need to have something to anchor in the UK. He's the one who leapt into action with a couple key staffers. He was chief economist of the bank at the time and said, look, these little countries are trying inflation targeting, but we think it can work for us. And he did. And so he was the father or the parent of what used to be known as the fan charts that you would...

29:30I love the fan charts. I think I was the only one, but I really liked that. No, no, no. There were a few of us scattered around, but it was definitely a niche product. And there are problems that are worse with fan charts and the Bank of England has changed it. But basically, Mervin was leading the effort, and we cited this hugely, Bernanke et al, cited this hugely in our book, that they were, again, back to the combination of accountability and transparency, that you were sending out a forecast, you were being much more explicit than central banks usually were about the forecast. You were with the fan charts, which are essentially colored spreads about how likely a given outcome would be.

30:09Here's what we centrally think is going happen here is what may happen. You were trying to give the message this was probabilistic, that we're making our best guess, but it's probably going to air on the high side and it's going to be somewhere around here. So anyway, it was very, very much about transparency, accountability, and more information is better, regular information is better, commitment to specific releases at specific times is better. So you have a track record and the committee has to admit when it changes its mind or learn something. Anyway, in more recent years, since Governor King left the bank, retired, he's become quite loud in the spirit of some of the things Chair Warsh has been saying, that it's too much noise, central banks can't forecast, we're lousy at forecasting, given that we shouldn't be putting out all this information that's not really misleading.

31:12And Mervyn also is, from even before that, was very concerned about this idea of the markets getting too dependent on the information and the future plans of the central bank, and then not giving as much information back, and also having more moral hazard that they're not going to take the price and risk. Right. This is the idea that yields are an important policy signal for central bankers, or they should be. They should be. And it should be a two-way street. It should be yields and volatility around yields should be higher than it had been. This is their point of view, not mine. Should be higher than it had been because that forces markets to take risk more seriously and price things better.

31:55And so you have less, not zero, but you have less chance of a bubble and less inequality of things running out of them. And then at the same time, that should mean the pricing that the markets give you is more informative. And Peter Fisher, who after he was at Fed New York and Treasury, was head of Asia and other senior roles at BlackRock, he feels very strongly these two points as well, at least what I know from his public statements. He's very skeptical about central banks' ability to forecast and very worried about central banks' certainty about central banks causing bubbles in discipline and then clouding market signals.

32:36So even though Chair Warsh in the speech here at Jackson Hole backed off a little bit of some of the more extreme statements of that, He admitted that he had this thing about a hall of mirrors in the speech, which is a way of admitting the market isn't always right. And if the Fed chases the market noise, you may get a weird dynamic. And I was glad he said that. Much better than play the ball, not the referee, which was garbage. That was the previous message was like, oh, market, you're the ball. Like, off you go. Yeah, that was really bad. But anyway, of all the things that annoyed the central banking community, that may have been the most annoying.

33:19But anyway, so just to say, I think Chair Warsh's true beliefs and instincts, though, are much more in the, we can't get any forecasts right. The market has much more information on a lot of things than we do. We have a moral hazard issue of not spoon-feeding the markets. So I think the communications committee is probably where we're going to get the biggest surprise.

33:47Tracy Alloway:Yeah, I find myself thinking maybe all these things, various charts, dots, et cetera, served a real purpose. Maybe opposed GFC, and maybe it's just a lot of noise right now. Since we're talking about this sort of monetary policy at the theoretical level, which is great. Oh, yeah. And, you know, I'm just sort of maybe sort of said a little bit here. And I'm curious, you know, from think tank world, what do you think about so many social scientists, including a lot of economists, suddenly either leaving universities or leaving think tanks and joining one of two, two, two very big AI companies? And when you think about the sort of future of social sciences, not so much like, well, we use models, which I'm sure there's going to be tons of that, but just the sort of, depending on which side you're on, either vortex or brain drain of people of stature moving into these companies.

34:44Tracy Alloway:What do you think? How does that make you feel? I mean, as someone whose main job is to hire, develop, and retain talent, I think about this a lot. and it is as i think you apply joe i mean i think it's not unprecedented so during the internet boom uh when amazon was first coming up and google was first coming up they hired economists and they were hiring them more to be useful like amazon's pricing model yeah useful in terms of internal design auction right so like the very famous mit microeconomist halverian became google's first chief economist and brought with him and hired a bunch of really smart people.

35:25But they also were there to talk about policy and help explain why the technology was good and what kinds of regulations they wanted and didn't want. And that's normal. I mean, that's okay. But there was also a little bit of this sense, which we're seeing now, an order of magnitude higher. Oh, my God, I can make real money. Oh, my God, that's where the cool people are. Oh, my God, I can be part of changing the world. so it's very seductive and we've seen this in other fields you know when genetic engineering had a boom lit many decades ago all these nobel prize winners and grad students would leave academic jobs and set up startups to you know genentech things like that um right now i think it's challenging.

36:15It's challenging because the case that can be made, and I know I have colleagues I know who have gone in-house at some of these companies. The case that can be made that this is the most transformative technology of a century and it has the potential to do enormous good for the world is legit. It may be overhyped, it may take longer to get there. We may have to care more about how many people we displace and what happens on way. But the idea that that is a valid view and you want to be part of that, I think is real. And so beyond the money and the sense of I want to be doing the cool stuff, which matter, because think tanks, you pay well compared to average American salaries, but you don't pay like those people.

37:07You know, I understand it. You can also go one step further, which is unlike, say, Google or Amazon when they were coming up, where there were policy issues. Actually, a lot of us didn't realize what all the policy issues were. And the economists who were hired, some of them worked on policy, but most of them were, like we said, working on sort of internal tools. Now, a lot of what the hiring, say, for example, Anthropic is doing, is by their own account about trying to envision what the right policies are to make the transition for AI work. And at least among the economists I know who've gone there, that's a sincere belief.

37:52But it does make it more awkward. Because it's one thing to say, oh, I work for Amazon, and I came up with the pricing auction model and that's why you get that. And people say, you're ripping me off. And you say, no, I'm not. But when it's like someone who's, you know, world-class expert on the economics of innovation or of growth or whatever goes in and then starts saying, well, you know, they're going to create three times as many jobs as they destroy and the singularity is near and so you can't regulate it right now because we're on the cusp of something. They may sincerely believe it, but people understandably discount their views once they're in-house and getting money.

38:37And also, and I was talking about this, a very noted academic who has been pursued by all these places who turned it down not to go. Zero. Well, and this is a person who's very techno-optimist. I mean, so it's not about that. but there's also just you do inherently these are still companies i mean you're you're becoming part of a hierarchy you're losing your independent voice what you choose to work on you know you may you may choose not to work on that which you might have worked on because now you work for this company so again is it outright corruption of the sort we're seeing in the trump administration no but it is unsettling.

39:22And I think there's a role for this academic colleague of mine, people at the Peterson Institute and like institutes to, I hope, be willing to settle for the low six figure salaries, which are still pretty darn good and influence policy without going on staff. Just on the AI side of things. So at the moment, if you look at the economic impact, It's very much sort of short-term effects on prices and inflation and capital investment. And everything else, you know, the impact on productivity, even jobs is much further off into the future and very theoretical. Do you see any evidence of an impact on the labor market side or productivity here and now?

40:04Much more indicative evidence of improvement in productivity, Tracy, than on effects on the labor market. Okay. So speaking of colleagues of mine, Martin Trozempa and Jed Kolko are both top economists who work at Peterson and work on these issues. Anton Koronek is affiliated with Peterson, is on leave this year. He went to work at Anthropic this year. But anyway, if you look at their work, and in particular, I would cite the work of Jed Kolko, and he was chief economist at the U.S. Department of Commerce under Biden. He was at Indeed. Was it Indeed or ADP? Yeah, Indeed, I believe. Yeah, and yeah, so he's a real practical labor market economist.

40:46And he, and there are a number of others, there's another think tank called Economic Innovation Group. There are a bunch of them. And you're just not seeing the data. So the number of hires, even of coders, if you had to pick the two jobs where you most thought they're toast, would be long-haul truckers and coders, and lower-level coders. And we're just not seeing it. Job growth continues in those industries. I think there's been a lot of, yes, theory, but really important theory work done, not by my team, but by people like Eric Bjornolfson at Stanford or Luis Garricano at London School of Economics, about why those are just two examples but they've done great work about why we haven't seen the job displacement yet and partly it's a matter of time as you indicated time keeps coming up it's how fast things happen that there is arguably a period in which it is efficient to have the human and the AI working together especially as the AI is in sort of learning mode and especially as the businesses just like with the internet you have the technology and then you have to figure out how to reform your business to make use of it so there's a period there we don't know if it's one year five years it's probably less than 10 years it's probably closer to five but there's a period there where the businesses are changing and the specialized applications are being created and things like robotics are being integrated and during that period we probably don't lose many jobs again long-haul truckers are not trying to make fun of them.

42:29I mean, they may be the ones. And so Brinjolson has spoken about a J-curve, that it takes time for this to happen. And it's similar to the argument I made with you all about the effect of tariffs and migration last time I was on, that businesses, people have to make decisions and implement things. It takes time. Another argument which Luis Garricano and his co-authors have made is what they call messy jobs, which is the idea that actually again you can you can try to come up with the uh sort of extreme case long-haul trucker job but most almost every job even arguably long-haul truckers um have a lot more specific knowledge and are embedded in a lot of relationships that there's much more complementarity and much more um i don't want to say uniqueness but specialization than people appreciate.

43:25And so just sort of doing a lot of these things that get published by consulting firms or international institutions, like these are the most exposed sectors, these are the most exposed sectors, probably are misleading. And we know this from the past that, again, in the Industrial Revolution in 19th century England, the analog to the long-haul truck driver was the skilled artisan who did weaving. And so those people literally did get replaced by the automated weaving stuff. But if you had done this kind of study before the Industrial Revolution, outside of that very narrow, they're real people, but that very narrow job description, the displacement was very different than you would have expected.

44:09Anyway, so the job stuff, it's probably coming. If it is coming, it is showing up in the lack of hiring of younger people yeah and terrible they had a throwaway line in a speech yesterday but it happens to be one i agree with and we again we've talked about this previously that a lot of the lack of hiring i think is overhang from the huge shifting around of people and redefining jobs after covid and the re-employment and so you can't automatically say the lack of hiring is ai I mean, it may be contributing, but there's other stuff. Productivity's different. So there I think there's a legitimate active debate.

44:52And it's not a debate ideologically or anything, because generally it's hard. You've got to limit an amount of data and you're trying to figure out what's going on. I think there's a legitimate debate about how much productivity growth we've got that's due to AI. Is it the real big money stuff yet? How soon? I'm at probably just this side of pessimistic on that in the sense that I think going back to the jobs reshuffling after COVID, I don't think the AI productivity kicked in, excuse me, the AI productivity boost to growth kicked in until very recently, last year and a half. But that is much more an open debate.

45:35Nobody except some really, really crazy techno-optimists who talk about staying in your lane who are not economists. I think... You mean Joe? No, no, no, no. I would never say such a thing. He's a man for all seasons. I'm very diplomatic.

45:57I think the extreme calls about huge amounts of productivity growth. As my grandmother used to say, we should be so lucky. But we ain't there yet.

46:11Tracy Alloway:I think, by the way, I find the messy jobs theory to be quite compelling. And by the way, the long-haul truckers would absolutely say, look, there's a lot more to this job. Oh, I agree. And include all the things that they have to do with the warehouse. No, no, I know. But people think of that. It illustrates that point. Yes, exactly. Let me tell you what's actually involved. Right. Another one, you know, people point out, Adam Ozemeckis pointed out that people still get hired to play the piano at parties. Yeah, yeah. But, you know, as others would argue, well, the person responds to the crowd.

46:43Tracy Alloway:They see what the mood is. These things that the player piano could not do, they could say, like, oh, maybe this crowd looks like it needs an uptempo thing. So I do think these jobs are much more probably complex. I'm glad to hear you say that. And again, I was using the truckers just because that's the example everybody uses. No, no, but I think it's a good thing. But I agree with you. And Adam Ozimek, who's at EIG, is one of the other people I think is doing great work on this and comes down in this sort of, it may come yet, but it hasn't happened yet. But I think the really important point you said about the messy jobs is like with the piano.

47:15So I was in a meeting, it was supposed to be off the record, I won't go into details, but a very big, big, big, big, big shot from the AI community, not an economist. There are no economist big shots. from the AI community was talking, and a pretty famous academic economist asked this person, well, you kept telling everyone there's going to be a job apocalypse. It hasn't happened. Why do you think that is? It's just an open question. And among other things, this person said, the big, big, big, big shot said, well, you know, it turns out people really like dealing with humans and don't always want to deal with machines.

47:52and even among the not exactly emotional IQ high economist community we're all kind of like duh you know but I mean that's what you mean about the live piano player I mean I didn't need AI to have Spotify current generation AI to have Spotify you know like figure out if I like Paul Simon and Billy Joel and then I did yeah

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50:45Tracy Alloway:Since we're talking about some of these questions and measurement and limited data, I wanted to get your take on, I think you may have, I don't know if you saw it, there are these questions about, it came up with NVIDIA specifically. and whether some of the chips that they design, but which are manufactured elsewhere, largely Taiwan, etc., whether they're being adequately captured in data. And there was this report out that said, oh, we should have added 0.3 % to GDP, which is not that much in the sense that, oh, the big techno-optimists were right, etc. No, but it's real money. I'm curious what you think.

51:20Tracy Alloway:It is real money. On the other hand, when I look at it, I say, well, the market certainly noticed that NVIDIA has been doing very well. the Fed doesn't target GDP so it doesn't really imply anything about we would have done something different tell us what your thoughts on this discussion GDP measuring how much income we get for how much production and how much labor that's what GDP is meant to do on a national basis and it is much more science than art but there are pieces of it where it's not very simple. And so there are multiple definitions. There's something called GDI, and then there's gross final demand, and there's these various things.

52:05And they're all meant to be a check on each other. And over time, they basically move together. So what you're saying, Joe, about this discussion of mismeasuring of, say, NVIDIA or the other top tech companies, again, doesn't really change the fundamental path. But going back to what you both raised, if we're trying to assess how much we've seen a big transformation in productivity, this matters. If this 0.3%, say a year, was overlooked and it is directly attributable to the AI sector, then that tells a different story about productivity. So it does matter. A colleague of mine I already mentioned, Martin Chorzempa at Peterson, is doing some work on this.

52:51former Fed official at Peterson, Joe Gagnon, has also written about this. So there's, I mean, there are a lot of subtleties, which I don't even understand, but there are basically two issues. One is sometimes when companies that are based in the U.S. using U.S. technology produce stuff abroad, the allocation of how much stuff is actually produced in the U.S. versus not, and therefore how, whether it's GDP versus GNP, what's imports, what's exports, gets messed up. And so with these very complicated supply chains, there is a issue of trying to figure out what stuff gets allocated to the domestic pile versus the import pile.

53:37This is the old value add argument. Yeah, sorry. Again, I'm worried I'm going to screw up on nuance. So look on our website for a paper by Joe or a paper by Joe Gagnon or Martin Shrezempa or a tweet. I'm afraid I don't want it. But just essentially, there is a discussion over how much is domestic versus national. But as you said, Joe, in the end, the markets, you're either selling stuff or you're not. I mean, NVIDIA's bottom line actually doesn't change based on any of this. Right. We all know they're making a ton of money regardless of how the government comes. Also, the people who are working at NVIDIA designing the chips in the U.S.

54:15are still getting paid. Absolutely. And all the money that comes into NVIDIA, some of it goes to the shareholders, some of it goes to investment, some of it goes to the workers. So again, this is worth worrying about, but this is not a major distortion. The second thing, though, which is the more contentious part, is there are always technological revolutions. there are recurrent statements that GDP or whatever economists are using are just not capturing the true value. And usually the economist's response to that is some combination of A, well, we're capturing the true market value. So if people are getting more out of it than what they're paying the markets, great, but the market value is what we're supposed to think about.

55:02So that's one response. The second response is, oh, well, there are these various things like hedonic indexing where we try to adjust for quality. And this shows up more on the inflation side than the growth side, but that helps you figure out what's real growth and what's not. So let's look at this specific sector and try and fix that. So there is still a controversy about that. I mean, but this goes back, Tracy, to what you were saying about the timing and the productivity or the j-curve right so we already have gpt claude whatever i don't want to cite any particular brand name we have to do we have the ai and you or i can go in and type get me the cheapest possible ticket to jackson hole and i want to have to think about it but don't seat me next to a baby um and that provides utils tracy when she does it and she says don't seat me next don't see me next to joe i thought it was don't see me next to you we spend enough time together do we really need another four hours on a plane no keep going no no no um if and so that's giving me utils yeah you know it's saving me some time it gets me a better experience um i don't get annoyed with the aa or united or delta website because somebody else is dealing with it for me does that show up in GDP?

56:22No. So this is why we usually think the big productivity gains and the disinflation stuff comes further down the pipeline. It's when, further down the track, I should say, not the pipeline, when the businesses start transforming. So like, it was really cool that Intel and all, and Texas Instruments and whoever else was building chips in the 90s, you know, were following Moore's law and all that, and that showed up a bit in GDP. But the gains really happened when McDonald's and Walmart and UPS and everybody transformed their businesses to take advantage of it. Joe, do you remember when Goldman Economist, I think it might even have been Hatsius, yeah, they put out a note saying that productivity was being mismeasured because the graphics in the new Grand Theft Auto game, I can't remember what edition it was at that time, were so much better than the previous graphics.

57:12We should have them back on now that the new one's coming out. Because the new GTA 6 is coming out.

57:16Tracy Alloway:Yeah, we should do that. All right. I have just one more question. We could talk for hours, and unfortunately, we don't have that much time. But just in terms of the pure inflation outlook, the last time we had you on, it was right after you published a paper saying that you thought inflation was going to be 4 % by the end of the year. I can't remember if you were looking at PCE or CPI. No, I was saying at that time, I was saying 4 % on PCE and a little higher on CPI. Yeah, okay. Well, I mean, at least on CPI, we got to over 4 % earlier in the year, and I think a lot of people were surprised by that direction of travel.

57:53What's your thinking now? I guess, thank you for citing that, Tracy. I guess what I was saying, and it was things I was saying, and then a joint piece with Peter Orszag of Lazard, what we were saying was, going back to where we were with the criticisms of the Powell Fed, that I think were legitimate. The U.S. labor market was much more resilient than they thought. Credit was much more available, or in the terms, the financial conditions were not as tight as they thought. fiscal policy was a little looser than we thought and the fed having not brought down inflation for 64 months or whatever it was then 55 months um did have some momentum built up and then additionally one thing we talked about was as i said i think there was a j curve in the impact of tariffs and anti-migration policies over time it took time for it to kick in but anyway the big point was whenever the next inflation shock comes, it's going to go worse.

58:56I had no idea that the President of the United States would bomb Iran and ignore the fact that disrupting the Straits of Hormones might have some inflationary effects beyond whatever else you think of it. But I knew there was going to be an inflation shock, and we were primed to have more. So the next couple months, inflation may trickle down a tenth or two because of the energy market, whatever. But as Chair Warsh said, as many FOMC members have said, this is not good. You've got persistence, you've got persistent inflation in essentially the core measures that are services and not imported goods.

59:35You've got, you know, as the chair cited in a speech, you've got three, six, 12 months where the moving average looks like it's going up. It's in the high threes rather than four, but it's going up. So my view is the Fed is going to hike. If they don't hike in September they're certainly going to hike in December. I expect if they hike in September they're still going to hike in December. And so six months from now Fed funds will be 75 bps or 100 bps higher than it is now. And inflation will start coming down for reals as the kids say. But until then we're going to be in this three and a half to four and a half range with some upside risk.

1:00:21Tracy Alloway:All right. Adam Posen, always great catching up with you. Thank you. Especially this beautiful location. Thank you so much for coming back on Outbox. Thank you for having me. I'm a big listener. Thank you so much. Thank you for having me. Thank you. Love to hear it.

1:00:44Tracy, I love chatting with Adam.

1:00:46Tracy Alloway:So good. It's always really good. I'm really glad we made it happen. You know what's interesting? I'll be curious to see how Powell's legacy ages. I think there's going to be, as Kevin Wurst said, 64, 65 months of above-target inflation. When you think back at the last several Fed shares, generally, the one who people really think that was a bad tenure was Arthur Burns, right? Right. Despite and Bernanke is held out like people have think of him fondly, despite the fact that he presided over a financial crisis and several years of high unemployment. It doesn't seem like from a reputational perspective, high unemployment under your watch gets sort of penalized the same degree as high inflation.

1:01:32Tracy Alloway:People really seem to hate inflation. You're right. Like it's kind of skewed. Yeah, it clearly it clearly is. So, you know, between like the questions like, well, did the Fed? gather this sense of momentum where people were not dissenting for maybe reasons that were sort of inevitable or structural, et cetera. Then you go over five years of above target inflation. I just think it'll be really interesting to see how people are talking about Powell in the years ahead. It was also interesting to hear that there seems to be a sort of unspoken norm that you can only have a handful of dissents per meeting.

1:02:06The other thing I was thinking about, just on the messy jobs note yeah um i was you know there is this thinking out there that oh well for instance contractors can get replaced because now you can just ask chat gpt how you're supposed to i don't know fix your toilet or something like that but i was thinking um so my husband and i we were doing a project where we were roofing an outdoor shed and we asked chat gpt how to do it and we watched a couple youtube videos and it told us to use this one product like to stick on the shingles and things and then after we had started doing it we realized that that product only worked in environments that were above 60 degrees fahrenheit and we were in new england and the bots and the youtube videos were incapable of spotting that we were in fact in connecticut versus florida so you

1:02:53Tracy Alloway:know there's there's some nuance left for humans yeah i think that's right um i feel strongly like for all the extraordinary things that the models can do that there are just so many of these minor things that we don't even articulate about what human judgment looks like that they're not there yet they may yet get there they may get there by the end of the year but they're not uh quite there yet no i um but just like on the conversation um i do think it's interesting you know the the term that i've been thinking about with the um the war speech i've it's i found it to be hawk-ish which is like like with a dash between the hawk and the ish as in it was clearly like more like yes clear that the there's a plan to fight and that there is going to be work to do to get inflation because he said the two things that were key which is inflation is going in the wrong direction and policy has been insufficiently restricted which therefore the third thing that the silent part is therefore high grades which he didn't say so like that is hawk ish on the other hand it was not hawkish in the sense that we are now about to embark on an aggressive it was not power 2022 where it's just we're going to get inflation down and i'll see you next year well it also begs the question okay you could have said the exact same things at the july meeting yeah and yet he opted not to hike because he said he wanted to see more information but more information is always coming out and also in this environment it feels like more shocks are also constantly happening.

1:04:28And so, you know, you have to wonder what the threshold actually is.

1:04:32Tracy Alloway:Yeah. Well, anyway, I'm glad. Big year, much to think about. All right, shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmin, Dashiell Bennett at Dashpot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, you should check out our daily newsletter. You can find that at Bloomberg.com forward slash OddLots. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots.

1:05:06And if you enjoyed this conversation, then please leave a comment or like the video or better yet, subscribe.

1:05:12Tracy Alloway:Thanks for watching and listening.

1:05:24Thank you.

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1:07:16Some people use ChatGPT to answer questions. Others use it to get real work done. With ChatGPT Work, you bring the goal, plus real inputs like briefs, notes, files, feedback, data, and project plans. It can help turn them into an analysis, tracker, deck outline, prototype, or workflow you can review and keep shaping. You stay in control, giving direction and choosing the final output. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode. Available on Plus and Pro Plans.