Are We Really Experiencing an Affordability Crisis? – with Michael Strain and Jason Furman

You Might Be Right

In this episode of You Might Be Or Right, former Tennessee governors Bill Bredesen and Bill Haslam host a deep dive into the perceived American

Key takeaways

• Michael Strain identifies three drivers of cost concerns: higher absolute price levels, the rate of inflation, and rising costs in essential services like childcare and education.
• Jason Furman notes a tension between statistics showing wage growth outpacing inflation and the public's 'inflation hangover.'

Main topics

• Inflationary drivers
• Federal Reserve independence

Notable quotes

95 % of Americans think we's in an affordability crisis.

Conclusion

The episode offers a sophisticated look at the disconnect between macr

Transcript preview

Speaker 5 (0:00) If markets and businesses start to believe the Fed won't carry out its mandate, then that creates inflationary pressure on its own. And that reduces living standards and prosperity for workers and households throughout the economy. When Speaker 4 (0:16) I look at statistics, I see that wage growth has been consistently for years now been outpacing inflation. Speaker 4 (0:25) People are buying more and more than they've ever bought before. So that's what the statistics show. But people really are very upset. Speaker 2 (0:36) Welcome to You Might Be Right, a place for civil conversations about tough topics, hosted by former Tennessee governors Bill Bredesen and Bill Haslam. I'm Marianne Wanamaker, Dean of the Baker School at the University of Tennessee, where members of our producer circle make this show possible. To learn more about our work, visit youmightberight.org. Speaker 1 (1:01) Well, welcome back, listeners, to another episode of You Might Be Right. I'm here with my co-host, Bill Haslam. Good to be back with you, Bill. Thanks. You too. Speaker 3 (1:09) Bill, when we were doing our homework for this episode, one stat jumped out at me, and I bet it did you too. 95 % of Americans think we're in an affordability crisis. That's an astounding number. We don't Speaker 1 (1:22) get that kind of agreement very much these days. If people keep agreeing that way, we're going to lose our podcast rationale here. Unfortunately, Speaker 3 (1:28) we're agreeing on bad news in this case. So, you know, we don't get that kind of agreement. But, you know, this really isn't a partisan fight because I think you'd find people, obviously at 95 percent, you'd have people on both sides. But whether it's the price at the pump, rent, health care costs. Speaker 3 (1:47) groceries. I think people are feeling that pinch. And so this is a conversation I think is particularly applicable today, whether you're feeling, whether, you know, our listeners are feeling that pinch or not. A lot of people in our country are saying this is driving their decision making. Speaker 1 (2:03) There's no question. You know, I think both of us as governors spent a lot of time on the supply side of this, trying to get jobs into the state and keep costs down for families. But what we're seeing now just feels different to me in terms of its scale. You know, recent job numbers showed the economy actually lost jobs. Wages are growing slowly than prices for the first time in years. So there's something different going on. Speaker 3 (2:29) I think that's undoubtedly true. And I think one of the things we want to talk about, how did this become the defining issue? As we talk about the midterms, the reason we're talking about this conversation is all the polls say this is the number one issue that people care about for the midterms. Speaker 3 (2:47) There is a split, though, among those 95 percent, about what the government Speaker 1 (2:52) can or should do about it. No question. Reminds Speaker 3 (2:56) me Speaker 1 (2:56) a little bit of the conversation that we had with Heather Long and James Lake a while back ago. A lot of what's driving prices right now traces back to tariffs. We're going to get into that today from, I think, a different angle. I Speaker 3 (3:10) think the other thing that we should note off of at the onset is. Everybody talks about a K-shaped economy, that if you're upper middle to upper income and you have assets, this inflation we've been going through hasn't necessarily been bad for you. Your stocks are up. Your house is worth more. But if you don't, you're on the downward part of that K. And so I think we want to talk about that with both of our guests as well. Speaker 1 (3:36) You know, I think, Bill, that's exactly the kind of attention we're going to hear from today's guests. Michael Strain from AEI and Jason Furman from Harvard, two of the most respected economists working in this area right now. Speaker 3 (3:46) And they've both been involved with government at the highest level and advising presidents. I think the interesting thing here is. They're going to agree on a lot of things. Some things they don't. Their politics are definitely different, but there are certain things they're going to agree. I don't think either one of them thinks tariffs are a good policy. They both are kind of fiercely protective of the Fed's independence, and we want to have that conversation. Why do they feel so strongly that way? I think where they might differ is, okay, what's causing this? Speaker 1 (4:19) I think actually it's a perfect question. kind of thing for our podcast here, for You Might Be Right, kind of a disagreement. It's not two people who are talking past each other, but people who are looking really at the same numbers and with many of the same sort of observations about it, but landing in different places about what to do about it. Speaker 3 (4:37) And that's kind of the point of You Might Be Right. I mean, smart people can have different thoughts about the same issues, and it's important to understand both sides. So let's get into it. Let's do it. Phil, our first guest today is Michael Strain. He's a director of economic policy studies and a senior fellow with the American Enterprise Institute. He's widely known for his work on labor markets, inflation, and the American economy. He's the author of, and this is a great title, The American Dream is Not Dead, But Populism Could Kill It. And his commentary runs regularly in the Financial Times, Project Syndicate, and the National Review. He's a professor of practice at Georgetown's School of Public Policy and a former economist at the Federal Reserve Bank. Bank of New York. Michael, welcome. Pleased to have you with us. Yes, great to be here. Thank you for having me. Let me ask you kind of a two-pronged question first. Is America really in an affordability crisis, number one? And number two, if we are, what caused it? Speaker 5 (5:32) I don't really know how to define crisis. Fair. But I think it's subjective, and I think the American people are pretty clear that they... believe that high prices and rapidly rising prices are a big problem that they're facing. And I think they're right about that. Where did it come from? I think there are really three distinct sources of the concern that people have right now about cost of living. The first is that Things are 25 % more expensive than they were five years ago. And that comment is about the level of prices. When you walk into the grocery store, when you walk into a restaurant, when you walk into a retail store, things are just more expensive. And it takes people time to adjust to those higher prices. You know, I'm of the age where... When I was a teenager and I wanted a can of soda, it cost a quarter. And I remember when that quarter became 35 cents. And I remember not liking that. But, you know, I'm no longer. Phil and I can Speaker 3 (6:47) remember it being 15 cents. So we have zero sympathy for you. Speaker 5 (6:50) Yes. But I'm no longer expecting it to cost 25 cents. And I don't think either of you are expecting it to cost 15 cents. And so at some point people do get used to these higher prices. Not enough time has passed, I don't think, for that adjustment to have taken place. A second concern people have is with the rate at which prices are increasing. That's the inflation rate. And it's the Fed's responsibility to keep consumer price inflation. low and stable. The Fed has failed at that for the last five years. It's been five years since inflation was at the Fed's target. And I think people are not just reacting to the level of prices, they're reacting to the rate at which prices are increasing. And then the third component of this, I think, is that there are a few goods and services that the American people think are central. to leading a middle-class life. And on that list include higher education, housing, childcare. Speaker 5 (8:04) And the American people, I think, are indicating that those issues have been a concern for not just this year, not just since President Trump came back to office, not just, you know, since the pandemic. But those have been concerns for. For two decades, in some cases, three decades. And both political parties, the leaders of both political parties have failed to adequately address those costs. And so I think it's all three of those combined are leading to a lot of frustration about cost of living in America. Speaker 1 (8:49) The different episodes of inflation that we've had over the last half a century or something like that have had different, maybe proximate causes. I mean, at the moment, we have obviously tariffs. We have oil shock from the war in the Middle East and so on. Are there policy prescriptions, however, that are universal that we should pay more attention to to address these different kinds of triggers? Speaker 5 (9:18) Well, I think, you know, if you if you look at what kind of got us into this mess, it was it was a combination of things that hit both the supply side and the demand side of the economy. On the supply side, there there are some things that are that are hard to control. And so a lot of the disruption around the COVID-19 pandemic pushed up prices on the supply side. But a lot of the inflation that we've had over the last five years has been demand driven and has been due to policy mistakes. So I think about the 2021 American Rescue Plan, which was a roughly $2 trillion stimulus poured into an economy that really only, you know, had space for. 300 billion, maybe 400 billion dollars of stimulus. And that added several percentage points to the rate of inflation in 2021. And that led to a higher level of prices that we're still living with. The American Rescue Plan, you know, I really think of as the most reckless fiscal policy pursued in decades. On top of that, We had some pretty substantial monetary policy mistakes. The Fed did not increase interest rates in 2021 for, you know, arguably six months, nine months after it became clear that we had a real inflation problem and that inflation wasn't just. a transitory supply driven phenomenon. The Fed didn't raise rates until CPI inflation hit 8%. And that was a big failure. And again, you know, these these increases in the level of prices, you know, we kind of have to live with even if even if the rate of inflation gets under control. And so, you know, I think I think in answer to your question, Speaker 5 (11:35) Important lessons really are for fiscal policy to be fiscally responsible and for monetary policy to do the hard things that are necessary in order to in order to keep inflation, inflation low and stable. So Speaker 3 (11:51) help our leader, our listeners who it's been a long time since they went to Economics 101 or maybe they never did. How does. increasing the interest rate impact inflation or decrease? Walk us through just an Econ 101 explanation of what should have happened and why it didn't. Speaker 5 (12:13) Yes, it's a great question. So, you know, businesses and households borrow money to finance their expenditures. Speaker 5 (12:25) Businesses borrow money to expand operations, to enter new markets, to start new product lines and all that sort of stuff. Households borrow money. in order to buy houses, in order to buy cars, and in order to finance some credit card transactions as well for day-to-day spending. And when interest rates, when the Fed raises interest rates, that puts upward pressure on interest rates throughout the economy. And so you get less of that activity. You get fewer people buying houses, you get fewer people buying cars, you get a