Episode Summary
Executive Summary: Kevin Hassett argues the CEA should provide objective, nonpartisan economic advice and says frequent staff turnover helps keep it connected to current academic literature. He contends the post-2008 slow recovery, weak wage growth, low inflation, and weak investment were driven largely by the financial crisis and worsened by Obama-era anti-business policies, while Trump-era tax cuts, deregulation, and infrastructure reform should lift investment, productivity, and growth.
Main Topics: Role and design of the CEA (Priority: 5/5): Hassett explains the Council of Economic Advisers as a White House institution created to embed professional economic analysis in policymaking, emphasizing its small, rotating staff and academic orientation. Institutional inertia and flawed forecasting (Priority: 5/5): He criticizes Washington’s career-staff culture for relying on outdated models like potential GDP and the NAIRU, arguing that official forecasts often lag behind modern academic evidence. Why the post-crisis recovery was slow (Priority: 5/5): Hassett argues that after a financial crisis, growth naturally slows for years, and that Obama-era stimulus and broader policy choices amplified the downturn rather than correcting it. Wages, productivity, and labor force participation (Priority: 5/5): He links weak wage growth to poor productivity performance, declining capital deepening, and lower labor force participation, blaming regulation, taxes, Obamacare, and other policy changes. Low inflation and interest rates (Priority: 4/5): He says low inflation reflected weak growth and labor-market slack, while low long-term rates were consistent with expectations of prolonged low short rates and subdued macro conditions. Trump policy agenda: taxes, deregulation, and infrastructure (Priority: 5/5): Hassett presents the Trump administration’s economic plan as supply-side oriented: lower corporate taxes, fewer regulations, faster permitting, and more private capital investment. Technology, automation, and adjustment (Priority: 4/5): He views AI and automation as productivity-enhancing but disruptive, requiring better training and transition assistance for displaced workers.
Key Arguments: The CEA’s strength comes from rotating in academics who are close to the literature, rather than relying on a permanent bureaucratic class that may ossify around old models. Potential GDP forecasting and similar conventional models are poor performers relative to simpler time-series approaches, yet remain entrenched in Washington. The 2009 stimulus was, in Hassett’s view, logically flawed because temporary spending boosts would be offset by later withdrawal and future tax burdens, producing little sustained benefit after a financial crisis. Weak wage growth and falling labor-force participation explained why unemployment could fall while the broader economy remained sluggish. Obama-era policies—regulation, tax burdens, Obamacare, and anti-business rhetoric—reduced capital formation and productivity, contributing to historically weak real wage growth. Low inflation was a predictable outcome of slow growth, weak wages, and low capital spending rather than a puzzle requiring a primarily monetary explanation. Trump’s tax cuts and deregulation were already improving business sentiment and should raise investment, productivity, and potential GDP. Infrastructure reform matters chiefly by reducing permitting delays and crowding in private capital, not merely by increasing government spending. AI and automation will increase productivity but also displace workers, making retraining and transition policies more important over time.
Data Points: CEA staffing: a little bit north of 40 people - Hassett describes the CEA’s size and rotating staff model. Annual staff turnover: about 34 of 40+ staff go home in June and are replaced - He uses turnover to explain how the CEA stays current with academic research. Potential GDP forecast horizon: 10-year growth forecasts - He criticizes official medium-term forecast methods used at CBO, the Fed, and elsewhere. Obama-era real wage growth: minus 0.4% per year - He says average real wages declined during Obama’s terms. Capital deepening contribution: negative in the second half of Obama’s term - He says this was the first negative contribution in U.S. history since WWII. Historical capital-deepening benchmark: a little less than 1% per year - He describes the typical historical contribution to productivity growth. CEA analysis of regulation growth: about 8% per year - He cites a measure of regulation growth during the Obama administration. Core PCE inflation performance: about 1.5% on average - He notes the Fed’s preferred inflation measure stayed below target over the decade. Fed inflation target: 2% - Discussed as the Fed’s implied and later explicit target. Historical NAIRU estimate at the Fed: 6% - He recalls the Fed’s earlier precise unemployment-inflation threshold estimate. Infrastructure approval time: 10 years down to 2 years - He says the administration wants to compress project approvals dramatically. Old project approval example: first submitted in the 1930s - He cites an anecdote about a stalled infrastructure project.
Pivotal Quotes: "the CEA was established basically to entrench the advice of professional economists in the White House" — Kevin Hassett: On the origin and purpose of the Council of Economic Advisers. "the U.S. economy, to anyone who actually studies economics and thinks about how things work, was the patient with a knife in the chest" — Kevin Hassett: His metaphor for how obviously broken he believed the economy was after the crisis and under prior policy. "if we were to introduce new government regulations, Podcasts say, then you guys might have to hire lawyers to study the new regs" — Kevin Hassett: On how new regulation creates compliance burdens and slows business activity.
Implications: Listeners should expect a strongly supply-side interpretation of recent U.S. macro history: weak growth and inflation are framed as policy-induced and reversible through lower taxes, deregulation, faster approvals, and labor-market participation reforms. Automation will raise the premium on retraining and mobility.
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Hosted by David Beckworth of the Mercatus Center, Macro Musings pulls back the curtain on the important macroeconomic issues of the past, present, and future.