David Woo on What the Economists Got Wrong About the Stimulus

Episode Summary

Executive Summary: The episode centers on a debate over U.S. inflation, stimulus, and whether COVID is primarily a demand shock or a negative supply shock. Guest David Wu argues inflation above 2% is enough to force the Fed to tighten, that the pandemic has disrupted labor supply, trade, and production, and that recent fiscal policy overstimulated demand. Joe and Tracy largely probe and contextualize these claims, noting the recovery in consumer spending and jobs.

Main Topics: Inflation and the latest CPI print (Priority: 5/5): The hosts open with the newest CPI release, noting moderation in sequential inflation and relief in used-car prices, while debating whether the current pace is still too hot for policymakers. Fed framework and inflation expectations (Priority: 5/5): Wu dismisses average inflation targeting as signaling gimmickry and argues that once inflation expectations rise, the Fed will be forced to act to avoid a Volcker-style credibility problem. COVID as a negative supply shock (Priority: 5/5): Wu frames COVID primarily as a supply-side disruption, citing freight bottlenecks, labor-force withdrawal, childcare constraints, and production constraints as inflationary forces. Fiscal stimulus and demand support (Priority: 4/5): The conversation examines whether stimulus, enhanced UI, eviction relief, and other programs stabilized incomes and spending or instead overstimulated an economy with supply constraints. Consumer balance sheets and the recovery (Priority: 4/5): Wu argues households are unusually strong due to rising home and stock prices plus low debt-service burdens, helping explain the rebound in spending and hiring. Global supply chains, Asia, and Delta (Priority: 4/5): The discussion widens to Asia’s COVID strategy, Delta’s spread, and the fragility of global supply chains, with Wu arguing that containment strategies are becoming obsolete. U.S.-China decoupling and inflation (Priority: 4/5): Wu warns that worsening U.S.-China tensions and deglobalization could create a more permanent supply shock, raise costs, and eventually pressure asset prices and inflation higher.

Key Arguments: Inflation at 3%-4% is already a serious problem because the whole market is calibrated around ultra-low Fed rates; the issue is not only 6%-7% inflation. Average inflation targeting is portrayed as a communication device meant to suppress rate expectations, not a binding commitment the Fed will honor if inflation rises. COVID should be understood mainly as a negative supply shock: it reduces labor availability, disrupts logistics, and limits the economy's ability to meet demand. Massive fiscal stimulus in 2021 was excessive relative to the moment because it boosted demand when supply was still constrained. Households entered the recovery in unusually strong financial shape due to asset-price gains, low debt service, and policy support, explaining strong consumption. Asia’s initial elimination strategy worked only against earlier variants; Delta makes containment less effective, and reopening/coexistence is the more sustainable path. De-globalization and U.S.-China decoupling would likely raise production costs, create inflation, and reduce the disinflation that supported asset-price growth over the last 20 years. Policies like PPP are defended as supply-side support because they prevented business failures, while later direct cash payments are criticized as unnecessary demand stimulus.

Data Points: CPI moderation: Sequential inflation showed moderation in the latest report - Opening discussion of the August 11 CPI print Core CPI monthly increase: 0.3% - Wu cites core inflation still rising at this pace despite easing in used cars Annualized rate implied by core CPI: Close to 4% - Wu argues this remains far above the Fed's comfort zone Inflation target threshold: 2% - Wu says even inflation modestly above this level becomes a Fed problem Potential inflation range cited: 3%-4% - Used as the level at which Fed credibility and markets get worried Global freight rates: Doubled last year and doubled again this year - Wu points to container shipping as evidence of supply stress Women’s labor participation: Massive drop over the last 18 months - Attributed to childcare burdens and lack of vaccines for children Household net worth as share of disposable income: All-time high - Due to stock and home price appreciation Debt payment as share of disposable income: All-time low - Wu says ultra-low rates reduced household debt burdens Enhanced unemployment benefits: Some recipients earned more from benefits than from prior wages - Used to argue policy strongly supported demand Federal eviction moratorium: Extended - Mentioned as part of ongoing household support Student loan moratorium: Extended until October - Example of continued policy relief U.S. household savings rate: 8%-10% - Wu cites elevated savings as evidence households had spending power Global economy contraction in 2020: 3.6% - Wu uses IMF-style macro framing Foregone global GDP in 2020: About $9 trillion - Wu estimates lost output from the pandemic recession Global fiscal spending: $15 trillion - Wu sums worldwide emergency fiscal support Combined pandemic cost cited: $24 trillion - Wu adds foregone GDP and fiscal spending together Combined wealth of global billionaires: $13 trillion - Used as a contrast to the pandemic cost Value of top 50 sports teams: $170 billion - Used to illustrate scale of $24 trillion Manhattan land value: $1.7 trillion - Used as another scale comparison People suffering chronic hunger: 700 million - Wu claims the cost could feed them People without safe water: More than 1 billion - Used in his moral framing of pandemic costs Children missing school: About 500 million - Used to illustrate global harm from COVID Cost to protect endangered species: $76 billion per year - Wu says the pandemic cost could cover this many times over Fiscal stimulus package: $1.6 trillion - Biden-era package Wu says was excessive and unnecessary Jobs recovered: Nearly 2 million in the last two months - Tracy cites labor-market strength as a counterpoint Employment gap: 8 million jobs short - An estimate mentioned as still missing versus pre-crisis trend Hospitality and leisure job creation: Fourth month in a row leading all private sectors combined - Supports the claim that consumers are spending again Delta mortality rate: About 0.2% - Wu cites this as the mortality rate for vaccinated people in the UK Delta spread in the UK: Cases fell more than 70% after peaking - Used as evidence that outbreaks can crest Israel immunity rate after two shots: Less than 40% - Wu cites waning immunity concerns

Pivotal Quotes: "I think the whole averaging inflation was a gimmick." — David Wu: Wu rejects the Fed's average inflation targeting framework as communication theater "If inflation just goes above 2%, if it just goes to 3%, the world is going to have a huge problem." — David Wu: His core warning about how sensitive markets and the Fed are to inflation "COVID is a negative supply shock." — David Wu: His central macro framework for interpreting inflation, labor, and supply-chain disruptions

Implications: Listeners should expect continued debate over whether inflation is temporary or structural. If Wu is right, the Fed may tighten sooner, deglobalization could raise prices, and markets reliant on low rates may face pressure.