Out of the Wilderness with Glenn Hubbard

Episode Summary

Executive Summary: The episode centered on December’s unexpectedly strong U.S. jobs report and what it means for the Fed, markets, and the incoming Trump administration. Glenn Hubbard argued the economy is strong but policy uncertainty, sticky inflation, tariffs, immigration changes, and fiscal expansion could keep rates higher for longer and complicate growth goals. The discussion also explored tax reform, debt, regulation, and why economists are losing influence.

Main Topics: December jobs report and labor market strength (Priority: 5/5): Dante and the hosts dissected a much stronger-than-expected December payrolls report, with broad labor-market resilience, low layoffs, and only modest wage pressure. The group agreed the report was impressive and consistent with a still-healthy economy. Fed outlook and interest-rate expectations (Priority: 5/5): The conversation focused on why markets moved sharply after the jobs report and why Hubbard thinks the Fed may not cut rates in 2025, or may remain on hold because of sticky inflation, stronger growth, and policy uncertainty. Trump policy agenda: tariffs, immigration, taxes (Priority: 5/5): The hosts and Hubbard debated the likely economic effects of tariffs, deportations, and TCJA extension. Hubbard supported border security and some trade measures in principle but warned broad tariffs and large deportations could be inflationary and inefficient. Fiscal deficits, debt, and budget constraints (Priority: 4/5): Hubbard emphasized that extending tax cuts, increasing defense spending, and paying higher interest on debt could worsen the fiscal outlook. He warned the U.S. is already at a large deficit-to-GDP ratio and that debt-limit politics will be difficult. Regulation, permitting, and government efficiency (Priority: 4/5): Hubbard argued the administration could make a constructive pro-growth agenda through regulatory reform, especially on housing, zoning, permitting, infrastructure, and the electricity grid, rather than relying on blunt force budget cuts. Economists’ public influence and communication (Priority: 3/5): The episode closed with a reflection on economists’ declining influence, especially after forecasting misses and populist skepticism. Hubbard argued economists need to speak more plainly and focus on policymakers’ real transition costs.

Key Arguments: The December jobs report was stronger than expected and showed broad-based labor-market resilience rather than a narrow one-month fluke. Underlying job growth is likely closer to 150,000-175,000 per month, still healthy but below December’s 256,000 pace. Layoffs remain extremely low; the labor market is not near distress even as hiring cools. Markets may be reacting less to new information than to the realization that rate cuts are less likely than they had priced in. Hubbard sees a strong economy, but inflation remains sticky and could stay higher because of tariffs, deficits, and uncertainty. Broad tariffs are not his preferred policy tool; if the goal is more domestic production, tax or regulatory incentives may work better. Immigration enforcement and border control are widely justified, but mass deportations could raise wages and prices and create labor shortages. TCJA extension is likely, but the bigger debate is whether to restore expensing and how to avoid worsening deficits. Debt-limit brinkmanship and rising interest costs will intensify fiscal pressure, especially alongside defense spending demands. The administration’s best pro-growth opportunity may be regulatory reform, not ambitious budget cutting through DOGE. Economists lose credibility when they sound detached from lived experience; better communication and policy relevance are essential.

Data Points: Nonfarm payrolls added: 256,000 - December jobs report headline gain, far above consensus expectations Three-month average payroll growth: About 170,000 - Dante’s estimate of more realistic trend job growth Average underlying monthly job growth: 150,000-175,000 - Dante’s estimate of sustainable trend job creation Wage growth m/m: 0.3% - December average hourly earnings growth Wage growth y/y: 3.9% - Ticked down from 4.0% after rolling off stronger prior-year gains Unemployment rate: 4.1% - Unemployment rate fell by one-tenth in December Average weekly hours: Steady - Hours worked were unchanged overall in the report UI claims four-week moving average: 213,000 - Marissa’s stat on initial unemployment claims; very low by historical standards Difference between payroll and household survey job gains in 2024: 1.695 million - Dante’s stat showing large divergence between surveys Payroll survey job gain in 2024: Just over 2.2 million - Used to compare with household survey employment growth Household survey job gain in 2024: 537,000 - Much smaller than payroll survey gain Annual payroll-household survey gap: Over 5 million across 2021-2024 - Dante noted four consecutive years of large divergence Largest annual divergence since: 2003 - The 2024 gap was the biggest on an annual basis since then 30-year Treasury yield: Over 5% - Glenn’s chosen stat to capture inflation, term premium, and fiscal concerns 10-year Treasury yield: About 4.75% - Discussed during market reaction to the jobs report Fed rate-cut expectation: One to two cuts in 2025 - Market pricing after the strong jobs data Current policy deficit ratio: About 6% of GDP - Used in discussion of fiscal constraints and growth objectives Potential growth target: 3% - Reference to Scott Bessent’s growth ambition Defense spending share of GDP: A little over 3% - Discussed as part of future fiscal pressure State and local tax deduction cap: $10,000 - TCJA cap Hubbard criticized raising as bad tax policy Corporate expensing phaseout: 2023 to 2026 - Hubbard said full expensing is already phasing out under TCJA Approximate 10-year cost of restoring expensing: About $400 billion - Hubbard estimated the cost using Washington’s scoring convention Michigan inflation expectations one-year and five-year: 3.3% - Chris’s stat on consumer expectations; up from prior month Previous Michigan inflation expectations: 2.8% - Prior reading referenced in the discussion Federal Reserve benchmark/population update timing: Next release / January 2025 benchmark - Household survey population controls and payroll benchmark revisions were expected next month

Pivotal Quotes: "“I didn't think the Fed would cut at all in 2025, and I'm still not sure that it will.”" — Glenn Hubbard: On why strong growth, sticky inflation, and fiscal policy may keep monetary policy tight "“It’s a damn good report.”" — Mark Zandi: Reaction to the December employment release after the roundtable assessed the data "“I think the administration's got to do two things right out of the box. One is to first be clear as to what its objectives are.”" — Glenn Hubbard: On how the incoming administration should reduce uncertainty and pursue coherent policy

Implications: Listeners should expect a resilient labor market, fewer Fed cuts, and continued policy-driven volatility. The administration’s choices on tariffs, taxes, immigration, and regulation will matter more than short-term data and could shape inflation, yields, and growth in 2025.