Possiblism and Probablism

Episode Summary

Executive Summary: The episode centers on three big macro themes: the high-stakes debt-limit standoff, the mixed legacy of Biden-era economic policy, and the path of inflation/recession. Guest Jason Furman argues the debt ceiling is dangerously close to a breach, the ARP was oversized and inflationary, but infrastructure, chips, and climate legislation were broadly positive. He sees inflation easing but still sticky, and recession risk elevated—especially in 2024 if the Fed must keep tightening.

Main Topics: Debt ceiling and default risk (Priority: 5/5): The group discusses why the current debt-limit episode feels more dangerous than prior fights, with Furman arguing that political fragmentation in the House makes a timely increase less certain and that alternatives like prioritization, a platinum coin, or a 14th Amendment workaround are all risky or legally dubious. Biden administration’s economic agenda (Priority: 5/5): They review the major legislation of the Biden years: the American Rescue Plan, infrastructure, CHIPS, and the Inflation Reduction Act. Furman sees the latter three as broadly constructive, but believes the ARP was much larger than necessary and contributed to inflation. Inflation dynamics and labor-market tightness (Priority: 5/5): The conversation explores why inflation has been so persistent, focusing on wage growth, vacancies, quits, and short-run inflation expectations. Furman argues labor-market tightness—not just temporary shocks—remains the key obstacle to returning to 2% inflation. Recession probability and timing (Priority: 5/5): The hosts and Furman debate recession odds. Furman puts 2023 recession risk around 40–45% and thinks 2024 risk is materially higher if the Fed needs to continue hiking. The hosts remain more bearish, especially on timing. Housing and the statistics game (Priority: 3/5): The episode’s lighter segment uses housing data to illustrate the slowdown in residential construction. Negative differences between permits and starts signal weakening ahead, while record multifamily construction is expected to feed disinflation in rent. Policy implementation and administrative capacity (Priority: 4/5): They stress that even well-intended stimulus or labor-market support is constrained by outdated government systems, which can’t easily target benefits or adjust payments precisely, limiting policy design options in a downturn.

Key Arguments: The debt ceiling is not a normal bargaining chip; breaching it would create default risk, market chaos, and legal uncertainty. House Speaker McCarthy’s need to appease hardliners makes a clean debt-limit vote harder than in 2011, when party leaders accepted that raising the ceiling was unavoidable. Prioritization is not a credible fix because it has never been done, may be technically infeasible, and would likely be treated as default by markets. The platinum coin idea would dangerously politicize the Fed and undermine constitutional checks and balances. The ARP was too large given the economy’s condition in early 2021 and likely added to inflation, even if it was preferable to undershooting support. Infrastructure, climate, CHIPS, and competition policy are viewed as mostly positive, though CHIPS’ effectiveness depends on implementation. Inflation is easing in goods and likely housing, but wage growth and labor-market tightness still make a return to 2% inflation difficult. Job openings and quits are better indicators of inflation pressure than unemployment alone. A recession in 2023 is possible but not inevitable; the bigger risk may be in 2024 if the Fed must keep rates high or raise them further. Administrative systems remain too primitive to deliver finely targeted countercyclical support quickly in a future downturn.

Data Points: Debt-limit extraordinary measures: Expected to last until June, with uncertainty possibly extending 1-2 months - Treasury’s temporary measures while Congress debates raising the debt ceiling House votes for debt-limit increase: 218 votes available, but mostly because of 212 Democrats plus a handful of Republicans - Political arithmetic for passing a debt-limit bill Senate votes for debt-limit increase: 50 votes already there - Furman’s explanation that the Senate is not the main obstacle Probability of death analogy: 10%–15% chance - Furman’s analogy for how concerned he is about debt-limit breach risk Biden-era fiscal support: 25% of GDP - Combined CARES Act, December 2020 legislation, and American Rescue Plan support within about a year Potential multiplier discussed: 0.2 in the first year; 0.2 in the second year as a thought experiment - Illustration of why large fiscal support can still create excess demand and inflation Consumer spending vs CBO pre-pandemic forecast: About 2.5% above forecast - Used to show demand has remained stronger than expected Real disposable income vs forecast: About 1 percentage point below forecast - Households are spending above income trends, drawing on buffers 2023 recession probability (Furman): 40%–45% - His personal estimate for a recession in the next year 2024 recession probability (Furman): Above 50%; implied around 60%–65% cumulative over two years - He expects higher risk if the Fed has to keep tightening 2023 recession probability (Chris): About two-thirds - Chris Dorites’ more bearish assessment UI claims: 190,000 - Low initial claims used to illustrate the still-strong labor market 4-week moving average of UI claims: About 200,000 - Near historic lows, contrasting with recessionary norms around 300,000 Single-family housing starts minus permits: -179,000 - Chris’s statistic game clue pointing to weakening housing momentum Productivity growth over the pandemic period: 1.4949% annual rate - Jason’s statistic game answer, described as close to “the meaning of life” for economics Multifamily units under construction: 926,000 - Record-high housing supply in the pipeline, important for future rent disinflation Wage growth: About 2 percentage points above pre-pandemic levels - Central concern in explaining why inflation may not return cleanly to target Fuel price peak mentioned: $5 per gallon - Used to explain how inflation expectations surged after the Ukraine invasion Current gas prices mentioned: About $3.25–$3.50 per gallon - Presented as evidence that inflation expectations are moderating Average hourly earnings growth: About 4.5% per year - Furman’s rough threshold for why 2% inflation is hard to sustain Short-run inflation expectations (New York Fed mentioned): Around 4% - Used to show expectations have declined but remain above pre-pandemic levels

Pivotal Quotes: "I'm much more scared than I have been in the past." — Jason Furman: His bottom-line view on the heightened risk of a debt-limit breach "If we don't have a recession this year, then I think almost certainly we're going to have inflation that's above 3%, more likely rising than falling." — Jason Furman: Explaining why the Fed may need to keep tightening if growth stays resilient "Possibilism, not probabilism." — Jason Furman: His critique of relying on plausible stories rather than the most likely macro scenario

Implications: Listeners should expect continued policy volatility: a real debt-limit accident, slower disinflation than hoped, and recession risk that may shift into 2024 if the Fed stays restrictive. Housing softness may help inflation later, but labor-market tightness remains the key variable.