Episode Transcript
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4:00
I hear people talking about whether he's
4:02
doing enough on climate change. Young
4:04
voters care so much more about inflation than they
4:06
do about climate change. I'm
4:10
Noam Hasenfeld, and this is the
4:12
second episode of Unexplainable's series on
4:14
economic mysteries. This week,
4:16
with inflation still at the top of so
4:19
many people's minds, how much
4:21
can we actually control it? Or
4:23
as one economist I spoke to put it,
4:25
What the heck just happened? And
4:28
what could we possibly do to make sure it
4:30
doesn't happen again? I'm
4:34
here to talk about the economy. What? Like
4:36
it's hard? You may be wondering, who got
4:38
all this money? Nobody knows. The money's not
4:40
here. Well, your
4:43
money's in Joe's house, on Mrs. Meiklin's house,
4:45
and a hundred others. It's just money. It's
4:47
made up. It doesn't exist. It's not real.
4:50
It's not alive. If you
4:52
believe it. Okay,
4:54
it's not like we don't know anything about
4:56
inflation. I mean, I kind
4:58
of knew nothing about inflation coming into
5:00
this. But over the last
5:02
few weeks, I've been talking to economists and
5:05
reporters, and they told me
5:07
that the best way to start understanding
5:09
how inflation works is to break the
5:11
theories down into two basic buckets. The
5:18
first bucket says that inflation comes from people
5:20
having too much money to spend. Maybe
5:23
they got lots of stimulus checks. Maybe
5:25
the government printed a whole bunch of cash. Or
5:28
maybe there's just a lot of people working
5:30
and getting paid. All that
5:32
money leads to more demand for stuff. People
5:35
buying more stuff, which drives up prices.
5:38
Or to put it all simply, too
5:40
much money, not enough stuff. So you
5:42
get inflation. You can think of
5:44
this bucket like a kind of seesaw. On
5:47
one side, you got inflation. We'll
5:49
use a synth sound for that. And
5:52
on the other side, unemployment. That's
5:54
going to be a piano. So if
5:57
unemployment goes down, more people will
5:59
be paid. are working, more money
6:01
to spend, inflation goes up.
6:04
On the flip side, if unemployment goes up,
6:08
there's fewer people working, less money to
6:10
spend, inflation comes
6:12
down, which is exactly what a
6:14
lot of major economists were pushing for when inflation
6:16
was skyrocketing a couple of years ago. Larry
6:19
Summers said things like this, that
6:21
you would need to see unemployment
6:23
rise significantly before you saw inflation
6:25
come down. There's
6:28
going to need to be increases in
6:30
unemployment to contain inflation.
6:35
It might seem kind of weird
6:37
to hear economists pushing for more
6:39
unemployment. They're advocating for
6:41
a worse economy. But
6:44
under this theory, it's just a zero-sum
6:46
game. The only way to
6:48
get inflation down is to get unemployment up.
6:51
It's a necessary pain. So
6:54
then how do you actually drive unemployment
6:56
up? The
6:58
idea is that the Fed, the central bank
7:00
that sets economic policy in the US, it
7:03
can raise interest rates, which makes it
7:05
harder for businesses to take out loans and
7:08
hire more people, which leads
7:10
to more unemployment. But
7:13
when the Fed did exactly that in 2022, the
7:16
Federal Reserve raised interest rates today
7:19
in its effort to stamp down
7:21
surging inflation. Something unexpected happened. Unemployment
7:24
didn't change at all. More
7:26
than half a million jobs were added
7:29
last month alone. But inflation
7:31
somehow went down. Inflation
7:33
is coming down hard, and it is coming
7:36
down a lot faster than I think people
7:38
thought. The two sides
7:40
of that inflation-unemployment seesaw, they
7:43
were both low. The theory
7:45
turns out to be badly wrong. It
7:48
turns out that you could have
7:50
falling inflation without rising unemployment. unemployment
8:00
at the same time. This
8:03
is where we get to the second stranger bucket
8:05
that I really want to focus on, which
8:07
is how most economists explain the way inflation
8:09
came down in 2022. It's
8:16
more complicated than just this simple
8:19
seesaw of unemployment going up and
8:21
inflation coming down. It's
8:23
how people feel about the economy
8:26
and what they think is going to happen in
8:28
the future. If you look at
8:30
most theories of inflation now, one
8:32
of the variables that you will see trying
8:35
to predict inflation is what
8:37
people expect inflation to be. Expectations.
8:41
Inflation somehow happens because people
8:43
expect it to happen. And
8:45
it goes away because people expect it to
8:47
go away. And that might seem a little
8:50
bit circular, but there's something
8:52
subtle and important happening there. When
8:54
you expect more inflation, you do
8:56
things that cause inflation. So
8:59
as a worker, you might demand a raise because
9:01
your prices are going to go up. And unless
9:03
you get a raise, your standard of living is
9:05
going to go down. So this
9:07
has a lot of the same mechanics as the
9:09
first bucket. People buying more stuff still leads to
9:11
inflation. But it's not
9:14
as simple as unemployment up inflation
9:16
down. It's more long term.
9:18
When businesses expect future prices to go
9:20
up across the board, they're going to
9:22
raise their own prices to keep up.
9:25
And if enough people and businesses are making
9:27
those kinds of decisions based on their expectations
9:29
of where the economy is going, it
9:31
becomes a self-fulfilling prophecy. This
9:35
whole idea of expectations came out of what
9:37
happened in the 70s and 80s, which is
9:40
the last time inflation was higher than it
9:42
was a couple of years ago. This is
9:44
a new strain of inflation, and it infects
9:46
the whole world. At that
9:48
point, after years of inflation, the
9:50
Fed eventually decided to follow the
9:53
seesaw model, jacking up interest rates,
9:55
triggering unemployment, just like they planned.
10:00
But inflation still stayed super
10:02
high. Economists weren't really
10:04
sure what to make of it. Why
10:07
wasn't the seesaw working? We
10:09
may have to change our minds about it
10:12
and simply accept high inflation and unemployment as
10:14
normal in a new world. So
10:16
they landed on a new idea. People
10:19
just didn't trust the Fed.
10:21
The past experiences any guide? The
10:24
future of our country is
10:26
in jeopardy. Inflation had
10:29
gone on for so long that regular
10:31
people didn't think the Fed's higher interest
10:33
rates would actually do anything. People came
10:35
to believe that the people who were
10:37
supposed to be the adults in the
10:39
room, the Fed, they were
10:41
just letting it happen and they didn't have the
10:44
stones to get it under control. Basically
10:46
the Fed lost credibility. We've
10:48
tried care and hope and this inflation
10:50
will not be charmed. So
10:53
the Fed needed to get that credibility back.
10:56
And it proved to people that these new interest
10:58
rates had teeth in staying power.
11:00
One cure is a great depression. So
11:03
they allowed interest rates to go sky
11:05
high, just pummeling the U.S. economy. High
11:07
interest rates and the restrictive money supply
11:09
are taking their toll with a consumer.
11:11
And it worked. Inflation
11:13
fell precipitously. The Fed
11:16
regained credibility and people began to see it
11:18
as an agency that took inflation seriously. I
11:20
think we owe you, Chairman Volcker, a rousing
11:22
vote of thanks for your great job in
11:24
bringing inflation down. Essentially
11:26
the Fed anchored people's
11:29
expectations. They convinced people
11:31
that no matter what, they wouldn't
11:33
let inflation spiral out of control.
11:37
And this is exactly how a lot of economists
11:40
explain what happened to us over the last couple
11:42
years. When the Fed raised
11:44
interest rates in 2022, they
11:46
basically reminded everyone there was an adult
11:48
in the room. That no matter what,
11:50
the Fed, essentially these people behind the
11:52
curtain of the economy, they'd
11:54
never let inflation get that bad again. But
11:58
this whole idea takes us to a... a pretty
12:01
strange place. Because
12:03
in a sense, it's not the exact
12:05
policy the Fed set, it's
12:07
that they got people to trust them, which
12:10
is weird. It can sound
12:13
a bit like voodoo and it is like
12:15
voodoo. Okay. But it does make the role
12:17
of the Fed almost
12:19
more psychological. That it's not
12:21
even about the actual policies they're doing so
12:23
much as, can they actually
12:26
reassure markets that things aren't going
12:28
to get out of control? When
12:30
Dylan told me this, I found it kind of
12:32
hard to believe. So I called
12:34
up Adam Pozen, who used to be a central banker
12:36
in New York and in the UK, you
12:39
know, one of those people behind the curtain of the
12:41
economy. And he told
12:43
me he actually had conversations about the
12:45
psychological aspect of interest rates all the
12:48
time. When I was on the policy
12:50
committee of the Bank of England, I
12:52
would go off to vote on policy and
12:54
my wife would kindly say, go make good
12:56
policy, as I went out the door. And
12:59
at one point she said, well, this
13:01
is just all a communications message. So
13:03
if you communicate to people that
13:06
you believe something and they believe you, then
13:08
it happens. So Adam would go to work
13:10
trying to get people to feel confident about
13:12
the economy. Essentially, yeah, that's a lot of
13:15
what it is. If you
13:17
convince people that you're willing
13:20
to take the steps necessary to
13:23
bring inflation down, meaning you're willing to raise
13:25
rates a lot and you're willing, if necessary,
13:27
to suffer unemployment or slower growth, then
13:30
people may believe you're willing to do it
13:32
and you don't actually have to go through
13:34
the process. According to this
13:36
theory, the Fed isn't just controlling
13:39
interest rates. They're shaping
13:41
people's beliefs about the world, which they
13:43
do by constantly being at the ready
13:45
to adjust those interest rates. But
13:48
no one really knows just how ready they
13:50
have to be. We don't
13:53
know how long it takes
13:55
people to change their mind
13:57
about inflation, how
13:59
much the... path of past inflation
14:01
affects their thinking about future inflation.
14:03
We don't know how high interest
14:05
rates have to go in order
14:07
to anchor people's expectations. We
14:10
don't know how long these expectations last. There's
14:12
a lot of things we don't know. So
14:14
for central bankers like Adam, the
14:17
psychological part of this creates a
14:19
kind of funny tension. You
14:21
don't want to give people false
14:24
impressions that you
14:26
know precisely what's going to happen.
14:29
But you don't want to communicate to people
14:31
how uncertain you are. Adam had to
14:33
deal with this kind of thing during the financial crisis in 2009,
14:36
when he was pushing for banks in the UK
14:38
to buy up all these government bonds. It was
14:40
all speculative. None of us knew exactly what was
14:43
the right amount, how long it would take, or
14:46
even the mechanisms necessarily. But in order
14:48
for the plan to work, Adam didn't
14:50
want to be honest about all that
14:52
uncertainty. We decided that none of us
14:54
would go out in public and start
14:56
saying, well, I'm not sure this is
14:58
going to work. Oh, I know I'm
15:00
really uncertain about this part because then
15:03
it was even less likely to
15:05
work. So it's showing confidence to
15:07
instill confidence. If
15:12
I'm being honest, this is not exactly
15:14
what I pictured the Fed doing behind
15:16
the curtain. I thought the
15:18
Fed was almost like this kind of
15:20
supercomputer, figuring out the precise mathematical way
15:22
to balance the economy just right. But
15:26
the Fed's most important role might just
15:28
be when that curtain opens, performing
15:30
a kind of theater. It's
15:33
less about exactly what they do than it
15:35
is about how they do it, publicly
15:37
and confidently. Like
15:40
Adam said, it's showing confidence to
15:42
instill confidence. Now,
15:44
to be clear, it's not just theater.
15:46
The Fed raising interest rates does make
15:48
it harder for people to make big
15:50
purchases. It makes it harder for businesses
15:52
to expand. But according
15:55
to Adam, the bigger, more enduring
15:57
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15:59
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Com. This
28:05
was the second episode Unexplainable is doing
28:07
on economic mysteries. Next
28:10
week, how understanding our economy
28:12
might just come down to
28:14
understanding chaos. I've been
28:16
educated as a physicist, and I was
28:18
used to motions that were regular. So
28:21
having the realization that the
28:24
world could be unpredictable was
28:26
kind of mind-blowing. This
28:30
episode was produced by me, Noam Hasenfeld.
28:32
We had edits from Marianne McKeown with help
28:35
from Jorge Justin Meredith-Hodna, who runs our team.
28:38
Mixing and sound design from Christian Ayala,
28:40
music from me, fact-checking from Melissa Hirsch,
28:43
and all kinds of help from Mendingwen. Bird
28:46
Pinkerton watched as more and more platypuses
28:48
started emerging out of the tree roots.
28:51
Slowly, one platypus walked over
28:53
to Bird, paused,
28:56
and nodded. The platypuses
28:58
were ready to join the war. Special
29:03
thanks to Emily Stewart and Dylan Matthews for their
29:05
help with this episode. And thanks as
29:07
always to Brian Resnick for co-founding the show. If
29:10
you have questions or thoughts about this episode,
29:12
you can email us at Unexplainable at vox.com.
29:15
You can also support the show and all
29:17
of Vox's journalism by joining our membership program
29:19
today. You can go to
29:21
vox.com/members to sign up. And
29:23
if you really love supporting us, leave us a
29:25
nice rating or review wherever you listen. It
29:28
really helps us out a lot. Unexplainable
29:30
is part of the Vox Media Podcast Network,
29:33
and we'll be back next week.
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