University of Chicago Booth School of Business Professor & Former Council of Economic Advisers Chair under Obama Austan Goolsbee discusses key takeaways from the G-7 summit.
AUSTAN GOOLSBEE: We've talked before, a lot of times at G7 meetings, nothing happens. They can't even agree to say that they had a productive meeting. This time, they actually drafted documents and reached some substantive agreement. And maybe it's because we've had such a contentious previous four years that the European leaders are just so relieved that the United States wants to work with them again. But I think on the tax front, on the austerity versus stimulus front, on the climate change front, you saw a lot of action that actually had some content.
ZACK GUZMAN: Yeah. What does that maybe signal about the progress being made there when it comes to some of the initiatives that we've heard not just from President Biden but also from Treasury Secretary Janet Yellen there in this global, coordinated effort to really make progress specifically when it comes to tax policy and what they're trying to do there to help support what they might be trying to do back here at home in a coordinated effort?
AUSTAN GOOLSBEE: Yeah, that's an important area. We don't really know the details. The agreement, in principle, to seek a global minimum tax of 15%, in a way, there are a series of US large tech companies and pharmaceutical companies that are paying low rates in Europe. So much of this might actually be directed toward them.
I think that, for sure, this spirit of the agreement goes in the way of the spirit that Secretary Yellen's been describing of kind of let's stop with the tax avoidance. Let's try to crack down on tax shelters.
In the broader EU, countries like Ireland and then a series of non-EU low tax countries, you kind of got to get them either on board or get some of the allies around with enforcing this agreement onto those countries if it's actually going to work.
AKIKO FUJITA: Yeah, I mean, to the point you've made, G7 often about sort of a commitment, but a lot of it is bottom line down to the policy makers on the domestic front.
Let's talk about another area you're going to be watching this week very closely, obviously, the Fed meeting kicking off tomorrow. This comes on the back of a number of economic data that we've gotten that really points to things heating up.
We saw CPI, the fastest pace since August 2008 in terms of growth in May. Core CPI, so the sharpest increase in nearly three decades. And then we're talking about job openings hitting a record number. How do you think the Fed should process all of that?
AUSTAN GOOLSBEE: Well, this is happening faster than any recovery has ever happened in the United States. So the first thing, we would normally have far more patience with how fast the comeback is taking place because it would be taking place over months or even years, not over weeks. And now it seems like we're demanding it to be in days.
I think the Fed outlined, before we started getting these numbers, fully expecting that we would have these blip-ups in inflation because prices went down a year ago, and now they're going up. So it's going to look like some substantial inflation. And the question is, is that lasting, or is that temporary?
The Fed tried to lay out, before these numbers came in, that they weren't going to overreact. You saw Chair Powell say, we're going to look at a longer-term average. We're not going to fall prey to these baseline effects. So most people anticipate not much to come out of the Fed meeting this week. But looking for the little crumbs, little glimpse, how long is long enough that we're then going to move to a new regime?
ZACK GUZMAN: But it does sound like-- I mean, if you look at the yield on the 10-year, it's come down quite a bit. I'm not sure if that's maybe proof enough to point to people buying into what Chair Powell has been saying in terms of them staying accommodative for longer or waiting to see some of the things they want to see in this recovery actually gaining strength for Main Street and the people that they've looked at who have not benefited so far in this recovery.
I mean, when you look at that, does that signal to you, with the 10-year now below 1.5 relative to 1.75, I think it was, in March, that people are on board with that idea?
AUSTAN GOOLSBEE: Yeah, I kind of think it says that investors do not anticipate this being a lasting inflation. If they thought that this was actually lasting inflation and we were opening the Pandora's box and could not get it back in, you would certainly expect that the interest rates would be going up and that other measures of inflation expectations would be rising quite a lot. And they haven't.
I think part of that is they believe what Chair Powell has said. I think another part of that is the preponderance of evidence is still that this is actually temporary, that these are just supply bottlenecks, that we did not have lasting or sustained inflation when the unemployment rate was 3 and 1/2 percent before COVID. So why should there be sustained, lasting inflation when the unemployment rate is almost double that in an apples-to-apples way?
AKIKO FUJITA: But so much of this is really about messaging. And to Zack's point, if you look at the move on at the 10-year, it does seem like we've seen investors buying into this idea of the Fed being much more patient. Now, the question certainly is going to be whether the Fed's outlook has changed as a result of the latest data. And if that's the case, how do you sort of start to make that turn on the messaging, not necessarily raising rates but at least this idea of tapering asset purchases?
AUSTAN GOOLSBEE: Yeah. Look, what you would expect to see is, in a shorter time frame, the same thing that we saw over the years following the financial crisis where many of the same inflation critics today were saying there's about to be an imminent danger of hyper-inflation. They were saying it in 2009, in 2010, in 2011.
And the Fed did a good job, I thought, of transitioning. They would kind of put in the so-called Evans rule they put on the table-- let's not even talk about tapering or changing the monetary policy position until we get the unemployment rate down to some level. And then they would try to put on people's radar screen with enough advance notice so nobody would have to freak out, here is what we're thinking. Here's what we think the economy is. Here's where we see things going over the next one year, two years, et cetera.
So you would think that they eventually will start putting some language on the board that might be subtle that gives people the signal, hey, pretty soon we're going to turn the corner. But I don't anticipate that for a while because I don't think that they feel that this is sustained inflation. If there's evidence of sustained inflation, then I think the Fed has got to act. But so far, this hasn't really looked like sustained inflation.
AKIKO FUJITA: And, Austan, finally, I'm curious to get your thoughts on the labor market because we've had so many conversations about business owners who are saying they're having a hard time filling these positions that are opening up or seeing these headlines about Americans quitting their jobs at a higher rate because they believe they have a little more leverage in terms of negotiating in wages and whatnot.
You could argue that that's certainly a better position for employees. From an economic front, how are you watching it?
AUSTAN GOOLSBEE: Look, we've been wanting for a long time to get wages up for ordinary workers in the country. If that is a sign that there is a shift back to a more of a balance that workers, during boom times, can expect wage increases, which was true for decades until recent times, I don't think that's bad. I think that's good.
Now, the question of labor supply and whether we can find workers is an important bottleneck as you're coming out of a scenario like this. One group says it's because of UI payments. One group says is because people are afraid of catching the virus in these very public occupations where you have to interact with one another. And one group says it's because of child care, health care, elder care, and things like that.
The good news on all of those fronts is, over the next two to three months, the constraint on each of those three should become a lot less, in which case, we probably would get a nice supply side boost to the economy. And we might be able to grow at an even faster rate without seeing inflation because of those supply side. So I guess I'm back to my, let's just have a little patience. We don't normally think of, when there are job openings, why haven't they been filled in the last three weeks? That's normally a couple of months process it takes.