(film reel clattering) - Welcome to today's Ethnic Media Services Zoom news conference.

I'm Sandy Close, EMS director.

Very happy to have a really great team of experts on our topic for today.

[background music] As we begin the year 2023, inflation is down but that is the end of the good economic news as most of us see it.

The threat of a recession still looms, which could result in job losses and budget cutbacks that will bring pain to many Americans.

Today's briefing focuses on how tight the economic squeeze will get in 2023.

How long will the recession last, if indeed we have one?

What populations will suffer the most?

What areas of the economy will be hardest hit?

And, which ones will be the most resilient?

How will new political realities affect policy and legislation, both at the federal and state levels?

We'll discuss all this with our expert panel in a Q & A session and invite our media to have their questions ready for the conversation.

Please enter your questions in the chat and you can start now.

Our speakers include Dr. Wendy Edelberg, director of the Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution.

(reading silently) Dr. George Fenton, senior policy analyst at the Center for Budget and Policy Priorities, CBPP.

And, Dr. Rakeen Mabud, Groundwork Collaborative chief economist and managing director of Policy and Research.

I should also add that Dr. Edelberg is the former chief economist at the Congressional Budget Office.

Now, turning the microphone over to my colleague, Pilar Marrero, who will be moderating today's briefing.

- Hi, Sandy.

Hi, everyone.

So, we hear a lot about inflation being down, which is a good thing.

Does that mean everything's gonna be okay?

Or, did Fed policy result in an economic squeeze that will bring job losses and a recession?

And, I'm gonna start with George Fenton.

- Thanks Pilar, and thanks for having me.

Let me say quickly first that, a disclaimer is that by training and practice, I'm not a macroeconomist.

So on the macro-forecasting questions, I may take more seriously what Rakeen and Wendy have to say as I'm learning much of what I do from the work that they're doing.

That said, let me maybe begin with a couple obvious but important points.

One is that, you know, we really do not know whether there will be a recession in 2023 or not.

A recent guest on Ezra Klein's phenomenal podcast said, "Look.

The consensus is that "if we have a recession, "that it will be short and shallow, "but it could be short and deep.

"It could be long and shallow.

We're really not sure what's going to happen".

Why does that matter when it comes to the policy upshot?

When it comes to the type of work that we do here at the Center on budget, which focuses on refundable credits: things like the Child Tax Credit, Earned Income Tax Credit, our most important anti-poverty programs which I'd be delighted to talk more about a bit later.

That this is all the more reason in the face of so much uncertainty right after an extraordinary period of historical crisis coming out of this pandemic, to have a firmer foundation of economic security with policies like that.

That said, and then I'll turn it to Wendy and Rakeen, you know, the forecasts are evolving.

So, Mark Zandi at Moody's Analytics currently has it literally at a 50-50 odds of seeing a recession in 2023, or not.

So, their baseline forecast has GDP growth and jobs growth slowing to a trickle by the fourth quarter of 2023 of this year, but neither of those actually declining.

A survey by Bloomberg of about 40 economists has those odds somewhat higher at more like 7 and 10.

- Okay.

So, thank you very much for that analysis and let's go to Wendy.

What do you think about this question?

Will we have a recession?

- Yeah.

It's an incredibly important one.

So, it's worth stepping back and thinking about some of the very broad factors that are pushing the economy around right now.

One of the reasons why I think the economy needs to slow is that, partly given all the fiscal support, and partly just because household balance sheets have been pretty strong and the economy has bounced back in many ways from the depths of the pandemic, we are spending- certainly as households and even in very broad strokes as businesses- we are spending as if there wasn't a pandemic.

We are back on track like the pandemic never happened, in aggregate.

There are really interesting things going on under the hood, but in aggregate.

And yet, labor force participation is still significantly below where would I would've expected it to be in absence of the pandemic.

We have maybe a million-and-a-half, 2 million fewer workers than I would've expected us to have.

So, something's gotta give.

Those two things are not compatible with each other.

And so, broadly speaking, the economy's gotta slow or something miraculous needs to happen to labor force participation.

But, I think we now have enough evidence under our belts that, that looks increasingly unlikely.

Another way of thinking about this, just in broad terms, is if you look at where the labor market was in December, there were about 225,000 net new jobs in December of 2022.

So, despite, you know-- it's worth noting that like, despite all of our concerns about where the economy might be headed, we still have a very, very strong labor market.

Like, December 2022 is just not that long ago.

So, 225,000 net new jobs.

That is-- I don't know.

Three times as fast as the sustainable pace, given what we know about population growth and the number of people who wanna work and all of those long-run trends.

So, if we were m... if the economy... if the labor market were moving at a more sus... eventually when the labor market gets to a sustainable pace, that the economy can just kind of keep replicating itself period after period, instead of 225,000 that's gonna look more like 75,000.

So, the labor market is just unsustainably strong.

Now, some... it makes perfect sense.

We're coming out of a v... you know?

We're still recovering from what was a very large drop in employment.

So, some of that makes sense.

But, somehow we're gonna have to get from point A, where we currently are, to point B where our economy looks like it's on more stable footing.

And, getting from point A to point B is going to mean slowing.

And, whether or not that means...you know, a year of bumping along at modestly positive growth, or few...just a handful of quarters at some slightly negative growth?

You know, that's certainly the difference in whether the headlines are gonna say "recession."

But, it's not going to feel very different to the average person.

And, the last thing I'll say is that under... it's worth thinking a little bit about under the hood of what that economic world is going to look like as the economy slows.

I think that this slowdown is going to be focused in the good sector, which has just been abnormally strong and it is finally starting to come back to earth.

And, I think that means-- I actually think that means the good sector probably feels like it's in recession right now.

It is contracting, and it kind of needs to contract in the U.S.

So, regardless of what these numbers look like in aggregate, the good sector is probably gonna feel a whole lot weaker than the services sector.

Even if we're in recession, I would not be surprised if we continued to see pretty good growth in the services sector, as people continue to come back to face-to-face services.

- Okay.

Thank you, Wendy.

I have a couple questions about what you said, but I'm gonna move on and go back!

Rakeen Mabud, what's... you know, what would you say to that?

- Thank you, Pilar and Sandy, for organizing this conversation.

I think it's lifting up already a number of really important debates and, you know, really, really important questions.

And, my answer to your question is that, you know, we are not out of the woods.

The Fed has increased interest rates seven times over the last year.

They're likely going to be going back for more at the next Open Markets Committee meeting, FOMC meeting, in the end of January.

And, Powell himself, which is-- he's the chair of the Federal Reserve, has admitted that we have not yet felt the full effects of these rate hikes, the medicine has not fully hit the system.

And, there is a significant risk that the Federal Reserve pushes our economy into a needless recession, which would throw millions of people out of work, slow down wage growth and cause immense financial-- immense economic pain.

You know, I really come to these issues with the principle that you cannot have a healthy economy unless the people who keep our economy going- workers, families, consumers- we all hold many of those identities, right?

Unless all of us are doing well.

And, Chair Powell really needs to recognize this and put people over his war against prices.

I think there's some really interesting analysis that's come out over the last couple of weeks that really bolsters this point.

So, Employ America put out a really interesting blog post that looked at past cases of where unemployment rose by a percentage point in a year.

The Fed is actually currently forecasting about 4.4% unemployment for 2023.

Employ America's analysis found that every single time that had happened, 1% unemployment, we've had a recession.

And, not only that, we've subsequently seen more than 1% unemployment, right?

So, this is... these are real li... these are real lives we're talking about.

These are real people's jobs.

These are real people struggling to put food on the table.

And, you know, the thing I think that concerns me, that doubles down my concern, is that these rate hikes fail to address the underlying causes of what is driving higher prices today.

The reason we have higher inflation today is not because people have too much money in their pockets or because they're spending too much.

So, you know, sustained consumer demand is actually something that keeps a healthy economy humming along.

The reason we have inflation is because we have a system that was built by and for big corporations that has utterly failed to meet the needs of people in a moment of crisis, right?

This is the same re... this is the reason we had empty shelves at the beginning of the pandemic.

This is also the reason, on top of this, that these same corporations have been able to raise prices up, jack up prices beyond what their production costs would justify.

You know, the most recent inflation numbers, the CPI report, makes it really clear that we actually don't need mass joblessness to bring down inflation.

You know, prices can come down without throwing millions of people out of work and under the bus.

And, in fact, we have other tools beyond the Fed which are actually more appropriate, given the inflation that we're experiencing today.

You know, workers and families who are already struggling with the burden of high prices, should not be asked to shoulder the additional burden of high unemployment.

That's cruel.

It's ineffective and it works against the shared goal of really building a sustainable, resilient economy that works for everyone.

- So, before I move on, I... you know, I'm an economic neophyte.

I don't-?

Sometimes my eyes go back in my head when I read this stuff!

But, this idea that... this idea that the labor market is too strong is something I don't understand.

Isn't being strong a good thing?

Can you explain to us why is this bad and why do we need to knock it down?

Apparently, that's what the Fed wants to do.

Wendy, maybe you?

- Yeah.

So, so... (sighs) We need the labor market.

A strong labor market is a very good thing.

And, getting the unemployment rate as low as it can go, is a very good thing.

But, it can't go to zero.

Like, we're not going to get an unemployment rate that's zero.

Like, if we thought that the only goal that we had-- I'm gonna say something stupid, and it's a straw man.

If we thought that the only goal we had was to get the unemployment rate to zero, we could create a law that everybody has to work.

And, everybody has to work all the time and employ... Like, we could just mandate it.

Everybody has to work; nobody has a choice.

Obviously, that's a stupid law and we want people to be able to quit their jobs, look for a new job, take some time thinking about the best match.

So... and we're not gonna have an unemployment rate of zero.

We're also not gonna have a world where everybody works.

Right?

Some people want to organize their lives around not working.

So, now the question is "what's an unemployment rate "and what's a level of, you know, "how many people work relative to how many people don't?

"What is... what does a world look like that is somewhat stable?"

Now, you have to define what you mean by 'stable'.

And, what the... the way the Fed thinks about it is that they have two mandates: they wanna have employment be as high as it can be in a sustainable way, and they wanna have inflation that is stable.

So, they don't have a mandate that inflation has to be 2%.

But, they have a mandate that inflation has to be essentially low and stable.

So, whether or not that's 2% or 3% or 4%, it has to be stable at that rate.

So then, the question is "how tight of a labor market "can you have, where inflation can replicate itself "period after period after period, "so everybody can stop thinking about it "and just know inflation's always gonna be 3%?

Inflation's always gonna be 2%?"

Whatever that world is, it's stable.

Okay.

So the world we're in now, with the overall unemployment rate at about 3.5%, or even less than 3.5%, is that work-- firms are trying so hard to find people to come to these jobs, that they're having to... they're having to entice people to come into work, who are like, "You know what?"

"I actually-- you know?

"I kind of like my life "where I'm home with my kids.

I kind of like what my life-- "where I'm only working 20 hours a week.

"I kind of like my life being retired.

"The only way you're gonna be able to entice me to come in is to give me a higher wage".

And, that's all well and good for that person.

But, what it means is that as firms are trying to find more and more people to work, they're having to raise wages.

And, if they're raising wages, they have to raise prices.

And, what this means is that inflation is-- that is one of the-- I'm not suggesting that this is the main factor that's given us the incredible surge in inflation that we've seen, but it is certainly a factor that it is creating price pressure.

And, what it means is that it's just creating an unstable inflationary situation.

And so, what the Fed needs to do, is it-- and this is well beyond what unemployment is.

It's trying to just create a whole broad labor market that can basically keep going in a stable way.

And, what I can tell you for sure, is that a net gain of 225,000 jobs in every given month, our economy cannot sustain that.

That is not... that's not the way economists use it.

That's not "steady state."

- Okay, sounds good.

So, what would a good economy in 2023 look like from the point of view, you know, from the macroeconomics, for Wendy, for, you know?

Do you know what... what people can see on the ground, for all the others who are more focused on some of this in-the-weeds.

What would a good economy look like in 2023?

What do we wanna see?

- I think I've largely laid out my vision for what I want a good economy to look like!

So, I will let Wendy and George take it from here.

[mouse clicking] - I mean, the simple answer, right?

Is that we-- unemployment remains low, that prices-- price growth moderates without significant costs in terms of employment, job losses.

So, the-- you know, the possibility of what the Fed was earlier calling a "soft landing", right?

Where we do get inflation under control, but not at the expense of all the suffering that would come from a recession.

I think that's-- that's the hope.

And, you know, the-- it just seems that things are potentially fragile enough that the other things we want to avoid obviously, as Wendy was just discussing.

I mean, the-- a debt ceiling crisis would be a catastrophe, right?

So, it seems to me that what we're trying to do in 2023 is steer around these obstacles successfully, right?

And then, I-?

You know, the other thing I would say is that the way, you know, that this panel was framed from the jump, is that sort of the only good news we have is that inflation appears to be coming down.

And, I would just-- you know, one qualifier there is that I think, you know, that's not the case!

That there actually are some reasons to be- if we can get through this- reasons to be optimistic, right?

That, I mean, that unemployment is as low as it's been in 50 years at 3.5%, that consumer sentiment is improving in the latest University of Michigan survey, inflation is coming down.

So, you know, those trends continuing.

I'll say one more time!

(chuckles) An expansion of the Child Tax Credit so that child poverty doesn't shoot back up, right?

Sustainably because that's expired, would be another thing that I'd love to see.

- Question: How much is what we are spending on the Ukraine war increasing the deficit, and thereby cutting into social benefits?

George or Rakeen?

- I defer to you here, George.

- I was gonna say the same thing!

I'm sorry.

From memory, I couldn't tell you about the costs of our support for Ukraine.

- But, I will say that-- - A lot of money!

- Those costs are not cutting into social benefits.

We have more than enough- you know, if Congress would do its job and raise the debt ceiling, we have more than enough capability between the revenues we get and the borrowing we can do to pay for both.

- [Sandy] Gotcha.

Gotcha.

What is the likelihood that we'll see things moving in the right direction this year in terms of policy?

Just to close.

- So, lemme let me start, because I think I'm gonna be depressing!

And then, maybe George or Rakeen can say-- - [Pilar] Yes!

(laughs) - Something a bit more optimistic!

- Yes, it is a bit of a big question!

- I think the next year ahead is gonna be incredibly challenging.

I think that...

I think we're in for a very big down-to-the-wire fight on the debt ceiling, and I actually think there's a decent chance that we're gonna... that we're going to hit that day, when it binds.

And, I think it's gonna be a mess.

I think that's gonna come somewhere close on the calendar to when we run out of appropriations that are funding the U.S. government.

And, we may also be arguing about whether or not we should have a government shutdown at the end of September.

And, I think that is mostly going to consume Congress and this is all going to be happening in the backdrop of a slowing, and thus fragile, overall economy.

And, that...

I'm just nothing but worried.

- I unfortunately have a similarly, you know, depressing assessment, (chuckles) which is for-- I think there are, you know, there are two major threats on the horizon, in broad terms.

The first is that Jerome Powell pushes us into a recession.

I think we are well on our way.

The medicine has not yet hit the system, and we are likely to see some real economic contraction.

Some, you know, unemployment ramping up because that's what he's trying to do.

And, he's... he and the rest of the Federal Reserve has made it very clear that they want to continue on this interest rate bender.

The second significant and reinforcing threat is that there is a...

I have a...

I'm really concerned that we see a return to government cutbacks and austerity this year.

Republicans have already signaled that this is on the top of their agenda.

The House GOP kicked off their 118th Congress by voting to help the super-wealthy dodge their taxes.

The debt ceiling fight, as Wendy mentioned, is another example.

You know, they are willing to hold this economy hostage to demand cuts to social security and other critical social programs.

And, together, that's really concerning.

Right?

Because what we need is for policy makers to keep their eye on the prize.

We want investments in the people who keep our economy going, and we want a macroeconomic policy that is not intentionally throwing workers under the bus.

So, you know, I don't...

I'm not optimistic but I think there is real advocacy that can happen to make that, you know, less of a horrible outcome.

- George, what's your last word?

And, are you gonna be as depressing as the other two?

(chuckles) - I will say this, Pilar!

I hope for more than I expect.

I... the one... you know, if I had to choose one note of optimism to pull out in the political dynamic, it might be this, related to what I said earlier.

That now that Republicans are in control of the House, that they may feel more fire from the business community than they did when they lacked power, right?

To fix this research and development deduction that has lapsed and is now costing corporations.

So, they are being lobbied hard to change that.

So, that could be a more powerful source of leverage for some kind of trade on an advance in policy this year than it was last year.

[background music] And what, unfortunately, what Wendy and Rakeen have said about the downside risks with a recession and with the debt crisis, I also concur with.

[background music] - Thank you so much to the three of you.

This has been incredible.

I really appreciate you spending this hour with us and with Ethnic Media, and it has been very helpful.

Sandy, do you wanna say bye?

- Just reiterate what you're saying.

Very grateful.

Would love to have all of you back again.

[background music] And, they're just-- they're just... this is such a complicated terrain but so vital to all of our audiences, and we really appreciate your insights.

- [Rakeen] Very happy to do it.

- Thank you everyone for inviting me.

[Rakeen] Have a happy weekend.

- [George] Thank you for having us.

- Ciao!

Adiós!

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