Jason Furman: ‘Everyone should wake up every morning figuring out how to get paid more’
However reckless the British government, however botched its “mini” Budget, it alone cannot explain the fragile economic outlook. Interest rates are rising, financial markets are creaking, the strength of the US dollar threatens to reveal that many companies and governments have been bathing costume-free.
“There’s just this incredible disconnect,” says the US economist Jason Furman. “If you’re just looking at the standard economic data, everything looks fine, yet there’s this sense that we’re right on the precipice of something terrible. People are tossing around terms — I think in some cases too loosely — financial crisis, recession. I’ve seen some people warn about a depression.”
Furman was chair of the US’s Council of Economic Advisers during Barack Obama’s second term. Long relaxed about government deficits — “I don’t think we really need to care about the level of debt, I think we need to care about the level of debt service” — he has nonetheless become a leading voice warning about US inflation. He is also one of the bluntest economic commentators. Of the “mini” Budget, he opined: “I can’t remember a more uniformly negative reaction to any policy announcement by both economists and financial markets.”
Over the past 18 months, his view that the Federal Reserve should raise interest rates sharply has gained adherents. “Last year there was a lot of wishful thinking,” he says. Such optimism has largely dissipated. In September, Fed chair Jay Powell said he wished “there were a painless way” to tame inflation — implying there wasn’t. Furman himself has suggested that US unemployment may need to rise to 6.5 per cent for two years, a change that would reverberate globally.
How likely is a recession? “I don’t think it’s certain at all,” he says — adding that maximum danger is likely to come in the second half of 2023. A soft landing for the US economy “really is a possibility, but I don’t think you want economic policy based on the best possible outcome”.
Yet the risks of rate rises were highlighted by the UK’s turmoil. The Bank of England intervened to protect pension funds; one banker said it was close to “a Lehman moment”. Other weaknesses are surely lurking in the financial system. Does this not call for caution? “A lot of what’s breaking is financial markets, as opposed to the real economy,” insists Furman.
“The initial brunt of the tightening has been borne more by the wealthy, whose wealth is evaporating, than it has been by the workers. I don’t think it’s always going to stay that way, but I do think some of the voices we’re hearing now are people who are looking at their stock portfolio, or the money they’re managing, and are unhappy to see it going down. I’m also unhappy to see it going down, I just wouldn’t make my unhappiness with my stock portfolio the basis for public policy.”
In Europe, inflation owes much to potentially transitory energy prices. But in the US, the case for tightening is less complicated, driven by the hot jobs market, says Furman. “If you’re looking at the actual inflation data, it’s just ugliness after ugliness after ugliness. Underlying inflation has not come yet at all.” Stopping rate rises would be “wildly premature”, at least until inflation has come down by a percentage point.
Truss’s predecessor, Boris Johnson, had hoped that limiting immigration would increase wages. “I think it’s impossible that unskilled immigration is a large negative for wages. There have been lots and lots of studies, lots of natural experiments,” says Furman. Some studies have found a small negative effect on inequality, but even this is likely to be outweighed by the benefits, especially over the long run.
Furman, who has three children with the publisher Eve Gerber, has also argued for more pre-school childcare, to enable parents to stay in employment. “It’s just going to require lots more money.” (Gerber once remarked she had given Furman a pass for eight years in the White House: “NO MORE!”)
Such ambitions, for the moment, are secondary to the immediate uncertainty. What would be the global fallout of continued US rate rises? “Last year the United States gave people so much money in the United States that we bought lots of goods and that raised prices around the world and strengthened the dollar and made it harder for others. Now I think we’re jerking everything in the exact opposite direction with a monetary contraction.”
Yet he insists: “The biggest issue isn’t caused by the United States. It’s caused by global commodity prices, it’s caused by the domestic policy choices countries have made. If you look at emerging markets, ones that have borrowed less short-term in foreign currencies have much less to worry about right now than ones that are more exposed to the world. As brutal as it sounds, the Fed’s job is to look after the United States.” Global problems could spill back to the US. But “we’re trying to slow our economy. Some of the spillbacks that normally you might worry about at this point might be a good thing.”
This story originally appeared on: Financial Times - Author:Henry Mance
