Take Five with Elliott Eisenberg: Economic forecast is growing but slowing

Take5 Eisenberg Panel

Elliot Eisenberg, the man who makes the “dismal science” of economics both entertaining and informative, makes his virtual return to Madison on Nov. 10 during State Bank of Cross Plains’ annual economic forecast. Eisenberg, of Econ70.com, home to the appropriately named GraphsandLaughs, will give his take on growth, inflation, and the global supply chain in a program tentatively titled “Growing but Slowing.” We spoke to Eisenberg by phone to get his take on the 2022 economy, and he’s cautiously optimistic.

What explains the big drop in quarterly GDP from Q2 to Q3 (from 6.7% to 2%)?

“It’s primarily supply chain issues. It really is. There is strong demand out there. The demand for services went up pleasantly. The demand for goods didn’t go up as much because you can’t buy what’s not available. That’s the problem. If you add to that the Delta variant, and Delta variant really kicked in in July [the start of Q3], so the Delta variant and Q3 were perfectly correlated. So, you had the bad Delta variant, which scared the daylights out of people in July and August. Then you had supply chain problems. There was also a reduction, of course, in government funding. All the unemployment benefits ended on Labor Day, which began the last third of the quarter — July, August, and September — so in September people began to run out of a little bit of money. So, you put all this together and it’s not necessarily surprising that GDP was a little disappointing.”

Unless I miss my guess, the ending of the unemployment benefits didn’t necessarily translate into more employment, at least not yet.

“It did not, correct, absolutely not.”

A lot of people left the workforce in August, maybe not just to retire but to start their own business thanks to remote work and our digital capabilities.

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Elliot Eisenberg

“Right, and I did a blog on that a couple of days ago. Through September, there were 600,000 people who started their own business with hiring employees, not just single, self-employed people, single persons. So, that’s a big deal, and then a couple hundred thousand died, and then 3 million retired. That’s 4 million workers right there, between the retirements, the people who went out on their own with employees, and people dying.

“And then you have day care problems persisting. Even though schools are open, day cares aren’t open. So, if you look at the data, especially among women of color and Latinas, a lot of those people can’t go back to work. They can’t afford an au pair. They don’t have the luxury. They don’t have enough money. So, you can clearly see a lack of day care problem continue.

“And then there are people who are helping people who had COVID or have had long COVID [aka post-COVID] themselves, and so on.

“So, it’s not surprising. I hate to sound like a silly guy, but think of your own life and ask yourself, ‘When in your own life has the solution to a difficult problem been that easy? Oh, if all we do is this, the problem goes away.’ I don’t know if it’s with your mother, your father, your husband, your wife, your kids, your brother, your sister, whoever it is, rarely is it ever a case of do this and the whole problem goes away.”

Well, I’ll challenge you on that because one solution people are touting is that if we just get more people vaccinated around the world, the supply chain issue will solve itself.

“Yes, but that’s a hard solution [laughs]. Cutting the unemployment benefit was an easy answer. Your statement is correct but that’s a hard answer.” 

Is that true even with the antiviral pill Merck plans to distribute?

“Yes, I think Merck said they are going let 104 countries get it for free or something along those lines [pending regulatory approval]. That’s a big help, yes. It’s huge, but it’s still going to take time to get there.”

And the computer chip shortage is going to take a while because even if you want to onshore those jobs, it requires the building of very expensive and very complex plants, as planned by Intel and Texas Instruments, and so it’s going to take a couple of years.

“Yes, the chip problem is probably the most severe supply chain problem that we face. Everything else will get dealt with quicker. We think that by sometime in the middle of next year, we should see some improvement, so that’s eight or nine months. It’s not overnight. We should see a nice improvement by then but not on the chip side. That’s a real serious problem.”

Treasury Secretary Janet Yellen still believes inflation is transitory because once we get through this supply chain issue, we’ll start to see inflationary pressure subside. Are you in that camp as well?

“I am in that camp. The data came out today [Oct. 29] on the personal consumption expenditure [PCE] price index. It’s flat, so this suggests we’re probably at peak inflation right now. The big question really is how fast does it decline? Is it a slow decline? Or is it a fast decline? And unfortunately, it really looks to be a slow decline in the inflation problem.”

So, you don’t think it’s going to get out of control as [former Obama economic advisor] Larry Summers recently said, or hyperinflation suggested by a very cryptic tweet by Twitter CEO Jack Dorsey.

“That’s just lunacy. That’s just complete lunacy. I don’t see long-term inflation, absolutely not. You can even expect some very weak inflation in the not-too-distant future. Look, job growth is OK, nothing spectacular. The excess supply, excess capacity of firms to construct things — the fundamental capacity of our economy hasn’t changed. Labor productivity is up. This is a weird, one-off problem because demand has recovered so profoundly quickly, in part because of government fiscal policies that were very stimulative, and supply is coming back quickly but not quickly enough, and supply chains are broken. I mean, they are flat out broken, but because demand has been so overwhelming, firms have gone from just-in-time delivery to just-in-case delivery. ‘Oh my God, there was a shortage. Let’s get more.’ That makes it worse. It’s human nature, but it exacerbates the problem. This is very painful but it’s a short-term problem. The fundamental productive capacity of our economy hasn’t changed.

“The only exception to that is labor. If labor doesn’t return to the labor force because those millions of people who retired, they probably are not going to come back. They were older because you have to get early Social Security before you can realistically retire in most cases.”

The biggest impediment to getting past these supply chain issues might be labor. It might be COVID, but the labor shortage is affecting the ports and trucking, so do you consider that the biggest impediment to solving the supply chain disruptions?

“It’s all over the place, but that’s certainly one of the keys. Certainly, one of the biggest problems in the supply chain is getting things packed and unpacked — both.”

Currently, the reconciliation bill, at least the watered down $1.85 trillion version, still has a chance for passage. In terms of its economic benefit, what do you make of it?

“In the long run, this looks like a pretty decent package. First, it’s important to put it into perspective. It’s a lot smaller than it was supposed to be. The Democrats were talking about a $3.5 trillion bill, and now it’s going to be $1.85 trillion from what we’ve read. That’s still pretty big objectively compared to what we talked about a year or two ago. This is still very large, and it will have major impacts on our lives.

“The most important thing from what I can tell is the child assistance in terms of pre-kindergarten activity, and there is some day care in there as well — the subsidized child care and pre-K. Those are big. The child care is big because the evidence suggests that if you’re going to help kids, the earlier the intervention is, the better it is. There are questions about how long it lasts and how to maintain the advantages you get in early [childhood] programs. Generally speaking, there is consensus that this is a good way to help kids. Get them out of their houses and get them into some type of supervised programs. The big question is can you get good teachers in pre-K? Just putting them in rooms with adults is not alone going to solve the problem, but this is good.

“The other thing I liked was the day care subsidy. I like that because we need to get women into the labor force. We don’t have a lot of immigration. We don’t have a lot of population growth. You’ve got to go with what you’ve got. Japan has been very successful in increasing labor force participation rates, particularly among women. It was already very high among men. If we can get higher labor force participation among women, that would be a good thing. Women, we know from the data, won’t go to work unless they know their child is in a good, safe environment. So, this is a step in the right direction. How good it ends up being … how good the programs are, that remains to be seen.”

Part 2 of this interview will run on Thursday, Nov. 4.

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