‘Immigration has been the most important factor’

Good morning. Yesterday in our review of US consumer companies’ results, we concluded that the composite picture was “decidedly not of a country sliding towards recession”. We should have been more emphatic. Soon after we published, the July retail sales report showed the strongest month-to-month growth since January of last year, and the Walmart CEO said “we aren’t experiencing a weaker consumer”. Remember the recession scare last week? Yeah, we don’t either. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

Friday interview: Jason Furman

Jason Furman is a professor of economics at Harvard University and a fellow at the Peterson Institute for International Economics. He served as the chair of the Council of Economic Advisers during the Obama administration. He spoke with us about the economic stimulus, immigration, AI and much more. 

Unhedged: Economic indicators are all over the map. Terrible manufacturing surveys, for example, while the job market looks solid. Is this an unusually hard economy to analyse?

Furman: I agree that we have a certain amount of unusual weirdness in the economy right now. Some of that is measurement. There has been a huge increase in immigration, which is very poorly tracked in the real time data. It’s affecting things like the relationship between GDP and GDI, and household and payroll employment surveys. 

The second factor is that the macro policy stance is quite unusual, in that it is very strongly expansionary on the fiscal side and very strongly contractionary on the monetary side. Those two tools affect different parts of the economy differently. So you see manufacturing structures growing and residential housing falling, and that’s exactly what you’d expect if fiscal policy was subsidising manufacturing structures, and the Fed’s high interest rates were crippling the housing sector.

Unhedged: Is it bad to have fiscal policy doing one thing and monetary policy another?

Furman: I think it is unfortunate that we have the expansionary fiscal policy that we currently have. The US has the largest deficit of any of the advanced economies. The markets actually seem quite relaxed about this. Interest rates are higher than they were five years ago, but in the grand scheme, that’s still on the low side. And if anything, part of why US short- term interest rates are higher than many other advanced economies is that the Fed has more fiscal policy that it’s fighting against. You don’t see this type of fiscal expansion in the UK or the Euro area.

Unhedged: During the last major inflationary bout, in the late 1970s and early 80s, inflation would fall, then come back. The Fed was repeatedly forced to backtrack on rate cuts. How worried should investors and the Fed be about an inflation resurgence? 

Furman: The people who keep saying that this is going to be like the 70s and 80s are all going to be wrong. The reason they’re all going to be wrong is precisely because they keep saying it. It’s a self-unfulfilling prophecy. 

Our monetary policymakers have learned a lot, and they’re much more credible now. During this whole episode, medium-term inflation expectations have been pretty much anchored. So central banks came into this with a lot of credibility. And look at what they’ve done: inflation has come down by two percentage points over the past year, and the Fed has kept interest rates the same. They’re erring, as they should, on the inflation side of the mandate. It’s only with the last two jobs prints and the last two inflation prints that they’re shifting towards the employment side of the mandate. 

Unhedged: What are you looking for in the next jobs report?

Furman: Mostly at the household survey [which generates the unemployment rate] because we don’t know what break-even payroll growth is. If you see a payroll number of 150,000 [in the establishment survey], you don’t know if that’s good or bad, because how many immigrants we’re getting, that has a big effect on break-even job growth. Whereas we do know what a higher or lower unemployment rate means. It’s just as simple as, is it going up or is it going down? If the unemployment rate stays at 4.3 per cent, the idea that [the disappointing July jobs reports] was just from temporary lay-offs or Hurricane Beryl is wrong. And I would fully expect that the Fed is going to read the data the same way, and cut by 50 basis points and signal that it’ll do more 50s if they’re needed. On the other hand, if the unemployment rate falls back to 4.1, it will look like last month was just a fluke, we’ll breathe a sigh of relief. But I don’t think there’s any data at this point that could stop the Fed from cutting in September.

Unhedged: Do we know enough about the fiscal approach of either presidential candidate to say anything of use?

Furman: Unified Republican control would be the most fiscally expansionary outcome. The Republican enthusiasm for tax cuts far outstrips the Republican enthusiasm for spending cuts.

Left to their own devices, Democrats don’t care very much about the deficit these days. But they do have a lot of appetite for tax increases on high incomes, and as a result, they probably could end up paying for a lot of the new spending they would likely push through. Some people might not like that fiscal mix, but it wouldn’t be very expansionary. 

A big wild card in all of this is the markets. When will the markets force Washington to take this issue more seriously? If the 10-year yield went above 5 per cent, I think it would get the attention of whoever was president. They have no choice but to engage seriously on the fiscal issues. Otherwise the next president has a lot of room, and they’ll probably use it.

Unhedged: We enjoyed your paper on the economic impacts of AI. How do you think AI will affect the economy? 

Furman: Predictions about AI have to have a really wide confidence interval. We are so far outstripping where any of us thought AI would be in the year 2024, but most businesses have not yet figured out how to use it. So in the short run, I think we’re getting demand for things like data centres, but we are not getting “supply” in terms of increased productivity. If anything, it is a short-run headwind to productivity because we are hiring so many people to figure out how to use AI before we’ve deployed it. But I think all of those investments will eventually pay off.

One possibility is that generative AI turns out to be an innovation that reduces inequality, rather than increasing it. It’s a bit like spell check: it’s more useful if you’re a bad speller. If that is the case, that would help keep AI politically viable, as long as we are making sure that governments don’t get in the way. On the question of job replacement, I tend to be sanguine. But if AI starts replacing large numbers of workers in different areas simultaneously, that would be a challenge. But that would be a good problem to have, as it would likely be a challenge in a world in which AI has helped make us so rich that we can afford solutions. 

Unhedged: Are companies and governments doing enough to anticipate these potential challenges?

Furman: If I were the government, the main thing I’d be trying to do is figure out how we can have more AI. Some of that would be streamlining the permitting and funding research. I do worry that a lot of the research has migrated into the companies, which don’t share it, and so we are losing out on the positive spillovers. In terms of regulation, I worry more that the government is going to do too much and do it too stupidly, rather than too little. I don’t want an AI super regulator — I want the Highway Administration, the SEC and the FDA to have expertise in AI so they can understand how it’s used in their different domains, but regulate it just like they regulate auto safety or medical device safety.

Unhedged: Your comments raise a general question about the technological economy. There’s a line of thought that says the last couple of rounds of innovation have led to a small number of companies and individuals reaping all the rewards, while the rest of us are left out. And those are the very companies that have all the research muscle in AI. Do you agree?

Furman: Companies grow in part because they make amazing things, and we should want that. I don’t think that Europe is sitting there feeling great that it doesn’t have any big tech companies so it doesn’t have to worry about monopolists. But on the other hand, some companies have grown through aggressive mergers and anti-competitive behaviours, and those are bad for consumers. I think today’s digital giants are giants in part because they’re amazing, and in part because they’ve done a set of aggressive things. And what we need to do is get the right balance of stopping the aggressive things, while keeping everything that’s good about them. In the EU, I think they’re going a bit too far on curbing monopolists. And here in the US, we’re probably not doing enough. But we’ll see what the remedies are in some of the upcoming trials.

Unhedged: You have done a lot of work on healthcare reform. Do you think private insurers are a barrier or a part of the solution?

Furman: Some of the innovation of insurance companies is terrific. They have come up with things like tiered drug formularies, narrow networks, HMOs and cost sharing which, while they are not necessarily popular, have saved a lot of money while not hurting anyone’s health. We don’t know the answer on how to control health costs. That answer, like everything else in the economy, is something that is best figured out by companies in competition with each other. But what you want to do is make sure that the health insurance companies aren’t competing with each other in a bad way; for example, insuring only the healthy people and dumping the sick people. The Affordable Care Act did a lot to stop that negative competition, but there’s still some of it — there’s even more of it in Medicare Advantage, the private health insurance plans for seniors. There are steps the government could take there.  

Unhedged: Sentiments about the economy have remained very negative, even as things have gotten better. Is there a perception problem?

Furman: Objectively, I could tell a story in which people would be somewhat negative about the economy. Wages have grown faster than prices, but only by a little by a bit, and growth has not been as fast as it was prior to the pandemic. And the unemployment rate is now rising. So I think there’s some reason to be a little bit negative. 

What is much harder to explain is the magnitude of the negativity. While it has diminished some as inflation has fallen, it’s still very persistent. So I think there is a combination there: some of it was seeded by actual economic development, but it has been dramatically magnified by non-economic events.

In the FT poll that came out recently, people are much more positive about how Kamala Harris would handle the economy relative to Trump than they are about Biden relative to Trump. I don’t think anyone should really have a different opinion there. If you hate or love Biden, you should hate or love Harris, too. But a lot of people have changed their mind about the economy based on which one is the candidate. 

Unhedged: You mentioned that one of the things complicating measurements right now is immigration. How are you viewing the impact of immigration? 

Furman: Immigration has been the most important factor in the US economy in the last couple of years. It’s the reason we’re adding jobs rather than subtracting jobs, and the reason we’re able to grow at 3 per cent while inflation falls. The US has two things that no other country in the world has in combination. One is it’s a very attractive destination for immigrants; the second is the immigrants that come here work. Employment rates for immigrants in Europe are much lower than they are in the US. 

A lot of it, though, has been against our laws. And I’m pretty uncomfortable saying that we should nullify our laws just because I like an outcome. We need to change our laws in a way that understands that we need both high-skilled and low-skilled immigration. Because right now if you fully enforce our laws, our economy would come apart. Once you create laws that support more people to come legally, then I think then you can really start to enforce your border and employment restrictions.

One good read

OK, maybe working from home has gotten out of control.

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