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Brian Lehrer: It's The Brian Lehrer Show on WNYC. Good morning again, everyone. New York City mayor, Fiorello La Guardia once made the point that the job of government is not ideology, but simply to serve the people. He made the point by saying, "There's no liberal or conservative way to take out the garbage." You know that quote. I actually think he was wrong about that. There's recycling and there's incineration and dumping, but that's another show.

The question we'll ask now is, is there a liberal and conservative way to fight inflation? It's the number one issue for many Americans in the midterm elections, according to many polls, and if not number one, inflation is at least way up there for just about everybody but the question is how? Do Democrats and Republicans have different approaches that have different pros and cons?

We'll explore that question now with University of Chicago economist, Austan Goolsbee, who as some of you know is chairman of the Council of Economic Advisors for president Obama. Austan, great to have you on again. It's been a minute. Welcome back to WNYC.

Austan Goolsbee: Thanks for having me back.

Brian Lehrer: I'll say right at the start to give credit where it's due that we invited you on to continue a conversation you were having with NPR's Ayesha Rascoe this weekend on Weekend Edition, Sunday. One of the things you said was that one of the roots of inflation we're seeing now is that the COVID recession that we've now come out of wasn't really a recession. Could you go over that again to start out? I was glad that you brought that up with Ayesha. How can a recession be not a recession?

Austan Goolsbee: Well, this is what I think. In fairness, there are many economists who disagree with me. I think it was a serious downturn, but it looked nothing like a recession in that recessions are driven by things that the market calls the cyclicals. Cyclically sensitive sectors of the economy like manufacturing of durable goods and autos and housing construction and stuff like that are what lead to recessions.

They're the ones that go down the most and in the comeback, they're the ones that go up the most. This time we had a serious downturn of the economy, but all of that stuff went up. People bought more cars, they bought more TVs, they tried to buy more housing because there was nothing to do. The thing that led to recession was the downturn in a bunch of industries that have never really had a recession before like going to the dentist and going to restaurants and personal services. That makes it weird. That makes the Fed's job, it makes everyone's job very difficult trying to figure out how do you get out of this because--

Brian Lehrer: It's such a different kind of recession with different sectors.

Austan Goolsbee: There's no data. We don't know how fast are people going to take twice as long of vacations this year because they've been several years not being able to take a vacation. Stuff like that matters for how overheated you think the economy's going to be and how hard the Fed needs to step on the break, but there's no past data that you can ask, "How does that happen?"

Brian Lehrer: I guess the lack of data is why you also said on Sunday that there's almost a religious battle. You used that term. That's taking place among economists over how inflation got this bad and what to do with it. Can you talk about the sides in that religious battle and why you used that term, which suggests that it's more of a matter of belief than of evidence?

Austan Goolsbee: That's why I used it. In the NPR way, they said, "Oh, that's not a religious battle, that's a religious schism." I said, "Okay,"

[laughter]

but now I'm going to use schism. That is kind of what it is. Is religious schism.

We don't have data to base this on so the schism is really-- It's more than just a academic point as I'll describe in a second. What your belief is on this schism matters a lot for what you think the government should do to respond to the inflation. The schism is one side says that fundamentally what happened here, how we got this much inflation, is we had too much demand, we had stimulus coming from the Fed, rates were extremely low, and we had stimulus coming from the federal government.

They passed the Cares Act under Trump of 5 trillion and then Joe Biden passed the American Rescue Plan, another 2 trillion, and fundamentally those two things overheated the economy. The other side of this schism says, "Wait a minute. Isn't a big component of this supply-side cost side problems?" The supply chain is messed up. The price of oil is through the roof. The labor supply into the service sector is heavily repressed because people either got sick or didn't want to get sick so they wouldn't go to work.

If it's supply shock, then the fed can raise the unemployment rate, but it won't make the inflation go away because the inflation in that world is not coming from too much demand. The Fed for all of the discussion of its power, what is the fed going to do? The Fed really has only one tool and the Fed's tool is all of variant of raising the interest rate to try to slow down the interest rate-sensitive sectors of the economy. Normally--

Brian Lehrer: To slow down the demand when in this case, the problem is too little supply.

Austan Goolsbee: It might be too little supply. The thing is, normally, when the fed tightens-- They just have one screwdriver and so the thing is tighten the screw or loosen the screw. That's great if your problem is a loose screw, but it's not great if you need to solve something or you need a hammer. That's the dilemma of if you think that most of this inflation is coming from the supply side, then the Fed tightening conditions to reduce demand in interest rate-sensitive parts of the economy is not going to fix that problem.

Brian Lehrer: It causes pain as Ayesha pointed out to you on Sunday. Raising the unemployment rate as a solution to inflation may look good on paper, but it causes real people, real problems.

Austan Goolsbee: Look, there's no doubt about the pain. If you look back to periods like the early '80s when Paul Volcker acted, not alone, everyone understood inflation was much higher than it is right now, had been going, and was accelerating so they said, "We must administer pain to get inflation expectations down and to stop the snowball." That's the thing that I call the two angels on the shoulder. You know how they got the angel and the devil?

Brian Lehrer: Yes.

Austan Goolsbee: One of them is the supply side argument that says, "Whoa, wait a minute. Don't tighten too fast. You'll just generate a stagflation because if the inflation's coming from supply, tightening and reducing demand won't work," but the other side says, "We learn in the 1970s that if inflation goes for too long and everyone begins expecting inflation is going to remain high, then it's extremely difficult to get rid of inflation so we should raise the interest rates right now because it's coming from too much demand and we could prevent it from getting rolled into the expectations.

The two angels are like, "They're the devil." "No, they're the devil. Listen to me." I think that's why the Fed has been slow to act. Not paralyzed, but just slow to act. Now, I think the Fed is scared. The latest inflation numbers showed-- What the Fed looks at is not what you or I or the regular person looked at. We would tend to look out and say, "What's the price of gas and how much is food?" For your daily things that you buy, what's happening to prices.

The fed excludes energy and food prices when it looks at inflation. It looks only at what it calls core inflation because energy and food are extremely volatile. They go up, they go down, they're all over the place so the Fed has over the years decided that core inflation is the better indicator of what's actually happening. Core inflation is supposed to be going down. What we need for this summer is for the non-energy and food part of inflation to start coming down to give us some comfort that, look, this was ultimately a shorter lived thing, not a permanent thing. What happened in the last inflation number is the core inflation didn't go down separate from the gas prices and the food prices that core went up and that got the fed spooked that got the stock market spooked because everybody looks at that and says, whoa, if we get one or two or three more months like that, then they're going to go get the tarot cards and try to consult the ghost to Paul Volcker. They're going to have to raise rates a lot. I think that's where we are and that's why the schism is not just an academic point. This question of what share of this came from supply and what share came from demand absolutely matters for how much you think the fed should raise the interest rate.

Brian Lehrer: We are talking about whether to use a screwdriver or a hammer to fight inflation. [crosstalk] We are in economy shop with university of Chicago, economist Austan Goolsbee, former chairman of the Council of Economic Advisers for President Obama. I wonder in our remaining few minutes listeners, if there's anybody in any business who has a supply side story to tell us about things you can't get or can't get as much of and how that's pushing up prices as opposed to demand because that's the organizing principle here that it's a supply shortage driven inflation, as opposed to just people wanting to buy too much stuff. Is anybody listening just casting a net here. We'll see if anybody jumps in and this sounds like you, anybody in any a business where prices are going up because of supply shortage, I guess other than food and energy, 212-433-WNYC 212-433-9692, or tweet at BrianLehrer. Austan, do you want to put your own cards on the table and this economist religious battle as you put it for transparency, are you a believer in either of those faiths?

Austan Goolsbee: I have been more in the camp of supply and I have thought that the main supply shock everybody looks and sees the ports and sees the computer chips and stuff like that. I think that the biggest supply shock has been to the supply of workers to the service sector. When you don't have a supply of workers to the service sector, it severely limits what people can spend money on. Normally we spend most of our money on services and during this whole thing we shifted to physical goods and of course that overloaded the supply system for physical goods because they can't handle that. If everybody's says I can't go do, spend my normal money on leisure and entertainment and medical and blah, blah, blah. I want a big TV. Of course there's going to be a shortage of TVs or I want fluffy toilet paper at home.

Of course there's going to be a shortage of toilet paper because the demand for residential toilet paper went way up and they don't in the short run, have a way to satisfy it. Now I will say the last couple of months, that core inflation hasn't come down, I have revisited? What share of this comes from supply? I still think supply is important and I think the fact that you're seeing the inflation happen around the world and that the producer side inflation has been higher than the consumer side inflation. All of those things suggest that the supply side is a worldwide phenomenon and there's an important component, but there's got to be some access demand too, because this core inflation is going the way it is.

Brian Lehrer: I think we have a story here from Daniel in Manhattan, Daniel you're on WNYC. Hi there.

Daniel: Hi. yes, I own a fine restaurant and I ordered fine wines and my wine bill just came in the other day and it was over 40% of what it originally is. The reasons given by the distributor is that the shipping container costs going from France to America has gone from 5,000 to 18,000. For my $800, I got three cases instead of five cases. That's how much it went up and there's nothing, the grower didn't get more. My distributor didn't get more money profit and I'm certainly not making more profit. I already heard it from my customers over the weekend that they were pretty angry at the new prices.

Brian Lehrer: Why is the container shipping going up? Do you know?

Daniel: No, nobody can figure it out. It's just the shipping companies that said, this is what it's going to cost. That's what it is. They contributor here had to pass the costs to us the buyer.

Brian Lehrer: You're stuck. Then the wine drinkers are stuck. One more story, Sam in the Hudson valley around WNYC. Hi, Sam.

Sam: Hi. I run the operations for a general contracting company. We build large warehouses and I bring in everything from glass to Sheetrock to steel from all over the country and from overseas to the last caller's point, actually containers went up because things were closed for so long. Then when people all came back, everyone had all this stuff to ship right away to meet deadlines. Then also, if you remember, I'm old enough to remember a year ago, one of the headlines in California was that port was so backed up, that they weren't even able to bring things in ships were waiting out in the ocean for around four months. Just sit sitting there, but one thing I wanted to say about supply, there are things actually that have started in the last six weeks.

There are things that have started to actually get better when it comes to supplies, costs are up, but that's probably more to do with inflation than anything else costs are up, but the thing you'll find is that a lot of subcontractors, the guys who sell you, the glass, the guys who sell you the different materials, they know that supply is such a thing in the news right now that they actually use it as excuses for totally other things. They'll tell you, hey, I can get you something in 10 weeks. Then when they, all of a sudden, it's 12 weeks you call them and say what's going on. It's really just because they didn't pay someone on time or who knows what they did, they'll say, yes. Supply chain issues.

Brian Lehrer: Then are they also raising the prices on you just because they can?

Sam: There are people who say, oh yes, costs went up and costs costs are going crazy. If you're a good general contractor, if you're a good business, man, it's probably applies anywhere. You'll end up calling seeing if you can get quotes from the material yourself and you'll [unintelligible 00:17:36] those guys out who are lying, but it's harder to know when they actually bought something and you're bringing something in from grease. It's harder to know before Corona a 40 foot shipping container from grease used to cost $4,000. Right now that same container cost nine and a half and in China, it was much worse. A Chinese container before Corona, before 2020 March, 2020 could cost anywhere between three and a half to $4,000 for a 40 foot container. At some point, early 2021 around a year ago its worst, it was $20,000 for that same container.

Brian Lehrer: Sam, that's a very bracing story. Thank you for sharing it. There are others, Austin, if we had time, which we don't. I'm just looking at our caller board. These are somebody saying, I'll go through a couple of these just as bullet points. Somebody calling from a tree shrub and lawn business, fertilizer and insecticide in short supply, an architect and roofer calling saying, can't get roofing materials, someone else, an ad agency who works at an ad agency for alcohol companies says you can't get glass.

All of these and I wish I had another hour and a half with you because there are so many other things that I wanted to ask about, but let me pick up on that last point from Sam, just to ask this and for you as someone who worked in a progressive administration for President Obama, there's a Robert Rice tweet out there that says, "let's be clear, inflation is being driven in large part by monopolies that are driving up prices for the sake of profit." The example he gives is last year, Proctor and gamble raised prices on staples like diapers and toilet paper citing increase costs. After some of its price increases, went into effect P&G reported at almost 25% profit margin. He says, it's not inflation, it's the monopolization of America. Obviously it's a lot of different things, but is there something that the government could do to prevent the price gouging that taking advantage because we all expect inflation now from taking place?

Austan Goolsbee: I don't think so. Rob Rice and I are old friends and I respect him very much. I don't agree with his read on the maybe I call it the causality of what caused the inflation. It is the case. I know he's not wrong that we've had a increase in consolidation and monopoly power let's call it, in a lot of industries in the US, and that problem got worse in many ways during the pandemic, because a lot of small businesses cease to exist, and big tech companies got bigger and things like that.

It is true that you have seen prices go up by more than costs in some industries. The margins, the business margin actually increased, but the question is, is there some policy thing you could do to change the margins? Sometimes it tempts people into the argument of let's go back to the Nixon era price controls where we would forbid any price increases. I think that's a terrible mistake. Do you just if you listen to the callers it was a failure when we did it in the 1970s, and the reason it was a failure is the reason it's always a failure.

You listen to the callers and just the granular level of detail that they have. They're like, I need this certain kind of green grass to make the bottles and I can't get that and the price is up. There is no, the level of information required to try to prevent mass shortages, that have spiraling and snowballing effects on economy just far in excess of what the government can handle. If you start putting in price controls to control one thing, it's going to have knock on effects on every industry that uses that thing, and it's really a I think that would be a mistake.

Brian Lehrer: Well, I don't think we've solved it here today, but least maybe we understand a little more of what's going on out there. Austan Goolsbee, University of Chicago economist, who was also the chairman of the Council of Economic Advisers for President Obama. We really appreciate it. Thank you very much.

Austan Goolsbee: Yes, great talking to you again, Brian.

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