Economic Update

Tuesday, June 18, 2024

Senior Fellow and Director of International Economics, Council on Foreign Relations

Introductory Remarks

Vice President for National Program and Outreach, Council on Foreign Relations


Senior Fellow, Council on Foreign Relations

Benn Steil, senior fellow and director of international economics at CFR, gives an update on the state of the U.S. economy and forecast trends in the coming months. The host of the webinar is Carla Anne Robbins, senior fellow at CFR and former deputy editorial page editor at the New York Times


FASKIANOS: Welcome to the Council on Foreign Relations Local Journalists Webinar. I’m Irina Faskianos, vice president for the National Program and Outreach here at CFR.

CFR is an independent and nonpartisan membership organization, think tank, and publisher focused on U.S. foreign policy. CFR is also the publisher of Foreign Affairs magazine. As always, CFR takes no institutional positions on matters of policy.

This webinar is part of CFR’s Local Journalists Initiative, created to help you draw connections between the local issues you cover and national and international dynamics. Our programming puts you in touch with CFR resources and expertise on international issues and provides a forum for you all to share best practices. We’re delighted to have over forty-five participants from over thirty states and U.S. territories with us. So thank you for being with us. We will be circulating the video and transcript from this conversation on our website after the fact at CFR.org/localjournalists.

We are pleased to have Benn Steil and host Carla Anne Robbins with us today for this on the record discussion. Benn Steil is senior fellow and director of International economics at CFR. He has written and spoken widely on international finance, monetary policy, financial markets, and economic and diplomatic history. Dr Steil is a lead writer of the Council’s Geo-Graphics economics blog. He’s the creator of eight web-based economic trackers, and the author of four books including his most recent, The World That Wasn’t: Henry Wallace and the Fate of the American Century, published in 2024. I have a picture of it here. Great cover.

And Carla Anne Robbins, who you all know, is a senior fellow at CFR and cohost of the CFR podcast The World Next Week. She also serves as faculty director of the Master of International Affairs Program and clinical professor of national security studies at Baruch College’s Marxe School of Public and International Affairs. Previously, she was deputy editorial page editor at the New York Times and chief diplomatic correspondent at the Wall Street Journal.

So thanks, both, for being here today. We will begin with Carla and Benn having a conversation. And then we’re going to turn to all of you for your questions and comments, which you can either raise your hand—we’d prefer you to raise your hand and ask it yourself—or you can also write it in the Q&A box. So with that, Carla, over to you.

ROBBINS: Thank you, Irina. And thank you, everybody, for joining us. And thank you, Benn, for explaining very complex things on a regular basis. And I very appreciate what you write in your blog. And we’ll talk about your trackers in the end of this, so we can explain all the great resources that we have here. So let me start talking about this cognitive dissonance that appears to exist. We’ve read a lot about how the U.S. economy is comparatively strong and getting stronger, but somehow pretty much everybody we talk to doesn’t feel it. And someone even coined the term “vibecession” to explain this disconnect.

And there was this poll done by the New York Times, the Philadelphia Inquirer and Siena College in late April to mid-May that found that more than half of registered voters in six battleground states rated the economy as poor. So can you start us off by talking about the state of the U.S. economy, and which metrics we should, as reporters, be looking at, and what caveats we should be using when we report on that?

STEIL: Well, the state of the U.S. economy is remarkably good considering where we came from back in 2021, as inflation started accelerating. As you know, we reached a high point of over 9 percent, which at the time the Fed was hoping, was arguing, was merely transitory. In the end, it took rate hikes of over 500 basis points in order to bring inflation back down. But most economists predicted that rate hikes of that degree would almost certainly push the U.S. economy into a recession. And that never happened. In fact, unemployment continued to fall to postwar record lows. We’re at 4 percent now, a little higher than the low of 3.4 percent. But given where interest rates are, where we are in the rate hike cycle, that’s pretty remarkable.

So why are consumers feeling as badly as they are? Well, when economists talk about inflation, they’re talking about the rate at which prices go up not the level of prices. And when journalists interview consumers, they get a quite different understanding of what consumers think inflation is. And they think of it as the level of prices. So if an economics reporter were to say, well, inflation is well down now—so-called core PCE inflation, that’s the Fed’s favored indicator, down to 2.8 percent—they’ll often get the response, but prices are still very high. They haven’t come back down.

And so that’s the perspective. Prices are much higher than they were, going back to the beginning of the pandemic and in 2020. Of course, consumers have not been used to inflation at that level for many, many decades. And we’d have to go back to the early 1980s. And survey after survey has shown that that’s really the number-one indicator that voters are bothered by, is the high level of prices relative to where they were before the pandemic.

ROBBINS: So do prices ever come down? I mean, gas prices go up and down, and that has a big impact on how people feel. But do milk prices come down? Or does—

STEIL: Well, yeah. And they have come down. So you can point to plenty of individual items where prices have come down certainly from their highs—milk, eggs. Gas has obviously been extremely volatile but, again, way down from its highs. But I have to emphasize that the Federal Reserve is not aiming to push down the general price level. They’re aiming to get down their favored measure of the general price level to 2 percent or so. That’s their target.

We are, according to their favored metric, right now up at around 2.8 percent. So we’ve got some ways to go. But in terms of what consumers will actually continue to feel, well, the general price level—even if the Fed is successful by its own metrics—is going to continue to rise. There are many good, logical reasons why the Fed aims at a low but positive rate of inflation, rather than a zero rate of inflation. But to the extent that consumers really want to see prices go down to what they’ve—are convinced are a normal level, they’re going to continue to be disappointed.

ROBBINS: So you talk about their favored metric. I mean, inflation numbers are released with great fanfare. But then we hear about the consumer price index, we care about core inflation. You were talking about the Fed’s favored metric. Can you walk us through what metrics—what are these different metrics, what are they—and what are they, which one does the Fed care about, which one actually affects our own lives? I mean, they talk about index of core inflation, which, you know, takes out volatile fuel prices. Well, actually, personally, I’m really concerned about volatile fuel prices.

STEIL: Sure. Well, what the Fed is trying to do—

ROBBINS: What does it mean?

STEIL: Yeah. The Fed is not trying to ignore prices that the public cares about. The Fed’s trying to get a perspective on what the general price level is doing. And it’s hard to do that when you’re taking full account each month of movements in prices of goods that have extremely volatile prices, in particular gasoline. So what the Fed is trying to do is not to say, hey, those prices that you’re looking at, at the pump, in the supermarket, they don’t matter. What the Fed is trying to do is make sure they don’t get misled by extreme, rapid movements up or down in the prices of very volatile commodities. So they’re looking for a generalized price index of goods and services that tend not to have these very volatile prices. That, they believe, gives them the best handle on how well monetary policy is actually working.

ROBBINS: And so, is that the consumer price index?

STEIL: Well, I should emphasize that the Fed’s favored metric has changed over the years. There’s no consensus, even within the Fed. But their favored metric right now is the one that’s called core PCE. I should perhaps highlight the fact that headline inflation right now, which includes a lot of these more volatile-priced products, is below core inflation. And that should give us some pause about where we might go to the future, because to the extent that it’s below where core is, it may very well jump back above core going forward and could pull it back up. So we’re certainly—

ROBBINS: You completely lost me on that last. OK—

STEIL: Well, yeah.

ROBBINS: Let me—let’s just back up here, keeping in mind that I, at least, am a bear of limited brain. So core PCE is core personal consumption expenditures.

STEIL: Yeah.

ROBBINS: So that’s like a basket of goods that—

STEIL: Basket of goods that tend to have relatively non-volatile prices. And that’s why the Fed likes to focus on it, because it’s not subject to constant up and down movements that we see each day, for example, with geopolitical events. Like oil, for example.

ROBBINS: But oil is nevertheless factored in, because things have to be moved around and all that? It’s just—it’s not that they’re completely ignoring that?

STEIL: No. And the Fed does—I should emphasize—does not ignore other metrics of inflation. It’s simply that they want to communicate to the public what their main area of focus is, so that there’s not a disconnect between what the markets are expecting and what they’re actually doing. They want to be as transparent as possible with the market about what their thinking is so there aren’t big surprises, because to the extent that there are big surprises when the market doesn’t understand what the Fed is doing, what the Fed is aiming at, what the Fed is looking at, you’re going to see asset prices—like prices of stocks and bonds—be more volatile. The Fed is trying to make sure that those prices are not more volatile than they need to be.

ROBBINS: So if I’m writing a story about inflation, and there are all these metrics that are coming at me, all these numbers that are coming at, there are different reasons to use different numbers. There’s the metric that the Fed cares about, because that’s going to have an impact on its decision on what to do about interest rates. And then there’s something as simple as what are gas price is doing, because that’s going to have an impact on how grumpy I am, as well as, you know, whether or not I take a summer vacation. Which ones should I be paying attention to, for what reasons?

STEIL: Right. Well, let me just give you an example of what one big media outlet typically does with an inflation story. The Wall Street Journal, OK? When there’s—a big inflation figure comes out, or when we have a Fed decision day, typically what the Journal will do is say what the big move was—you know, such and such a price index has moved this way or that. And then they will also talk about other indexes, other measures. OK, so to emphasize that this is—this is not the only one that the Fed, or the market, or consumers care about.

Then they’ll talk about what the Fed has done and what it might do in the future, and what its logic is, what it’s aiming at. And then, typically what they’ll do at the end of the article is then tie it to the human level. They’ll interview, for example, shoppers, or job seekers, and find out what they’re concerned about, what they’re doing, how they see the world, to make it tangible for readers. Because ultimately, readers are concerned about these issues because they affect their daily lives. So what the Journal is trying to do, usually in the last quarter of the article, is make it—make it visceral for the reader. This is how it’s affecting real people around the country.

ROBBINS: As a former reporter and editor at the Journal, I’m very concerned that they’re putting that in the last quarter of the story.

STEIL: (Laughs.) They always do. It’s almost formulaic, yeah.

ROBBINS: Since we all know no one ever gets but to—

STEIL: (Laughs.)

ROBBINS: And certainly, I knew that when I worked at the Journal. So can we talk about wage growth for this inflation and this feeling people have that they keep falling further and further behind? Yeah, I—for more than a year, growth, at least for the middle class, has actually been running ahead of inflation. I mean, how much does that vary by wage level, by where people work, what industry? And how much does it vary by parts of the country?

STEIL: Well, wage growth certainly varies quite a bit by industry. Certainly, varies by part of the country. And the parts of the country like, you know, Miami-Dade, where the job market is very hot, wage growth in a lot of sectors is very good relative to the rest of the country. Which is, of course, what you’d expect. But there’s a big debate among economists—and it’s not a new one; it’s gone on for generations, in fact—over the degree to which wage growth feeds directly into inflation. That is, wages go up, the cost of producing goods and services goes up, and this gets passed on to consumers in the form of higher prices.

The extent to which that’s the way the economy works, or whether it really works in the other way around—that is, prices rise, you’ve got a generalized inflation, and this leads to a demand for higher wages so that workers can keep up. And there’s no doubt that the direction—this is—this is not a unidirectional phenomenon. It goes in both directions. But there’s still a longstanding debate among economists about the extent to which the so-called Phillips curve holds. That is, the extent to which wage growth feeds directly into inflation. In some sectors, it appears to do so more than in others.

ROBBINS: So if I—you know, I can read that, you know, nationally that wage growth is—for the middle class—is ahead, actually. So that people may be complaining about prices, but actually they’re making more money so they can afford the prices even if psychologically they’re horrified by the prices. How would someone reporting locally or regionally find, you know, wages for their state or region? I mean, are they reported, do you know, on a state level?

STEIL: Yeah. I mean, there are various—there are various places where you—where you can get that data. The various Federal Reserve banks issue wage growth data. The BLS, the Bureau of Labor Statistics. So it depends how granular you want to go. I’m not clear how reliable the statistics are when you get down to the state and local level. But even on the national level, there are a number of different metrics that are used to estimate wage growth. Because, of course, you can’t track everybody’s actual wages. So, you know, there’s some degree—to some degree it’s based on surveys to understand, you know, what the trajectory of wage growth might be.

And even though wage growth is pretty good now, relative to where inflation is, remember inflation going back to 2022 was extremely high. And so for many workers, they’re saying, all right, well maybe I’m doing OK now, but overall I’ve done terribly because I still remember the days of 8-9 percent inflation. And this goes back to the beginning of our conversation. And those prices have not come back down. So all in all, I’ve fallen behind over this period. So for a lot of workers, you know, those really bad days of, you know, 2022 are still in—still in their—still in their mind. They’re still trying to catch up.

And there are many aspects of the economy which are very much part of consumers’ daily lives where they really are paying attention. Restaurant prices, eating out has gotten quite expensive. There has been exceptional inflation in that area. And a lot of consumers are therefore cutting back on the number of times they might eat out per month, or cutting back on what they’re ordering. You can see it, the cumulative effect of inflation feeding in on consumers’ behaviors. Supermarkets are struggling to decide exactly what sort of merchandise to stock, because consumer sensitivities really do seem to be in flux right now.

ROBBINS: So beyond the fact that the Wall Street Journal buries the really cool stuff into the last quarter of the story—(laughs)—so I know there are different Feds, like the St Louis Fed and all that. So they have data that may be regionally focused. Who does—either in the public, or in the private sector, or in the academic world—who does good survey research or gathers data if I wanted to look to better understand either national or regional sentiment? Or just even, you know, who monitors the fact that people are eating out less often, or buying fewer toys? I mean, who gathers data like that?

STEIL: If we want to focus specifically on the area of consumer spending and consumer sentiment, the Conference Board is a good source of information. So I would definitely recommend their website. On consumer sentiment as well, the University of Michigan has a regular survey of consumers. And the popular business press pays enormous attention to it. And it’s interesting that in May the Conference Board survey and the University of Michigan survey of consumer sentiment were pointing in opposite directions. So this, you know, would really suggest that we’re entering into a period where it’s not at all easy to tell where the economy is heading.

From 35,000 feet, looking at the growth data, for example, looking at the labor market data, we seem to see some mild cooling. But still, the May jobs report was quite good. And if you were paying complete attention to the Conference Board survey, you would say consumers are looking pretty optimistic. But then, if you look at the University of Michigan’s survey, if you look at the recent unemployment figures where the rate has gone up slightly, you might say, well, perhaps, you know, finally we’re in a cooling off period. And maybe, just maybe, headed for a recession in 2025. As you know, economists have been predicting recession for three years now, and the economy has held up remarkably well given the interest rate rises we’ve seen. There are reasons for that, I would emphasize. It didn’t just come out of nowhere.

ROBBINS: You mean they’re better than the people who predict weather, is what—

STEIL: Well, you know what I think most economists didn’t take full account of? With some exceptions. Larry Summers, I would highlight. Is the fact that the Biden stimulus, in particular, was exceptionally large by historic standards. And you can argue that, you know, given what we knew or simply didn’t know about the trajectory of the pandemic at the time, it was justified. But given how fast the economy did begin to recover, you know, with hindsight, it was clear that it was too large. So, you know, we really needed to do two things. One, to tighten monetary policy, because there was simply too much money in the economy given the supply constraints, the ability of the economy to produce more. And when there’s too much money chasing too few goods, we get inflation.

And we needed to cut back on fiscal policy. You can justify running massive budget deficits in a temporary crisis, but I think the real long-term problem for this country right now is that we’re running 5-6 percent-plus deficits at a time when the economy is doing very well. And this is historically unprecedented. So why did the economy hold up as well as it did? Well, consumers had an exceptional level of savings compared with historical metrics coming out of the pandemic. Very much owing to the exceptionally large fiscal stimulus we had. That excess savings has now dissipated, and we’re seeing household debt levels beginning to rise quite robustly. So that’s a—that’s a sign that we have come—we’re coming out of this extraordinary period. And the Fed will have to be quite sensitive to signs that the economy is slowing.

ROBBINS: So, and I do want to get into the deficit questions and interest rates, which are obviously directly related, but I want to throw it open to our group here. So if you have a question—well, I’ll turn it over to our maestra to remind everyone to—if you have a question, please raise your hand or put it in the Q&A. And please, you’re reporters, you have questions. Reporters ask questions. It can’t just be me. So while you are cogitating on your questions, I will ask an interest rate question.

So the Fed isn’t cutting them as fast as expected, which made sense for the economy as a whole. And it looks like we are on our way to the much-desired, quote, “soft landing.” How does that affect individuals in the longer term—let’s do the shorter term. Credit card debt is going up enormously.

STEIL: Credit card debt is going up. And to the extent—now, the Fed—it could conceivably continue to hike rates, but that looks unlikely given where inflation is, and the trajectory on which it’s going. It’s stabilized at a relatively low level, about 2.8 percent, as I said. But it’s—it still appears to be coming down. But the Fed has disappointed the markets repeatedly by putting off its target of when it believes it’s going to be cutting rates. Remarkably, given the tug of war between the two over the past year, and in particular with the Fed constantly pushing back against the markets and telling the markets, hey, you’re jumping too far out in front here. We don’t see the news on inflation as being as good as you do. We’d like you to curb your enthusiasm.

The markets have only mildly curbed their enthusiasm. The Fed has now said, we project one small rate cut this year, about twenty-five—that would be twenty-five basis points, probably in December. And the markets are still saying that there’s roughly a 50 percent chance of two such rate cuts. The gap between the Fed and the markets has definitely shrunk, but it’s not gone away. So the Fed has routinely disappointed the markets. Rates are higher than the markets expected them to be at this time. And that does mean that for consumers who are carrying credit card debt, consumers who might be on a floating rate mortgage where the rate is going to reset, consumers like that who have interest rate-sensitive debt, or may be incurring it, are entering an environment that’s not very favorable.

Now, of course, this could change significantly if inflation comes down more than expected over the coming months. But the recent signs have been, over the course of the past year, that the Fed has been more right, or at least less wrong, than the markets on inflation.

ROBBINS: So Wes Muller, do you want to ask your question? I can also ask it for you. So, Wes Muller—oh, yeah, thank you. Can you identify yourself and ask your question?

Q: Yeah. It’s Wes Muller. I’m with the Louisiana Illuminator.

And I’m just curious, how are 401(k)s and retirement accounts faring, as compared to pre-pandemic statistics?

STEIL: Well, it would depend very much on what you’re invested in. If you were completely invested in stocks, obviously, you went through an extremely rocky period, going back to the early years of the pandemic. But if you didn’t panic and sell it all, you see the markets are at record highs right now. You’ve done OK. If you actually were adding to the stock component of your portfolio over the past year, you’ve done exceptionally well. For those savers, however, who are more conservative and might in, say, you know, a mild panic, or worse, in 2020 sold off stock and just put allegedly safer assets in their portfolio, for example, bonds, they’ve not done well. Bond prices have done, since the beginning of the pandemic, extremely poorly.

So it depends on where they invested. Overall, for investors that, you know, were stock heavy, if they just held the course—and, as you know, this is where most financial journalists urge people to head. You know, don’t get caught up in short-term market events. Stick with your long-term plan. Those who did stick with their long-term plan are looking pretty good right now. And that’s obviously helping the economy because it’s supporting spending. To the extent that we have a good nest egg waiting for us for our retirement, we’re more likely to go out and feel comfortable about consuming now—going out to restaurants, taking a vacation, splurging on, say, you know, a furniture purchase that we might have hesitated on when the market was lower. So, all in all, the markets are helping to support consumer spending right now.

Q: Do we have any sort of collective data of how much are in retirement accounts currently as compared to previous years?

STEIL: Yeah. I mean that’s definitely out there. I’m not—I’m not clear what the best source for that information is. But you’ll routinely see data in that area published by fund managers like Vanguard. And there are various nonprofit organizations that that monitor these sort of data. You’ll have to forgive me. I’m not—I’m not remembering the exact sources. But, yes, these data are available.

ROBBINS: So can we talk—Wes, thank you for those questions. Can we talk about in this place, and to this savings issue, is that higher interest rates, I mean, credit card debt and which also has a big effect on people’s performance—and for all of younger people out there, limit your credit card debt. So—

STEIL: Excellent piece of advice, yes.

ROBBINS: (Laughs.) Something I tell my daughter all the time. If people buy houses later, for example, if they have to put off an investment like that or don’t get around to even buying a house because interest rates are high, can we talk about the impact of high interest rates for a long period of time on people’s lives?

STEIL: Yeah. Yeah, I think we didn’t do as good a job as we might have done early on in the crisis measuring what the effect of higher interest rates was going to be in terms of how it would feed into the housing market. For a lot of people who locked in their rates before they started rising, I very fortunately refinanced a thirty-year mortgage at the very end of 2020. It closed in early 2021. I did well. So meaning, you know, when—with mortgage rates that at 7 percent, that has absolutely no impact on my consumer behavior because I’m, you know, locked in at sub-3 percent. And there are also—there are a lot of homeowners who are in that situation, and therefore didn’t feel the rate hikes.

As you know, there are a lot of buyers who have been sitting on the sideline for two years now because they can’t afford to take on rates at that level. And it’s also reduced the number of sellers, because in normal times you would have people, you know, selling a home in one area to move to another area, or to move into a bigger place. But they don’t want to give up, say, their 2 ¾ percent mortgage in order to take out a new one at 7 percent. So this has led to a perverse situation where we’re seeing relatively few housing deals, but house prices at record levels. There’s just not much inventory out there because sellers are reluctant to sell, knowing that they’ll have to take out 7 percent mortgages in order to move.

So mortgage rates have had a very disparate impact on consumers. As I say, if you’re locked in at 2 ¾ (percent), you’re not feeling it. If you’re looking to start a family, you’re in an extremely precarious position because you just—you just can’t afford a 7 percent mortgage, and rental prices in much of the country are also extremely high, relative to where they were pre-pandemic.

ROBBINS: Is there research—I mean, I know that there is research on when the job market is bad that if you get a—if you get employed later, you know, out of high school if you’re unemployed for two or three years, that it really slows down your earning potential for the rest of your life. If you—you know, for wealth accumulation, if you have to put off buying a house, or you never can afford to buy a house because interest rates are high, is there research on what impact that has on ultimately in your life wealth accumulation potential?

STEIL: Yeah. It’s a fair question. I don’t know what specific research has been done in that area. But, of course, these are exceptionally high mortgage rates compared to what we’ve been used to over the past fifteen years. So for the younger generation of new graduates, this is a really devastating way to start your career and try to start a family. You may have to live with your parents for a longer period, or you may need to get their help—if not to buy a house, in order to continue renting. So there’s definitely a very great and worrying shortage of affordable housing in this country right now.

And I think government policy is going entirely in the wrong direction in this area. President Biden has announced a number of initiatives to basically subsidize home purchases and mortgages. The last thing you want to do, from a macro perspective, in a situation where supply is being constrained by policy, is stimulate demand, because you’re just pushing up prices. One of the huge problems we’re facing around the country right now in terms of stimulating more supply is very restrictive zoning regulations, particularly restrictions that do not allow construction of multifamily residences. Now, the Biden administration, to its credit, has been putting a spotlight on these regulations, emphasizing that they really do need to be reconsidered.

But the federal government doesn’t have control here. It’s state and local governments who do. I think the Biden administration could do things to encourage municipalities to take off a lot of these restrictions. They could, for example, threaten to withhold highway funds or threaten to take away the state tax deductibility. You know, you could—might consider those sort of nuclear responses, but that’s really all the federal government can work with. So we really do need state governments and local governments to start seriously reconsidering these zoning restrictions, because that’s the only way we’re going to get down the general level of house prices in this country.

ROBBINS: And do you think that part of the problem is even the language that affordable housing, in people’s minds, is somehow affordable housing becomes sort of public housing? You know, it’s—rather than affordable housing is housing that, you know, our kids can afford?

STEIL: Sure. But it’s not just that. I mean, multifamily housing, for example, is traditionally associated in people’s minds with subsidized housing and unwanted social effects that they may believe come from the provision of such housing. But multifamily housing is much more cost effective to build. And really, if you—if you want to look at what it’s like being, for example, a janitor trying to buy a modest home in the New York metropolitan area, compared to, say, the Atlanta area, it will take up almost twice the level of income for a janitor in New York to afford the same level of housing in the New York area, even though income levels for that position are considerably higher in New York. And zoning restrictions really do explain a lot of that housing cost differential. So this is a really critical area for the country to begin to pay attention to.

ROBBINS: This also has impacts on things like you know, whether you have requirements whether your police or your teachers live within your city even.

STEIL: Of course, sure.

ROBBINS: And can they serve a community if they don’t live inside a community? But can they live inside of a community if they can’t afford to live inside a community? And I’d like to add, I live in—I live on the east side of Manhattan. And I live in multifamily housing. It’s called an apartment house. So, but, yes, I do think that the sort of NIMBY impacts of that. And if you look at Westchester, which—half the towns in Westchester are under court order to build affordable housing. And they’ve resisted it for twenty years.

STEIL: Right. Exactly. And—

ROBBINS: There’s a lot of great stories to be written there about that.

STEIL: And what are we relying on instead? Things like rent control, which make the supply much worse. Of course, rent control reduces the cost of housing for those who are fortunate enough to win the lottery and get rent controlled housing. But, of course, it makes it much less attractive for developers to produce the new housing that we need. So it’s certainly not a long-term solution. Over the long term, that sort of policy is making things worse.

ROBBINS: So you wrote—please, if there are questions raise your hand or put it in the Q&A. Although I could just be—I got a million questions here for Benn. (Laughs.) So debt and deficit don’t seem to be major political issues anymore, perhaps because both parties are responsible for running up the numbers so much. And but you wrote in May that, quote, “for the first time, the U.S. is spending more,” this blew me away, “paying the interest on the U.S. debt than it is for the defense budget.”

STEIL: Yeah. The percentage of federal outlays on interest is now higher than the percentage of federal outlays on defense for the first time in the nation’s history. And the trajectory is all in the worst possible direction. So the deficit levels we’re running now, 5-6 percent and rising by CBO forecasts going forward, absolutely unsustainable. Meaning that if we continue to go on this path, we will definitely see the situation where the federal government is really competing with the private sector for capital, and therefore pushing up the price of capital. And that will harm long-term economic growth.

So no doubt—look, when you’ve got a major unexpected crisis, you want to do a fiscal stimulus. It’s appropriate to run a 5 or 6 percent budget deficit. But you should do that with the intention of bringing it down when the crisis is over. The crisis of the pandemic is now long over. And we’re going precisely in the wrong direction. And, as you emphasize, neither party in Congress wants to deal with this issue. Republicans want to cut taxes. Democrats want to increase spending. And if we do what both of them want to do, the problem will only get worse.

ROBBINS: And so you have been predicting throughout this conversation that likely the problem will only get worse across the board. Can you talk a little bit about what, you know, your actual predictions for the economy over the next—and I don’t know what time frame you work in. Do you work in six months or six years? But can you talk a little bit about this?

STEIL: Yeah. Well, I mean, so the fiscal deficit this year is projected to be 5.6 percent, rising to 6.1 percent of GDP in 2025. Predicting beyond that is exceptionally difficult, because we obviously don’t know what Washington’s going to do. We know that policy is going to be very, very different if President Biden continues in office or President Trump takes office. But in either case, right now it looks as if the deficit is going to continue to rise. That is, if President Biden is reelected, we can expect considerable increases in spending without commensurate rises in taxes. If Donald Trump comes back into office, we can expect tax cuts without commensurate spending cuts.

As you know, Donald Trump has stood against, for example, making cuts in Social Security. Now that may be a perfectly sensible policy to produce in terms of ensuring the living standards for seniors, but it needs to be financed with an aging population. And neither party is dealing with this right now. So with that as the working assumption, the trajectory of the deficit is, without question, in the wrong direction. And that will ultimately feed into lower economic growth in this country, lower investment, lower innovation, and lower living standards. So it’s really important to get this back on the agenda in Washington.

ROBBINS: So, finally—and I want you to talk a little bit about the data that you collect in your tracker that’s available for people, for reporters, which I think would be really useful. But before you do this, and I know—can you just explain layman’s terms if President Trump is back in the White House, he’s talking about putting enormous tariffs on trade with China, but also just across-the-board tariffs on trade with everybody. Ten percent is what he’s talking about, for trade with everybody. I know, and you know, and pretty much everybody here knows, that tariffs are actually a tax on consumers, not that—the Chinese aren’t going to be paying that. What’s the—even though he keeps talking about how he’s the only president who’s ever gotten billions out of—out of China. (Laughter.) Because people don’t understand. Tariffs are hard to understand. But they’re a tax on what you buy at Target. So can you talk about what the impact would be—

STEIL: It’s really not that complicated.


STEIL: The importer pays the tariff. The tariff is a tax that is charged to the importer. Now, the importer some way, in order to stay in business, has to earn that money back. And the importer will get it back by raising the price of the goods that are imported, that gets sold onto consumers.

ROBBINS: But I think he’s talking about, like, a 60 percent tariff on China?

STEIL: He’s talking about 60 percent across the board on Chinese imports, and 10 percent across the board for the global economy at large. As you know—(laughs)—he also recently floated the idea of eliminating the federal income tax entirely and replacing it with presumably even more tariffs. Now, if we went in that direction, you know, the Smoot-Hawley tariffs of the early 1930s, I mean, that would be nothing compared to the economic catastrophe we would bring about, moving in that direction. (Laughs.) We would have enormous stagflation. The global impact would be, you know, utterly enormous, because obviously we would see massive retaliation from the countries who were affected around the world.

I don’t believe that he’s really thought this through and is serious about moving in that direction. But I think what it does highlight is the fact that even though tariffs may be bad economic policy, they’re relatively popular from a political perspective because people, by and large, really don’t understand how that they work. And that’s why a president can get away with saying very misleading things, such as China pays the tariffs.

ROBBINS: So if he were to—beyond the retaliation issue—if he really were to place a significant tariff on imports from China, I mean, there were already tariffs on imports from China. What would be the impact on the U.S. economy?

STEIL: Well, first of all, prices in the stores from anything that we buy that has an imported component would go up very significantly. But importantly, exports would also fall. And there are many reasons for that. For example, as imports decline, the demand for—as the imports decline, this tends to push the level of the dollar up, which harms exports. And so even without the retaliation effect, you will see exports coming down commensurately with imports. An enormous amount of our exports also include an import component, because much of what we import are actually intermediate goods that American manufacturers absolutely need to stay globally competitive. So what I think is really not widely understood is that imports are not just goods that compete against American-made goods. They are goods that our world-class businesses need to be cost effective and quality effective globally.

ROBBINS: So with that happy thought, can you finish us off—and I really appreciate your doing this—by telling us about your trackers? And we will share all the information with people here.

STEIL: So I have a whole series of economic trackers which are updated regularly which produce data on a single screen, very, very easy for you to use, going back decades in most—any area where you need information in order to write an article. You can just go to the CFR.org website and type in the search bar, for example, geoeconomics trackers. You will find a global trade tracker, a global inflation tracker, a global monetary policy tracker, a global growth tracker, a sovereign risk tracker, a global imbalances tracker, and a global energy tracker.

And they are very, very easy to use. They’re not just tables of numbers. You’ll actually see a map of the world, and you can hover your mouse or your finger, depending on what you’re using, over any part of the world and instantly get all of the up-to-date data that you want to illustrate your story. So you can get it going across the world, and you can get it going back over time. And, as I say, these are updated regularly.

ROBBINS: They’re cool. I can attest to that. So I want to thank Benn so much for doing this, and thank everybody for joining us. And I’m going to turn it back to Irina.

FASKIANOS: Well, thank you Carla and thank you Benn. Carla, for all your wonderful questions. And to those of you who are on the call, we will send out the audio, video, and transcript, as well as links to the trackers that Benn mentioned. So I hope you will take advantage of those. Again, you can follow our speakers on X at @BennSteil and at @RobbinsCarla. And we encourage you to visit CFR.org, ForeignAffairs.com, and ThinkGlobalHealth.org for the latest developments and analysis on international trends and how they are affecting the United States. And do email us with future suggestions—or suggestions for future webinars by sending an email to [email protected]. So thank you all again. We hope that you enjoy the rest of today. And happy July 4, a little bit early. Take care.

ROBBINS: Thanks.

STEIL: Thank you.

ROBBINS: Thanks, Benn.


This is an uncorrected transcript.



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