Inflation and U.S. Economic Outlook

Thursday, February 10, 2022
REUTERS/Carlos Barria

Steven A. Tananbaum Distinguished Fellow for International Economics, Council on Foreign Relations


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

Roger W. Ferguson Jr., Steven A. Tananbaum distinguished fellow for international economics at CFR, discusses the U.S. economy and factors contributing to current rates of inflation. 



FASKIANOS: Thank you. Welcome to today’s Council on Foreign Relations State and Local Officials Webinar. I’m Irina Faskianos, vice president for the National Program and Outreach here at CFR. We’re delighted to have participants from forty-four U.S. states and territories with us. Thank you for taking the time to join us for this discussion, which is on the record.

CFR: It’s an independent and nonpartisan membership organization, think tank, and publisher focusing 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.

Through our State and Local Officials Initiative, CFR serves as a resource on international issues affecting the priorities and agendas of state and local governments by providing analysis on a wide range of policy topics.

Today we are pleased to have Roger Ferguson Jr. with us. Dr. Ferguson is the Steven Tananbaum Distinguished Fellow for International Economics at CFR. He’s also the immediate past president and CEO of the financial services firm TIAA. Dr. Ferguson previously served as vice chairman of the Board of Governors of the U.S. Federal Reserve System, and his recent work has focused on inflation, labor, and supply chains, and recently launched project on the Future of Capitalism.

So, Dr. Ferguson, thank you very much for being with us today. Last year brought record economic growth and falling unemployment in the United States, but now we are seeing rising inflation—in fact, the inflation report just dropped today—supply chain issues, and labor shortages. Can you talk about the causes of this and give us your thoughts on the U.S. economic outlook?

FERGUSON: Thank you very much for inviting me, and I look forward to this conversation. And, by the way, my intention is not to give you a forty-five-minute speech but, rather, short opening comments followed by questions and answers, which will be moderated.

And so as we gather here today, the question on everyone’s mind, that’s supplied by the opening, is the interaction across three different dimensions: one is basic economic supply and demand that all of us learned in Ec 1 or Ec 10. The second component with that, though, is the macroeconomic impact around growth and, most recently, inflation. Which then leads to the third question, which is monetary policy and policy reactions and what that might portend for the whole society.

So let me start at point one, which is around the basic economics of what is going on here. So what’s going on here is we’re struggling with a supply-and-demand imbalance, not just in the U.S. but globally. This is the natural outcome of the fact that the economy globally closed in a very synchronized fashion, literally within a couple of months, and has been struggling to open different parts of the world, different sectors, at different paces, and so supply and demand are still looking to find the kind of balance that we normally learn about in economics classes, and the way that happens is by having price adjustments.

So what do I talk about when I talk about supply and demand? The growth that we’ve experienced in the U.S. and globally has been relatively unbalanced by historical standards. It is still largely focused on goods. Demand in the U.S. has been measured to be about—as much as 18 percent above trend, and far less so in services, until recently when we all were reluctant to go to restaurants; we didn’t go to movies; we didn’t go to amusement parks; we didn’t, you know, consume services that define so much of the economy. And it is this imbalance between goods and services that is driving the uptick in inflation we’re seeing.

So let me give you some examples of what we talked—and by the way, in Economics 10 what we learned when we had that kind of imbalance in demand is something that’s called cost-push inflation. I’ll come back to describe that in a minute.

So what are some of the places where we see this imbalance? Well, famously, in the newspapers, we know there’s a chip shortage. That has had a big impact rippling through other parts of the economy, including, famously, the automobile sector. In fact, there was an analysis earlier that automobile companies have lost something more than 200 billion (dollars) in lost sales last year from the inability to produce new cars because of an absence of chips. We also have seen very much a similar kind of factor when it comes to labor markets. By some estimates, our country’s experienced nearly 2 million in what we call excess retirements, and there’s a notable decline in labor force participation to historically low levels among women and some minorities. Labor force participation has jumped back just a little bit, but we still recognize there’s quite an imbalance between supply and demand for labor as individuals have retired. We also see sporadic shortfalls in labor due to COVID, which I’ll come back and talk about. And so these supply-and-demand imbalances for goods are also showing up in the major input into goods production, service production—or one of the major inputs, which is obviously labor force participation.

Some other examples from last year—I don’t have new ones from this year: We estimated that last year nearly 1.2 million people with children under the age of eighteen were out of the labor force and hadn’t been looking for work due to the pandemic and childcare issues, and that’s nearly four times the number of people who would have reported that pre-pandemic.

And we also know that these various forces, labor force imbalances, are showing up in supply chain challenges. As one example, we know there’s a shortage of truck drivers. There’s an estimate that we’re probably about eighty thousand truck drivers short. Now, there’s an annual turnover of truck drivers that is very high, so the inability to replace truck drivers becomes even more difficult as people choose to leave that profession.

Now, this has played into something that came up very recently which is CEO confidence. CEOs have become gradually less confident about the outlook. There’s an index of CEO confidence that went from about eighty-five to about fifty-six. That’s quite a dramatic drop, and anything above fifty is a positive reading, but by definition, fifty-six is less positive than eighty-five. And what’s been driving this decline in CEO confidence has been exactly the factors that I’ve talked about: labor force participation, supply chain issues, and the results of inflation.

So now let me take—let me go to, then, that point, which is—I started with supply-and-demand imbalances as being the fundamental problem, uneven reopening of the economy impacted by omicron and earlier versions of the virus. That is clearly now playing through into inflation. This morning we saw, you know, eye-popping-headline inflation numbers. The total CPI showed a growth of 7.5 percent year over year; that’s the fastest rate of price increases in roughly forty years or so. And the major increases there were in food, electricity, and housing or shelter, as measured by the CPI. And those numbers are really quite startling. The energy index increased almost 1 percent over the month, with increases in electricity being particularly high, offset slightly by increases—(much lower ?) increases in gasoline and natural gas.

Now, economists tend not to focus on that headline number, the so-called overall CPI that’s at 7.5 (percent). We tend to look at the core index, which is inflation minus food and energy, but even there, yearly inflation ran at around 6 percent, which was, again, very high, the largest

twelve-month increase since, again, August 1982, so it had been forty years. And some of the things that were driving that, back to what I said about shortages, were cars and trucks, medical care, and apparel were some of the items that had the largest increases over the month, and so we see that these increases are really broadly dispersed throughout the economy, but some areas are particularly hot, so to speak, and those are areas that are in many ways—few exceptions—associated with the kinds of supply-and-demand imbalances that I’ve been talking about, and we can delve more deeply into the report here, if you’d like.

So now that takes me to the third point, which is—or point 2a, which is around inflation—around growth. So we’ve seen inflation has picked up. What has been very interesting is that the GDP growth rate has remained relatively stable and relatively high, which is surprising given the sporadic comings and goings of individuals in and out of the labor force and those various tightnesses and bottlenecks that we’ve talked about. So what’s the implication of that? It says that the U.S. economy and more globally our economies are becoming more resilient to the impact of this virus, which is effectively good news that we can continue to grow in a more predictable manner, which has not been true in the first year or so of this crisis, so there is a little bit of a silver lining in this cloud, which is that the economy does appear to be fairly robust and resilient to the shocks and shortages that are occurring.

Let me go to the last point, which is, what will all this mean for financial markets and for monetary policy? And I’ll start with monetary policy.

Monetary policy is, as you know, the setting of interest rates done by the Federal Reserve in our country, other central banks around the world, the Bank of England, Bank of Japan, European Central Bank, et cetera. Almost all central banks right now are in the process of tightening their monetary policy because all central banks, almost all, are confronting this kind of inflation dynamic that were talked about. This—in the U.S. the Federal Reserve has already started the process of unwinding some of the stimulus that it put into place for the crisis. Those who follow this know the Federal Reserve has been buying U.S. Treasury notes and bonds and bills and also has been buying mortgage-backed securities. They’re slowing down that purchasing, the pace of that purchasing. That is called moving from quantitative easing to a phrase that’s called quantitative tightening. So that’s the first step towards the Fed beginning to adjust its interest rates. The second step will be the actual adjustment of interest rates, and most economists and others expect the Fed to adjust its rates at its March meeting, which is March 15th and 16th, if memory serves me, roughly mid-March, and there’s an expectation that the Fed might raise rates at the subsequent three or four meetings during the course of this year, which would be quite a pace of interest rate hikes from the Fed.

There are some debates as to whether or not the Fed will actually, you know, do even more than that. Normally the Fed increases rates by twenty-five basis points. A basis point is one one-hundredth of a percentage point. In exceptional times, they might increase rates by fifty basis points and so there’s quite a bit of debate now as to whether or not this inflation reading from today will incent them, encourage them to either do more rate tightening or do it at higher levels.

And all that has played into the stock market and this will be the place where I end, and what we’ve seen is quite a bit of volatility in the stock market as investors try to understand what is likely to happen and, frankly, try to figure out how to avoid being harmed financially by a rise in rates engineered by the Federal Reserve. Some sectors would do better than others. But I think the biggest concern is whenever the Federal Reserve tries to do what it’s doing, which is raise rates to slow inflation but not slow the economy, that’s called trying to achieve a soft landing, and that has been very, very difficult historically for the Fed to maneuver.

And so let me wrap up by just summarizing what I said. Basically I made three points. First, the fundamental challenge that we’re dealing with here is supply-and-demand imbalances that have emerged as the economy is trying to reopen, the global economy and the U.S. economy, and we find shortages here or there, we find an absence of workers where we need them, and so things are very sort of ragged when it comes to supply and demand working together. The way that normally gets resolved is by price increases called cost-push inflation, and indeed, we are seeing just that: relatively high amounts of inflation, not everywhere and in some pockets much more subtle than in other pockets. And the third point I made is that the Federal Reserve and other central banks are responding to this as they normally would by doing what’s called normalizing rates—i.e., gradually raising rates, reducing some of the excess support that they gave the economy, sort of this quantitative easing, and that has led to a great deal of market volatility and uncertainty.

So that’s my opening remarks and I hope that has been enough to enlighten and hopefully stimulate conversation. So let me turn it back over to you.

FASKIANOS: Thank you, Roger. That was fantastic.

Let’s go to all of you now for your questions, comments. We want to hear from you. If you click on the raised-hand icon and I will call on you and ask you to unmute yourself and say who you are. And you can also put your question in the Q&A box, write it there, and if you do that, please tell us who you are so it gives us context as to—gives us your context and it will help place, situate the response.

OK, so I’m going to go first to Michael Matias (sic).

Q: Thank you. Matthias, but that’s all right.

My question, sir, and I appreciate your summary, is what—to what degree do you think that the infusion of the—on the fiscal side, the infusion of the amount of capital that’s gone into the economy in kind of a—somewhat of a graduated one-time event? How much does that affect structurally the interest rates, and what do you foresee as that money winds its way through the economy?

FERGUSON: Michael—

FASKIANOS: Michael, can you give us—tell us who you are? “Matthias.” (Laughs.)

Q: (Laughs.) Yeah. Michael Matthias; I’m the city manager of a small city just south of Seattle called Des Moines in Washington state. And my background’s economics, Cambridge University, so Keynesian all the way. (Laughs.)

FERGUSON: (Laughs.) And that sounded like a Keynesian question.

So Michael, great question, if I call you by your first name. And as a trained economist and Keynesian, you fully understand that the fiscal policy, the stimulus that was put into place certainly would have had an impact in driving aggregate demand. Now, it’s important to know that the amount of stimulus that was put in, that was a very, very large amount, certainly played a role in keeping us from having a recession at the very beginning, a deep recession, at the very beginning of this crisis, or I should say, a deep and prolonged recession because we did have a very short one and a very rapid recovery, but it was not prolonged. And so that was the benefit of a fiscal stimulus. Now, we also know that we had a few packages and along the way what that meant was individuals started having more money in their bank accounts than they were used to having; that undoubtedly created some extra demand that may not have occurred otherwise for some of these areas. And so, you know, to some degree, what we’re seeing is the natural result of long-time fiscal and monetary support, which has increased demand probably in certain areas. So it would be impossible to say that none of this is attributed to fiscal policy, but I think we have to be careful about over-attributing only to fiscal policy because a fair amount of this has to do with labor force participation changing quite dramatically, either temporary or permanently, because of the health crisis and the aging of population; some of it has to do with shortages in particular areas. And so this one is an unusual combination of the usual things that you and I would have learned in school—you know, too much money chasing too few goods, the classic definition of inflation—and the unique circumstance of an uneven reopening of the global economy and the backdrop of health crises that have had impacts in different parts of the labor force. And so, you know—and the weighting across those will be something I think is debated for a period of time, but it is the complexity of this situation that makes it very, very difficult for the Fed to figure out exactly how to moderate its interest rates.

One last point I’d make, and you’ve implied this: the fact that fiscal stimulus was put in last year and not being put in this year will immediately have an impact in terms of slowing the economy and, again, making it much more difficult for the Fed to calibrate its interest rates just right. So I hope that’s helpful and responsive to your question.

FASKIANOS: Great. So I’m going to go next to a written question from Steven Rausch, who’s the deputy city clerk in Niceville, Florida: How long do you expect it will take for changes in the Federal Reserve interest rate to take effect on deposits and debt?

FERGUSON: Great question. So certainly will take effect on interest rates, deposit rates relatively directly. That is, you know, one of the so-called transmission mechanisms and it’s one that moves, you know, pretty quickly. Anyone who has a floating rate loan of any sort will see the change in those interest rates pretty quickly, according to the terms of those loans. And that will certainly be true in the marketplace overall. As an example, the ten-year Treasury, which has had an interest rate of 1.5 percent, 1.6 percent, 1.7 percent for a period of time, sometimes even a little lower, has recently spiked up to 1.8, 1.9 (percent)—I think over 2 percent on the ten-year Treasury recently. And that Treasury rate plays in directly to how various interest rates are reset, if they are floating-rate instruments, floating-rate mortgages. So we are already starting to see an impact just in the expectation of rates rising and that will have an impact more broadly. I would say that banks are likely to be slower to raise deposit rates, what they pay investors or savers, than they are to raise the interest rate they charge those who borrow, because this will be a chance for all banks to increase their profitability. So those who are saving with your bank, you may find that you’re getting pretty slow rise in interest rates just as the interest rates being charged as a borrower might go up more quickly. So we’re seeing some of that already, already occurring.

When it comes to debt, I think what we’re going to see is some companies, some individuals are slower to add more debt than they would have been in the past because the price of debt certainly goes up, and that’s also certainly been true of corporations where we’ve had record amounts of corporate debt issuance in the past to take advantage of these very low interest rates; most expect that to slow down going forward.

So I hope that’s responsive to your question.

FASKIANOS: Great. And Steven Rausch is also the finance director of the city.

FERGUSON: OK. Good, Steve.

FASKIANOS: So let’s go next to raised hand from Beth Schlangen. Please tell us who you are.

Q: Beth Schlangen, Benton County commissioner in Minnesota.

And my question is dealing with the—since we’re in an imbalance of supply and demand, can we get our focus onto the supply and get the supplies that we needed to balance, you know, faster instead of raising interest rates, but to help get the things out there that we do need and make sure that we’re working on that?

FERGUSON: So, Beth, one of the great dilemmas in economics is that both fiscal policy, you know, taxing and spending, and monetary policy, so-called interest rates, have a much bigger effect immediately on demand than they do on supply. It is very, very difficult to, as one of our central bank colleagues at the Bank of England said, higher or lower interest rates won’t create more or fewer chips to go into cars. (Laughs.) Higher or lower interest rates won’t help to get more individuals back in the workforce. And so your point is certainly well taken that, you know, part of what has to happen here, according to my analysis, is to smooth out supply where we can, and that does depend on labor force participation, more truckers, more manufacturing capabilities in certain areas. And so you put your finger on one of the great dilemmas around monetary policy, which is, you know, there—as powerful as interest rates are, there’s some things that interest rates cannot do very well. And, you know, that is what one of the dilemmas the Fed’s going to face because they don’t want to slow demand so much as to slow us into recession, and they also know that, you know, two years, going on three years into this crisis, supply bottlenecks are gradually easing, but only gradually, and so they want to make sure that they don’t slow demand just as those bottlenecks open up and then we find ourselves with an unnecessarily slow economy because the supply side picks up. And so, you know, you put your finger on one of the dilemmas that we’re all confronting and I know from, you know, various corporations and boards I’m involved with, they’re all trying to understand how to increase supply where they can, but there’s still quite a bit of imbalance that we’re still working through. So I appreciate your great observation. I hope my response helps to just encourage you that you’re thinking about the right thing, though I must say I didn’t give you much hope that we know how to—(laughs)—fix supply in the short term.

FASKIANOS: Great. I’m going to take the next written question from Patrick Walsh, who is—works in the office of Representative Danielle Gregoire in Massachusetts. How will inflation and economic outlook affect government investment such as the president’s infrastructure agenda?

FERGUSON: Right. So it’s very interesting, back to—and that harkens back to the earlier question. So part of the president’s infrastructure agenda was actually meant to deal with some of these supply questions. By, you know, modernizing our infrastructure, the expectation would be not in the short term but over the long term the productive capacity of society would go up. There are other components as well, including, you know, education, for example. I did a study a few years ago that showed if we, you know, increase the college participation rate, that could increase the size of the U.S. economy by a couple percentage points over, again, a 10-year time frame, again, because of supply side. And so the point of the infrastructure bill is to over time respond exactly to—I think it was Beth’s question—about increasing supply. The challenge, to some degree, is that, you know, the government has been able to pay—the federal government have been able to pay for this by borrowing moneys at these very, very low interest rates; those rates are likely to go up some now, and so it becomes somewhat more expensive to pay for, you know, all of the investments that the president would like to make. And you’re seeing that play out in politics when, you know, some senators are concerned that the cost of these programs is much too high and, therefore, people have been—some senators have been reluctant to vote for them. So you put your finger on a really important point here which is, you know, the idea behind infrastructure is to increase supply over a longer period of time. It is somewhat costly, and the cost will have gone up somewhat because interest rates have gone up, and so there is a cycle that we’re trying to sort of cut through, so to speak, to make all this come together a little better, but right now I think the politicians are struggling a bit with this conundrum that you just identified.

FASKIANOS: Great. I’m just going to go back to Beth; she had a follow-up just clarification. So we have a supply of goods but not workers? Just clarifying that point.

FERGUSON: Well, both things are true. So, you know, workers and goods go together. Correct? So obviously you have workers who are coming in and out of factories. You may have seen, if you have been in an airport at all, that some of the local stores have shorter hours because there aren’t enough workers. We don’t have enough truckers, which has had an impact on the ability to get goods from one place to another. And so we have supply challenges for workers that have played into some of these so-called supply chain issues; think of that as truckers. We’ve had supply challenges for workers that have played into manufacturing, for example, and so all of those—it’s all part of a cycle, but it starts with the decline in the number of workers; that has an impact on the ability of services and manufacturing companies to consistently provide their goods and services. That has had an impact on inflation, as both businesses try to bring in more workers by raising wages, which then has an impact on the cost of goods. So I hope that that cycle is clear.

FASKIANOS: Thank you. We’ll go next to Liz Ellis, who has raised her hand.

Q: Thank you very much for calling on me. And thank you, Dr. Ferguson, for giving us such a great overview. I’m Liz Ellis. I’m on city council here in Aberdeen, also in Washington state.

And I’m not an economist, but it seems to me that even with rising interest rates they’re still pretty darn low compared to—I remember paying 17 percent ages ago on something. So, given that so many cities like Aberdeen have aging roads and city buildings and a whole host of projects we would like to tackle, isn’t this really the best or a good time to take advantage of debt through bonding or other kinds of measures? Thank you.

FERGUSON: So, Liz, you can see by the way I’m nodding my head—first, I disagree with you. You may not be trained as an economist, but you understand economics, because you put your finger on a really important point, which is, interest rates are very low by historical standards. Those who were alive in the ’70s and ’80s will remember, you know, mortgage rates that were 12, 14, 15 percent, and so yes, you’re right to say this still may be a good time for states and municipalities to issue bonds, to fund infrastructure. And in fact, I believe—I may get this wrong, but last year was one of the strongest years in terms of muni bond issuance that the country has seen. Yes, it is also true that on an absolute level interest rates are still relatively low. And I’ll add something else, Liz, which is you’ve heard me—you’ve heard us talk about inflation as being a major issue. There’s this concept called real interest rates, which is the interest rate that’s quoted—it may be 2 percent or 3 percent—minus the inflation rate, and that is called the real interest rate. And right now, real interest rates—you know, the nominal, the stated interest rate minus inflation—is still negative. And so it’s still, you know, relatively inexpensive, versus history and versus inflation, to borrow money, and I think that explains why, if my recollection is correct, we’ve had a very, very strong municipal bond issuance market for, you know, states and municipalities, towns perhaps such as yours.

So you start by saying you’re not an economist. I think your understanding of economics proves to be, you know, very sound.

FASKIANOS: Thank you. I’m going to take the next written question from Danielle Schonbaum, who is the finance administrator in Shelby County, Tennessee. Any thoughts on how rating agencies may revise ratings in a more inflationary environment, specifically for muni debt?

FERGUSON: Well, I think they’re going to be looking at the ability to pay and service the debt—right?—because what rating agencies have mainly focused on is exactly that. I mean, municipalities, as you know, cannot go bankrupt, states don’t go bankrupt, so they’re not worried about bankruptcy, but they are worried about, you know, the cash flow to pay the debt. And so depending on the nature of the bond that one has, if it’s a fixed-rate bond, they’ll be looking to see, you know, if you can—you don’t expect the interest rates, the payments to go up very much, but the ability to continue to service that, and if you have some sort of floating-rate debt, certainly they’ll be asking the question as interest rates rise, is the debt service burden manageable? The other thing that they will be looking at is, you know, the underlying dynamics of the local economies and to what degree are those bonds, you know, general purpose bonds or special purpose bonds? To what degree are they tied to, you know, a project or a utility perhaps where maybe they can cover inflationary increases? So I think these rising rates and this question of inflation from the standpoint of rating agencies goes to the question of debt service coverage and the ability to generate revenue, either through general obligation, taxes, or through, you know, special assessments, fees, et cetera, to make sure that the payments are covered. So that will be the topic on people’s minds, and I suspect that for the vast majority of municipalities this will probably not be a major problem. There may be a few for which it is.

FASKIANOS: Great. We had a couple raised hands and they lowered them, so if you want to raise your hand again, please do. I’ll go next to Glenn Hodge.

Q: I’m sorry—

FASKIANOS: There you go.

Q: Can you hear me?


Q: OK. My name is Glenn Hodge. I’m the county administrator for Mobile County, Alabama.

And you mentioned more than once about the truck drivers and about the eighty thousand that have migrated out of the industry. It just so happens we’re in a critical stage right now because the trucking companies are picking off our CDL drivers. Can you elaborate more on why the eighty thousand left? That gives me a better idea of what we’re competing with, because as far as salaries, we cannot compete with the private sector, but we’ve got to do something to keep our truck drivers.

FERGUSON: First, I’m not a complete expert on this, so I should be, you know, mindful of limitations of knowledge. But when you do surveys and talk to individuals in the sector, it’s actually not so much about wages; it’s lifestyle questions. You know, and some of this has to go to infrastructure. And so you have the stories, and most of this is anecdotal, of truck drivers literally waiting for hours and maybe even days at ports to, you know, get the containers put on the back of their trucks so they can get back to work. You have the story of truck drivers, you know, not having enough rest stations and rest stops and bathrooms along the way, for example. Obviously, there are, you know, lifestyle questions of being on the road for days on end away from home and all those rigors. And I think you’re also finding, as the story that you were saying, you know, truck drivers at their salaries are finding that there may be, you know, other options and opportunities that are not quite so demanding. And so, you know, this seems to be the story with respect to truck drivers. It seems everything to do with lifestyle, but what happens in an economic system such as ours is, you know, you simply bid up wages. At some point, people will say, OK, for that amount of money I’m going to tolerate an unpleasant lifestyle, and that’s sort of the dilemma that I think we are—that we’re facing.

So I hope that’s responsive to your question. I think this is just an example of basic Economics 101. (Laughs.) If you have a job that folks don’t want to do, you keep paying them more and more, until eventually some of them come back in, and then also part of this question of fixing infrastructure to make the role of a truck driver much more attractive. But I don’t foresee any moment in the near term where the kind of competition that you’re talking about suddenly sort of evaporates. I think we just are going to have to continue to confront this issue for a long period of time.

Q: Thank you.

FASKIANOS: Thank you.

So I’m going to take a written question from Henry Lust, who’s the mayor pro tem and council member in Powder Springs, Georgia. What steps do we need to take to get the labor force participation in balance?

FERGUSON: This is one of the toughest questions. Labor force has dropped off for a number of reasons, some of which we can’t fix and some we can. First, there’s just the aging population. As I said, we think we have roughly 2 million so-called excess retirements, but we have to recognize that we do have an aging population and people are getting to the stage where they expect to retire. So that’s one element that I’m not sure we can deal with. Second thing that’s been driving this is the point that we made earlier around health care. And as, you know, the variants become milder, as schools stay open, as, you know, parents are feeling more confident, I think that will help to bring some of these people back into the labor force, and to be fair, the labor force participation rate ticked up just a little bit the last two readings, I think, from the labor force. I’m guessing on the number of times we recently have had. So there’s some positive signs there. So that’s, you know, a second element that we, you know, have to focus on, which is maintaining and improving the health outcomes.

Having said that, then there’s this third thing which I’m not sure anyone knows quite how to fix, which is, you know, the whole question of working from home, working in the office, young people in particular who seem to be somewhat disaffected with their jobs. I think there the issue is to create a much more sort of friendly environment, particularly for individuals who are only sort of loosely associated with the job market, people who, you know, are happy to drop out for a period of time, live off their savings and then come back in.

And so, you know, that’s I think a—probably not a totally satisfactory answer. It’s the best that we know right now. Some of it has to do with aging workforce. You can do something to keep people in at retirement age. Some of it has to do with how and some of it has to do with lifestyle questions, and we can hopefully manage those second two a lot better.

FASKIANOS: Thank you.

I’m going to take the next question from Bret Wier, who is the Colfax County commissioner in New Mexico. What type of pressure on labor rates can we expect in the coming years? Due to these inflation rates, should a COLA match current inflation rates?

FERGUSON: So, good question. We just had a survey of CEOs that I do for a group called the Business Council, and we asked the CEOs exactly that, and in fact, they are expecting to see increases in wages roughly 3 percent, maybe 3.5 percent over the next several years. Don’t know for sure if that’s what is going to happen, but that was sort of the interesting finding from this group of CEOs. And so then the question is, should COLAs keep up with that? And one of the challenges is even at those rates of increase of 3 percentage points or more over the next year, still, to a point I made earlier, those increases are not necessarily going to keep up with inflation. And so we’re still going to have a bit of a dynamic where, you know, wage rates go up but there’s going to be a demand for even more increases in wages to keep up with inflation. And so, you know, I think that we should expect to see those kinds of wages increases for a period of time. And all of that, back to an earlier discussion about municipal bonds, what we factored in when, you know, individuals think about the ability of municipalities to cover the debt expense, if they are in fact paying more and more money to keep up with these—through COLAs to keep up with these cost of living increases and the expected wage increases.

FASKIANOS: Thank you. I’m going to go next to Anthony Wright, who has a raised hand.

Q: Yeah, thank you. I’m a city councilman in the small town of Hueytown in Alabama.

And I think a few years ago I realized that quality of life is more important than money, and so—and where—the people who are going back into the workforce, what areas are they going into?

FERGUSON: Yeah. So your point about quality of life is really important. It depends on the generation, and so I’m going to make some broad generalizations because, by definition, each person’s making their own choices. We are obviously seeing younger people continuing to be very interested in, you know, smaller businesses, start-up businesses, where I think what they are looking for is, you know, the excitement of the new, so to speak. They seem to place less emphasis on the kind of security that at least I would have wanted when I was that age. I think for older workers, obviously their questions, as you sort of imply, of gee, what is the work that they can do? There are some people who are clearly retiring because, you know, the physical labor is too much. We are seeing some individuals, to your point about quality of life, migrating from larger cities to smaller towns and into rural areas, which many of us think is a quality of life decision. And so there are many different ways that people are looking at this, and I think some of it has to do with generation; some of it has to do with, you know, industry that you may have been in. We’re certainly seeing many people in health care pulling out of that because of the stresses and strains of the last several years, so there’s a dramatic shortage of nurses. There always—has been for quite a while in the U.S. and it’s even worse now, and that’s, I think, attributed to the stresses of being front-line, you know, health care workers during a pandemic that’s lasted—you know, ebbs and flows, now coming into three years. So, you know, there’s lots of different—and then we talked obviously about the truck driver issue, which is, you know, a type of quality of life question as well. So I think we are seeing people pulling out of jobs where the quality of life is unappealing and moving to jobs where I think they’re feeling even more valued or, you know, more capabilities.

One last thing I would point out: We have seen a dramatic drop of women in the labor force, and we think that’s very much attributed to the challenge of, you know, working from home or living at work and balancing, you know, childcare issues as well. So that’s a separate kind of sort of quality of life and life trade-off matter where some women in particular who may be primary caregivers in their homes have decided to focus more on the caregiving side during these difficult times, as opposed to, you know, continuing to pursue their careers.

So there are lots of different places in which quality of life comes into play, either driving people out of jobs or bringing people into jobs.

FASKIANOS: Thank you. I’m going to take the next written question from Wayne Domke, who’s a trustee in Roselle Village, Illinois. Obviously, we’ve seen immigration continues to be a source of a lot of discussion in this country and immigration laws. So his question: Is increasing immigration a viable answer to the labor shortage?

FERGUSON: And the answer to that question is yes. So let’s start with the other side of the question. We know that a drop-off in immigration over the last couple years was one of the sources of labor shortage, and so by definition, to your point, increasing immigration could well be one of the solutions to this challenge. And, you know, we have quite a bit of challenge in this country politically around immigration, et cetera, but I don’t think there’s any economists—maybe a few I don’t know, but most economists would certainly say that a more regularized, more stable, more certain immigration process and approach is certainly part of the process of making for a better labor force. And we actually saw that—when I say better I mean in terms of size. We absolutely saw that—you know, the decline in immigration was associated with a decline in the size of the labor force.

FASKIANOS: Thank you.

So I’m going to take the next question from David. We have several Davids on the roster so I’m not sure from where he hails. But any rate, the written question is: To what extent is what we’re seeing the result of last year being artificially low demand as a result of the pandemic, rather than underlying or continuing structural issues that ought to trigger more fundamental responses from the Fed and other actors?

FERGUSON: Well, very good point. That has been one of the big debates. You may recall that the discussion of inflation for a period of time was, was it permanent, was it temporary? Transitory was a phrase being used. Now, it’s very much a discussion in this domain. I would also say to the earlier—to your point; it feeds into one of the points I made earlier. When we had the shutdown associated with the first stages of the COVID challenge, the COVID pandemic, what we saw was a dramatic drop-off in demand for services—restaurants, hotels, trips, transportation, you know, Broadway, et cetera—but an increase over time in demand for goods. And so you’re hitting one of the dilemmas. We know that over time all that’s going to be resolved, and it goes back to the point I made earlier, which is, as the Fed is raising rates, it’s going to be very challenging to figure out, well, how much of inflation is sort of built in and is likely to stick? How much of it is going to resolve itself because of the supply-and-demand imbalances fixing themselves? How much of it will resolve itself as people start to buy more in the way of services but less in the way of goods? And so some of this for sure is simply the result of the imbalances of last year becoming new imbalances this year or the imbalances two years ago, and that is one of the things that makes the Fed policy decision making very, very tricky is, you know, they—it will take a little while for them to figure out which of these inflationary pressures are due to rates being much too low or can be fixed by raising rates, versus, you know, other things in terms of the supply chain that we’ve been talking about.

FASKIANOS: Thank you.

I’m going to take the next written question from Jon Thompson, who is on the Sedona, Arizona, City Council. Is growth essential to a healthy economy or is it possible to convert to a circular economy that is indefinitely sustainable?

FERGUSON: Very difficult question. This is a question of personal belief. I believe that equitable and balanced growth is essential to forward progress in the economy. That is in part because we have now an aging population, and so we’ll—you have to have, you know, increased productivity for every person who’s working in order to support those who aren’t working, in our Social Security system, and that implies growth because it implies that, you know, working people become much more productive, if you will, and hopefully productive enough to pay for themselves and increasing lifestyle, as well as supporting the lifestyle of other people, older people, retirees, et cetera. So, you know, this is one of these—this is an interesting question from many, many years ago, this whole notion of, is growth a good thing or a bad thing? Can we have a circular economy? I very much—of the mode of growth being much more likely to allow us to do everything we want to do. Right? We have to make investments in infrastructure that is underutilized. We have to make investments in education. We have to figure out how to improve our medical system. We have to have a smaller number of people working age for those of us who are advancing to retirement age. And so all of that says to me that sort of ongoing growth, if done well and equitably, is better than trying to maintain an economy of just this size and somehow or another make it more sustainable, or more certain, to use your word.

FASKIANOS: Thank you.

So I’m going to take the next written question from Fire Chief Mark Niemeyer, who is in Idaho. Does modern monetary theory have validity? Many economists are predicting a significant slowdown, recession, even depression, as we get closer to 2030. Very concerned about several indicators not headed in the right direction.

FERGUSON: So for those who don’t know what it is, modern monetary theory is a theory that says that economies such as the United States or Japan or others don’t need to worry about debt; they can just keep printing debt or borrowing money because they pay for it in their own currency, which says, basically, you know, the deficit doesn’t matter, debt doesn’t matter, and that none of these things—that all constraints are far less relevant. I tend not to believe in that theory.

You know, I do think that even the United States over time has a limit to how much it can borrow. We have certainly seen that inflation has occurred in part because, as we said earlier, of very stimulative fiscal monetary policy. You know, one of the very interesting things that I discovered—it was an article about modern monetary theory in the paper a couple days ago where one of the leading proponents of that theory argued that the reason we have inflation is because we have these imbalances and bottlenecks I just talked about, you know, but that’s always—whenever you have rapid growth, you always have that as a risk. And so, you know, the theory of modern monetary theory, that somehow or another you can have rapid growth of money and rapid growth of the economy and never have inflation presumes that you can just keep producing goods at just the right quantities just as quickly as the society needs them, and we’ve seen that that has not been true. And so I think what we just had is an experiment, to some degree, in modern monetary theory that, in my mind, has disproven the theory, not proven it, and I think most economists have become more skeptical of modern monetary theory over the last year and a half than perhaps had been true before. So, you know, out of that, I would say I wouldn’t worry too much about some of their projections because I, at least, think that, you know, the inflation that we’re confronting right now is at least in part a repudiation of some of the basic tenets of modern monetary theory.

FASKIANOS: Thank you.

We have no other raised hands, so I’ll just ask a quick question about, what implications does inflation have for small and local businesses?

FERGUSON: That’s a very good question. Inflation tends to be more difficult for small businesses to manage than for larger businesses. Smaller businesses have very little in the way of purchasing power, so, you know, they have to—you know, whatever the prices are that are charged by their bigger providers are sort of the prices they have to take, and at the same time, many small businesses, not all, are dealing, you know, in local communities where maybe, you know, the economy doesn’t allow them to raise prices as quickly as possible. Also, small businesses tend to be, you know, in very competitive marketplaces where if you don’t like what’s at one store you go to the next store, and so, you know, there’s a lot of price comparison for many small businesses that limits their ability to raise prices more than, you know, the standards. So small businesses, I think more so than some larger ones, because they—we call them as being price takers more than price setters—tend to struggle a bit more during inflation than others, and so there’s a bit of a challenge for them that maybe some of the larger businesses don’t have, even though all businesses have shown in this particular inflationary period that, you know, these rapid rises in prices and wages have actually had an impact, you know, on almost—on many, many businesses, so it’s not only small businesses, but over time, smaller businesses tend to suffer from inflation more than others.

It is also true that there are certain sectors, when the Fed is raising interest rates to deal with inflation, that tend to have bigger impacts, so housing, for example, tends to have a bigger—be impacted more directly when the Fed is raising rates, so, you know, one of the outcomes of inflation is the Fed having to raise rates to stop it and that has unequal impacts across the economy as well.

FASKIANOS: And then you layer on the pandemic and the effects, how that has affected things.

FERGUSON: Exactly right.

FASKIANOS: Well, Roger, if you want to just give us any parting remarks. There are no more questions. You have been terrific in covering a whole range—(laughs)—of this, so—

FERGUSON: So let me—you know, a parting a remark is, you know, I’m incredibly optimistic that we’ll work through this. Some of this has to do with these supply issues I’ve talked about, some of it has to do with getting people interested in the right kinds of jobs. You know, I think, you know, we should recognize that this really, while it’s challenging is also manageable, because I don’t think—you know, the U.S. economy is proving to be incredibly resilient through inflation, deflation, other things. The fundamental strengths of the economy have to do with our vibrancy, our general optimism, you know, the kind of can-do attitude that, you know, distinguishes America maybe from any others, and so while we are focused in on a challenging time now, with labor force participation and supply chain issues and inflation, you know, none of us should reach the stage of thinking that this is anything more than, you know, yet another, you know, challenge that America has confronted but we should all be incredibly optimistic, as with other challenges, that we will, you know, persevere and work our way through this one as well. And so I want to leave people on a sense of my own personal optimism, even as I spend a lot of my time digging in dry numbers—(laughs)—and trying to understand arcane facts out of that. For me, at least, has come a real sense that we will continue to do reasonably well, quite well, and I couldn’t imagine any other country that’s going to do better with these challenges than the United States of America.

FASKIANOS: Well, with that, we will bring this webinar to a close. Dr. Ferguson, thank you very much for your expertise and analysis today, and to all of you for your questions and comments and for spending this hour with us.

As always, we will send out a link to the webinar recording and transcript so you can review it and share it with your colleagues or constituents. You can follow Dr. Ferguson’s work on CFR.org. As I said at the outset, he is working on a project called the Future of Capitalism, so we’ll have to bring him back when—to talk about that—(laughs)—at the appropriate time. And please follow the State and Local Officials Initiative on Twitter at CFR_local.

And as always, I encourage you to visit CFR.org, ForeignAffairs.com, and ThinkGlobalHealth.org for more expertise and analysis, and do email us, [email protected], to let us know how CFR can support the important work you are all doing in your communities. So thank you all again. And thank you, Roger Ferguson.

FERGUSON: Thank you so much for giving me this opportunity.



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