Wall Street Week - Full Show (08/12/2022)

Wall Street Week - Full Show (08/12/2022)

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So much for the dog days of summer. Two landmark pieces of legislation a major river runs dry. Inflation takes a holiday. And the FBI searches former President Trump's Mar a Lago residence. Welcome to August. This is Bloomberg Wall Street week. I'm David West. This week special contributor Larry Summers on Not Counting Our Chickens. Too soon on inflation.

We've sure seen this movie before. And Melissa CARNEY of the University of Maryland on the risk of running out of workers. Our population is going to age and it's not going to grow. Eventually we're going to have a shrinking working age population. Things are supposed to be quiet in August but the news gods haven't gotten that message. The week started off dramatically as dozens of FBI agents executed a warrant to search former President Trump's Mar a Lago residents and Trump allies were quick to comment. It's unprecedented that you would go into a former president. Why wouldn't they just ask the president if

they have something there that they want. But Attorney General Merrick Garland waited until the end of the week before weighing in. I personally approved the decision to seek a search warrant in this matter. Second the department does not take such a decision lightly. And then on Friday we got to see the warrant and what was taken. The FBI has again seized classified records and some that were marked as top secret from former President Donald Trump's Mar a Lago home. And this was a copy of the search warrant that was seen by Bloomberg. Congress moved forward on not one but two pieces of major legislation that chips act that's been pending forever. The United States must lead the world in the production of these advanced. This law

will do exactly that. And a piece or two of the build back better proposal that had been left for dead but came back like Lazarus at the eleventh hour and the fifty ninth minute. The motion is adopted. And those summer in the northern hemisphere are supposed to be hot not so hot that Europe Wine River dries up posing yet another problem for strained supply chain. It's also just getting extremely expensive. The same barge owner I was speaking

to before he said that he literally fell off his chair when he saw the cost of shipping on the rise. But as hot as things were everywhere else inflation chosen this week to cool down a bit with headline CPI numbers flat month over month and core up less than expected. Though to be fair you still are facing more inflation than anyone would like. It is good news though. I do think we have to be cautious as we've said all along. There's no silver bullet here. And after the producer price index numbers reinforce the idea that inflation just might be softening a bit. The markets

responded warmly with the S&P 500 posting its fourth weekly climb in a row up three point to six percent and the NASDAQ back in bull territory up over 3 percent. While bonds were relatively calm with the yield on the 10 year ending the week not far from where it started at two point eighty three percent. Here to help us sort it all out are Joanne Feeney portfolio manager at Advisors Capital Management and Christina Hooper chief global market strategist at Invesco. So welcome to both of you. Christine let me start with you on the reaction of the markets to this CPI and PPO numbers some encouragement. Does it sort of

suggest maybe we're heading in a better direction. David we're definitely heading in a better direction now. It looks like we're past peak for inflation. But the problem is inflation is still very very high. If we think about the Fed's inflation target of 2 percent we're way far away from that. And it's going to take us a significant amount of time to get there. But this is the first step in that direction. And so it's progress. I think the market sort of thought maybe we can back off a little bit. Well the market I think might be a little bit too optimistic about how much work the Fed still has to do.

Yes the numbers have been good. In fact the core P.C. inflation looks like it peaked back in March. And we got that information. And that's a positive. And we're starting to see some of those items that were really short supply now start to become more available. And that's helping to take the price pressure off. But we are as Christina said we are a long way from 2 percent inflation although the long term expectation for inflation is closer to 2 percent. We still have a lot of work. The Fed has a lot of work to do in the short term. So I think the market might be a little bit too

optimistic about the path of rate increases. And I think they're going to continue to rise over the next few meetings at least until the Fed is really convinced that inflation is moving in the right direction. And because they're data driven they're going to wait until enough data has really piled up before they shift their focus. I think you're seeing that take us over the next month or a half or so because at Jackson Hole first rate we'll hear from Fed speakers including Jay Powell and then just fill in the data. I think we get another CPI reading or two. We get jobs numbers reading things at that. Where do you think the Fed will be. Come September. Well I'm actually gonna go out on a limb David and say we're probably going to be in a place where

the Fed feels it should air on the side of a little more caution. Right. We've gone at a pretty breakneck speed in terms of back to back 75 basis point hikes. And the Fed is as Joanne said very data dependent. So it's going to be looking at data and seeing that longer term inflation expectations are better anchored than they were. And they are going to see inflation moving in the right direction. Inflation growth is obviously still an issue. So they're going to be hiking rates but they don't have to be as aggressive. So perhaps they signal it in a Jackson Hole speech that might be

too premature. But I think by the time we get to September October we should see a fed that pivot to a less hawkish tightening stance. I think the critical data in it is do you just mentioned Christina is going to be the employee cost index that ECI. But we know the labor market is very tight and we're concerned

right. That wages are going to continue to rise and that's going to put a floor really under price inflation as those bleed through into prices from firms. We're seeing that a lot. We're seeing firms actually be pretty successful at raising prices in the face of those higher costs. So you know if if job openings drop and some of the heat comes out of the labor market and we don't get as large increases in wages and overall employee costs then I could see the Fed you know becoming a little bit more at ease about the number of rate increases. But right now the wage pressure just looks really severe and companies are still clamoring for workers even as we hear about these anecdotes of telecom you know firing hundreds more workers and others. But a lot of those that are you know announcing firings are the ones who are right in the center of the pandemic benefit in terms of just massive business expansion. And they're now having to dial back. So we'll see if that spreads more broadly across the

economy. Joanne I would argue some of the heat is already coming out of the job. Market that we've seen a drop in the number of job openings. It's moving in the right direction. And of course we are seeing companies and earnings calls talking about how they're going to be more cautious in hiring or actually implementing hiring freezes. And of course we have heard about some layoffs as well. So I think this is an environment in which we're going to see

increasingly lower level of labor mobility. And so that should help tamp down upward wage pressure. Joel I'm curious about your take on the risks faced on the one hand by the markets on the other hand by the Fed and whether it's the same because there is a risk in backing off too quickly. I mean you say boy the inflation is down headline and

core but it's still pretty high. And even with the wage increases that may not be as high as they're worth. They're still pretty high for the Fed. Do they have to really be concerned about the appearance they're backing off too soon. Yeah I think they do have to be concerned about that because they're their main tool for getting this right is creating the correct expectations. They really have to convince the market firms workers who might be out there clamoring for raises. They have to convince them that this inflation spike is a temporary one. And so to back off you know too soon would potentially lead the markets to think OK this could get out of control. I agree with Christina. We have seen some softening in the labor markets job openings that did come down a bit but there's still nearly twice the number of the unemployed. And that could be a little

bit of a mirage. Right. And we could see more more firings. And that's a backward looking data point. We know. So you know that's why I think we will know a fair bit more over the next couple of months. But the Fed I think cannot air on the side of looking like they're going to ease off if the data is not really strongly supportive Christine. We have to talk about the possibility of a recession and the yield curve because we've had the twos tens now inverted for an extended period time. It's

somewhere in the 30s right now. Got as high as 58. What do you see in terms of the risk of recession at this point. Well actually David I would argue this week was a good week that increased our chances of avoiding a real full blown broad recession. I think the Fed it's going to be a little bit easier for the Fed to execute a soft landing but that would mean that the Fed needs to pivot to a less hawkish tightening stance sooner rather than later. Do you agree with that Julianne. What do you think. The chances of a recession. But you know I think it's probably the case that things got a little bit brighter in terms of the outlook with the data we got this week with those inflation numbers coming in below expectations. You know clearly short term constraints can go up even significantly without triggering inflation. What we're watching is really the longer term interest rates. Right. So the yield curve being inverted doesn't surprise us. It seems

actually kind of a natural outcome of the Fed trying to deal with what hopefully will be a short term inflation problem. So you have you know the shorter term interest rates the three month a two year etc. spiking up a little bit as the Fed moves but provided that the tenure remains anchored close to the level where it's currently sitting. That doesn't materially raise the

cost of doing business for firms. It doesn't raise mortgages as much. It doesn't raise the cost of financing durable goods purchases. So we tend to have less of a drive towards you know any recessionary dynamic than just having the short term rates go up. Christina Hooper of Invesco and Joanne Feeney of Advisors Capital Metro. We stay with us as we turn from the markets generally to what investors can do about them. That's next on Wall Street on Bloomberg. Housing starts reversed a four month decline and the overall economy grew in the spring at a modest two point three percent annual rate. But amid signs that inflation was again easing that wasn't good news for everyone this week. The oil market stepped into a puddle with the price taking its biggest one day hit in almost a year. And every currency in sight took a bite

out of the dollar. That was it was rock ISE just take on the economy on Wall Street week back in 1987. Now 35 years later we're still focused on housing and energy and growth. But from a very different vantage point. Joanne Feeney of Capital Management and Christina Hooper of Invesco are still with. So Joanne let me start with you if I could. Let's see what housing is. A lot of talk about housing right now whether we in fact are in a bubble. Obviously housing prices have gone up a lot. Rent costs are really in record levels. First place is the same time the feds trying to come off of that sugar high.

Yeah it's clearly a reset going on in the housing market. You know that those low interest rates clearly create a lot of demand a lot of activity in the housing market. But people shouldn't forget that there's still an awful lot of younger folks out there who have delayed getting into their first first homes and that latent demand is still out there. I think what we're seeing now is a re-evaluation of how much house can I afford. And so we have seen people walk away from contracts. We've seen the builder slow down a little bit. But given our high mortgage rates are the existing homeowners don't want to

get out of their old cheap mortgages. So that's going to push demand to the new builds. So we're still pretty enthusiastic about some of the plays in the new you know in new building for housing like sale in our for example which tends to serve that lower end the first homebuyer or the one step up homebuyer. So there are places to be in housing. You just have to be a little bit patient here. As this recent plays through and folks renegotiate contracts and then find slightly cheaper houses to buy servicing because you heard about Lennar there maybe lower ed how's your work. What are you seeing is a lot of volatility in the marketplace. Where does it create opportunities for investors at this point. Well it creates opportunities really at

times when we see a sell off. Of course we haven't seen much of a sell off in in recent weeks. But but when we do get those that's an opportunity for investors to reshuffle portfolios. Right. And sometimes it's about exchanging lower quality less defensive for higher quality more defensive getting a little more yield in there. So I think areas that I would focus on right now are our opportunities in health care like pharma as well as as technology to secular growth plays there. Join One of

the things I'll use is if a drive in the U.S. of sometime our consumers consumers had a pretty good time of it. They've had really good balance sheets. They've got a very fair amount of income coming in the same time. There's more pressure there now. What does that say in terms of investing in stocks if in fact there's more pressure on the consumer. Yeah it's become a very challenging time to invest in the consumer space because what we have going on now is really a tale of two consumers.

We have folks at the lower to middle end of the income distribution really being hurt by these high prices this high inflation. For them it's making their budgets a lot tighter. And so we're seeing that and the results of say a Wal-Mart and a Target where they're fighting their shoppers aren't spending less but they're switching away from discretionary products towards the necessities which have lower margins. So it's hurting their profits. But then you look at the higher end of the income distribution you see companies like Apple selling expensive iPhones. They're not seeing a drop in demand. We're seeing Williams-Sonoma. Right. They sell higher end kitchen gear and furnishings type stuff and they're not really seeing a drop.

So it really depends what kind of a consumer products company you are and how much you can raise prices because you have a resilient supply of shoppers or how much you're having to really trim them back to keep the shoppers walking in the door. And so it does make it a real selection question. And to Christina's point finding the higher quality companies that have the more resilient shoppers is really going to help your portfolio. David I would just argue that in this environment having seen gas prices come down significantly. Real incomes aren't as pressured now as they were just a little while ago. So I think that that chasm between those two sets of consumers might not be as wide. There's a little alleviation of the pressure on lower and middle income American households right now just because energy prices have come down. So it's certainly not a much better situation

but it is materially better. And we saw that borne out in the most recent consumer sentiment numbers. You talk about earnings if you would say from what we're just getting through the earnings season here. If we're seeing a tail to consumers as we just heard from drowning. Are we seeing a tale of two sets of companies as well but high quality versus less high quality. Well certainly there are some companies that are far better able to pass on their costs than others.

There are those that are really experiencing a reduction in traffic. For example if we're looking at some of the retailers and others that have have held up fairly well. So I think going forward what we're going to have to make an assessment on is is which are those higher quality companies that can defend their margins that can pass on prices that can weather this storm better. Because let's face it it's going to be you know there are going to be some significant headwinds in the next two quarters I would argue. Joanne as a portfolio manager how are you feeling about tech

these days. I know techs covers an awful lot of sins. There are a lot of different things called tech but how are you feeling. There are opportunities right now in tech. Oh yeah I think there definitely are. You know it could take some patients really for investors to to reap the rewards of tech. But when we look at technology what we look for are companies that are in the middle of a change in the way things are done. A demand coming from the market whether it's demographics or tastes. But you know the cloud area companies shifting their activities away from internal services to the cloud. This is still happening. And more traffic on the Internet is pushing data centers to have to expand and build in faster

wider pipes. So if you look for the companies that supply the parts to enable that know they're going to be able to sell well no matter what happens in terms of the cyclical side of the economy. And generally if you if you pick and choose carefully you can find ones that have deep moats around them that don't have a lot of competition. You're not buying into companies that are selling commodities. So you know whether it's a Broadcom or an Amazon which really enables the class out or Microsoft which enables the software to make all this work. These are companies are going to power through. You're going to be a little bit cyclical but they're going to hold up better than others will. Christine finally let's go overseas if we could because we've

talked about the Fed however fast they're going to tighten their tightening. No question about it. Europe looks like they're tightening. There are some places like Japan and China that maybe going the other direction. Does that create an opportunity for investors. I think so David. It's not just a difference in terms of monetary policy. So we both have we have China easing

and we have Japan remaining very easy. But it's also fiscal stimulus. We're seeing fiscal stimulus in both those countries whereas in the U.S. and other Western developed countries they're pulling back on stimulus. And so that sets up an environment in which there are built in tailwinds that we're just not seeing here. I think there's potential there. Now when

we look specifically at China equities there's a lot of pessimism right now around China especially given headlines around the property sector. But if you ring fence the property sector and look at the broader market especially technology there are a lot of effort opportunities in China equities and I think there's the potential for positive surprise. Joanne what about China. And I'll push Christine to here a little bit. It's certainly the property sector but there are also geopolitical risk. And we saw the de-listing of a lot of the big Chinese publicly traded companies because of problems

with United States. There are a lot of frictions here. How do you feel about China. Are there investments. It makes sense there. You know we do think there are some good opportunities in China and around China. Our international team which manages a set of internationally oriented portfolios now they're in there.

They're picking and choosing very carefully. You don't want to invest in a country as a whole. Like you said the property issue in China is a serious one. But look at the cloud enabling companies in China the political environment China is still pro growth even if they're running into problems with Covid and politics. Right. A company like Buy Do for example or Alibaba they're going to be able to be the engines of growth in China for many years to come. Even with those regulatory questions and if they get delisted here. Right. They're going to be listed in probably Hong Kong. And so even if you're in an ETF you know of

stocks in this country listed in New York even if they switch over to Hong Kong the investor is going to be fine with that. So it's not as risky from that regulatory perspective I think as a lot of people think. And even on the geopolitical side you have to really understand what the Chinese leadership wants to accomplish. And one thing they want to accomplish is continued growth. So if you look for the companies that enable that even if they're a little bit more volatile those could be good places to be particularly at the valuations at which we're seeing them now. So briefly at the end Kristina how do you factor in the geopolitics of it when you appraise possible investment. It's very very hard to. So I think the best course of action is to

take a longer term view and recognize that geopolitics can have an impact on the shorter term rarely on the longer term rarely on fundamentals if at all. What use it opportunistically. Because if geopolitics drives down stocks that's an entry opportunity in my view as opposed to anything that causes concern and a run for the exits during that what you do and picking your stocks look for some low hanging fruit as it were. Yeah I like the way Christine put that. You can't be a short term investor in this kind of environment if you're going to go internationally. Right. There are stocks that are going to happen. There's geopolitical risks but longer term. Right. Economies get through cycles. They get through these kinds of risks. And when you find those opportunities for good solid companies that attractive valuations you do have to at act

opportunistically. That sounds like a lot of sense to me. Thank you so much to Christina Hooper of Invesco and Joanne Feeney of Advisors Capital Management. Coming up we look around the world or what's coming up next week. That's next on Wall Street week on Bloomberg.

This is Wall Street week. I'm David Westin. It's time to take a look at next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. China's July monthly activity data are likely to show the recovery eking out a little more headway. Bloomberg Economics expects industrial production investment and retail

sales all picking up elsewhere. Japan's second quarter GDP will probably show a strong rebound that takes output back to pre Covid levels. Australia's jobs report is likely to show employment stabilizing after a few months of strong growth. Plus we are on interest rate decision watch from the RBA NZ and central banks in the Philippines and Sri Lanka. Now over to Tom Mackenzie in London. Tom here in Europe could be looking ahead to the earnings from the bailed out utility giant over in Germany unipolar at a time of potential blackouts and rationing when it comes to energy particularly around the winter months. The forecast from some when it comes to that energy crisis of course a drag on the eurozone growth picture. Would you be any

GDP out next week from the continent at a time when increasingly economists are forecasting a recession and sticking with the energy theme. We're going to be speaking to the new Secretary-General of opaque of course to get a sense of where we stand in terms of supply demand and pricing for oil. Big week here in the US really on the earnings front. We're going to get a big update with Home Depot and Lowe's. Of course housing as you know it's been a really big bright spot here during Covid in

the U.S. with some of the economic data that we're going to get around that as well. Does that continue or are we really starting to see a significant slowdown in the face of rising rates. I want to stick with retail and some of that earnings as well. Next week we talked a lot about the consumer. Wal-Mart Target T.J. Max Kohl's all set to report next week as well. And we've talked a lot on our programs about sort of how inflation has hit the lower end consumer much harder than some of the luxury and retailers. So that will be a key focus for us here as well. Back to you David. Thanks to Juliette Saly Tom Mackenzie and Taylor Riggs. Coming up we ask our special contributor Larry Summers whether those CPI numbers have him feeling any better about inflation. This is Wall Street week on Bloomberg.

This is Wall Street. I'm David Westin to take us to the high points of this week. We welcome back our very special Katrina Larry Summers of Harvard. So Larry thank you so much for joining us from Aspen actually this week. We'll talk a little later about what you're doing out there. But first we've got CPI numbers this week. On Wednesday they came in significant better than a lot of people thought they would. So do you find some relief from this. Are we over the worst of it when it comes to

inflation. I think these were encouraging numbers. We we knew that the headline number was going to be coming substantially down because we could see what had happened with gasoline prices. The core number was better than most people expected. That's certainly better than the alternative to that. On the other hand it was heavily driven by volatile sectors like used cars like hotels like airfares serious. Seen this movie before. We had a

terrific core number in March but it was from those volatile sectors and then it bounced back off in April May and June. So we'll have to see what happens going forward. But this is certainly a better number than most people expected and it will come as a bit of relief to the Fed. But I certainly think it's nothing like we are out of the woods. It's nothing like a fundamental change in the orientation. It's nothing. That means that we can pivot away from the overwhelming paradigm being a need for restrictive policy to contain inflation. Well that's what I want to ask you about. Some relief for the Fed you said.

Is there a risk in that you've warned before about backing off too quickly in the cooling of the economy. Is there a risk the Fed pays too much attention to numbers like these. We'll have to. We'll have to see what they do. If the Fed regards this as a major game changer they will be making another major mistake. I would be surprised if they regarded it that way because I think when you look within it you'll see that seasonally adjusted airfares coming out of 2 July ISE when airfares were highly distorted by Covid. How could you take that seriously as a huge harbinger of new trends. So I don't think they will make that

kind of mistake. They certainly shouldn't make that kind of mistake. But you know you get out of woods and even deep woods you get out of them one step at a time. So I don't want to deny that this that there's some encouragement in this number. But overreacting to that would be a grave mistake. I think that on your show before David I've talked about how prudent people

finish their regimen of antibiotics even as they're gratified for days in that they feel better. Len I still think that's the right metaphor for thinking about this situation. Larry you and I have talked a lot about rates. What about the balance sheet. Because I say just about every week after we get done on this program as somebody emails and says what about the balance sheet. How effective is the balance sheet in helping to slow down the economy get our arms around inflation. And are they

doing it the right way. Should they be coming off the balance sheet even faster than they are. I wonder if they should come off faster than they are. I think the clearest statements about the balance sheet is that they should have stopped buying six or nine months earlier than they did. I think it's clear that we had something that history will look back on as a bit of a housing bubble. And I think they contributed to that by buying mortgage backed securities. Now I certainly think they're going in the right direction with Kutty rather than QE. Could they do it faster. Perhaps they could. Would it make a major difference.

I'm not sure that it would. Would it add to financial risk. It might. In terms of some kind of accident in markets in general David I think yields are driven more by the fundamentals of what's happening in the economy and less by central bank policies like Kutty and QE that I think many in the markets think you know I could be right about that or I could be for I could be wrong. But I think people often ascribe to the direct impact of these policies what is in fact a signaling with respect to future monetary policies. And I don't think that now. This is an area of stability. The

Fed has set an expectation that expectation is under way. I wouldn't be recommending a. Major change in balance sheet policies at least at this point. Laura we spoke last week. Inflation reduction was getting toward being statute. Now we actually have pen put to paper. One of the issues that has been of concern to you is carried interest. You were concerned

actually they should go further and cutting back on carried interest. In the end they went even less far. What do you make of what happened there particularly with some of the lobbying we saw on Capitol Hill. I think it's very sad how much special interest lobbyists were able to stop things that are clearly in the public interest. The idea that carried interest which after all is income paid to people who work at providing a service. Some people provide the service of legal work. Some people provide the service of serving meals. Some people provide the service of asset management. And the idea that the people who provide the service of asset management who are often some of

the best paid people in our country should be able to have their compensation be taxed at half the rate of everybody else I think is outrageous. And I think it's very very sad that people on the progressive side allowed themselves to be persuaded by very substantial donors to their campaigns that the legislation as it was originally drafted should be gutted in that area. I also think it's very unfortunate even more unfortunate because it's in some ways a larger issue that the hugely historically important legislation or in agreement that Secretary Yellen reached with President Biden very much involved to foster international tax cooperation. That's probably going to collapse now or may well collapse because Congress wouldn't pass the enabling legislation by going after tax havens. And I sure wish that that had happened. I hope

that some way will be found to go back to that set of issues and frankly gave it it all has me thinking about the role of money and business interests in our system as you know. I am hardly one who takes the perspective of the most progressive wing of the Democratic Party most left wing of the Democratic Party that wants to see things socialized or wants to see punitive taxes levied. I tend to be on the more moderate side but I am pretty offended by what's happened here. And I think business leaders who lobby these provisions who want to be explaining about public private cooperation in the national and global interest and all of that I think they should always be asked. Shouldn't a start by not lobbying to subvert

the tax system we have. OK. Larry Summers I'm delighted they will be staying with us because we're gong to be joined by Melissa CARNEY. She's professor of economics at Maryland. And she has convened Larry and some other esteemed economists in Aspen to address the very important question of after we come through whatever downturn we're going through. Where will the growth come from. That's coming up next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin our special Matt Miller has stayed with us and we are joined now by Melissa CARNEY. She's professor of economics at the University Maryland. Also director of the Aspen Economic Strategy Group which she has

convened in Aspen this week with Larry and other esteemed economists to address a critical question really of whether the United States could be facing stagflation. So Melissa welcome to Wall Street. Great to have you here. Let's start with the question of where growth will come. On the other side of whatever it is we're going through because that's ultimately going to be the question here. I understand for economists like you it comes from one of two sources. Is there more workers or more productivity. Are we going to get more workers. We're looking at both fewer workers and lower

productivity as you know. So let me focus on the fewer workers aspect for a moment. The real issue demographic issue facing the U.S. is we have a plummeting birth rate. And so total fertility in the US is now below the level required to keep population growth constant. And so the issue here is that on average now a woman in the US is expected to have one point sixty five children over her lifetime. So women used to have three kids. Then it fell to two women were having comfortably above two kids for many decades with a roof with a fertility rate below 2. That means our population is going to age and it's not going to grow. And so eventually we're going to have a shrinking working age

population. Unless Melissa we have immigration. That's and that's why immigration I think many of us at this conference feel is so very very important. What's your sense of what economists would say the politics apart about immigration policy. Economists love immigration. We think immigration is the is the potential answer to our demographic challenges as well as our productivity innovation challenges. Since immigrants come in they work.

They're more likely than native born Americans to be entrepreneurs and innovators. Of course as you know Larry immigration rates are way down. So we used to bring in you know 2016. We had as many as a million new people coming into the country every year. That number is now below two hundred and fifty thousand. And so the combination of a declining native born population and a decline in immigration portends even worse demographic challenges than if we were just facing one versus the other. Let me see if I can do a little arithmetic based on what you've said for one million two hundred fifty thousand. So that's about seven hundred and fifty thousand people a year. So that's about half a percent of our workforce. Maybe a little less so. Half a percent slower labor force grows

over time can accumulate to something that is there that is very large. And if we go back to the birth rates we have about 500000 fewer babies being born a year than in the not distant past. Melissa if you. What would you say about about this. Most people are scared that immigrants come in. They take jobs for Americans and that if they're more immigrants than there ought to be as many jobs for Americans or if there are jobs because there's more competition they're going to be paid less. And that's true.

Whether the job people think is working at McDonald's or is working doing computer programming at Microsoft. What how do you how should people feel. Shouldn't they. Shouldn't they have this worry that they're going to be poorer if we take all the immigrants just like they get hurt. If we take a lot of look at a lot of trade from other countries where they have much lower wages. So so the reason economists are so bullish on immigration is because we have so much evidence that immigrants are good for the economy. They are good for most workers. But it is true that there are some groups in some places that will feel wage

pressures. And I think the way we the way we solve this issue is to make sure that we recognize the disparate impacts of certain groups. We recognize that low wage workers in certain sectors might not experience the benefits the overall benefits that immigrants bring to the economy. And we take steps to help them. I mean it's not it's not just similar to what we have to do with trade to you know more imports is good for most people but some people are harmed by it. We're gonna see this too with the shift to green a greener economy. Some people are going to lose their jobs even though it's better for everyone. And so I mean I think

acknowledging that some people feel and are harmed by this but that's a small concentrated group and taking steps to address that allows us to do things that make the economy grow and be more productive. Mills I wanted to come back to fertility. Mary's. Out a way in which economics weather misperceived or not they affect our willingness to have immigration. What about fertility. Are there economic causes for the reduction in fertility. The decline in U.S. fertility and it's really being driven by a plummeting of birth rates since 2007. Births fell after the Great Recession. They haven't recovered. You can't

point to any any policy or economic factor that's changed since 2007. So sometimes people will say things like child care has become more expensive. And if we just made childcare less expensive people would return to having more than two kids. I know that is just not the case right. There's nothing there's nothing that easy that we could point to. And in fact U.S. women now are just having births in the same way that women and other high income countries have reduced their birth rates long before in the 80s and 90s. So I don't think this is going to be easy to turn around. Lots of other countries have taken direct steps to try and incentivize people to have more kids. There's a lot of countries that have experimented with baby bonuses a few

thousand dollars. Birth rates go up a little bit in the following year but nothing like the 20 percent increase in fertility. We would need to get back to replacement level. Also having an expert like you here I can't resist stepping out of our mutual lane as economists to ask a question that I suspect is on many people's minds. Do you think that the recent Supreme Court decision and the steps that are going to be taken in a number of states do you think that's going to materially affect the number of births in the United States. The we do have estimates on this based based on lots of data we have about how

abortion restrictions lead to more birth rates. I expect there will be about 100000 more brass a year. So yes not this is this is not going to bring fertility rates back to where they were. This is going to mean that some women who wouldn't want to have a child now are going to. Since you raise the issue I will say that this makes the imperative of doing more to support kids and low income women in this country that much stronger which is you know that that was something that Congress was talking about for a brief moment in the initial build back better. That stuff got jettisoned in a post Dobbs decision paradigm. We are going to have some more births disproportionately born to

low income women. And we need to talk about how we're going to make sure that those children are well taken care of. So Larry can we make up the loss of population and workers with productivity. We have the Chips and Science Act. Now we have the Inflation Reduction Act both of which I understand are meant to increase productivity. Can we make it up and increase

productivity. You know Melissa organized a terrific session here on R and D science leadership issues. ISE. There's a lot we can do but it's both about spending money and it's about spending it. Well there was the famous discovery of DNA by Crick and Watson today. People can't usually get their first grant until they're over 40. And so I think we need to change the systems as well as putting more resources in if we want to maximize science innovation and their capacity for productivity. I think we've

also going to have to think about a lot of things. Post Covid David. There's one other factor here. So we've talked about fewer working age people less productivity per worker. We also have fewer working age people working. So the decline in labor force participation among people between the ages of 25 to 54 is yet another challenge that we're going to have to deal with in this country that's negatively going to impact growth going forward. It used to be that 95 percent of working age men were working. Today it's 85 percent are working. That is an extra 10 percent of people who aren't having the satisfaction of work

aren't contributing to the economy are much less well placed to raise healthy successful families are often angered and alienated from our society. And so we tend to think of shows like this the path of fortunate college educated workers. We have got to be thinking about that large group of men. Men much more than women who are. Really struggling in our country right now and what can be done.

From childhood on to maximize their opportunities. It's such an important point. As you know both of you know well there's been some serious economic work suggesting that opioids actually have been a non not insignificant contributor to that problem. Thank you so much. Has been a great discussion. I wish I were out there in Aspen with you. I could learn a lot more but thank you so much for our very special treat. Larry Summers of Harvard Analysts Akani professor of economics at the University of Maryland. Coming up it's one thing to handpick your successor. It's quite another to make it work. That's next on Wall Street week on Bloomberg.

Finally one more thought. Heavy is the head that wears the crown at least according to Shakespeare's Henry the Fourth. And it's not only heavy. It's hard to pass that crown under the next head. At least judging by how often it doesn't seem to work we don't have to go all the way back to Lear to find leaders bungling their succession plans. We have diverged in three ISE kingdom has passed intent to shake off tourism business for my age concerning the money and distance. We all know how that worked out for King Lear. There are plenty of more recent examples though particularly in the world of business like Jack

Welch and joining Jeff Immelt to carry on his legend at G.E. something that didn't work out so well. Although Jeff seemed to be the last to know when he spoke to our John Micklethwait in 2017 not long before he had his crown removed. We always have a group of successors and I always think you've got to earn it every day. So you'll be doing it in a while. I feel great. And we'll see where it goes. Our Kevin Johnson who had the bad fortune to be the second CEO to replace Starbucks chief Howard

Schultz only to be succeeded by you guessed it Howard Schultz. Though when I spoke with Kevin in 2019 he admitted that it was tricky in a transition from founder led to founder inspired. Those transitions oftentimes are the most difficult and the most critical transition that any company will go through. And this week we got yet another example when the founders of the Carlyle Group announced that their hand-picked heir to San Lee would be leaving abruptly to be replaced at least temporarily by Bill Conway. One of those founders who'd picked him says definitely shaken the investment universe. Let's not be coy about it. 10:00

p.m. Eastern on a Sunday night. And remember like I said he is stepping down before the contract is even up. But it wasn't only coup leader who stepped down this week. We also saw a legend prepared to move on when Serena Williams arguably the greatest of all time in women's tennis announced that she would be retiring after the U.S. Open this year something she had just joked about earlier. Every tennis player thinks about the R word as soon as they hit five years. And when it comes to Serena I'm not sure that we're going to see any successor anytime soon. So given how much drama there is around the subject it shouldn't be surprising that there is a hit TV drama series given over to the matter of succession because it's one thing to know the boss has to go. It's quite another to figure out who should be the new boss especially if

you're warring with family members. He's erratic. He's making bad decisions. If he's not careful he's going to destroy the company and he's going to do something. I think I'm the best option. All right. Because you're not playing boss. That doesn't put this up as a Wall Street week. I'm David Westin. This is Bloomberg. See you next week.

2022-08-16 15:02

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