“It’s the economy, stupid.” Bill Clinton’s 1992 campaign mantra has never felt more prophetic. In an era when presidential scandals barely register, where lawbreaking and corruption seem consequence-free, where the president himself once boasted he could shoot someone on Fifth Avenue without losing support — the economy may be the only force powerful enough to reshape our political landscape. 

And right now, beneath the surface calm, something fundamental may be shifting.

Matthew Klein, economics commentator and publisher of The Overshoot newsletter, takes us deep into the weeds of consumer spending, inflation persistence, housing market dysfunction, and the ticking time bomb of household wealth that could reshape everything if interest rates fall. 

This isn’t your typical economic overview — it’s a forensic examination of why the numbers we’re being given don’t match the reality people are living, and what that disconnect means for our immediate future.

Klein explains why inflation isn’t actually under control, despite official reassurances, how tariffs are just the tip of an inflationary iceberg, why young workers are being devastated while the overall job market looks strong, and the danger lurking in trillions of dollars of untapped household wealth. 

We explore the housing market’s strange paralysis, the limits to what the Federal Reserve can actually accomplish, and whether the artificial-intelligence spending boom is genuine economic progress or another bubble waiting to burst.

The emotional weight of economic anxiety is real, but understanding the actual numbers — and more importantly, what they’re hiding — reveals the precarious moment we’re in. This conversation matters because the economy might be the only thing that truly matters politically anymore.

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(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)

[00:00:15] Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. The phrase, “it’s the economy, stupid,” has never been more relevant to our political discourse. While policy after policy, law breaking after law breaking has had very little impact on the popularity of the president, it seems very clear that the ups and downs of the economy may be the single largest factor in determining our political future, as well as our economic one. The disconnect has never been more stark. Wall Street celebrates robust growth, while Main Street struggles with prices that won’t come down. The job market today looks healthy by traditional measure, but something feels fundamentally broken. We’re told inflation is moderating, even as costs of everyday life, from dining out to dental care, continue their relentless climb. And now billions pour into AI infrastructure, a spending spree large enough to move the economic needle, while questions mount about whether any of it will ever pay off, or whether it’s just a bubble. These aren’t separate stories, they’re threads in a larger tapestry of an economy that increasingly seems to work for some, while leaving others behind. With the data we rely on to understand our situation may itself be compromised, where the policy tools we’ve trusted for decades might be dangerously mismatched to the moment we’re in, when the Bureau of Labor Statistics commissioner gets fired for producing numbers the administration doesn’t like, we’re not just witnessing a political dust-up, we’re watching the potential erosion of the very ground truth upon which all economic policy must rest. When households sit on trillions in accumulated wealth, while current income growth already runs too hot, the case for cutting interest rates looks less like sound policy, and more like pouring gasoline on a smoldering fire. And when the headline numbers tell us everything is fine, while underlying trends point in the opposite direction, we have to ask, whose reality are we measuring? My guest Matthew Klein, formerly an economics commentator at Barron’s, and now the publisher of the Overshoot newsletter, has been tracking these cross-currents where data meets reality, where policy meets consequences. And it is my pleasure to welcome Matthew Klein back here to the WhoWhatWhy podcast. Matt, thanks so much for joining us.

[00:02:35] Matthew Klein: Thank you very much for having me, Jeff.

[00:02:36] Jeff Schechtman: Well, it is a delight to have you here. Before we get into the numbers and to the economics of all of this, there does seem to be, on the surface, this disconnect between what’s happening with the economy. You can listen for an entire morning to CNBC and have no sense of the craziness of American politics at the moment. It’s as if that world is operating in a completely different world than our political climate and never the twain shall meet. Talk about that first, what your sense of that is.

[00:03:07] Matthew Klein: Well, I guess the first thing I’d point out is that this isn’t, that’s been going on for several years. And I think, in sort of the short term, it’s attributable, I think, to COVID and the disruptions associated with that. So there’s been research that’s been done where basically you can look at survey measures of consumer confidence, which essentially is how people feel about the economy or what they think is going to happen, you know, their optimism or pessimism about the future. And historically, you could recreate those survey results by taking real economic data, things like incomes and inflation, unemployment, things like that, like the price of gasoline, for example. You kind of put it into a pretty simple equation and you could generate something that looks a lot like the survey results. And starting about, I think about four years ago, so four or five years ago, the relationship just breaks down. And so confidence falls a lot during the pandemic, during the teeth of the pandemic in 2020, which makes sense. Also, the economy itself was tanking. What’s interesting is then the recovery afterwards doesn’t really happen the way you’d expect. In fact, people end up being extremely pessimistic about the future in times like 2022, when many measures of the economy overall would make it look like things are pretty good. And for perspective, I mean, people being pessimistic, you know, worse than say, like the depths of the global financial crisis in 2008, 2009. And so the disconnect that we’re seeing now, in many ways, I mean, that disconnect never closed, that gap never closed. And we can argue about why that is maybe the, you know, there’s some fundamental series break and the old methods of modeling these things doesn’t work anymore. But essentially, it’s just been for the past several years, it just hasn’t worked. And I mean, you can see that in the election results, which, you know, in the US and the US was far from unique in this, basically, every incumbent party in democracies that had an election in 2023, 2024, every incumbent party lost the vote share, relatively speaking. Whether it led to a change in government not depends on other factors, but basically, everyone lost somewhat and that happened, the United States was no exception. And it seems to be that this sense of just, you know, I’m not a political analyst, right, but it seems to be consistent with this idea of just that there’s this disconnect between the state of the economy and, you know, whatever the supposed objective reality is. And you look at the surveys of US voters at the time, the people who said the economy was the number one priority overwhelmingly voted for a change in government in 2024. And so, you know, whether or not that that, you know, perception necessarily matches with the official data we’re implying that that sentiment seems to, you know, again, the disconnect being the sort of sentiment, the reality is that it’s been persisting for several years.

[00:05:41] Jeff Schechtman: And was there, to the best you can see, was there, beyond the pandemic, a tipping point at which that happened, from which we haven’t come back?

[00:05:51] Matthew Klein: Well, it’s tough to distinguish between the pandemic and then everything else, right? So the pandemic itself was incredibly disruptive to everything people did. And because the economy is just what people do most of the time, right, buying, selling, working, that’s what the economy is. So obviously, it’s very disruptive for that as well. And then after the pandemic, you had, of course, this big increase in prices, which, you know, I think relative to the alternatives that we could have had, where you didn’t have an increase in prices, I think actually, it was probably the best outcome. You know, we didn’t have mass bankruptcies, for example, you could have had a situation where people were staying home, and not getting paid. And you know, they run out of money, and they get foreclosed on their house, they get evicted from their homes, the businesses fail, right, you would mass bank-, that could have happened, right? That didn’t happen. Instead, we ended up having, we gave people money so they could afford to continue to cover their expenses and pay their bills, but then you had inflation later. So I think there was no good outcome given that the pandemic happened. I think, but regardless, you know, people don’t necessarily say, well, this is better than what it could have been. It’s still unpleasant, right, regardless of even if you know, in your head, that you could have been foreclosed on and put on the street, like even if that’s not the case, but you’re paying way more for groceries, that’s not fun either. And so, you know, that was compounded, of course, there was a second round of, you know, price increases in 2022, after Russia invaded Ukraine, and that led to big increases in the prices of energy and agricultural commodities. That stopped, though, you know, by mid-2022, like the pace of price increases, obviously, the level, you know, didn’t go down, but like the rate of future increases, basically, more or less came, you know, close to normal by like the second half of 2022. People obviously don’t think about things from that perspective. But that I think, you know, that is very unpleasant for a lot of people, you know, if your incomes catch up, and a lot of people’s incomes did, maybe it’s fine. But not everyone’s incomes necessarily did catch up. And so I guess for those people, you know, it’s not necessarily, it’s obviously a much more unpleasant experience. In the aggregate, it worked out pretty well, because if you look at the aggregate amount of inflation adjusted spending, people were seem to be like they’re living pretty well, living standards rising, unemployment being low. But you know, the disruption in the sense of, you know, what you think the price should be that people can understandably get very upset about that.

[00:08:08] Jeff Schechtman: And bringing it up to the present, where we are, on one level, told that inflation is under control. But on the other, there seems to be a persistent increase in inflation right now.

[00:08:20] Matthew Klein: That’s right. I would caution, I mean, inflation being under control, it’s less under control now than it was, say, 12 months ago, right, we’ve had some pretty significant policy changes that make inflation somewhat, you know, more of a risk, I think, than it would have otherwise been, most obviously tariffs, but also I think, you know, the general attacks on the sort of business climate and on the population of people who live in this country, or people who might want to come live in this country, I think that also has a potential to affect prices as well. But as you said, I mean, the thing is that if your perspective on inflation is, you know, it was around 2% a year before the pandemic. It peaked, you know, it accelerated to something like 10% a year in the first half of 2022. And then, since then, it’s been sort of in the three and a three to three and a half percent a year range. So if your perspective is from two to 10 to three, you say, okay, that’s pretty good, right? We’re basically back to normal. But if you’re just focusing on it used to be 2% a year, on average, and now it’s more like three, three and a half consistently, you know, even before the tariffs, I mean, that is a change. Now, again, is that necessarily a bad change? I mean, income growth is also accelerated conventionally. That’s I think, the sort of easy explanation for why inflation is accelerated. It seems like there’s been a fundamental shift in what people consider normal. And I would also point out that before the pandemic, the world we were in then was not necessarily one people were happy with, right? That was a period of time where after the financial crisis, you had a very long period of high unemployment, persistent underemployment, and weak wage growth. And so the fact, I’m not sure we want to anchor to that and saying that’s the goal here. So the fact that inflation is a little faster now than it was then, wage growth is a little faster than it was then, that’s not necessarily a problem by itself. I think the challenge is, first of all, if that’s the case, that has implications for where interest rates should be, and it has implications for other kind of policies you do and what the risks of those might be and how people respond to them. Whether it’s tariffs, or as you were mentioning, like there’s a lot of wealth that households have that’s not being spent, used to finance spending right now. And so, you know, thinking about what sort of the policy implications of that, I think that’s very important. And so sort of being complacent saying, well, inflation is stabilized, like that’s not quite right. I think it’s important to kind of bear in mind what the risks are.

[00:10:50] Jeff Schechtman: The tariffs are almost an add-on at this point, because we’re seeing this inflation rate in the personal services area and other areas that really have very little to do with tariffs specifically.

[00:11:02] Matthew Klein: Yeah, that’s right. So far, I mean, the tariff impact on inflation is real, but it was always going to be relatively limited just because the extent to which goods that are imported, you know, it’s only so much of what, you know, the total consumption spending is, right? A lot of what we spend money on are things that are not imports. But as you said, it doesn’t help. And then the other thing is, you know, sort of the big question is how the tariffs get passed on by businesses to consumers and that chain of events. And so sort of the literalist approach is, okay, like you buy a shoe that retails for say $100 in the U.S., the actual price that the importer pays is, you know, $20 and the rest is markups. You put, you know, a 40% tariff on that, you know, then the importer is paying $28. You pass on that $8 to the consumer, it’s $108 instead of $100. Okay. That’s not, that’s, that’s annoying, but like the consumer can, could pay $108. You could also find ways of spreading that among the, you know, the retailers or whatever. Or, or, you know, that that’s sort of the normal view, right? It could be that the businesses say, oh, well, sorry, you know, tariffs, the price just has to go up a lot. And then they make it instead of $108, they say it’s like $125. And if the consumers want the shoe, and they have the money to afford it, and they pay the $125, then you have a much more inflation that you’d expect based on the tariffs. And we’re seeing some signs of that in parts of the data, which is alarming to me. And you mentioned in personal services, right? Like so restaurants, there obviously is some element of a sit down restaurant meal that is sensitive to the price of imported goods, the groceries, maybe some of the equipment, right? But mostly, that’s not what the cost is. So if restaurant prices are accelerating as much as they have been, and they’ve been accelerating quite a bit, you know, the inflation rate for restaurants is running something like five and a half to 6% annualized so far this year, which is pretty fast and way faster than it was before the pandemic. You know, that’s not, you know, just passing on the cost of groceries, ingredients, that’s something that’s something else. Dentists is another, you know, odd one, right? Like dental inflation has been very fast this year. Some of that is, it may be attributable to higher prices of some of the equipment that dentist offices have to use. But again, most of the cost of going to the dentist isn’t the equipment. So if you figure, you know, only a fraction of the cost of going to the dentist is the equipment, but then they’re raising their total price by the same percentage amount, which seems to be what’s happening, right? So like equipment prices go up by say, 5%. The cost of going to the dentist goes up by 5%. That’s not how it should work. It should be the cost of going to the dentist goes up by a lot less than 5% because other costs haven’t accelerated that much. And yet we’re seeing that kind of, you know, more than one for one pass through. That suggests that there is a lot of sensitivity there, that people on the one hand are very wary of inflation. So there’s a real psychological element to this, right? There’s sort of a straight economics, but there’s psychological, which is if businesses are telling people this is what the cost is and people say, okay, I’m going to pay it, there’s that. And if they can afford to pay it, there’s the other thing too, right? It seems so far that there is enough income and wealth and credit available to support these higher spending and these higher prices. And that could make inflation much more, not just persistent, but I think a lot more kind of an upside risk of inflationary acceleration to tariffs than you’d think just by looking at the scope of the tariffs that have actually been imposed and the relatively small extent to which imports actually are part of the U.S. consumption basket.

[00:14:40] Jeff Schechtman: The credit is another important part of it because we are seeing more and more consumers using that credit at this point.

[00:14:47] Matthew Klein: Yeah. Although it’s still quite low. I think there’s also an important point. So in dollar terms, right, the amount of credit card debt outstanding, for example, hits record highs, but you’d expect that over time. What’s interesting is that as the economy grows, what’s interesting is that relative to income levels, relative to spending, credit card usage is actually quite low. The growth in credit card usage has actually been unusually small relative to the growth in actual consumer spending. So the story basically since COVID is that credit has not been playing a big part in household spending. The household savings rate is counterintuitively actually unusually high relative to what you’d expect given how much wealth households have and relative to how much spending has been going on. And in fact, overall debt growth in the U.S. has been basically the same as it was, percent of year to year change in debt is comparable to what it was before the pandemic, even though the economy is bigger, even though there’s inflation. And part of that is because the federal government borrowing is higher. But still, it’s noteworthy that and I think that sort of speaks to the strength of the expansion, the growth that we’ve had, the sustainability of it, what have you, is that there hasn’t really been a big reliance on debt. Obviously, there’s some pockets, some individual consumer cohorts where debt is relatively more important. But in the aggregate, it’s not really been the case that people basically had, during the pandemic, there was a lot of forced saving because there was things you couldn’t buy if you couldn’t leave the house, right? And people kept making money. So they saved more then. And then on top of that, there was all the income support that was given to people to encourage an economic recovery. And so those things put together meant that there’s this big, persistent stock of extra saving people had. And then their income growth accelerated relative to the pre-pandemic period. So instead of growing 2.8% a year on average, like an hourly wage, typical average hourly wage, we’ve been in sort of like a 4.5%, 4% to 4.5% a year. And that’s been pretty consistent for a while. And so those things together have meant that people have needed to borrow less than they otherwise would have, which is, I think, good in a lot of ways. It also means that the sensitivity to interest rates of this economy is not the same as I think it would have been, say, 20 years ago. And I think that affects some people’s analysis. They say, oh, the interest rates are too high. It’s like, well, if they’re too high, then why is the economy still doing pretty well? I mean, maybe take past year aside, given the other policy changes, but up through 2024, the economy still did quite well, despite interest rates supposedly being too high. So I think it’s important to have this kind of perspective.

[00:17:39] Jeff Schechtman: Talk a little bit about how the housing market fits into this equation, because so much of it seems to be impacted by the housing market. And if you take the housing market out of some of these numbers, it changes the equation.

[00:17:52] Matthew Klein: Housing is an interesting one, because there’s obviously a lot of moving parts there. One thing I think is helpful as just a context for it is that a lot of the dynamics of the housing market are similar to things that we see, other kinds of stay-at-home goods that we saw during the pandemic, where basically there’s this huge demand increase when everyone had to stay at home and weren’t going to the office and had extra cash. And then that demand increase subsided as the economy normalized. So just as there was a big surge in the stock price of Zoom, for example, or home gyms or toilet paper, there was a very short-term kind of extreme demand increase, because suddenly people are like, well, I don’t need to be living in this particular place because my work is remote, or I need to have a bigger home because I need a home office I didn’t have before, or I don’t want to live with roommates because I don’t want to get sick. These kinds of things happened. And then there was a big change in behavior and people moved and there were a lot of transactions. House prices went up a lot. Interest rates also fell a lot, which helped. But eventually that kind of stops. And you’d expect that to sort of go back to normal as just sort of the post-pandemic normalization process. And that’s basically what happened from the perspective of home building. So the pace of home construction is still faster now than it was before the pandemic. It’s a lot slower than it was at the peak. So I’m not sure how much there is of a story to tell there besides toilet paper. But there is a sort of separate point here, which is that the transactions in existing homes, in other words, people moving from one place that already exists to another place that already exists, that has come down a lot and is still quite low. And the standard story here is interest rates are a lot higher. And so if you were among the many fortunate people to have locked in, you know, two and a half percent mortgage rate or whatever, you don’t want to switch to get one that’s 6%, right? And that means there’s a lot fewer transactions happening that otherwise might be the case. Now, there’s still plenty of people moving because, you know, sooner or later you have to move whether or not you like the interest rate. They’re just things that happen to people and then those transactions do happen. In fact, mortgage debt growth, especially mortgage debt growth for purchases of homes, has actually been, you know, pretty much in line with the past. The big thing that’s come down in terms of mortgage debt growth is refinancing activity, which makes sense because there’s less appeal in refinancing when interest rates are so much higher than the rates on many people’s mortgages, not all of them, but many people’s mortgages. And so the question then is, you know, if mortgage rates were to come down a lot, you’d have a huge cash up refinancing, lots of spending. I mean, it seems like there’s kind of a range, right, where you could have rates come down a little bit. There might not be a lot of activity. There’s some threshold point. I don’t know exactly where it is. Nobody does, but some threshold point where if interest rates go below that, mortgage rates in particular, then you could probably have this huge boom in activity, probably a lot of extra spending, probably very inflationary. But you know, right now we’re not, you know, anywhere near that, right? It’s not great for people who want to sell, but it’s also not terrible for a lot of people. You know, it’s, you know, the economy as a whole has been doing pretty well, right? It’s unusual to have an economic cycle where housing has been kind of flat the way it’s been and the overall economy’s been fine. But I think there are good reasons for why, you know, these circumstances are unusual. I guess one other thing that’s tricky as well is we’ve had this big change in net immigration flows. And so, you know, a couple of years ago, we were having something on the order of like 3 million people on net coming into this country, you know, and staying, right, and working and consuming and living here. And now the best estimate is that that flow is now net negative, that more and more people leaving, many times involuntarily, than coming in. And so that has an impact on lots of things, including obviously housing demand and also housing construction. And so disentangling that shift from sort of what you would have expected anyway, from the end of the pandemic, to the impact of mortgage rates in particular, I mean, it’s kind of tricky how those things fit together. I don’t think mortgage rates are actually that high relative to the overall economic growth rate, relative to longer term history. It’s just that if you’re looking at like 2020, 2021, early 2022, it looks higher. So that’s kind of the challenge, sooner or later, people are just going to accept that we’re kind of back to normal, as it were, and things will change. But you know, until then, you’re kind of in this sort of on pause situation, I think.

[00:22:30] Jeff Schechtman: I want to talk about that and the inflation aspect of it, which you mentioned, if in fact interest rates do start to come down, if the Fed does cut rates, if we’re looking at maybe 100 basis point cut between now and a year from now, there is all that pent up demand for both purchase and refinancing people that had to buy at 6 and 7%. And that is potentially very inflationary. Talk about that in the context of what the Fed might be doing.

[00:22:56] Matthew Klein: Well, so one thing that’s interesting, actually looking back even a little further, if you take the long term history of the US data, basically since the end of the Second World War, what you see is that in general, the household savings rate tends to be pretty closely related to how much wealth people have relative to their income, in the aggregate. So like the total household wealth in the United States, relative to total household income in the United States, that’s a ratio. You compare that to the savings rate. Basically, the richer people are relative to their income, the less they tend to save. That tends to be, that was pretty stable relationship up until about 2012. And then after 2012, it breaks down. It breaks down in a very particular way, which is that the wealth to income ratio started going up a lot, but the savings rate did not fall. And it’s now still the case that the savings rate is way higher than what you would expect given the historical relationship between wealth, income, and saving. In fact, if that historical relationship had held, the household savings rate on average right now would be something on the order of like negative 6%, because there’s so much untapped wealth that people could be monetizing by doing cash out refis or things like that. But that hasn’t happened. It’s basically been since 2012. And it seems to be housing is kind of the thing. Some of that, I think, is there’s a psychological… People learned from the experience of the housing bust that you don’t necessarily always want to do that. Whether you’re a borrower or a lender, there might be, maybe there’s some regulatory changes. I’m not sure how much of it’s regulatory versus just actual just changes in risk management and preferences. But either way, there’s a lot of untapped wealth. And right now, it’s not super attractive to get at it because rates are relatively high. Although, put that in kind of square quotes, because high depends on what, right?. But high enough that maybe that wouldn’t be necessarily the most attractive thing. But if rates were to come down somewhat, you have people at the Fed saying interest rates should be, short-term interest rates should be like 2%, which if you think of how that usually flows through to mortgage rates, maybe that would make it like 4% for a 30-year fix, maybe 3 and 1⁄2. That would have a potentially very large impact. And it wouldn’t be like an incrementally like, OK, you lower interest rates by a little bit, you get this much more spending. I think it would be more like a very sharp move because of where people’s mortgages are and where it becomes economic for people to say, OK, I’ll refinance. The rate might be a little higher than what I’m paying. Maybe it’s the same, but you get so much extra cash out. And then, again, we’re talking about tens of trillions of dollars here of spending power that’s not being used at the moment. And if it were, unless the supply of real goods and services increases by the same amount at the same rate, which it probably would not, that means much higher prices.

[00:25:52] Jeff Schechtman: A lot of that money, though, would come out of homes from boomers, and you have this transfer of wealth that’s going on and the demographic shift, which has an impact on all of this.

[00:26:04] Matthew Klein: Yeah. I mean, in that case, the best way to do that would just be having people sell, right? Having someone cash out, refi the home without selling it, and then spending that, I mean, that wouldn’t necessarily be a, I mean, it could be a wealth, I mean, I guess they could, you know, take out, do the cash out, refi, then gift to their kids or something. I mean, there’s a lot of way that could happen, but there is definitely a generational aspect to this. I mean, one of the things that’s, you know, what is the right rate of property taxes, right? That’s a thing, right? If you have people who, I was reading somewhere, I don’t remember the source, unfortunately, but basically like the vast majority of bedrooms in the United States are owned by people who don’t have children living with them at home and like are above a certain age, right? Basically that, which is obviously very strange and not like the most efficient distribution of housing resources when you think about it, but you have a lot of people who age in place. They had a bunch of kids and then the kids move out and they still live in a big house that would be in a nice area that would be good for having kids, but then like they’re living in that. And so there’s a question of how do you make these transactions happen? And some people say, oh, if the mortgage rates were a lot lower than they would sell, et cetera, it makes things more affordable. I’m not sure that’s true because I feel like house prices would probably go up, but leave that aside. I mean, the other way, of course, is if you had a property tax regime that were sort of intelligently structured and encourage people to be owning homes that are appropriate for what they can afford out of their income and, you know, that would also potentially encourage more sales. In California, it’s kind of extreme, obviously, where you can essentially keep a property tax if you don’t move, your property tax essentially does not rise over time. So if someone who bought a house, you know, 50 years ago is doing, you know, paying close to nothing relative to, you know, what they have, but, you know, that’s kind of an extreme case. And so I think that also, I mean, there’s a lot of, you know, potential angles there. Obviously, more construction also helps, although, again, like, you know, to build more in areas that people want to live, it requires increasing density in a way that some people think is good and some people don’t. And that makes it challenging sometimes to get it, you know, approved. But you know, that’s, you know, even if that is sort of the logical solution as well.

[00:28:15] Jeff Schechtman: One of the other aspects that enters into all of this, and there’s certainly been enough controversy about it of late, are what the employment numbers are, and what are the true job numbers and what’s changing in terms of the employment market?

[00:28:28] Matthew Klein: Yes, so the challenge in terms of knowing what’s going on is that, as you mentioned at the beginning, the Bureau of Labor Statistics is no longer publishing any data because the government has been shut down, you know, through a lack of, I don’t know the exact congressional procedure, but anyhow, no one’s working right now at the moment. So we don’t know what happened in September. We should have found that out last week, but we don’t know. What we do know is as of through August, the unemployment rate has basically been flat for the past, you know, since last summer. The share of people in the 25 to 54 age group, which tends to be kind of the best indicator of the overall health of the job market, obviously people are younger, older, but like that tends to be the most representative, that share has basically been at, you know, hovering at multi-decade highs for, you know, over two years. So those kinds of indicators suggest things are pretty good. There are other indicators that suggest things for some people are not as good. So one thing that’s quite striking is the unemployment rate and the employment rate for people under the age of 25 has deteriorated a lot over the past year or so. You know, why that is, it’s not entirely clear. One thing we’ve seen in the data is that hiring rates by companies overall have actually been unusually low, and that’s been offset by unusually low levels of layoffs. And so the aggregate effect is that unemployment has stayed low, employment has stayed high for most people. But if you’re new to the labor market, like you just graduated high school or you just graduated college or you didn’t graduate high school, but you’re looking for a job like that, those people seem to be getting hit quite hard and have been. For everyone else, it’s kind of, it’s mostly fine, and it’s not flowing through to wages because the people at that lower end of the, you know, are just starting out. They’re not usually the ones that are creating, you know, have a lot of leverage in the job market anyway, earning the most. So it’s not really having an effect on aggregate consumption either, because again, they’re not the ones making a lot of money. But you know, there’s an interesting question of how long you could sort of sustain a balance where everyone over the age of 25 more or less is, you know, happily employed and getting raises and everyone under is not. I mean, that’s an oversimplification. But you know, again, like, is that a kind of thing that could last for a long time? And now we don’t even know because the data aren’t available. Unfortunately, the data that private sector companies are able to generate, so like ADP, for example, has estimates, Indeed has estimates, LinkedIn has estimates, there’s a company called Revalio that does estimates. They’re all based, they’re all counting as the number of people who are getting jobs. But the number of people getting jobs is not necessarily helpful, because, you know, what you really want to know is what is the unemployment rate? Like, what’s the total population of people who should be getting a job? Given the changes in immigration policy, like 200,000 jobs a month is not a realistic target for, you know, right now, I mean, the best estimates we had going into this is that job growth, you know, on the order of like 50,000 a month net job growth would be sufficient to keep the unemployment rate stable at a very low level. So knowing that it’s like 30,000 or plus 30,000, or plus 10,000, or plus 50,000 is not really telling you as much as what’s the actual population of people. And no one has a substitute for that. You have to go out and poll, you know, tens of thousands of households, which is what the government does. And nobody, there’s no private sector substitute for that, unfortunately.

[00:31:56] Jeff Schechtman: And none of this really takes into account, or at least not in any significant way yet at this point, the impact of AI on the job market, particularly on the entry level area.

[00:32:06] Matthew Klein: Yeah, that’s a really tricky one. And I’ve heard different things. And I don’t really know how to judge it. I mean, there’s some research that’s saying that it is having a big effect. There’s some research saying, actually, it’s not having a big effect that in fact, the sectors where it seems like it’s having a big effect are ones that were already having issues before, you know, OpenAI released the first ChatGPT in the end of 2022, right? So it’s difficult to say. And also, you’re also seeing a lot of people getting hurt who are not going to like wouldn’t reasonably be affected by AI taking their job, like, you know, someone who didn’t graduate high school, for example, is probably not doing the kind of job that AI is suddenly coming in and displacing them. And yet they are having a rough time in the labor market, more so than recent college grads. So it’s possible that AI is having a contribution to this. But I don’t, I suspect that there are other kind of bigger forces. And I guess one thing I’d also be cautious of in general is, seems like whenever there are big downturns in the job market, not that we’re in one yet, but when there are that people come up with various kind of explanations to like why it’s actually different from the sort of the standard reason of, well, the economy is just weaker than it used to be. And those explanations usually turn out to be wrong. So I remember, you know, 10, 15 years ago, people were saying, oh, it’s weird that like young people aren’t getting jobs in the early 2010s after the financial crisis. And rather than saying it’s because there’s been a financial crisis, they say, oh, well, you know what, it turns out that video games are a lot better now than they used to be. And so the value of leisure time has gone up. So people are just choosing not to work to stay home and play video games, which is, you know, I say is that this sounds silly. And of course, it turned out to stop being true as soon as the job market improved. And by the time you get 2019 or 2022, for that matter, that’s not a thing at all, right? Like nobody suddenly don’t like people say, oh, the video games got bad again. Like that’s not just people, you know, the economy got better, people went back to work. So I’m not saying that AI is not having an effect, I would just be cautious about making those kinds of claims yet, given the limited data we have and how like the history of these kinds of things are like, there’s probably a more straightforward kind of macro explanation.

[00:34:11] Jeff Schechtman: And I want to come back to this idea that you’ve talked about a lot in the overshoot, the idea of really overshooting growth targets as a way of finding some equilibrium.

[00:34:22] Matthew Klein: Yeah, I mean, I think the perpetual challenge is, you know, we don’t know how strong an economy can be any point in time, right? And so the question, like, historically, the approach has been, well, don’t push it too much, because then people will be unhappy about inflation or other things. And you know, that actually, to be fair, it seems like that we got a sort of vindication of that thesis in 2024. But you know, my view was, you know, when I when I started the overshoot was, well, you know, maybe we should try doing something different, maybe we should see how, you know, just how much we can push things to like get an economy that’s as good for as many people as possible. You know, I think this was informed in particular by the experience after the financial crisis, where for a variety of reasons, you had the US economy growing basically up until 2006. Remarkably, there was obviously big downturns at different points in time, but there was a pretty stable trend in growth and that the average person, their living standards increased remarkably consistently over time, basically from the end of World War Two until 2006. And then 2006 hits 2007. And that stops and you get this, and just persistent, it’s not even that the downturn itself was that unusually bad, although it was severe, but that the recovery was so weak and just persistently weak. And so there’s a huge gap by the time you get to the pandemic, where people were living way below their means. And that, I think, was just, you know, a huge, tremendous waste. And so, you know, in 2021, when I started the overshoot, in the summer of 2021, right, it was not clear at that point how the recovery from the pandemic was going to go, although it was looking more positive, it was basically, let’s not make that mistake again, let’s try to aim high and see what we can accomplish. I think we did. And then I think the irony is, people decided they didn’t like it, and now, so here we are. So, but that was the idea.

[00:36:17] Jeff Schechtman: And there certainly are limits to what, I mean, to bring this back to interest rates and pulling it all together, there’s limits to what the Fed can do in all of this. Monetary policy only goes so far.

[00:36:28] Matthew Klein: Yes. If you’re just talking about the Fed, that’s absolutely right. I mean, I think there’s a whole suite of policies you can look at on the, like, budget policy and regulatory policy as well. But yes, that’s absolutely right. I mean, there’s only, if people don’t want to borrow, I mean, I think this is what happened in the 2010s, right? People said, like, let’s have the Fed do whatever it can, and the Fed said, okay. But if no one wants to borrow or is able to borrow, no one is willing to lend for other reasons, right? It doesn’t matter if the interest rate is zero or close to zero. It’s not going to be attractive. And then there’s not going to be, there’s only so much, there’s only so much growth you can eke out in that kind of scenario. And it’s not just the US that had that experience, by the way. Lots of countries had this experience. So you need some combination of things. And I think that sort of, I mean, I think now we’re in a much better place. We’ve been in a much better place since the pandemic than we were before, at least in sort of the economic fundamentals. Obviously, a lot of other things have changed. But we’re not worried as we were before the pandemic, in the years between the financial crisis and the pandemic, of saying, well, basically, we can’t have borrowing costs go above like 2% or the whole, everything breaks. This very slow growth, steady state, like we’re not in that, like people are richer now. The debt, a lot of debts got paid down. Income growth is faster. Interest rates are much more like healthy levels, I think. On the whole, things are quite, I would say, pretty good. Obviously, there’s lots of individual points we can look at negatively, but kind of at a big picture level, compared to the pre-pandemic world, it’s a big improvement. I think an analogy that I’ve drawn in the past that I like is, you can think about, if you think of the financial crisis as being kind of akin to the Great Depression, and then the period, the 2010s, basically, being like the 1930s, a milder version of that, the pandemic and the response to it is kind of macroeconomically like World War II, which obviously, again, is very destructive, and it would have been better if we hadn’t had that. But you come out of it, and suddenly, from the American side, obviously, the rest of the world is different. But from the US side, persistently higher wages, faster wage growth, household balance sheets and corporate balance sheets have been cleaned up. Then you have this trajectory, many, many decades of robust growth, and things are a lot better. It didn’t quite work out that way in the US for a couple of reasons, and I think there’s some interesting case studies of things to look at specifically what the differences were. But there’s still a lot of similarities. I think it’s worth paying attention to those as well.

[00:38:49] Jeff Schechtman: Finally, what are the biggest concerns that you have that could really upset the apple cart at this point?

[00:38:55] Matthew Klein: Well, the obvious one is that we have a government that has just decided to sort of squander this inheritance. As I said, I think we’re in a pretty benign state as of the end of 2024. Since then, you have people who are saying, okay, well, what are one of the big advantages the US has had historically, particularly given what I was talking about since the 1930s, is that the US is a place that has historically attracted the most motivated, hardworking, talented people from around the world to come here because they think it’s a good place to live and to build things and to be free and have families and all that. We have a pretty concerted effort by this government to tell those people to not come or to get rid of them. What is the cyclical short-term impact of that on GDP? I have no idea. But longer term, I think that’s extremely costly to this country, and it’s consistent with other things they’re doing. The tariff policy is bad, and I think it’s fine to say that it’s bad. I think it’s actually one of the less destructive things that this government is doing. I think that it is indicative of their approach, which is basically, what are all the things? Let’s just have a degree of arbitrariness in policymaking that’s going to be very unhelpful for business investment. You want companies to make long-term commitments in this country to hire people to build. Why would they do that if you’re constantly changing the rules on them, constantly changing what their cost basis is going to be? That’s not helpful. You have the cuts to science funding, the attacks on the universities, the attacks on the rule of law. All these things are very destructive. I don’t know. Again, it would be ludicrous to quantify the GDP impact on this, especially in the near term. But I think we can be confident that directionally, it is a serious risk for this country. Other stuff seems fine, actually. It’s like this longer-term picture, and of course, the extent to which people take the longer-term view and then bring that to the present, that’s when things hit home. But as long as people remain optimistic or complacent about the longer-term damage, things can be fine for a while. But sooner or later, I don’t see how, without some serious changes in policy and in quite frankly the people in charge, that things continue to do well on sort of a multi-decade trajectory.

[00:41:22] Jeff Schechtman: Matthew Klein, his must-read newsletter is The Overshoot. Matthew, I thank you so much for spending time with us today here on the WhoWhatWhy podcast.

[00:41:30] Matthew Klein: Thank you very much for having me.

[00:41:31] Jeff Schechtman: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.