An Interview With Claudia Sahm: Gauging an Economy That’s Emerging From Covid-19

But Sahm stirred up controversy last year on a different topic: She is the author of the popular blog macromom, where she published an incendiary post detailing the indignities suffered by women and other underrepresented groups in the economics profession. Sahm argued that a lack of diversity and inclusion is degrading economic knowledge and policy advice. Today, Sahm is senior fellow at the Jain Family Institute and runs her economics consultancy, Stay-At-Home Macro. We talked to her recently about when people are getting back to work, her outlook for inflation, and the need for diversity. Read the following edited excerpt for more.

Barron’s: You’re an expert on jobs. What’s happening with the labor force? There are 10 million job openings and 8.7 million unemployed. When are people going back to work?

Claudia Sahm: Covid-19 is the root of all evil in the economic crisis that we are still living through. The economic dislocations are exacerbating economic problems we had before Covid. The extremely thin silver lining is that we had just finished the longest expansion in history. But [during the pandemic] we had a massive loss of jobs. The people hardest hit were the least well-off. We found that our social safety net wasn’t robust. We still don’t have this pandemic under control in the labor market. It takes time to reconnect workers to businesses.

Last month, we saw nearly one million jobs created. About half of the workers who came back had been laid off by employers who kept ties with them. They are easier to bring back than workers whose employers cut them loose entirely, and often rapidly, in the depths of the crisis. I wouldn’t have much loyalty to that employer and rearrange my life when they say, “Please come back.”

With Covid, what was extremely unusual is that millions of people quit jobs and left the labor market. A lot were parents who had to stay home with their kids, some were older workers who didn’t want to die at work. Some aren’t ready to go back for legitimate reasons that go way beyond getting jobless benefits: They don’t have child care, they don’t feel safe. Delta causes a big problem with the feeling of safety.

What will it take to bring people back?

Last winter, when we had the massive spike in Covid cases and deaths, the economy started going sideways, but we knew a vaccine was coming. Things came back as the vaccine started rolling out; we got another $2 trillion relief package; people felt safe. They went to see family and friends and went outside.

Things are getting back to normal. Delta could slow that process, but I don’t think we’ll see a situation like last winter. I’d be surprised if we drop back below the pace of monthly job gains this spring, when we averaged about half a million. A lot of people will come back, and there are always people graduating from school coming in.

After the 2008-09 recession, a lot of policy makers wrote off the long-term unemployed. They said that in 2016, and the unemployment rate continued to fall; we continued to add hundreds of thousands of jobs every month. They were wrong. Especially toward the end, employers had to be willing to hire people they wouldn’t have considered even a few years before. People want to work.

Delta is fueling fear and uncertainty. To relieve price pressures, we need to get people around the world vaccinated. The U.S. has the capacity to lead on this effort. We’re not getting those semiconductors out of Asia until the people who work in those facilities are vaccinated. And we need to get through this distrust of vaccines in the U.S. That’s a decisive factor in our economy’s recovery.

What do you think of the Federal Reserve’s handling of this crisis?

We’re experiencing a sea change in monetary and fiscal policies. These are very welcome developments. In the summer of 2020, the Fed introduced a new framework for [achieving] stable prices and maximum employment.

I worked at the Fed from 2007 to 2019 and saw its reaction to the financial crisis and slow recovery firsthand. I knew that the new framework the Fed adopted last year [which puts more weight on employment] was the result of years of introspection. The Fed needed a new approach to avoid making those mistakes again and raising interest rates too soon. So, they promised to wait until the higher inflation this year averages out the lower inflation last year. They also promised to wait until people are back to work.

Their new framework is being tested now by the jump in inflation. Many people, especially academic macroeconomists, say it’s a bad idea and they should raise rates now. If not, they say inflation could get out of hand. I give credit to Fed Chairman Jay Powell and other Fed officials for holding firm. It helps that Wall Street is with them and agrees that inflation will come back down soon. That means a lot, because Wall Street has skin in the game.

The Fed moves very slowly. And when it moves, it doesn’t move back in a heartbeat, because it has done all this work to justify moving.

Is the Fed behind the curve in addressing inflation?

No. They don’t have crystal balls sitting around, but they do have 400 Ph.D. economists, hundreds of whom work on the economic outlook. Jay has an immense amount of firepower to really understand the data. Anybody who gets paid to forecast agrees that this inflation is temporary. The people out there saying inflation is high and going higher don’t [forecast] for a living.

I spend a lot of time interrogating the economic policy advice that I give. Some weeks ago, I said OK, I’ve got to look at this inflation data. As soon as I looked at it, I thought: Used-car prices have never had any measurable effect on inflation. They’re massive right now; this isn’t going to continue, and, frankly, it’s going to reverse. It’s negligent to make a case that this is a persistently higher inflation that would be damaging. I mean, 3% versus 2% inflation isn’t a big deal. Inflation last year was about 1%. The Fed said that it wants an average of 2%. One and three averages two. The latest data on the consumer price index showed a step down in the monthly rate. It’s one data point. Things are working. Monetary policy is on a good path.

What about fiscal policy?

Congress has always done something in recessions; we’re all Keynesians in a foxhole. They’ve learned from a lot of mistakes. Congress sent out $5 trillion within a year. We have a $21 trillion economy. That is real money. They sent out less than a trillion dollars in the first year of the 2008-09 recession. In 2013, Congress totally walked away. The unemployment rate was still high. Soon thereafter, they actually started cutting the deficit. This time, they’re debating longer-run growth: fixing our bridges and roads, investing in our children, improving jobs that have been bad jobs, saving us from the existential threat of climate change. What they haven’t done for a long time is big spending plans to support the economy over a longer horizon. They might do it, and if they really build back better, that is the sea change in fiscal policy.

Let’s talk about that famous blog post detailing bad behavior in the economics world.

It’s an open secret that economics has a toxic culture. That post was a really deep introspection about women in the economics profession and how they’ve been treated and marginalized. It was kicked off by Alice Wu in 2017. She looked at a website called Economics Job Market Rumors, which has been described as a “virtual water cooler” for academics and students to exchange gossip about hiring in the economics profession. People often anonymously attack economists from underrepresented groups, especially women. She was the first to collect the data and analyze it. I started my blog in support right after her research was covered in the New York Times.

The economics profession has tried. We got a code of conduct in 2018. The next year, the American Economic Association created a policy for discrimination and harassment and gave us an ombudsman to help enforce it. [Former Chair] Janet Yellen made it a priority at the Fed. But I don’t know any woman economist at the Board of Governors who hasn’t had something degrading said to her.

I have done hundreds of hours of mentoring, phone calls, Zoom meetings, coffees. The blog post was never supposed to be a post—I was writing to Ben Bernanke and Yellen, who were the current and former presidents of the American Economic Association. I’ve worked for both of them. The week before I posted it, I had mentoring calls with three different students, one of whom had been doxxed on the website. I showed what I’d written to a friend; he said people need to see this, and I put it online.

You say that the lack of diversity among economists is “degrading economic knowledge and policy advice.” How so?

To do good policy, we need to ask tough questions and understand the reality of many Americans. Few people have a seat at the table when policy makers are given advice; people affected by the policy need to…