Nouriel Roubini is a Turkish-born Iranian-American economic consultant, economist, and writer. He is a Professor Emeritus since 2021 at the Stern School of Business of New York University.
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Why would you bet on Goliath when we got pet taved?
Value chain, giving values contagious.
Okay, so our guest today is a special guest, Dr. Nouriel Rubini.
Let me properly introduce him.
He is a Turkish-born Iranian-American economist, writer, and economic consultant.
He's a professor emeritus at Stern School of Business of New York University, NYU, and the founder of chairman of Roubini Global Economics, an independent global macroeconomics and market strategy research firm.
He is best known for predicting the 2007-2008 subprime mortgage crisis in the U.S. and subsequent global financial crisis.
He's also known for warning about other economic risks, such as the European debt crisis, Chinese economic slowdown, the potential for a stag inflationary environment.
He's a highly respected economist, and his views are often sought by policymakers and investors around the world.
He's been named one of the top 100 most influential people by Time magazine and one of the 50 most influential global thinkers by foreign policy.
He has written New York Time best-selling, he's a New York Time best-selling author, written several books on economics and finance, including Crisis Economics, A Crash Course in the Future of Finance, Mega Threats, and a bunch of other books.
He is a highly accomplished economist, and his work has significant impact on our understanding of the global economy.
He has a couple of nicknames.
He's, you know, very few people have multiple nicknames.
He's got one that's very known, Dr. Doom of Economics.
Some people have called him, this is an interesting one.
I got to tell you, the more I read about you, the more interesting you are to me.
Rubini was described by a journalist, Helene Olen, as having an accent reminiscent of James Bond villain.
Okay, so I don't know what that accent is going to be like, but the Dr. Doom nickname, have you always, Mr. Dr. Rubini, have you always been this optimistic and positive about the future?
Well, thanks very much for being on your podcast.
First of all, you know, I'm an economist, and as an economist, you have to think about what can go right and what can go wrong in the world.
You have to do scenario analysis.
There are downside risks, there are upside risks.
But in studying the U.S. and the global economy, I've realized that over time, some of the downside risks are becoming more severe than the upside risk.
And the kind of relative economic and financial stability that we had in the 1950s and 60s has given way to periods of time of much greater economic and financial and monetary volatility and instability.
We've had economic and financial crises, both in advanced economies and emerging markets for the last 20 years.
They're becoming more frequent, they're becoming more virulent, and we have to address them.
And also, I realize, and that was the subject matter of my last book, Mega Threats, that in addition to the economic, monetary, and financial risk, we live in a world in which there are social risks, political, geopolitical, environmental, health, technological, and military.
And that's why my book addresses both economic and non-economic one.
We live in a very dangerous world.
So we have to be aware of what can go wrong.
For every problem, there are potential solutions.
They're not easy.
They're not cheap.
They're not expensive.
So I prefer to be called, I would say, Dr. Realist rather than Dr. Doom.
But I guess the moniker of Dr. Doom is more catchy.
And that's why people keep on using it.
I like it, though.
I like Dr. Doom.
To me, it's more like a movie.
I can see you being an Avengers.
I can see it being, if I was your manager, I would say, let's stick to Dr. Doom.
We can market that more and do bigger things.
But anyways, I appreciate that.
Again, I appreciate you for being on.
We've been following your work for a while.
And, you know, my question I got, just to open up with, a lot of times, like when you go to a doctor and a doctor that's seen a thousand patients, 2,000 patients, you'll say, you know, this part of my body hurts.
This is what I'm experiencing.
And then instantly by three questions, are you having spasms here?
It could be this.
Let's test this.
Let's do an MRI.
Let's do that.
But for the most part, a doctor who has been around for 30 years is going to have enough case studies to go to to say the trends of what you're talking about, the symptoms matches this symptom that I've seen with 78 patients before, right?
And let's kind of get clear on what's going on here and we get to the bottom of it.
Today, I'm not sure if we have another case study like this.
It would have to be outside of the U.S. where we printed as much money as we did during COVID, trillions of dollars.
You've seen some numbers that said we printed 40%.
Of course, it's not all paper.
Some of it is digital, but still, we've seen what the numbers are.
We've never printed that kind of money before.
We've never had interest rates be at zero or one for as long as it did, you know, the economic expansion, 128%.
I'm not sure it's good to keep interest rates that low for that long.
We've never seen people staying home during COVID the way they did.
Everybody all of a sudden wanted to work from home.
We've not experienced that simultaneously.
The advancement of AI coming the way it is, the conflict we're having, you know, with Ukraine, Russia, and then Israel, Iran all hitting at the same time.
You know, a lot of people right now are not selling their homes.
We have mortgage rates at a 27, not even mortgage rates, mortgage application at a 27-year low.
Like there is no mortgage applications coming in.
Real estate sales are at a 20-year low.
We're not selling a lot of homes right now because people don't want to give up that 3% rate.
So, wow, we think the market's going to crash and real estate's going to crash and property value is going to come down.
It's not.
Gradually, we're seeing some stuff that's going on with commercial that they're defaulting in and some subprime auto payments.
What other case study does somebody like you who this is your world, what do you look at to say, no, Patrick, we've seen this here.
We've seen this aspect here in what happened in Venezuela.
We've seen this, what happened in Japan.
We've seen this, that happen here.
And we feel based on these markers, this is what's most likely going to be happening.
So, one, the question would be, what case study do you look at?
And two, based on that case study, what are some possibilities of what could happen with today's economy?
You're right in suggesting that the times might be different today, as I argue in my mega thread books.
There's a bit of a regime change in the world economy and the world at large.
But of course, there are hundreds of episodes of economic and financial crisis.
The whole economic history of events have occurred for the last few decades.
And there are some similarities and there are some differences.
But in terms of differences, I would say that, you know, I grew up between Middle East and Europe.
I was born in 1958.
And then for the first 24 years of my life, I was mostly then in Europe and Middle East.
And I came to the US for grad school around 1983.
But you know, when I was growing up, the risk of, say, a war, a nuclear war among great power had gone away because in the 70s, you had the taunts between the Soviet Union and the US.
Then Nixon went to China.
And therefore, while there were arrivals of us, Soviet Union, China, communists, there was no risk of a military war or a nuclear war.
Today, as you know, there is already a hot war between Russia and Ukraine.
This hot war could become unconventional, could involve NATO.
We start to see the beginning of a war between not just Israel and Hamas, but it could extend to Hezbollah and involve Iran.
That will be a second front.
There's a Cold War between the US and China.
It's getting colder.
Under some scenario, there is even risk that China invades Taiwan and then it will respond.
You have a hot war between the US and China.
And you have this little dictator, North Korea, who keeps on sending rockets and has nuclear bombs towards the sea of Japan and Korea.
So there are four strategic rivals of the US and the West that are nuclear-armed.
One is not yet, but might become soon Iran.
And therefore, today, the risk of war among great powers, all nuclearly tipped, is higher than ever before.
Another difference, you know, when I was growing up in the 60s and 70s, there was barely any mention of global climate change.
You know, temperature were barely above pre-industrial level.
Today, we're already 1.5 above.
Pre-industrial, we're going to go towards two or more.
It's a disastrous slow-motion train wreck.
You know, when I was growing up, I never heard about global pandemics.
The last one had been the Spanish flu in 1918-19.
You knew it only in the history books.
Since 1980, we have had HIV, SARS, MERS, swine flu, bird flu, Zika, Bola, COVID-19.
It's now going to be the last one.
For a reason we can discuss, there'll be more virulent ones.
You know, AI, you know, today people worry that AI eventually is going to become super intelligent.
It's going to make the human species almost up and obsolete.
When I was growing up, we're in the middle of an AI winter, right?
There was barely some research about it.
Nobody really thought there was not even a personal computer, let alone the internet.
Therefore, the idea that machines can threaten our jobs, our incomes, and our lives was totally far-fetched.
We're mostly at that time in stable liberal democracies, at least in the West.
And the kind of radical extremist populism of either extreme right or left that you see all over the world was not prevalent.
Yes, there were some authoritarian countries, Soviet Union, Communist China, but they tend to be the exception rather than rule.
In US, Europe, advanced economy was political stability, and today instead were polarization, partisanship, and populism that is radical and extreme.
And even economic and financial cycles were much more mild.
We did not have the severe recession, the severe financial crisis we've seen in the last 30 years.
So it was a very different world.
And today, it's a world in which the threats are much more severe.
So in some sense, yes, we project from the past and believe that the recent past is going to imply the way the future is going to be.
And with all of the ups and downs, we have had 75 years of relative peace, progress, and prosperity since World War II.
And we hope that the future is going to be like the recent past, but there may be a regime change.
And the kind of threats that are emerging are very different than the last 75, 80 years.
So when you think about that, as a consumer.
Okay, so the feedback I'd want to give to the consumer and even from you, would it be fair to say don't believe anything any experts or economists are saying right now 100%?
Because everybody could be right and everybody could be wrong, right?
A group could be right and a group could be wrong because it's so hard to predict what's going to happen.
You know, we're having a conversation yesterday about, you know, what happened to Venezuela stock market, how earlier this year was at 10,000.
Right now it's at 63,000, 64,000.
And that's a reversal market crash where the market crashes up and then the rich get richer, the poor get poor, where my one of my concerns is what happens if Powell, like, you know how all these knobs we control?
You know, when you're on a plane, you're looking at the pilots, they're controlling all these knobs and you're like, okay, there's probably five knobs that are the most important knobs to a pilot.
There's probably five knobs that are the most important knobs to a tanker or a driver or anybody that has a knob.
In America, when it comes down to the economy, there's a handful of knobs.
One of the knobs is the interest rate.
That's a very powerful knob, right?
If you increase it, you decrease it, Jerome Powell.
That's a knob.
We have a few other knobs that we can look at.
We feed, you know, whether it's quantitative easing or tightening.
We put money in or we took money out.
How bad do you think the market would be if in the next six, 12 months, because Powell right now is trying to raise the rates to bring inflation down to 2%.
You're saying it's mathematically impossible.
I read in an article, you said it's not going to happen back to, we have to, it's going to be absolutely impossible to get to 2%, just controlling the knob with interest rates.
It's not moving it that much, but slightly.
How bad would it be if he brought the rates back down to levels we were at a year and a half ago, say 4%, say even 3%?
Would the Dow suddenly go to 40,000, 45,000?
Because my biggest concern is with everything that's going on in the economy, some of the behaviors before that you would see, hey, gold should go to $50,000, $5,000.
It's not moving.
Bitcoin should go to $100,000.
It hit at $35,000.
But the knobs that would typically move certain things are not doing it right now.
So what are some of the knobs you worry about the most that if we screw up can really affect the economy?
You made many points, interesting and valid.
First of all, the world is uncertain, but I wouldn't go as far as saying we cannot trust anybody.
Of course, even among professional economists and senior ones, there can be a spectrum of views.
But I'd rather to listen to an economist that has views different from me, and I can have a dialogue with him or her on why they come to certain conclusions rather than other ones.
But I don't trust those who pretend to be experts, who don't know anything.
Unfortunately, today on Twitter, anybody can go and bash me and attack me.
Whether you like it or not, I've been studying, doing research economics, PhD at Harvard, Yale, NYU, White House, Treasury, international organization for 50 years.
So I understand certain things.
Does it mean I'm right all the time?
Of course not.
Does it mean that other people may be right?
Of course.
That's why we have an intelligent dialogue among people who are understanding these issues and they are experts.
So I don't believe in the idea that anybody can say anything just because the experts are always wrong.
At least economists, even when they disagree, they have a parameter of discussing why they disagree on what.
And I'll give you the specific example.
But predicting the future is hard.
Think about what the Fed is trying to do.
They're trying to achieve inflation back to 2% without a recession, what they call it soft landing.
So there's one scenario where you have a soft landing, you go back to 2% without a recession, Goldilocks, immaculate is inflation.
There's another scenario of the other extreme that as you try to raise rates to fight inflation, you cause not only an economic crisis, recession, but also a financial crisis because the interest rates people have to pay on their debts, household, corporate, financial institution, government becomes too high.
So you have an economic and financial crisis called the hard landing.
And then there's a middle scenario of a softish landing or a bumpy landing where we go back to 2%, but we do so only through a short and shallow recession, not a severe one, not a financial crisis, and so on.
Now, the world could be more than these three scenarios, but let's simplify to these three scenarios.
Then you can discuss whether the Fed is doing too much or too little.
If they do too much and they really want to fight inflation, they have a risk of killing the economy, causing financial crisis.
If they don't raise interest rates enough because they care about economic growth and financial stability, the risk is that there is a de-anchoring of inflation, inflation expectation, wage price spiral, and we end up with high inflation.
So you have many objectives.
You want price stability, inflation 2%, growth stability, no recession, because recession leads to unemployment is painful.
And you want financial stability that is avoiding financial crisis and banking stresses.
And you have one instrument in principle, the Fed funds rate.
Can you achieve all those three targets, one instrument?
Maybe yes, maybe not.
It depends on many factors.
So my point is you have to be really sophisticated.
You cannot be just judgmental and generic.
You have to do scenario analysis.
I provide you with three of them.
You have to assign probabilities.
And then those probabilities change as the facts change.
Say a year ago, the hard landing looked like a likely scenario because we had the spiking oil energy, food prices, and inflation because in part of the Russian invasion of Ukraine, six months ago, we had banking stresses with a few banks going bust.
So many people thought we're going to have a real recession.
Then the policy response, more flexibility in some markets, some adjustment have implied that now it looked like maybe a short and shallow recession.
And the latest number actually suggests that U.S. economic growth is still above potential, around three rather than two.
And inflation is still falling because some of those negative supply shocks that hit us during COVID are being reversed.
And the price wage spiral is going downward rather than upward.
So more economies are actually of the view that we may even avoid the bumpy landing with a short and shallow recession.
We may actually have this immaculate disinflation and still grow at potential, avoid recession and go back to 2%.
So you have to be, as I say, nuanced.
I like that on what you just said.
Rob, did you get a text by Brandon on a statista number that just came back recently?
Maybe I'll show it in a minute here.
It's very interesting.
I really want to get your feedback on this one.
When I get the statistic chart, I'll show it to you.
I think you may have some commentary on it.
By the way, in regards to real estate, okay, in regards to real estate, very different than 2008, right?
I mean, 2008, we're dealing with nagam.
You know, people are paying the minimum instead of the interest only or the 30-year fix or the 15-year.
You know, that whole four-pick a payment mortgage that we had that turned into a movie, Big Short, that did very well.
It was a book, then a movie, Fantastic Movie, and a book.
And you look at today's real estate.
Obviously, a lot of our audience that listens to this, they're small business owners.
Some of them want to buy a house, some of them want to sell their house, but a lot of them are also within the real estate market, whether they're loan officers or they're on the real estate side.
So, what do you like?
Let's just say I'm your son, okay?
And I'm your family.
I know you don't have any kids, but let's just say, you know, I'm related to you.
You truly care about me making the right decision.
I come to you and I say, Uncle, I got a question for you.
I respect you a lot.
I'm thinking about buying a house right now.
You know, should I buy right now?
Should I wait right now?
Based on you having been in this industry and, you know, the industry of economy is seeing what's going on with rates.
You know, prices are not lowering.
People are not selling.
There's not a lot of inventory out there.
Inventory is super low.
Everyone's waiting.
They're thinking the interest rates are going to come down.
Buyers are thinking sellers are going to lower their prices.
And some pockets are lowering prices.
What do you think is going to happen to the real estate market the next six, 12, 18 months?
Well, my answer to that question will be that the situation today for real estate, and I'm talking about residential.
Of course, there is also commercial real estate.
That's a different story.
Retail and office space and things of that sort.
But if you're looking at residential, I would say the good news might be that things are not going to get bad as bad as they did during the subprime bubble and bust and the global financial crisis.
Because in that episode, what happened was that the bubble in home prices was much worse than today.
There might be some froughtiness in home prices today, but say the ratio between average price of a home to the average household income or the ratio between the price of homes to rents was really stratospherically out of place.
Two, as prices were going higher, there was a massive increase in the supply, much more many new homes being built, and that supply was going into speculative demand.
People buying homes just for, say, condo flipping.
So once it burst and the speculative demand disappeared, the excess supply of housing implied that the price collapsed 20, 30%.
Many people were essentially having no equity in their homes.
They could not essentially pay their mortgages.
They walked away from their homes.
And once the recession was severe, people didn't have the income to pay also for their homes.
So we had a real severe recession, bust of housing.
Today, instead, first of all, those measures of a bubble in the housing market are showing frottiness, but not a massive bubble like 06, 08.
Two, the economy is still growing.
So the household might have a balance sheet problem.
The interest rates are starting to pay on the mortgages is higher.
But if you have a job and income, you can still afford it.
Three, when interest rates were very low, you know, as of two years ago, you could get, as a prime borrower, say, you could get a 10-year mortgage for 2.5% to 3%.
Today is 7%, 8%.
Many people locked in mortgages along maturity, 10, 20, 30 years, and interest rates, they're much lower.
So the average person is not paying 7%, 8%.
The average is paying something like between 3% and 4%.
Some people less, some people more.
And people have jobs.
So are we going to have a downturn in real estate?
Yes.
Is it going to be more severe in commercial, meaning offices and stores and so on?
Yes.
Could there be risk also for housing?
Yes.
But if we avoid a real recession, people have jobs and income and have now locked in interest rates are lower.
As some of those mortgages refinance, then people are going to find much more expensive to pay their mortgages.
And today, I would say, given the ratio between prices and rents, it's much more, how to say, much more reasonable for an individual to rent rather than buy.
You want to wait.
to buy only when mortgage rates are lower or prices have fallen 10, 15%.
So if I had to give an advice to anybody, I would say rent today, wait until mortgage rates are lower and all prices of home are lower is not a good time to buy.
And I don't know if you saw the numbers.
It said, what?
52% cheaper right now to rent to buy.
Yeah, that's correct.
And there's other stats that support what you're saying.
Right now, in America, 61% of the total mortgages in America are held at under 4%.
What percentage?
61% are held under 4%.
And 81% are under 5%.
And if you looked at it as a band, about a quarter of them are 3% to 2.5%.
38% of them are 3-4%.
And 20% are 4-5%.
So to your point, sir, people that go, say, from migration north to south, they could Airbnb, which is another phrase for just rent your old home.
And if you're a retired person, rent something in any of the southern sunbelt where you go for your winters when you not for extravagance, just as you go down for the winter, the way the retired folks go.
The other side of it is there's a little bit of a tick up in foreclosures for subprime.
But I read this morning that even if that peaks out, it probably only adds 50% to the current inventory, which would still keep it like only 40% of the historical average.
So in other words, if the subprime inventory comes out through foreclosures, the inventory for sale right now is still so low.
It's just going to bring it up a little bit.
And it's going to be more.
Spot market.
Well, the other thing I read that was very interesting is who owns the houses that are being discounted?
The homeowner discounts the rates much slower.
And it was the foreclosure glut and the banks that dumped the assets they were holding.
Because you and I have a bank.
All of a sudden we have four houses and no mortgage behind them.
We're like, holy crap, we sell them and we dropped the price.
So the banks were the ones that started the snowball of the price dropping because Pat and Tom's bank, we're not making interest on that.
We got property tax.
We got insurance.
Get this thing off my balance sheet.
And so we tossed it out.
I want to show this.
I want to show this, Dr. Nouriel.
If you can pull this up, Rob, I know I'm not going to be able to see it.
As long as he sees it, that's what I care about.
I saw this the other day.
And for me, I'm always wondering, you know, who is going to predict the recession more accurately?
Do they know something the rest of us don't know?
As long as you see it, I'm good.
Whenever you see it, if you can just tell me you see it, it should say what's next for the U.S. economy, 2024 projections.
Are you able to see it?
Not yet.
Okay, Rob, let me know when you have it so he can see it.
On this chart, before he brings it up, I'll just read it to you.
It shows seven different brackets.
In these brackets, it's shown what is the percentage.
Who thinks a recession is coming?
Okay.
Fed staff, 0%.
They don't think recession is coming.
This is people that work for the Fed.
They don't think a recession is going to be coming.
Yield curve, 61%.
Economists, economists think 48% chance a recession is coming.
Consumers, 69% chance they think a recession is coming.
Goldman Sachs is only at 15%.
Bank of America is at 35% to 40%.
However, CEOs of larger companies, they're at 84%.
CEOs of larger companies are at 84%.
So why would CEOs of larger companies be at 84%?
What do they know that the rest of us don't know?
Now, if you, of course, you know, study this, a lot of these companies, when money was so cheap, everybody was saying, guys, let's go get some money.
Let's go get some money.
Money is so cheap.
Some of them put it to work.
Some of them, you know, put it in a treasury and they made interest on it.
But for the most part, some of these guys are paying interest rates that they're worried if it gets called a year from now, six months from now, their interest on the loan that they took.
Some numbers have shown it's going to go from 530 billion this year to 780 billion next year.
Then it's going to crack a trillion one, then a trillion three in the next three years.
And these are interest payments that they have to be paying.
That's a lot of money.
Why do you think CEOs who are in the business think a recession is more likely than the rest of the other seven communities?
Yes.
I mean, first of all, that chart shows that there is a whole distribution of views among different groups, even among economists.
Some are optimistic, some are pessimistic.
I'm sure that's the case also among a variety of CEOs.
So the honest answer is, as I said, when it comes to predicting the future, you can only do a bunch of scenarios and try to assess probabilities.
Six months ago, the staff of the Fed had a recession, short and shallow as being their baseline.
Today, instead, they say their baseline is no recession.
So that probably has gone for them, not to zero, but the baseline is a soft landing rather than a short and shallow recession.
Additional point, when people say there'll be a recession, is it going to be short and shallow?
Is it going to be more severe associated with a banking financial crisis or not?
And is there a recession next 12 months as opposed to after the presidential elections?
If a recession were to occur before the next presidential election, it's going to have impact on whether it's going to be Trump or Biden winning, even a short and shallow recession.
If it occurs in 2025, the implications are going to be different.
So even the question has to be more specific.
I think that the CEOs, in my view, are concerned about several things.
First of all, while during the global financial crisis, the problem was too much debt of households, mortgages and lending by the banks.
In the last 10, 15 years, there has been a massive buildup of corporate debt.
Corporation have borrowed like crazy, and they've been financed less by banks and more by what people call shadow banks, non-bank financial institutions, a variety of capital markets, hedge funds, private equity firms, and you name it.
There is already a lot of debt that is what's called junk bonds below investment grade of people that have so much debt that is risky and the spreads that you have to pay on it is much higher than investment grade.
There's a trillion dollar of what people call fallen angels, debt and firms that were investment grade and now they've been downgraded to junk level.
There is another trillion dollar of corporate debt that is barely investment grade, one step from being downgraded.
And in the private market, there's been a massive buildup of private debt, not financed by banks or capital markets, and things like what people, exotic instruments like leverage loans, CLOs, peer-to-peer, private debt.
A lot of it has been done in very risky ways without safe covenants.
So, and some of this debt by the corporate sector, like the household, during the COVID crisis was refinanced at lower interest rates and longer maturity.
But several trillion dollars of this corporate debt is coming now to maturity in the next one, two, three years and so on.
And if interest rates remain high, those firms that were borrowing at low rates, like households, will have to refinance themselves at much higher rate.
Now, like for the household sector, today there is a balance sheet problem.
You have a lot of debt, and the interest rate on that debt is rising.
But you don't have yet a P ⁇ L problem, meaning an income side, because the economy is still growing, profits are still positive, revenues are growing.
So, yes, corporates like households are strained on the balance sheet, high debt, and gradual interest rates going higher.
But as long as households have jobs and incomes, rather being unemployed, as long as firms have revenue growth and profits, they can still manage the interest payments on those liabilities.
If instead there is a recession, you get a double whammy, a shock to your balance sheet, high debt and rising interest payments on the debt, and then a hit to your income statement, your revenue, your income, your profit, your employment, and then you get into a severe financial distress.
So, the bad news, debt ratios are high and debt servicing ratio rising.
The good news is that income, revenues, profits are still rising.
And therefore, for now, even the corporate sector can afford it.
But CEOs are becoming nervous that eventually this large stock of debt at high interest rates is going to become unsustainable.
They also look at global risk of various sorts.
And of course, the geopolitical risk are a threat.
If energy prices were to rise even more so, because there is a regional war between Israel, US, and Iran, not just against Hamas, that shock to all prices is going to lead to inflation, recession, stagflation, like the 1970s.
This is some of the things that might be on the mind of the corporate leaders.
Yeah, that's on the mind of the CEO.
I have a question for you, and that's what's on your mind.
A year ago, you, like many others, and I was kind of in this camp, you saw all the things you articulated, and you thought that this year could be a pretty hard-landing recession.
Now it appears that it extended.
The stimulus took consumer credit card debt all the way down to 300, excuse me, 400 billion.
But now the consumer has spent that all the way up to 1 trillion, really driving what appears to be third quarter.
And then you've got the things that you just talked about that so the consumer may have a little bit more runway because they've got a PL and the interest rates on their debt is rising gradually.
So this consumers probably got some time.
But it doesn't sound like you think corporates got a lot of time.
What do you think is coming for next year?
You think it's going to be a soft landing, but I'm hearing between the lines, I think you've got some thoughts in there that may be more severe for the corporate sector.
Did I hear that?
Yes, I would say if we go back to the three scenarios I described before, a real hard landing, a short and shallow recession, call it softish or bumpy landing, and real soft landing.
I would say that the good news compared to a year ago when we had spiking inflation and rising commodity prices, or six months ago, when we were worried that the banking problem would lead to a credit crunch and a crash of the economy, is that the tail risk of a real hard landing today looks much lower than it was.
And the stimulus, the fiscal, might be part of the story.
So then the question is: say, think about the next year or so through the end of 24.
Do we get really a soft landing or a short and shallow recession?
I would say the consensus moved towards a soft landing, but there are scenarios under which you could still get a short and shallow recession.
You get a short and shallow recession for the following reason.
You could be in a situation in which, suppose that this conflict in the Middle East gets worse and oil prices have already risen by 10% compared to the pre-barbaric attack of Israel by Hamas.
Suppose that they go up by 20% or more.
Then you have two shocks.
One, inflation is rising.
Two, those who are users of energy, households and those firms that are energy users in the U.S. have a shock to their income as well because it's more expensive to buy energy.
So you have a stagflationary shock that reduces income and increases inflation and cost of production.
Then the Fed has a dilemma.
If you want to fight inflation, you have to raise rates more, but they're already high, and that creates distress.
And if you don't raise them because you're worried about growth, then you can have a deanchored inflation expectation and a wage price spiral.
So the trade-off becomes more difficult for the Fed.
The economy is already going to slow down in the fourth quarter because of a bunch of headwinds, not just energy prices.
Most likely, we're going to have a government shutdown.
The GOP doesn't even have a speaker.
Even if they have one, they'll be having a collision course with the Democrats.
So we get a government shutdown, get energy prices rising.
We have labor strife with strikes in a number of sectors.
Student loan repayment have to start.
That's a drag of 50 billion on the economy.
And rising interest rates are becoming a burden both for households and for corporates will have to start cutting back on consumption, cutting back on capital spending, cutting back on hiring.
So you get a slowdown of the economy slowly, slowly.
And then there are all these new uncertainties coming from the Middle East that require in uncertainty people like to wait.
It's the option value of waiting.
They might do less capex, less production, less employment, less consumption.
They may save more.
And then it becomes self-fulfilling.
So I would say for now, the economy has been growing about potential.
Q3 actually could be very strong.
Q4 is going to be probably weak.
And then depending what happens to the Middle East, what happens to inflation, whether the Fed can stay on hold from here as opposed to hiking more, you may end up in a soft landing or you may end up into a short and shallow recession.
And those are the factors that you have to keep in mind as you're asking yourself whether it's one or the other.
What do you think the highest probability?
I mean, that's a wide analysis.
What do you think the highest probability for the U.S.?
I mean, no economists can say anything with certainty, of course, but what do you think the highest probability?
Soft landing and then corporate banking and corporations have a tough time adjusting because they're carrying some of them a trillion dollars of, you know, barely above junk?
I would say right now the situation in my view is the probability of a soft landing, I would give it an epsilon more than a short and shallow recession, say 55, 45.
A few months ago, I would have said the opposite, but the economic data have surprised on the upside.
There's also a lot of fiscal stimulus in the pipeline between the CHIPS Act, the Infrastructure Act, and the IRA.
And the IRA is going to cost us not 360 billion, but it's such a generous system of tax credit for investing into energy that probably the final cost is going to be over a trillion over a decade.
And then you have the new investments in AI that many firms are doing that are also a positive and so on.
So I would say a soft landing as of now looks more likely.
And the Fed may be close to being done with raising rates as long as there is not a spike in inflation rather than even a short and shallow recession.
But I would say if energy prices go higher by another 10 to 20 percent compared to current level, then probably we get into a short and shallow recession because then inflation is higher.
The Fed cannot just ignore it.
They'll have to hike once or twice more.
And the rise in energy prices has a stronger impact on the users of energy.
They will have to spend less than on the producers of energy.
They'll have a windfall of profit and revenues.
So the net effect on the economy is weakening the economy while raising inflation.
So I think that what's happening in the Middle East at this point is very critical.
The banking problems, we worried about them, but they're under control right now.
A few regional banks went bust.
The other ones were backstop.
The credit crunch has not been so severe.
The big banks are still have plenty of cash, plenty of capital.
So we're not going to have a banking problem as of now.
But if the Fed were to raise interest rates, you know, two or three or four times more, because inflation goes higher, because energy prices go higher, then I think we end up into a recession.
Do you have for someone that, you know, Turkish-born Iranian-American, I read somewhere, I think you were also, you also lived in Tehran for a year, if I'm not mistaken.
Yeah, from Istanbul to Tehran to Tel Aviv and then Milano, and after college again, the U.S. for grad school.
So quite interesting.
So you've been in that region.
I lived in Iran for 10 years myself, born 78.
Three months later, Khomeini obviously comes in and the rest is history.
And then we go to Germany to live in a refugee camp.
What are your thoughts about what's going on right now with Israel, Palestine?
And then you're someone that's gone to Harvard and you're not just anybody that went to Harvard, professor there, respectable.
You went to school there yourself.
But you're seeing the criticism that's happening within schools, universities, kids taking different sides.
Many billionaires are now saying, I'm not going to be funding schools, whether it's Wharton, whether it's Harvard, whether it's Yale.
It's not like it's just one school.
It's a lot of that taking place.
How are you processing the current conflict taking place in Israel and Palestine and Hamas?
You know, first of all, as an economist, I have to ask myself what are going to be the economic and financial implications of this conflict, regardless of personal views.
You know, I'm Jewish.
My parents, my sister, 21st cousins live in Israel.
You know, I support strongly Israel.
I think that this attack by Hamas against Israel was totally barbaric, torture, rape, abuse, something disgusting, barbaric.
But I also believe that eventually there has to be a political solution to the Palestinian problem with a two-state solution.
And maybe we need a war to go to peace.
That's what happened in 1973.
Egypt attacked Israel, restored their honor, and then Sadat went and made peace with Begin.
So maybe we'll need a war until then we get rid of Hamas and we can have more stable Palestinian authority in Gaza and resume the normalization between Israel, Saudi, US and the rest, and then we can restore the peace process.
At least that's my hope.
As an economist, I have to think about scenarios.
I would say, in principle, you have to think about two scenarios.
Scenario number one is one in which this conflict remains limited to Gaza.
Israel goes into Gaza, try to dislodge as much as it can of Hamas, try to eradicate it.
Amas has been actually more of a curse to the Palestinians in Gaza than to the Israelis, because it's made their life miserable.
And it'll be painful.
Hopefully, you can avoid and minimize the loss of civilian life and all the rest.
But as long as it remains contained just to Israel, Hamas, in Gaza, the macroeconomic implication globally remain modest.
Market seems to be pricing this scenario.
Say oil prices, energy prices have gone up by only 10% compared to before the attack by Hamas.
It's significant, but it's the fear premium.
There is not yet a shock to the production or supply or exports of oil and energy and gas from the Gulf.
It's more the fear premium that is spiking 10% energy prices.
And the movements in bond yields, in stock markets and gold has been minimal.
When there was a panic, gold went higher, bond yields went lower, equity corrected a little bit.
But now good economic news on the US show that bond yields are going higher again, equity are stronger, and gold is moving sort of sideways.
So the markets seem to be believing that the probability of a conflict contained to essentially Gaza is an 80% probability, even more.
The probability of a regional conflict, let alone global, 10, 20% maximum.
That's what the markets, bond markets, equity markets, oil markets, and gold markets are telling us.
Now, market can be wrong.
So that's a, how to say, less dystopian scenario.
Still ugly, painful, but manageable, both geopolitical, economic, and financially.
The second scenario is one in which Iran decides that they cannot let Israel completely eradicate Hamas as they've been supporting it for decades.
And the way to try to make it hard for Israel to beat Hamas is to unleash Hezbollah in Lebanon, because then Israel has to fight on two fronts, south against Hamas, north against Hezbollah.
And Hezbollah is something like 100,000 rockets, not 10,000 or so.
So they're much more powerful.
There could be even a third front in the West Bank as well.
Now, if Iran decides that they have to essentially support the proxy Hamas at any cost and they unleash Hezbollah, not only US and Israel attack Hezbollah, but then Israel and US have to attack Iran.
Why?
Two reasons.
Most likely, Iran was already behind the Hamas attack against Israel and certainly will be again behind the attack of Hezbollah against Israel.
So a decision of Hezbollah having a full war with Israel cannot be taken without Iran agreeing on it.
And two, Iran at that point has to accelerate its own nuclear plurification program because they know they have to try to get the bomb before Israel attacks them.
And by the way, in the deal that the US did with Iran on releasing the six hostages in exchange or a few hostages in exchange of 6 billion, Iran also committed to stop enrichment of uranium to 60%, not going to 90% weapon grade.
Now that the US has pulled out of this deal, say no more 6 billion, Iranians can retaliate only by enriching uranium.
So you have two reasons why Israel and US have to strike Iran.
Iran unleashed Hezbollah and is trying to fight Israel on three fronts and Iran is going to go and build the bomb.
Then if Israel and US attack Iran, then the production and exports of oil from the Gulf, slate of hormones is blocked for a few weeks, if not a few months, depending on how severe this conflict becomes.
It becomes like 1973, Yom Kippur War or 1979 Iranian Revolution, where you had a doubling or tripling in all prices.
And if that happens, then it's a regional conflict.
Oil doubles in price.
Inflation goes to the roof.
You have a US recession, you have a global recession, and we have stagflation, like we had in the 70s.
Stagflation means inflation and recession.
And then it becomes really ugly, becomes an economic and financial crisis globally.
So the honest answer is which one of these two scenarios is more likely?
The honest answer, nobody knows.
And you can try to assign probabilities.
The market is saying the negative scenario, in which everything goes wrong, is only a 10 to 20% probability, 80% probability that the conflict is contained to Gaza.
Other people, geopolitical experts, think that the second scenario is more likely.
Does anybody know?
Not clearly.
But it's a very, very different outlook for the US and the global economy.
In one, the impact is really minimal on the economy, on the markets.
In the other one, it's a total disaster.
Yeah, it's not a pretty face.
When you're looking at it right now, it's not looking good at all.
And a lot of people are concerned.
But again, if you're saying 10 to 20%, the way the markets react and saying they're going to figure out a way to have a peace treaty or, you know, kind of finish this on and move on, it doesn't look like Israel wants to do that.
It almost seems like Israel wants to impose because they're not happy about what Hamas did, and they want to defend their position.
But again, we're going to see what's going to happen with that.
No, but Israel is going to go after Hamas.
They'll have to invade Gaza.
They'll have to try to limit and they will try civilian debts because Israel doesn't want to kill civilians.
And unfortunately, Hamas uses them as human shields.
But say the conflict in Gaza could become painful and ugly and whatever, but eventually there'll be a ceasefire.
Eventually, hopefully, most of Mamasa is eradicated.
Maybe you get Saudis, Egyptians, and moderate Palestinians from West Bank controlling and providing security to Gaza after Israel has done the cleanup.
And then you have a path either for at least a ceasefire and or then resuming a peace process.
But the economic implication, however ugly things become for Israel and for Gazans, are contained.
So I'm not saying it's a nice scenario, but it's contained.
It doesn't have global consequences.
The other scenario, you get the global stagflation, global recession, and high inflation.
It's a real disaster for the world.
You know, when I was talking to Ray Dalyo, one of the things he was talking about is how closely he also watches the political side of how it affects the economy, right?
I mean, you have to almost pay attention to see what's going on with politics in this region and China and this and then Middle East.
How does this impact 2024 elections?
We're 12 months away, right?
Give or take?
12 months and a week.
12 months.
Yeah, exactly.
12 months, 53, 54 weeks away from election.
How does this impact elections?
Negatively, positively, no impact.
What do you think the impact of this is on the election?
You know, it's complicated.
I would say that assuming that Democrats nominate Biden and Republicans nominate Trump, that's the baseline for now.
The key things probably that determine the results of the election are, first of all, the economy.
Secondly, of course, you know, the campaign and the debates are going to be mattering as well.
Which one of the two candidates looks stronger in debates or in a campaign?
But I think that's going to be a bit of a wash.
The economy is a first-order magnitude.
And then foreign policy issues also can matter as well, directly, indirectly.
Now, I would say the economy for now is doing okay.
It's not great, but growth is a lot of potential.
Unemployment rate is low.
Job creation is still solid.
Wage growth is fine now and so on.
So the economy is doing reasonably well.
So that should be favoring Biden.
What could derail the economy?
I would say is not the Fed directly, it's more the Middle East.
As I said, if oil goes up by another 20%, then inflation is rising.
The economy is weakening.
And the Fed, damn if you do, damn if you don't.
If you raise rates, the recession becomes more severe.
If you don't raise rates, then inflation goes higher.
And that's also painful.
So the Middle East, first of all, can derail the economy.
And that's one direct effect.
Two, of course, the Middle East matters because then you have a foreign policy kind of crisis where the Russian invasion of Ukraine is brutal.
Now you have another conflict.
I would say that the reaction of the president so far has been quite strong.
Even Republicans believe that, you know, the strong support of Israel has been the right thing to do.
But, you know, the same way the Ukraine thing became partisan, unfortunately, because we should be supporting Ukraine, even the Middle East could become partisan.
I'm sure Trump is going to say it's your fault by trying to have a dialogue with Iran.
We look like we were appeasing Iran and then a mass attack.
The thing is, I'm very criticism.
I think that Trump getting out of the joint comprehensive plan of action was actually a big mistake.
But that's a personal view because then Iran became even more radicalized.
But, you know, foreign policy, if there is a total disaster in the Middle East, they could blame it on the president.
But so far, I think the president has taken an approach that is the right one and supported by most Americans and so on.
So the key thing, I think, is really the economy and whether they'll have a recession.
And that depends in part on what's going to happen in the Middle East.
So the results of the election depend on the economy.
And the biggest threat to the economy right now is probably a conflict in the Middle East that spikes all prices and leads to inflation and recession.
Then, you know, Carter lost his election in the second term when he ran again because not only you had the hostage crisis, but more importantly, you had the Iranian revolution that led to a shock to the production of oil, doubling of all prices, inflation and recession.
That was the trigger for Carter losing to Ronald Reagan.
And a carton beat Ford because we had the first oil shock of 1973 as well.
And that rightly or wrongly was blamed on the sitting president, General Ford.
So the Middle East can really affect the results of the U.S. election when Carter beat Ford and when Reagan beat Carter.
It could happen again next year.
Meaning it could happen where Trump beats Biden again next year.
Kind of like Carter beating Ford is what you're saying.
So some would say, I mean, if you look at the Washington Post just came out saying Biden's economy is great everywhere, except in the polls.
And I think this is a couple of days ago.
As the U.S. economy continues to improve, President Joe Biden continues to not get credit for it.
Only 35% of voters in seven swing states trust Biden on the economy, according to a Bloomberg Morning Consulta poll, with 51% saying it was better under Trump.
That's 16% difference.
And it's a WAPO talking about this and Bloomberg talking about this.
So why do you think the American voter doesn't trust Biden on the economy?
You know, polls, you know, first of all, can change over time.
I think that the economy did well under Trump, but of course, then you had the COVID crisis, an external shock, led to a recession.
Since then, we've had a recovery from the COVID crisis.
Growth has been robust.
Unemployment is low.
Job creation is good.
Of course, inflation for a while led to a reduction in real wages, and people felt the pain of inflation.
Now, luckily, inflation is falling.
It's still above target, but core is getting close to three.
So I think some of the malaise is a malaise that comes from the recent increase in inflation and the erosion of real wages.
In the U.S., we also have a large amount of income and wealth inequality.
That's not because of Biden or Trump.
It's more structural.
But I think that even if you have jobs, there is a feeling that the middle class or the working class are sort of left behind, that neither party cares about them.
I would say Biden is policies, you know, Trump ran as a populist and then he governed as a plutocrat, giving tax cuts mostly for corporations.
Biden has, through his own industrial policy, tried to rebuild the industrial base of the country, and new factors in manufacturing jobs are being created.
But the average American is still quite cranky because he's worried about still inflation being too high.
He's worried about all these economic and political and geopolitical uncertainties.
There is now a meaningful amount of income and wealth inequality, and there is resentment against it.
And usually people tend to overall blame whoever is in power because the buck stops there as well.
So I would say, you know, the results of the presidential electoral depend, of course, on five to seven swing states.
Which direction they're going to go is not clear.
Economic issues may matter.
And those polls suggest that while the economy is doing well, only part of Americans are supporting Biden those swing states.
But then many people believe that in those swing states, soccer moms, independent voters, and others find that the brand of populism of Trump is also quite toxic, is a divider.
And many of them were put off by him in 2020, were put off by him in 2022, and they might vote for Biden in 2024.
So I would say the results of the 24 election are totally open.
Whether it's going to be Biden or Trump is all to be seen, right?
I agree.
I do think it's going to be totally open.
By the way, have you seen, studying the economy last 50 years, us having this many strikes in a year?
UAW, writers, actors, FedEx, UPS, who else is the recent one?
Kaiser Permanente, 75,000 of them.
I mean, left and right.
There's so many strikes that are taking place.
Have you ever seen a time where we've had this many strikes at the same time?
Well, you know, in the 70s, there was a lot of labor strife.
But I think the reason why we're seeing this type of labor strife, not just in the U.S., but also in Europe, is that, you know, for the last few decades, there has been a massive increase in income and wealth inequality.
Real wages have not grown very much, regardless of who was in power.
Profits have grown a lot.
The share of labor income as a share of overall income has gone down.
The share of wages have gone down.
The share of profit and capital has gone up.
And there is more inequality.
And I think that that's something that leads up to political resentment against it, not only among Democrats.
You know, one of the reasons why, you know, the GOP used to be the party of Wall Street and big business and small business.
And now it's become the party instead of economic populism, right?
Of the left behind blue collars and white collars saying we want policies in our favor, bashing big business against free trade, against migration, against things that usually the GOP standards for.
Why?
Those who are suffering are not just white collars and blue collars that are socially more progressive and vote Democrats, but also many people that are socially conservative feel they're left behind and they want economic populism.
And the economic policy, at least the rhetoric of Trump was economic populism and nationalism and protectionism, you name it.
So, you know, the economic policies of Bernie Sanders are not very different from those of Donald Trump, at least those that he pretends to have.
And Biden has taken some of the same economic populism.
And by the nomics in part is, I care about you, about the working class.
I want to create jobs in manufacturing.
I want to restore it.
I want to invest in our infrastructure.
I want to produce a lot more chips, more energy, more alternative, and so on and so on.
So, you know, economic populism and industrial policy is something that both Republican and Democrat sort of agree on.
Let's say fair free capitalism is out of the wind, but not only among Democrats, but even among Republicans.
Yeah, it's funny you say that when you say, you know, GOP was about Wall Street.
It was this, it was that.
I mean, I would even add GOP, maybe some would say censorship and for war.
And it's almost like flip.
Today, it's more Democrats that are for war, for censorship, for Wall Street.
They're controlled by them.
And it's very confusing for the voter on what's going on.
But, Tom, you had a question about – go ahead.
You were going to say something.
But yeah.
So Tom, you had a question about immigration on, you know, how the amount of people that are coming across.
And then, you know, Dr. Rouweeni talked about how immigration is a good thing.
We're getting a lot of workers.
What question did you have?
Well, the question I had, most recently you talked about immigration.
Immigration also is not the number one topic for an election, correctly.
You know, Bill Clinton was right.
It's the economy stupid.
But right behind it, you've got immigration.
Because on one side, people see excess immigration on here, maybe taking basic low-paying jobs and taking jobs away from the people that are already here who desperately want to find those jobs.
On the other hand, you pointed out that it actually helps innovation.
When actually, information I've seen is that the H-1B program, and I don't know how you got to Harvard, how you came to the United States, but you look at a lot of these leaders and innovators in Silicon Valley.
They came across some H-1Bs from India and places like this where they had strong undergraduate degrees and were coming for graduate degrees and MBAs here.
Right now, when you look at immigration, you were saying it's good for the economy, but doesn't it create an immediate deficit burden?
Because when they arrive here, they're not ready to be workers, and it's not a handful of innovators, entrepreneurs coming to start companies.
That's a mass of humanity that's basically refugee status.
So, most recently, you talked to that on CNBC.
Can you unpack that a little bit?
Because it seemed like you were talking on both sides.
Yeah, I mean, first of all, I would say that migration has to be regulated.
Nobody says, let's have an open border, anybody can get in.
And we have to have a more rational migration policy.
And I would say both parties have positions that are too radical.
Essentially, Republicans blaming every problem on migrants, and Democrats not being willing to maybe having more constraints of how we manage legal migration as opposed to a more open border.
But even Democrats are going to realize that you have to address this problem in a more consistent way.
And even Biden, I'll say, I want funding for the wall and for a more rational migration policy.
So, hopefully, if you don't make it a political issue, both sides can reach an agreement on having good quality workers coming to the U.S. and legal migration rather than illegal one.
You know, the U.S. as a country has always been built on people coming from abroad, migrants.
You know, everybody in the U.S. came from somewhere else, apart from the native American ones.
And the strength of the U.S. has been getting people from all over the world.
And it's not just that people say, do people who come here like me go to go and get a PhD and being high productivity workers as opposed to those who are people with less skills?
But think of it this way.
Even among those that are maybe lower skill, suppose that you are a poor farmer in Mexico or Central America, and you are deciding to leave your village, risk your life because you could be dead, cross the border to come to America.
Even among those farmers, you are the one that is slightly more entrepreneurial, slightly more risk-taking, slightly more hardworking, and you're willing to risk your lives to have a better life in the U.S.
And when you come to the U.S., you're not going to get a welfare check.
You're going to work your ass off in the fields, in the factories, delivery of food, whatever not.
I mean, we see it.
You see all these Latinos that provide a service every day.
I see it in New York in tons of them.
And I'm sure whether it's Texas or California, these are really hardworking people.
They actually work hard.
They pay taxes because they have to pay tax.
Some of them even pay social security taxes because they hope that one day they'll become legal and they have the social security benefit.
And therefore, whether it's a PhD like me, high productivity, or somebody's going to create a Silicon Valley firm, and a good third of them were created by foreigners, or even a small campesino that is working his ass off to have a better life and so on.
The kind of people that the U.S. attracts are those who are more ambitious, more entrepreneurial, more risk-taking, more hardworking, more willing to have a better life at any level of education, at any level of skills.
Are there some people that are coming here maybe because eventually they think they're going to get welfare or something?
Yes.
Are the majority?
I don't think so.
Then the majority want to come here to work and have a better life.
Now, you cannot have it unregulated.
You cannot have millions of people illegally.
They put some pressure on local public services, whether it's housing, healthcare, education, and other ones.
And therefore, we have to have a managed process.
So we have to go beyond the extremes.
We have to be rational about it, sensible, do immigration reform, essentially, allow those who are still here and work hard to be legalized, and then have a system that allows people to come in in the U.S. legally.
Maybe you do like Canada, where you give points for skills of some sort.
You know, we don't need just PhD, we need people who can be electricians or plumbers or working in the farms and so on.
So, skills is different at different levels of the distribution of the job matching as well.
So, we have to have a little bit less rhetoric, less partisanship.
And, you know, I'm a migrant, you're a migrant, many others are.
At some point, everybody came from somewhere else to America.
And that's what made America great.
But we have to have a rational approach to it.
We cannot just call them all rapists and murderers and bad homes like Trump did.
That was sick.
That's totally false and wrong.
But we cannot just have borders are open without any illegal migration either.
So we have to tone down the rhetoric.
And we have to.
And by the way, there's a massive lack of supply of labor.
You know, in New York, where I live, many restaurants, you know, don't have enough workers and skilled workers.
So you have all these people coming from Venezuela, by the way.
Many of them are skilled, they are escaping Maduro and economic disaster, and they want to work.
And until recently, they couldn't work because if you come in the U.S. and you're not yet officially a refugee, you cannot have a work permit.
Luckily, I think rightly so, the Biden administration decided that they can have a work permit because these people are actually highly employable.
Many of them are highly employable.
They want to work once they are here.
So if we let them in, we should let them work and legalize their ability to work so that they're not a strain on our social welfare system.
That's the right thing to do.
I just want to hear what restate what I think you said.
So you're for legal immigration.
You're not for leaving the border open and letting everybody in.
That's what you're saying.
You're not for illegal immigration.
Okay.
So it's very important to say for legal immigration and also for a system maybe of points that gives we need different people of different skills.
And different skills means that not everybody is entrepreneurial.
We need more farm worker.
We need more plumber.
We need more electrician.
We need people who are doing blue-collar work in manufacturing.
So skills are skills at every spectrum.
So it's not as if you just give a premium to people who have a college degree.
We need skilled workers, even though blue collars.
I love that.
I love it.
And I agree because we do need that.
There's certain work that not everybody's going to do.
We need people across the board.
But to specify that you're for legal immigration.
And what's interesting is what I love is going on is at first, you know, a lot of Democrats and, you know, Republicans criticize Democrats for other things and Democrats criticize Republicans for other things.
I love to see how initially so many Democrats were against the wall.
And I'm so impressed with Biden that he sets aside his ego and the embarrassment for the Democratic Party.
And he's agreeing to continue building the wall because he's realizing how catastrophic it is at the border.
And maybe the verbiage, because I'm a 1978 kid.
So Muriel Boltliff, when it happened in Miami, Jimmy Carter is the reason why I'm in America.
You're probably in America for different reasons.
I'm here because of Jimmy Carter.
Jimmy Carter's entire campaign was around human rights.
And at that time, it was like, no, hey, Reza Charpa Lavi, you're an evil man.
You're an evil leader.
You have to let go to 3,000 political prisoners.
Well, you know, a lot of those people they let go eventually 9-11 happened.
And many of those leaders were from the political prisoners that he had held hostage in Iran.
And then the same thing happened with Cuba when it was kind of like, hey, you know, it's not fair what you're doing to all your political prisoners.
And then came one of the greatest movies of all time called Scarface.
And he came up and he says, I'm a political refugee.
And guess who Castro sent to Miami?
He sent the people out of prison.
125,000 people out of his jail said, you go to Miami, and Miami's unemployment rate hit nearly 50%.
I don't know if you've, you know, I'm sure you've studied what happened in Miami when he sent it.
So a part of what Trump was saying, he was saying they're sending not their best is what they're sending.
And he's talking about how Mexico needs to do a better job creating a better economy so people don't want to leave your country and come to America.
And then, you know, I was so enamored by a book I read about how Indians raise their kids to become leaders.
I spoke in Mumbai with Arundhati Bacharia, who was the former chairwoman of State Bank of India, 240,000 employees.
And I spoke with Divyang Turakia and a couple billionaires from there.
We were at IIT.
I'm sure you're familiar with IIT Institute, which is like our MIT, but they crush our MIT many times when they're doing different kinds of testing.
And, you know, when you say immigrants, when it comes down to Fortune 500 immigrants, a lot of the CEOs are either Indian, they're either Asian, it's different kind of, or they're from Venezuela, or they're from, you know, so it's folks that came here legally that couldn't stand their country that eventually worked their way up to doing what they're doing, which is great.
We want to see that.
And a lot of times, you know, especially with what's going on right now, I think they found, Rob, what did they find at the border the other?
Four Iranian extremists or terrorists that are coming through the border.
And the Fed just recently gave us an update two days ago talking about that there's a high likelihood that Hezbollah Hamas folks are coming through the southern border and we have to be careful about it.
So I think that is becoming a very big concern for families saying, look, you know, tragedy, you know, for example, sometimes revenge is done by people that are patient.
They'll wait five years, 10 years, 15 years.
And then all of a sudden, when you least expect it, 9-11 happens.
When you least expect it, an event in Israel happens, when you least expect it.
So it's but the best part, you know, while I'm saying all these things about you, about Biden, what I love about what I'm seeing with Biden is Biden is showing he has no ego giving credit and obviously he's not giving credit, but following Trump's policies that worked and he's following with it, whether it's the semiconductor chip policies that he had, you know, whether it's different kind of things that he was doing, there's great to see.
The other side about immigration that I want to kind of ask the question to you, and maybe this is just my lack of expertise in this area.
I want to see what you'll say about it.
You know how on one end you'll say, we need more immigrants.
We need to have more immigrants coming here.
I agree.
I think we need to have more kids.
I don't think we're having enough kids.
I think we need to have more babies.
I think one of the biggest problems we have in America is Americans are not having enough kids.
We're having too few kids.
We need to be having more kids.
And that's a problem.
That math can be shown in many different ways.
But if we're saying we need more immigrants to come here, and these are your words where you're saying we need more immigrants to come here, that's fine.
I agree.
But then on the other end, you also think that AI is going to destroy a lot of jobs where they're going to rely on, you know, what's the thing that Andrew Yang was talking about.
We had him on the podcast, the $1,000 a month.
He called it something that was UBI, universal basic income.
So isn't that kind of contradictory to think on one end, and maybe that's normal.
It's okay to entertain both thoughts, to say we need more immigrants, yes, because they're willing to do some works.
And then on the other end, we're like, yeah, but AI is going to replace a lot of jobs.
That's a very valid and important point.
I think the answer of it is over which time horizon you're worried about which problem.
I would say that today, the job disruption caused by AI are extremely limited.
And if anything, the fact that there are going to be hundreds or thousands of new AI firms created, living like the internet startups and so on, may actually create many more jobs because there'll be lots of new firms trying to do AI and they require workers of different skills.
So in the short run, actually, there'll be a boom in capital investment by the US corporate sector because every firm is going to have to say, I want to invest into AI not to fall behind.
And they're going to need people that actually know about AI and can implement it as a first stage.
And the unemployment rate in the US is very low, really 3.7% by any historical standard.
It's been strong job creation, both in manufacturing, in services.
The CHIP Acts, the Infrastructure Act, the IRA is going to create many more jobs, whether in manufacturing, whether in fossil fuel and renewable energy, whether construction work for infrastructures, and you name it.
And right now we have actually a tight labor market.
And there has been a fall in labor force participation rate, aging of population.
And we also need more workers because our social security system and Medicare is pay-as-you-go.
And the payroll taxes of the young pay for the benefits of the elderly.
And now we have less young people, more old people, and the social security trust fund is going to run out of money in a decade.
And the only way to avoid it is either you have more babies, but people cannot force them to have more children.
I agree with you.
You should have more children, but for a whole bunch of reasons, people don't.
Or the other option is immigration.
Immigration has helped us with this implicit debt or unfunded liability coming from pay-as-you-go, healthcare, and social security system.
Over the next 10 years, I think that there'll be really a demand for jobs and there's going to be a scarcity of jobs, giving aging, giving the great resignation, and so on.
So immigration is going to be necessary.
In the next 10 years or so, as there'll be more AI, there'll be disruptions.
There'll be job loss in manufacturing, job loss in services, even cognitive, if not creative jobs.
And eventually, probably, if you're looking not next 10 years, but 20 years, you could have a significant amount of permanent technological unemployment.
That's the bad news.
The good news is that AI is going to increase productivity growth.
It's going to increase potential growth.
Today is only 2%.
Potential growth will become 4%, 5%, 6, 7%.
And therefore, eventually you can tax the winners and then redistribute money to those who are left behind, not because they are lazy or whatever, but because they are unlucky and they are in firms and jobs that are made obsolete by AI.
So that's exactly what universal basic income is going to be.
You tax the winners, you tax the robots, you tax those who gain from AI, and you redistribute to those that need to be reskilled or need to be supported with a broader social safety net.
And I would say in the next decade, we're going to need more jobs, more people.
We have aging, we have unfunded liabilities, we have bottlenecks on the labor market in terms of supply being low and demand being high.
So we need migrants.
If and when productivity growth from AI is going to cause massive job disruption, massive technology and unemployment, and we don't need all those foreign workers, then we can reduce the amount of people we let in from abroad, maybe significantly over time.
We might need still skilled workers, right?
You know, to do AI, to do the jobs of the future, to do data science in the US.
Let me push back a little bit on that, though.
China is a year, 1.3 million people graduating in computer science and engineering, a multiple of what we do in the U.S.
So we might still need lots of engineers from India to help us to build AI.
So let me push back on that on a couple different fronts.
On one, and I want you to, if I push back and you're like, you have no idea what you're talking about, push back as much as you can.
I want to find leaks in my argument.
So you're saying we still need immigrants.
Okay, fine, we need immigrants.
But at the same time, the rich people, we're going to have to overtax them to pay the others because they got unlucky.
But we need people because in other countries, they're getting degrees in areas that are high-paying jobs.
So why are we entertaining the idea of allowing everybody and anybody to come here?
America back in the days was about what do you bring to our country?
What do you offer to our country?
We recruited and allowed the best to come here, like the best of the best, the best minds, the best educated people.
Nowadays, we're getting people that are coming to our schools, learning our stuff.
Then they're going back to their countries.
They used to stay here.
Now they're like, nah, I don't know if I want to stay here anymore.
I'm going to go back to my country.
And, you know, and then the other thing about Social Security and what are we going to do within the next 10 years, I have a thought.
Why don't we, when we came out with Social Security, retirement age was 65, whatever it was, and people life expectancy was 62.
The benefit was barely being paid for a few hundred, if not a few thousand people.
Now we're paying a ton of different people.
How about the idea of doing the following?
Okay.
Is raising retirement age to 72.
Social Security doesn't start till 72.
However, there's a big however.
And I want to see how you would break down this argument and say, no, I don't think it's going to work.
What if we raise retirement age where Social Security benefits start at 72?
However, from 65 years old on, every year you make money up to $200,000 salary, you pay no taxes.
What does that mean?
So I'm sitting there with my wife.
I'm 65 years old.
I'm about to take Social Security.
I say, babe, we can't afford this.
Guess what?
What?
I'll work for another year, but this year, if I work, I won't pay federal income taxes.
And I'll work one more year and I'll work one more year and I'll work one more year and I'll work one more year.
Every year, you're delaying the benefits of Social Security, which is a good thing.
And as long as you choose to do that, great.
But Social Security doesn't start till 72.
This may cause some young people.
I know people right now that are 80 years old, that are very young.
They look like they're 60 years old.
It's a very different climate today.
But I think there's some contradictions in that argument of we need immigrants, but we need more educated.
But if we don't, then we have to pay the unlucky ones and get the people that are creating the jobs to tax them even higher.
That doesn't really excite people to pursue incentives, knowing the ones that are going to work above and beyond and find solutions are going to get destroyed by the government taxes long term, don't you think?
You make many valid arguments.
And I think that, as we often agree, is never black and white.
It's a matter of trade-offs.
So it's not no immigration or totally open border.
It's not like AI is going to destroy jobs tomorrow as opposed to eventually destroy jobs.
And there are many ways in which you can resolve the problem of pay as you go, social security and healthcare systems.
One is, as you suggest, increasing retirement age.
And odd ones to give incentive, including tax ones like you suggested, to work longer.
You could gradually raise the payroll tax.
You could radically reduce even the benefits not of the currently old or the one too soon to be retired by the benefits of younger people.
So it's a combination of things that you can do to resolve this problem.
And we'll need to make them.
Unfortunately, neither party wants to make entitlement reform.
It's the third rail of US politics.
You know, Democrats say, let's not touch Social Security.
But Trump knows that it's toxic to talk about Social Security and he doesn't want to talk about it.
And he says the other Republican candidates who want to reform Social Security are stupid.
So both parties are in denial.
And unfortunately, it's going to take eventually a crisis getting closer to running out of the trust fund.
And we're going to need a bipartisan commission like we did in the 80s with Greenspan running it to try to reform Social Security.
But until we get to the problem that we're running out of money, nothing is going to be done because both sides are going to be pretending that it's not a problem.
So entitlement is a big issue.
And the kind of things you suggest definitely go in the direction of what we need to do.
But we're not going to do anything for the next 10 years.
And meanwhile, having skilled workers who come generate income, pay payroll taxes, and then they make this problem less severe is one of the solutions.
If we don't have more babies, more migrants as a result, this unfunded liability all over the world.
Well, don't you think 10 years ago?
You know, on migration, we agree.
It's not black and white.
We don't want to shut down the border.
We don't want to leave it open to everybody.
We need skilled workers.
And for the next decade, I would say the demand for workers is going to outstrip the supply.
And the bottleneck is going to be we don't have enough worker qualified for the jobs that we need.
And unless we have more skilled work in the US, unless we have more babies, it's going to take 20 years anyhow for these babies to become adults.
We need more workers from abroad.
I would do a reform of our migration policy that first is legal migration, that you get points for different types of skills.
And we need both manual workers, blue-collar workers, white-collar workers, entrepreneurial.
So the kind of points you get depend on what are our bottlenecks in which sectors.
And we're going to have more of them.
And those who want to come to the US, as I said, usually are those who are more entrepreneurial, more ambitious, more risk-taking, more willing to leave family, society, tribe, village, and start their life from scratch, like you did, like I did, right?
And those who are actually staying back home are those who are maybe less entrepreneurial, less ambitious, less risk-taking, less hardworking, right?
So actually, the U.S. gets the best of all when they get the migrants overall with few bad apples, but the bad apples tend to be the exception, and the good apples tend to be the good ones.
That's what made America great again.
And then if and when AI is going to really destroy lots of jobs, then we'll have to figure out phase out migration.
And regardless of migration, eventually AI is going to destroy so many jobs that there is no other solution but taxing the winners and redistributing to those who lost jobs because they were unlucky.
So eventually we're going to have UBI and eventually we'll have some universal basic provision of public services, if not UBI, because there is no other way.
Otherwise, inequality is going to go through the roof and you'll have massive social strife.
So in a democracy, eventually, if there is permanent technological unemployment that is not your own fault, but because of technology, we have to tax the winners and redistribute like we do in any progressive social welfare system like in the West, not just Europe, but also in the US.
We already do it now.
We'll have to do it in a more systematic way.
There's no other alternative.
Otherwise, you'll have a revolution.
Well, I think what you're saying is very interesting.
10 years is not a long horizon.
I mean, think about it.
10 years ago, Obama was in his second term.
We think of him as maybe just the president the other day, but 10 years ago, he was in his second term.
He had a chef.
And we've got now what you seem to be describing as a labor bubble that's going to happen over the next 10 years.
I like what you're saying about a point system for skills to moderate immigration to those people.
You know, give us your tired, your poor, your huddled masses, yearning to be free, and bringing those over.
You seem to be describing that there would be a labor bubble that's going to lead to acceleration of socialist policies.
Is that kind of the crystal ball you're seeing?
Well, what they see is a situation in which income and wealth inequality has risen, real wages are lagged behind, workers have done less than people who are entrepreneur, owner of capital, or very high-skilled worker.
And of course, the right solution is not taxing the rich and redistributing, but giving economic opportunity.
So reskilling, education, investing into the restoring of manufacturing, infrastructure, AI, you name it, policies that lead to more jobs and more good jobs.
And again, not to be partisan, doesn't matter whether a Trump is going to do it or a Biden is going to do it.
We need sound industrial policy that rebuilds the job and industrial base of our country.
I think whoever is going to be in power will have to go in that direction.
We have to make sure we are not excessively protectionist, excessively against migration, because migration is going to help us to deal with some of those challenges.
We need rational economic policies and we can go in the right direction.
And if eventually AI is going to destroy many jobs, the economic price is going to be so big that we can redistribute to those who are left behind or reskill them.
So we have to manage all these transitions with a rational migration policy, with a rational reform of entitlements and social security, and with a rational industrial policy as well.
Dr. Rubini, this has been fantastic.
Really enjoyed talking to you.
Rob, if we can make sure we put mega threats link below with all the links to social.
Before we wrap up, 30 seconds, Dr. Rubini, I know you talked about it briefly earlier.
What will the readers get from the book?
If you don't mind taking 30 seconds and sharing with us what's in the book, well, the book speaks not only about the economic, monetary, and financial threats, but as I said, the political inequality and backlash against liberal democracy, geopolitical, the risk of war between great nations, the technological one, how much AI is going to produce more as opposed to disrupt jobs, the risks coming from climate change, and we have to address them to save the planet.
How to address global pandemics are becoming more severe.
The backlash against globalization.
So, what are the policies we can have to avoid the dystopian future where these economic and non-economic threats feed on each other and we end up in a dystopian future?
I think we can do it, but we have to start waking up, stop living like zombies, stop kicking the can down the road.
And all the solutions, this problem exists, but they require sacrifices individually, socially, collectively in the short run for the common good nationally and globally over time.
So we have to be less divided, less partisan.
Most of Americans actually, I think, are mainstream.
The radicals on the right and the left are the minority.
We have to be together because the problems we're addressing are serious nationally and globally.
Together, we can resolve them.
We swim and survive together, or we sink together, we're all in the same boat.
So, but we have to address them individually and collectively and stop partisanship, polarization, and division.
That's what can weaken America.
America is strong economically, technologically, even militarily.
What can actually destroy America is internal division, partisanship, and polarization.
Thank you so much, sir.
Again, gang, the link's going to be below to order the book.
