Director Hassett, thank you for joining us.
I'm glad to be here and please call me Kevin. I don't like the Director Hassett.
Okay, Kevin, it is. Polls are consistently showing that Americans still feel worse off than they did four years ago. We just got a record low reading from the Michigan Consumer Sentiment Survey, which has been asking people how they feel since the 40s. At what point does this administration have to own that record rather than having inherited it?
Well, we're happy to own the record. If you look at real income growth, it's very high, 1.6% over the last year. That's after inflation. If you look at specific like goods producing workers, it's about double that. If you look at taxes, the tax season, there are about 60 million people that are benefiting from no tax on tips, no tax on overtime, or no tax on social security. For the no tax on tips people, I actually went to a restaurant down the way and just because I'm a nerdy economist, I asked the waiter some intrusive questions. I said, 'How much did you save on your tips this year?' And the low estimate was 3,000 and the high was 10,000. And it kind of shows how averaging works because the average in the data right now is about 7,000. And so we've got lots of success putting more money in people's pockets even after inflation. And so we're very happy to own that record.
But for a long time, a way to predict future elections was simply to ask people how they felt and if they felt better than they did four years ago. And you're heading into midterms where the polling is tough and you know there's been a lot of talk of affordability. We can get into some things that have perhaps made that more complicated on the inflationary side. But you know, what is the message between now and November?
Well, first of all, I'm an acolyte of Ray Fair, the famous economist at Yale University who began a political science literature back when I was a kid practically, where he looked at what predicts elections and he found that the best predictor was the state of the economy the summer before the election. In fact, I think his informal rule was if GDP growth is above two and a half percent, then the incumbents win. And so right now, I guess the question is are we confident that the economy is going to be strong this year? And we really are because we have so many positive effects that we're seeing in the data.
But you've been predicting as recently as last week, I think, four to 5% GDP growth.
Yes, GDP growth, I think four to 5%. And I could tell you where you get that, so it's not just a made-up number. Right now, the best estimate we have for productivity growth, which is the growth you kind of get for free in the economy, is about two and a half percent. So, if we didn't increase capital spending and we didn't increase labor supply, and we just held them flat for the year, then we'd have about two and a half percent growth. Right now, if you look at the orders and shipments of non-defense capital goods, they're the highest they've ever been. And one of the things Alan Greenspan taught me to look for was, are higher than shipments? Because that means they're even going up from here and they are. And so there's a massive amount of capital spending, easily gives you like about a percent of extra growth for the capital spending, and then for labor supply, we've got increases in hours worked that gets us sort of up to four.
But okay, but Wall Street consensus, not saying they're always right, often aren't, is about two, two and a half percent. Treasury Secretary Bessent last night told my colleague Ben Smith that the economy would, quote, 'have some making up to do' after the first quarter when I think even the Atlanta Fed has growth, you know, just over 1%. Do you think they're all wrong? What are they missing?
Well, I can remember in 2017 when we ran the same kind of arithmetic out and said that growth would be about 3% that I went on CNN, Zakaria's show, and it was the first time I was on a show and he introduced me as follows. He said, after me saying that we'd have 3% growth, he asked Larry Summers to comment and Larry, in his own special way, said that Kevin Hassett is either stupid or a liar or both. And what happened was we got the 3% growth and the same models. In fact, you could go back and look. The Wall Street Journal a couple years later wrote a long unsigned editorial about how pretty much every number that we put out at the Council of Economic Advisers when I was chairman came to be true within a tenth or two. And so the same models are saying that we can definitely produce 4% growth this year. And it's not based on optimism, it's based on science.
Okay. The president came into office promising to bring prices down. But he's done a lot of things, tariffs and now the war in Iran that are pretty clearly inflationary. Tell me if you disagree. But in some ways, wouldn't the administration have gotten a lot more of what they promised had they simply not done these things discretionarily?
Well, let's look at the record. We just had a consumer price index that the core number was 0.2, which is about what the Fed's target is. And in fact, it rounded up to 0.2. And when you look at why core and other prices, non-energy, we can talk about energy in a minute, that it's doing so well is you can identify the policies that created the good news on inflation. So for example, all of our attempts, Trump Rx, to reduce drug prices shows up in the CPI as lower drug prices. Go figure. Our effort to arrest the avian flu did such a good job. Remember when we came in, every time I went on TV, we were talking about egg prices. Well, now nobody talks about egg prices because they're basically about as low as they've ever been. We had an executive order opening up imports from Argentina, increasing their quota for beef, and the CPI, beef prices went down. And so, we're taking action to lower prices. And the metric really that I think is best is that core inflation over the last six months now is 2.6%, which is lower than it's been since the inflation under President Biden began. But I think a lot of people understood when he said, 'Well, let's do inflation x eggs, right? We can take eggs out of this.'
But no, but I just said it's point two. Core is ex food and energy. Energy is a huge input into people's prices and people's pocketbook. And you know, the president had said first he thought gas prices would be down by the summer and then he said probably not by the midterms and it just feels like this is an affordability snowball that is starting to build and without a clear timeline on what might happen in Iran. I just want to get a clearer sense of what is actually the message to the American people right now about what they are going to pay for things. These are supply shocks that can't be sort of papered over or monetary policy-ed over or even stimulused over. There just isn't enough of the stuff.
Look, I'm not a political consultant. I'm an economist. I can tell you that right now core inflation is the lowest it's been since before President Biden's team created runaway inflation. When they created the runaway inflation, the minute that they did it, even before the inflation was visible, I was talking about it. You could go back and look, John Cochrane and I wrote an article in National Review saying that inflation is going to go up about two weeks later. I did a TV interview where I said it'll be probably around 7% this year and it was about 7%. It went up into double digits and that whole time I don't remember turning on the TV and seeing most places talk about affordability. We're making an enormous amount of progress. We've cut inflation down almost to the Fed's target and we're going to continue to think of policies like the, you know, opening up beef imports or attacking prescription drug prices. We're going to continue to pursue policies like that which will reduce inflation even more.
Ken Griffin was on the stage earlier and he said almost certainly if the Strait remains closed for I think he said six to 12 months, we're going to be in a recession. Is that not? Have you modeled that out?
Well, in fact, if you look at the literature on oil prices of the economy, there's a famous paper by two old friends of mine, Olivier Blanchard and Jordi Galí. People who want to look it up could go to the National Bureau of Economic Research and see it. And they look into what they say is the puzzle: why is it that energy prices don't have as big an economic effect as they did in the 70s for the US? The obvious answer is because we're the largest oil producer on earth. But the other thing that's happened over time is that the energy intensity of GDP has gone way, way down. And so, you know, we certainly don't expect this to take anywhere as long as the speculation of Ken, who's a very good man and a friend. But the fact is that it's not the 1970s anymore and there's a whole academic literature that suggests that the whole global economy is more resilient than it used to be because of the reduced energy intensity of GDP.
Looking ahead, I think most people expect AI to be deflationary in the long term by making things cheaper and the cost...
And that's where the productivity is partly coming from.
