Economy 2023

PHOTO BY ED RITGER

mortgage interest rates. So there are some signs, there are some pros and cons, but on balance, things are looking up.

I think a big chunk of the forecast now in terms of probability is to either skirt recession with a slowdown or to have a mild recession. I think most people have reduced the probability of something severe and long lasting, but we shouldn’t rule it out. We’ve had occasion where we looked like we were starting to get out of the woods and that didn’t hold and we wound up in a deeper recession later. So on balance, yes.

HARRISON: Dr. Obstfeld, you’ve been quoted as saying that there was a greater than 50/50 chance that there’d be a recession in 2023. You said this back in December. How do you feel now?

MAURICE OBSTFELD: I would like to make it more interesting by disagreeing more with Mike. But I really can’t. I still think that the odds of a recession emerging at some point next year are pretty good. But, you know, I think the sort of recession/ nonrecession dichotomy is a little bit misleading to focus on that. We’re clearly going to have a slowdown next year relative to the past year in the U.S., an even bigger slowdown in Europe.

China will grow more quickly for sure, compared to what they did under zero COVID, and that is going to boost Asia. But there are parts of the world, like Latin America, which are facing widespread political crises and probably lower growth. So I think all in all, it’s going to be a tough year. Alone among major advanced economies, the U.K. is forecast to have negative growth by the IMF. But we’ll see what happens. Are we seeing a false dawn, as has happened in the past, or will we have a soft landing? If we do have a soft landing, that’s going to be a very rare event by the standards of past history.

HARRISON: The Fed officials met yesterday. Were you surprised by their decision? What would you have done?

BOSKIN: I think it was the right move. Looking back, they were quite late in starting to raise their target interest rate, the short run Fed funds rate. I wrote in the spring of 2021, not quite two years ago, that the additional fiscal stimulus and continued monetary stimulus will likely lead to inflation and then slow growth as they had to react.

So I think they were probably nine months too late to get started. You know, there was so much uncertainty at the beginning of COVID, how bad would this be? How deep would it be? How long would it last? Was the early, apparent, rapid recovery from a very deep hole going to continue? All all that uncertainty, I think, led to a bit of over-insurance by the monetary and fiscal authorities. But I think by mid 2021, it was pretty clear that they were behind the curve, and they took a while to adjust. I said at the time that I thought they’d get up to around four and a half percent and reconnoiter. I think that’s more or less what they did. They got up to it fairly rapidly from a late start.

Usually you have to get the short run Fed funds interest rate above the rate of inflation for a while to actually have a good chance of bringing inflation down. We’ve seen it come down some. It’s inching down on a trailing 12-month basis the last few months. It’s been better than that. But there’s so much uncertainty about the seasonal adjustments, and there’s so many swings to the headline number from booming energy prices to collapsing energy prices. So the Fed looks at what’s called the core rate, the personal consumption expenditures deflater—I’m sorry to use techno language; but it’s not exactly the CPI that’s more commonly known— and they try to look at what’s happening as you strip out food and energy prices to underlying inflation. Goods prices have been coming down, especially in energy. But the big problem is that inflation has spread to services. And that’s going to take a little while longer to get down.

OBSTFELD: To put everything in perspective, the last few years have been almost unprecedented in terms of the scale of the economic adjustments and shocks that we’ve seen in the global economy. You really have to go back to the mobilizations and the reconstruction after World War I and World War II to see to have something comparable. And of course, we didn’t have the level of destruction, certainly of physical capital, that we saw. We had some human capital certainly destroyed. And then on top of that, you had the Ukraine war and the sanctions and all the dislocations those have caused. So it’s a very hard environment for policymakers and for making forecasts about what’s going to happen.

Now, having said that, I agree with Professor Boskin that the Fed was really late to the game. Clearly by the fall of 2021, it was obvious that inflation was running at a dangerous level. It’s hard to understand why they didn’t move more quickly. That put them into a position where they were really playing catch up and scrambling and probably engineering a much steeper pace of interest rate hikes than they would have done otherwise.

That’s one of the reasons why I still think, as we see this play out after the year to 18 months that we think they will take, we may see more effects than even we have seen so far. We have seen some effects so far. Manufacturing has been in contraction for three months now. There are a number of very negative leading indicators. I was kind of surprised by the sort of soft tone of Chair Powell’s remarks given what had gone before, with the Fed basically trying to telegraph resolve and sort of make up for its tardiness in addressing the inflation prob- lem. Basically they didn’t slam the door on the idea, which markets have embraced, that the Fed will cut this year.

I don’t think that’s really likely, personally. The effect of that you can see in the stock market, you can see it in the bond market, you can see in mortgage rates falling today. And that works exactly counter to the desire to bring inflation down. So I’m not sure that the Fed did themselves any favors with the sort of mixed messaging that came out of yesterday’s events.

BOSKIN: In [the] last couple of decades, economists have started to look at the use of alternative tools in addition just to the setting of the short term interest rate. And I think Maury rightly pointed to the tone and sometimes what’s called forward guidance; they will be a little more direct about what they’re likely to do in an effort to affect longer term interest rates, not just shorter term interest rates.

People have now gotten to the point where they’re textually analyzing the comments of the Federal Reserve chairs and matching it with optimistic words and pessimistic words. I think that’s fine. I agree with Maury that the message was a little softer than might have been, but in any event, I think in some sense this is of a second-order consideration at this point. I think unless something unusual happens, there are only going to be one or two more modest interest rate hikes, and unless inflation proves a lot more stubborn than the base case looks like right now.

HARRISON: Well, let me follow up on that question. What’s your best guess for when inflation will come down to the Federal Reserve’s goal of 2 percent annually?

BOSKIN: With a wide distribution, 2024— late 2024, maybe.

HARRISON: How about you, Maury?

OBSTFELD: Yeah, I would say if things go well, in a positive scenario, that’s what we would expect. And that’s also sort of [what] Jay Powell called a soft-ish landing scenario. It wouldn’t be until then.

HARRISON: So let me follow up on that soft landing idea. Do you think it’s possible that inflation can come down without leading to a recession and job losses?

BOSKIN: A couple of things about that. First of all, yes, of course, it’s possible. As

Maury said earlier, such instances are rare. But the mid-’90s was one example. So we shouldn’t rule it out. History suggests it’s a hard thing to manage, particularly with something as blunt as interest rates, with a lot else going on, a lot of the puts and calls, shocks to the economy and so on.

However, I think it’s worth remembering that, as Maury put it earlier, this sort of false dawn, etc., that there’s some possibility this will drag on. Unless there’s a very big shock to the economy from external forces, for example, or we wind up having a much deeper problem in the financial sector than anyone anticipates right now from the data, I think it is possible. I think the odds of a soft landing are decent, if you have a broad interpretation of what soft means. Such as the slower growth and inflation comes down very gradually and we’re all happy.

I would say there’s one other thing, and it’s the biggest question mark in my mind about what’s going to happen. First of all, the way a recession is announced historically by the National Bureau of Economic Research Business Cycle Dating Committee—Maury and I are both research associates of NBER, but not on that committee— they’re supposed to look at four things. Increasingly, they’ve weighted employment—payroll employment—the most. The potentially most important uncertainty to me is how the broader economy—not just in the tech sector, [which has had] a lot of layoffs—but the broader economy reacts at a time when it’s been very hard to hire workers for a long time.

So they hoard workers, not lay off as many as they normally would, etc. That’s hard to know. We just got the most recent data showing there’s now 1.9 job openings for every unemployed person. This is kind of a historically unprecedented time to be talking about this. And for the last two or three years, even going back just right before COVID, especially, smaller businesses were having a very hard time attracting workers.

That’s something I’m trying to pay close attention to. And it’s interwoven with lots of things, policies that are fairly generous during COVID and have continued, some of which should be gradually phased out. That made it easier for people to stay home and not work. There’s still a spread between employees’ desire to work more remotely than employers would like them to. That’s been narrowing.

So those are a variety of things that I look at. I would say right now that my guess is layoffs relative to the state of the [economy], measured by GDP and so on, [will] probably be somewhat less than we would have expected from historical experience because of this phenomenon.

HARRISON: Let me move to a favorite topic—the stock market. I’m sure we’re all delighted that January has been much better than last year. But when will the stock market fully recover?

BOSKIN: First of all, we should figure out where it was, which was selling at 23 times earnings. Kind of quite unprecedented, basically heavily supported by virtually zero interest rates for a long time. And a huge part of the run-up in the stock market, say the S&P 500, was the vastly disproportionate run-up in large tech company shares, anticipating low interest rates and continued rapid growth.

That was kind of a false presumption from the very torrid rate in 2020 and 2021 during COVID, when they were hiring like mad. Amazon, I think, announced 12,000 layoffs, but they hired 30,000 people in this period. But if you take a look at that, that wasn’t going to continue. Air was go- ing to come out of that anyway. Generally with higher interest rates, but especially for stocks of companies that were rapidly growing, that was going to take the biggest hit in that.

Now it’s down to the high teens. It’s still a bit above normal, but real interest rates may be a bit lower than historical for a long time. So I think it’s more fairly valued now than it was at this peak. So if you mean fully recovered, I don’t know how much further it has to go to be fully recovered. I wouldn’t take the benchmark of where it was before the initial hit with COVID and then the big run-up that also occurred, by the way, in the aftermath of the financial crisis, the Great Recession—the stock market recovered much more rapidly than employment and output. So I don’t know if that’s going to be the new trend, but low interest rates certainly help stocks, particularly those of companies [that] are growing rapidly.

HARRISON: Dr. Boskin, let me ask you another question about the market. Based on the current economic forecast and your personal views, what is the most attractive investment to make in 2023? [Laughter.]

BOSKIN: Well, when my undergraduates ask me about that, I say the first thing is, you can make 20 percent by not running up credit card debt. So that’s the easy one. And it’s hard to make 20 percent in anything else. However, looking at it, I think bonds have become a little more attractive, particularly for people who are a little risk averse. And maybe that’s generally an older population.

But I still think if you have a long horizon that I’d be primarily in broad-based, low-cost-to-execute stocks, maybe S&P 500 fund or a broader fund or something like that, which should be a big base part of your portfolio and you should try to ride out market ups and downs. Trying to bet on the timing of the market is, especially for people who aren’t getting paid a lot of money to make those I would call them guesses, I think is probably not a wise idea.

HARRISON: Dr. Obstfeld, are you in agreement?

OBSTFELD: I don’t disagree with any of that. I think the market is basically recovered at this point. If interest rates return to very low levels, we could enter into anoth- er period of speculation, such as we saw a while ago before the Fed started its hiking cycle. But right now what you can earn in treasuries looks pretty good if you want to park money. And if you’re at the age of my children and you’re facing a long investment horizon, then probably stocks will be a good bet.

HARRISON: So let me turn to the labor market, which you talked briefly about. Even though where we live we see a lot of headlines about layoffs, in fact, it’s true that, as you pointed out, the U.S. labor market is extremely strong and has been for a while. Is there any sign of the labor market easing? And do you have an outlook for the rest of 2023?

BOSKIN: Yeah. Just to be honest, I think it’s a huge open question that we don’t have a lot of data on. I think it’s a pretty unprecedented situation to be facing a slowdown or recession, and have so many job openings and firms facing this conundrum: Do I keep people I would normally have laid off in an analogous situation because it’s been so hard to hire and retain people?

So I think that the labor market remains stronger than might have been projected based on previous experience for the slowdown. But I do think that we will see this spread some. I think Maury’s right that a really soft landing that you don’t even notice you’ve landed, in an airplane analogy, I think is probably unlikely. But I think that I’m not looking for unemployment to get up to levels it was at not only in deep recessions—10 percent in the aftermath of the beginning of the Great Recession from the financial crisis or to the even higher levels in the COVID layoffs. But I don’t even think it’s going to get up to the 7.7 percent or so it’s gotten in previous, allegedly mild recessions, which were shorter duration and by themselves. But I’d be surprised if the layoffs didn’t spread some.

I think it’s important to remember, especially if you’re here in the Bay Area, that the employment at the tech companies that are in the headlines are a very tiny fraction of the total labor force. And of course, technology is a larger fraction of the labor force more broadly, because most firms have I.T. departments, for example. So not all tech workers work for Amazon and Apple and

Google and Oracle. So I think it’s important to look at what’s happening elsewhere. But we’re going to see layoffs elsewhere. I think they’ll just be not as dramatic.

There’s also a new element in this, which is California has the Warn Act. So you have to announce layoffs. Now, if you’re shutting down a line of business, but you’re still hiring somewhere else, you don’t report the net number, you report the gross number. So we’ll have to pay some attention to that as well. I don’t think it’s going to be pleasant, but it’s not going to be nearly as bad as we’ve had recently, unless there’s a bunch of bigger shocks than is currently expected.

HARRISON: Speaking of shocks, the ratio of the U.S. national debt is the largest as a ratio to GDP that it’s been since the end of World War II. Is this something that we should be worried about?

BOSKIN: Well, I tend to be somewhat hawkish on deficits and debt. I believe that when you’re running deficits—and debt is the accumulation of all previous deficits, net of any surpluses, which we haven’t run very often—and so it’s now a little under 100 percent of GDP, if you exclude the Fed’s holdings and the Social Security Administration and so on, which is more or less where we were in the immediate aftermath of World War II. What got us out of that conundrum was we had very rapid growth after World War II, so we mostly grew our way out of it.

The public sector was much smaller then. It’s grown immensely relative to GDP, and it’s changed from mostly doing goods and services—the military, roads, stuff like that—to now being a transfer of income and a social insurer with Social Security and Medicare and Medicaid and so on. So we have a more robust, if imperfect, safety net.

So we look at all that. It seems to me we have to really think about what we’re borrowing the money for, that’s left out of the conversation. There are some things that

Top to bottom: Michael Boskin; Maurice Obstfeld; Bank of America make sense to borrow for. President Roosevelt financed three quarters of World War II with debt. That was the right thing to do, because we would have to have had an immense tax increase, which would have been much worse for the economy. So if you have a big public investment build up, that’s temporary for a few years—the interstate highway system, the Reagan military buildup, which most foreign policy experts say helped end the Cold War without firing a shot—it might make sense to borrow for that, because in addition to the swings in taxes you’d have to have, which are disruptive, they’re also doing things that are providing security for future generations. So they’re not as intergenerationally inequitable as if we were taking that money and spending it on current consumption. So we should evaluate, in my view, and target the spending better and be careful that we’re not just borrowing.

Senior Vice President David Leimsieder (standing, right) introduces the panel.

Alexander Hamilton, our first treasury secretary, argued for the federal government to assume the Revolutionary War debts of the states—which put the states in a very difficult position—that it was the price of liberty. Now we borrow money to fund growing entitlement payments. That will eventually stop. Social Security and Medicare trust funds are going to not be able to make full payments on projected benefits later this decade. So we’re going to have to figure out how we’re going to deal with this problem, and I think it is going to be politically disruptive. We should try to make it not so economically disruptive that we can make some sensible decisions and have things phasing gradually and have grace periods, etc.

HARRISON: Dr. Obstfeld, would you like to comment on that?

OBSTFELD: You know, again, I agree. I don’t think the level of federal debt itself is the big problem right now. I mean, it’s not great, obviously, but it’s really the entitlements and the demographics that are really making Social Security and Medicare unsustainable. Basically we have to tax our children, many of whom are having a tougher time in the labor market. There’s been slower population growth. And we have to fund these things, and young generations which are actually still pissed off about what happened during COVID, rightly feel that there’s some element of unfairness here.

At the same time, you look in Washington and both major parties now agree that entitlements should not be touched; not everyone in those parties, but a large swath of the Republican Party. So there’s a fight about the debt limit, which is focused on discretionary spending, which is a third of the budget. And that’s just not going to really be impactful. So one solution or one piece of a solution would be in terms of coming to a consensus on immigration in a way that would allow more immigration, particularly high-skilled immigration. That doesn’t look like it’s going to happen. So we really are in a pickle, and I’m not sure how the dysfunction ends.

BOSKIN: I would just add something at the risk of intruding on Maury’s international expertise. Our demographics are challenging, as you just said. The ratio of people over 65 or pick any other age—I used to think of that as old age, I don’t anymore. [Laughter.] In any event, in the U.S., the ratio of retirees to workers is quite a bit smaller than in many other parts of the world. In Japan the labor force is shrinking. We have places where the population is shrinking—Russia, the population is apparently shrinking. If you believe the data of parts of Western Europe, many parts of Italy, perhaps in the worse shape in that regard. So the demography is really, really difficult. About half of the growth of Social Security benefits that are projected are due to demography, and about half are due to rising real benefits over time per beneficiary.

There are many solutions that have been out there. Some have been tried and worked okay in the past, but there will have to be eventually some coming to terms with this. We economists have been arguing about this for decades. The last time we made any major revisions to the entitlement programs was in 1983. So we’re now four decades later. And what seemed to be obvious from the projections is now very much in front of us in the next few years.

HARRISON: We’ve been running deficits pretty much ever since.

So I’m going to shift to the international and global economy. Dr. Obstfeld, a question about the global economic fallout from the war in Ukraine, [which] has led to higher food prices, energy prices, disruptions in global trade. How do you see the impacts of that playing out in 2023?

OBSTFELD: Even before the Ukraine war broke out, global energy prices were high and global food prices were historically high. These two go together in a way, because high oil prices draws corn into ethanol, natural gas is a big component of fertilizer. So they really go together. And we were in bad shape before the war in Ukraine. The war in Ukraine drove everything into overdrive.

If you look at where we are now, prices have kind of dropped back to where they were before, both because markets have adjusted and because countries have worked very hard to find alternative sources of supply. So one of the reasons for the development that Mike mentioned before, the surprising resilience of Europe to the energy situation, is that they’ve done a great job in amping up their supplies of natural gas from sources other than Russia. They’re also benefiting from the unseasonably warm winter.

So in some sense we’re back where we were price-wise. We’re not back where we were geopolitically, in the sense that the sanctions are still there and this whole process of sanctioning and an increase in geopolitical tensions has really accelerated the sort of deglobalization trend, which we had already started to see even before COVID, which COVID itself helped accelerate somewhat.

And the way that proceeds is, I think, one of the big fallouts of the war, but also of prior developments, and is certainly something that’s going to be negative for growth, negative for consumers, possibly negative for world peace going forward.

HARRISON: On that topic, do you see the globalization—the world was globalizing more and more since the end of World War II and now we’ve seen a reversal—do you see do you see any changes in that reversal? Do you see any hope for global cooperation?

OBSTFELD: I think global cooperation is more necessary than ever, and it’s a shame that it has broken down to the extent that it has. Basically, I sort of view the world now as retreating much more to the kind of alignment we had in the Cold War. We’ve got the West, which includes, broadly defined, [South] Korea, Japan, Singapore, countries like that; the former communist bloc, you know, Russia and China are sort of uncomfortably glommed together there, because I think the Chinese have serious misgivings about what Vladimir Putin is doing. And then there’s this big nonaligned world, and nobody quite has the confidence they used to have that trade or financial relations will continue in the way that they have.

When the West freezes a country’s international reserves, that’s a big deal. The U.S. froze Japan’s international reserves in 1940 and embargoed shipments of U.S. oil to Japan. The U.S. was the biggest supplier. And that pretty directly led to the attack on Pearl Harbor.

So we are kind of on dangerous ground here, and I think we need to try to move back from this precipice that we’re approaching. I think there are a couple of global projects that really need attention and where the U.S. has an opportunity to be more of a leader than it has. One is in the climate area, where there would be broad buy-in from the nonaligned world, and also in the area of international public health, where there was a heightened awareness of the deficiencies in that area as a result of COVID. Now that COVID is over for us, we are not focused on that as much. But if you look at public health needs and the threat of the emergence of other pandemics, which is very real, the world as a whole could benefit from really upping the game in terms of global public health infrastructure.

The U.S. has better position than any country to be a leader here. It would not be that expensive, certainly compared to raising military budgets. And I would personally like to see this be a major locus where the U.S. launches initiatives with the nonaligned world.

BOSKIN: Let me bring in a couple of [thoughts], as I think Maury does raise some important questions. And on many of them we’re in close agreement. I would just raise one implication and one observation. The implication—I would put it slight- ly differently, but I think we’re in the same place—that Putin’s invasion of Ukraine made it much more obvious how dangerous the world is and has become. The day before, I don’t think we were in great shape. I think that there were growing tensions and there was always the risk of things spilling out and over.

That in combination with the fact that our military has been slowly losing its competitive advantage relative to the military of other countries, because we haven’t recapitalized, we have many weapons systems that are long in the tooth. We have lots of other issues. The force has been shrinking. The Navy is too small and not equipped really to deal with anything, the Chinese military invasion of Taiwan, for example, should we choose to defend them, which is a whole other set of questions. So I think that has raised the understanding more broadly in our leadership, especially in Congress, that the military is going to need to be rebuilt in several ways, and that’s not going to be cheap.

Hopefully we can get a big chunk of that from better efficiencies in the Pentagon, which are certainly there. There seems to be something like maybe an eighth of the budget that has actually nothing to do with defense, that’s been put into the defense budget. That really belongs elsewhere. That’s number one.

Maury properly mentioned that all the attention is on one third of the budget called discretionary spending, the part that’s annually appropriated; the other stuff’s sort of on autopilot. Social Security, Medicare, interest payments, etc. So 40plus percent of that is defense spending. And that if anything has to go up. In the last two Congresses, controlled by Democrats, both parties substantially raised President Biden’s budget request for the military, understanding that this was necessary. So it’s likely to continue. That’s focusing on a smaller part. So it’s not going to be easy to achieve large savings from a modest part of the budget. But any event, global tensions are playing into our budget policy.

HARRISON: That’s a really excellent point. How all the domestic challenges we’re facing are being reinforced by global uncertainty and geopolitical tensions. So let me just talk about China, which has been mentioned a couple of times. China’s economy last year had one of the worst performances in decades for China. But since that very rapid reopening after the lockdowns, we’re seeing a resurgence, hopefully, of growth.

What’s your prediction, Dr. Obstfeld, for how China will do in 2023 and how will that affect the rest of the world economy?

OBSTFELD: Well, after a very bad 2022, it’s likely that they’ll bounce back and grow at 5 percent or better in 2023. In terms of the world economy, Chinese growth is a large fraction of global growth. So that number is forecasted to be higher by the IMF as a result of opening, significantly.

It’ll have a big effect, particularly in the Asian region on countries like Indonesia. It will also tend to push up global energy and commodity prices, which will complicate the tasks of central banks, including the Fed. I would just add a note of caution about the general celebratory atmosphere about China and China being back, because part of the problems that they’ve had have not only been from the lockdown—that was a severe problem—but from a crisis in their real estate sector, where there’s been substantial overborrowing and overbuilding, from a negative rate of population growth, which they now have. This is the aftermath of their one-child policies. It’s come home to roost. And from an increasingly author- itative management model that I think stifles innovation and growth in the private sector, in the interest of political cohesion. We also don’t know how bad will be the human toll of COVID as the virus passes through a relatively less resistant population than what we’ve developed in Western countries.

BOSKIN: China also has very large excess capacity in some basic industries, in cement, steel, etc., that they’re going to have to deal with over time. I would also say one additional thing, as Maury was talking about geopolitical tensions and returning to more of Cold War blocs of countries, the West, nonaligned and former communist countries, is that this episode I think really should have everyone reconsidering all the problems we bemoan about democracies and the temptation to look at authoritarian countries. They can make decisions faster and so on, they can force things to happen. Well, they can also make bad decisions. And obviously that’s been happening increasingly. So for all we bemoan about our not being able to get together or solve our problems—the political polarization, etc.—I’m still betting on democracies, or other forces—demographic, catching up to the technological frontier, etc.—that we’re not going to take a lot of advantage over in the future. But just as you’re thinking of geopolitical economy models for countries to emulate, I’d be a little cautious about the benefits of being so authoritarian. Look at Putin’s latest move and [China’s paramount leader] Xi [Jinping’s] latest move. That should tell you, you can screw things up pretty badly, too.

HARRISON: Thank you. Dr. Boskin, This question is for Dr. Obstfeld. The European Union is arguing that Biden’s Inflation Reduction Act, which included record spending on climate and energy policies, discriminates against European Union companies. Could this turn into a trade war?

OBSTFELD: This is a very interesting situation, and I think it probably will not turn into a trade war, but it’s turning into a competition of a different kind. Europe also has extensive green subsidies. But they have a system which is partly due to their decentralization, in which those are very hard for businesses to access—just amazing bu- reaucracy, amazing delays. Businesses don’t know where to go access [the subsidies]. These European leaders are going to have a meeting next week to [consider] what to do about the Inflation Reduction Act. One likely outcome is that they will greatly simplify this system and extend their green subsidy program. There have been calls to set up a European fund so that the less prosperous countries, which traditionally have not been able to subsidize to the extent of Germany and France, can do so.

It’s a sensitive issue, because of the state aid rules within the EU, which try to preserve a level playing field by basically prohibiting state aid, were relaxed for COVID, they were relaxed for the Ukraine war, and they will probably be relaxed in some sense, or at least be brought under a new institutional structure because of the Inflation Reduction Act.

So an unintended consequence is not so much a trade war, I think, but a war in green investment and subsidies. And that may not be the most horrible outcome for the world since reducing emissions has to be a global project.

BOSKIN: Yeah, that’s an important point. Most of the growth of emissions is coming now from China and India and some other developing countries. They argue in the international negotiations that we should be helping them, and many countries are looking for trillions of dollars of transfer payments from the rich countries, saying “You put all this stuff in the atmosphere, it’s already there. Why are you trying to force us not to do it?” So they want massive aid for their own potential green transitions. That’s a really complicated geopolitical problem. To give you one example: Yes, the Inflation Reduction Act had record green subsidies and green spending. You can argue about each one, whether it was perfectly targeted or whatever. But the estimate is that if kept in place by itself, it would reduce global temperature in 2100 by nine thousandths of one degree. So we’ve got a ways to go and it’s got to include everybody, particularly the places that have immense rapid emissions growth, not just the U.S. and Europe.