Former Fed Economist Breaks Down the National Debt and the Current State of the U.S. Economy

Claudia Sahm (00:00)

This is a privilege of the federal government. And we have people around the world and in this country who want to buy treasuries, hold them, because we are the greatest economy on this planet and we are a very safe asset. That's the thing we need to protect. Right. Because we can keep issuing debt as long as people want to buy it. Right now looks great. But again, this goes back to, like, let's look at the tax and spend policy. Let's make sure we continue to be the best planet, the best economy on this planet.

Announcer (00:31)

Welcome to Paychex THRIVE, a Business Podcast where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks.

Gene Marks (00:47)

Hey, everybody, it's Gene Marks again. Welcome back to another episode of the Paychex THRIVE Podcast. Thank you so much for joining us. We're going to talk about the economy today with Claudia Sahm. Claudia is a former Federal Reserve economist. She is a columnist for Bloomberg, and she's the founder Sahm Consulting that provides independent economic research and analysis. Claudia, first of all, thank you so much for joining.

Claudia Sahm (01:11)

Thank you for having me.

Gene Marks (01:12)

Yeah, tell us a little bit about yourself. As we were just about to start recording, you were like, yeah, former Federal Reserve economist. Like, that's no big deal. Give me a little bit of your background, your history. How did you make it here?

Claudia Sahm (01:23)

I started the Federal Reserve in 2007 as one of the staff economists covering consumer spending. You all can imagine how my first year at the Federal Reserve was with the financial crisis. I stayed there for a little over a decade. During that time, I had a chance to be an economist at the White House for a year. And when I left in 2019, it was to work with Congress on ways to fight the next recession. As it turned out, the next recession came rather quickly. And I have had an opportunity to work on everything from the CARES Act to the Rescue Plan and then some after. And in that time, I became an independent economist so I could do lots of different kinds of work and not have a partisan bend to that work.

Gene Marks (02:04)

I am glad to hear that. And I think it's a great field to be. And so as an independent economist, do you get hired by companies or think tanks or research organizations that just want some kind of special work done on their behalf?

Claudia Sahm (02:20)

Another great aspect of founding my own consultancy is I have a very wide portfolio of work. I do everything from fiscal policy for the United States, also for foreign countries. So, writing papers, doing analysis, giving talks on how to do their fiscal policy better. I do private sector. I talk to Wall Street. I talk to business owners just like I am today. And I also do writing. I do a lot of opinion writing. I write at Bloomberg. I have a Substack. I do other publications like Financial Times on the side. So, I've just had an opportunity, many opportunities to pursue the kind of work that I love. Now, being a consultant is not easy, and yet it's afforded me opportunities that I couldn't go take any one job and be able to do all the things I'm doing right now.

Gene Marks (03:11)

Understood. That's great to hear. All right, let's get into this. So, as I told you before we started recording, our audience are mostly business owners and managers, mostly for employer-owned businesses all across different industries. And it's very tough to generalize about the U.S. economy. But I'm going to tell you, we're talking right now, it's like almost the middle of February. Just last week, the Wall Street Journal had an editorial that said that, and I quote, "The Congressional Budget Office shows the US is paddling toward the fiscal falls with obviously our national debt being at an all-time high." So I'm going to start with that. Claudia, again, you're talking to business owners. Why should we care?

Claudia Sahm (03:55)

First of all, I could go back decades ago and find a Wall Street Journal article that looked a lot like that.

Gene Marks (04:01)

I agree.

Claudia Sahm (04:02)

We've been sounding this alarm for a very long time. Yes, $34 trillion is a big number. Household wealth in the United States is multiple of that. So, we can play the big number game. And yet that really doesn't tell us much about what are we facing. So, I wrote a Bloomberg column last month.

Gene Marks (04:22)

Let me interrupt you. It said the U.S. debt is now 34 trillion. Don't worry. Seriously? That's what you said. And tell us why not.

Claudia Sahm (04:32)

I didn't get to pick that column or I didn't get to pick that headline. What I argue in the piece is instead of talking about the top line, talking about how big the deficit is, let's step back and have a real serious conversation about our tax and spend policies. We can spend $34 trillion in a great way and we can throw it to the wind. Right? So that's the conversation. There's only so much time for discussion in Washington, D.C. or in any of our lives. So, I want us to switch the discussion to what I think would be much more productive, which is talking about what are we doing with a deficit, as opposed to setting some artificial cap, saying this is too big. So, I understand the concerns. I'm just trying to shift the conversation on the idea. I do agree with the headline to some extent. Right now we do not have a problem. One place that we should look and be very careful of. We have to service our debt, right? The United States has to make those debt payments. Right now, the interest payments on us debt are at a very low fraction. That percent now is lower than in the 1990s. So we're able to pay that interest. And the federal government, unlike any household, unlike any business, unlike any state and local government, we don't have to pay it back. This is a privilege of the federal government. And we have people around the world and in this country who want to buy treasuries, hold them, because we are the greatest economy on this planet and we are a very safe asset. That's the thing we need to protect. Right? Because we can keep issuing debt as long as people want to buy it. Right now looks great. But again, this goes back to like, let's look at the tax and spend policy. Let's make sure we continue to be the best economy on this planet.

Gene Marks (06:24)

What do you mean when you say we don't have to pay it back? Is it because we have the ability to just refinance and refinance?

Claudia Sahm (06:31)

Technical term, you have to pay off. Like if someone holds a treasury, you do have to tenure treasury, you have to redeem it and pay them off. And yet you could, even if you wanted to, the federal government could just issue more debt and pay off that other treasury. The federal government has no constraint unless we set a constraint. Congress could set a constraint. There is no constraint on their ability to issue treasuries, print money. That is a very special privilege. It's one that the U.S., the fact that we have people who always want to buy our treasuries, our debt, that is a very special position to be in. And we can use that authority and have used that authority often for very good measure. But again, we should never make any comparison of the federal government to a household, to a business. They're just not the same.

Gene Marks (07:26)

And it's funny that you say that and it's really relevant because that's the biggest mistake that my audience make as business owners. I make the mistake as well. I mean, we view of expenses outrunning revenues, and therefore that's a deficit. And that's just not a sustainable thing if you're a business. But I guess your point of view is that if you're a government, particularly the United States government, which has the most sought after securities in the world, that can be sustained for the foreseeable future. Is that sort of the point that you're making?

Claudia Sahm (08:00)

Absolutely. As long as our people that buy the treasuries, as long as they still have full faith in the U.S. government to pay off those treasuries, to pay off the interest, and as long as our economy, our treasuries, continue to be seen as a safe asset in times of trouble, even if the trouble starts in the United States, U.S. Treasuries are a place where investors go, right? So that's a longstanding privilege that we've had as a country. It's not God given. Like, we can lose that privilege. We are nowhere near losing that privilege right now. And yet that's why I think we should think about the policies we're doing. The other misconception that I come across is, and I even saw JPAL fed chair do this on 60 Minutes, and I took a deep breath, is the idea that by borrowing now, we are hurting our grandchildren, our children, like the future generations, that we ought to now live within our means as a citizenry and have the debt. Okay, so technically we know that our children and grandchildren will be paying taxes. And again, we do have to service that debt. We have to pay the interest. And yet there are a lot of other problems that we could pass to our children if we don't have policies to think about climate change, if we don't have policies to fight child poverty, invest in schools, these are spending policies the U.S. government can do. So, you have to think, would my grandchild rather have a little bit higher tax bill? Or would they still like to have a planet to live on or have had a childhood that allowed them to flourish, right? So you have to put it in context and think about, well, what are the trade-offs here?

Gene Marks (10:00)

If you take an extreme example of your point of view, people can argue that, hey, listen, why do we even need taxes if we don't have any revenues coming in? We'll just have expenditures and we'll just continue to borrow to fund those expenditures and we can live in a tax-free country. Obviously that's unrealistic, but why do we need taxes then? If you feel that we can continue to borrow as long as the interest can be sustained.

Claudia Sahm (10:32)

It's not a good look for the country in the sense that we do need to, again, have investors see us as a credible government, one that is being responsible with our resources. So, the idea that you're just going to let the money printer rip for generations, this will undermine the confidence that people have in our country. But there's always a big discussion. I find it fascinating. So, as an economist, I can bring a lot of data and research to a question about the federal deficit. How should we think about this? And yet, as I watch the debates, I'm like, this really isn't about economics, which is fine. It's really a discussion about how large do we want the federal government to be, how much do we want them to be doing in our lives, or how little. And people can have different views on that. That is perfectly fine. That is not something I, as an economist can or should be weighing in on. And yet the political economy, particularly around the deficit, I mean, this has been with us for a long time. And honestly, at the end of the day, it's the size of government. And your question about the taxes that does the less and less taxes we have, because we do have to have some sense of a balance for investors that then is going to pull in the spending or vice versa. So you can definitely see this fall on political lines.

Gene Marks (12:03)

I definitely can. Okay. You wrote another great column in Bloomberg about economists flying blind all along, if I can stoke your memory in that. And it was very relevant for me because we get, as consumers, business owners, we get data that's fed to us from the government, GDP, unemployment rate, retail sales, all that kind of stuff. We all know, but we don't realize that this data gets revised quite a lot. I forget which economist I just saw on Twitter did a whole look back at 2023's job numbers and showed from the initial revision and then the two revisions afterwards, how many times those job numbers were revised down. And sometimes they're revised up, but they go through a lot of revisions. You talk about the economists flying blind all along. What are your thoughts on relying on the government's numbers? Are they good numbers for a business owner to track? Does GDP really matter or is it really relevant coming from the government, or should we be looking at other metrics to really track how the economy is going?

Claudia Sahm (13:15)

The official statistics that we have, whether it's GDP or the payrolls or inflation, the CPI, those are the absolute best numbers that we have in this country. They're very comprehensive. There's statistical methods that really take, put a lot of effort into putting all the pieces together. That said, and the point of the column, and I think the point of anyone who uses it, is we try to measure what's going on. We have a $24 trillion plus economy, the best statisticians in the world, the best survey. How are you going to measure something like that to perfection? So the estimates that we have, these are good estimates. They're the best we have. The official statistics. It's gotten more challenging to get people to answer surveys. It's gotten more challenging to really get those estimates. And that was something I talked a lot about in the column. Now, backing up to someone, to a business owner that might want to use the statistics. Just never get hung up on the latest number and you'll hear the talking heads. Oh, the CPI was 0.2%. Oh, no, it was 0.25%. People like me, our job is to really drill down, know the details, look at the latest forecast revisions, and, yeah, it's like these things will revise over time. And the official statistics give you a national picture. Any business owner is going to have a lot of data that they need to look at that's very specific to their work, their own conditions. So, I try, and I would advise in this group, look at the data and kind of look at the big picture. Right. Even though payrolls revised them and did, it still looks like a good labor market. Right. And that's what jobs are being created, the industries are being created, spending is good. So, it's important to step back some, not get sucked into the commentary. The day it came out in one month, look at a pattern, look over three months, think about big picture. What does this look like? Line it up across different data series. It's been really hard over the last four years to figure out what was going on in the economy because everything was haywire. One other thing I would say that I didn't talk about in the column, but for this audience is relevant. The data that you have, the information, say, from your own company or your industry, it's worthwhile to take some time making sure that's high-quality data, and that can be pretty tough. And I worked with some payment transaction data with a large payment processor, and we put a lot of time at the Fed into kind of sifting through what really wasn't helpful to figure out spending and then kind of get it down to a. So be always be a little suspicious of data and yet bring it in. Like decisions based on data, including to your own judgment, you have to draw an inference, have an opinion. The data don't speak for themselves. They don't tell you what to do. And so one way to counteract some of the issues would be to look at a larger set. And yet, even though you shouldn't take one month of any official statistic and run with it, those are the best data that we have.

Gene Marks (16:52)

So, if you were running a business, Claudia, and you are, you've got your own independent firm that you're running. What data do you look at to kind of see at least what direction the economy is going? You mentioned earlier about industry specific data, and that's critical, even regional data, I mean, the markets that you're in. And I don't know if you have any data that you can or sources that you can share with us, but give me some idea of what metrics you like to follow that kind of give you a good thumb on where the economy is heading.

Claudia Sahm (17:31)

So as a macroeconomist, I tend to work on economy-wide data. Every once in a while, I have a project that's specific to an industry or a region. And so, my go-to, for almost all the work I do, there's a database called FRED run through the Federal Reserve. It's set up in an easy way. You can go find stuff. They actually do have regional industry data. Again, it's a nice, user-friendly database. Now, in terms of what do I look at when I'm trying to figure out what's happening in the economy, one piece of information I spend a lot of time thinking about, are we in a recession? Are we going into a recession? I've been asked this for two years straight. So, I'm an expert on recessions. I pay a lot of attention to the labor market. The unemployment rate is often an excellent measure of where are, like, are we in a good place with the labor market? Are we in a bad place? It's not perfect, but if you can only pick one data series you sent to a desert island, that's the one you would want to take with you. And in fact, I have a recession indicator, which was later named the Sahm Rule, that uses the national unemployment rate and looks at changes in it to say, hey, we're in a recession, send out the fiscal relief. That's why I ended up a recession expert, because I have an indicator, that's one that I look at, consumer spending, this won't be a surprise to anyone, is an important measure of the strength of the economy. Consumer spending is 70% of the economy. It's the driver in any part industry or part of the country. I look at that as a sign of health and resilience. And again, where one is sitting in terms of a business, there are different pieces to pull out.

Gene Marks (19:30)

Sure.

Claudia Sahm (19:31)

But your labor market and your consumers, that's a big deal, because those two, there's a virtuous cycle or a not virtuous cycle when we go into a recession.

Gene Marks (19:43)

Yeah, the consumers drive everything. I mean, they were the biggest factor in GDP growth for the past two quarters. There's no question about that. When they stop spending, that's a big issue. And when you talk about consumer spending, though, I mean, you're right. If you go onto the St. Louis Fed website, FRED website, there is some things to track. There's consumer confidence, University of Michigan's consumer confidence. There's a conference board. There's also retail sales. Are there any metrics that, and the reason why I ask you about metrics when it comes to consumers, Claudia, is I know some economists that sort of shun the government stuff or the surveys, and they kind of focus on the banks and the like. If the CEO from, you know, is telling you that spending is trending down, like that has more of an impact to somebody, or if the CEO of Wells Fargo is saying that credit card delinquencies are trending up, that pulls more weight for some economists than just relying on government data. And I'm wondering if you feel the same or what, when it comes to consumer spending, what do you look ?

Claudia Sahm (20:54)

Over time, we have had so many more private sector data sets available. The private sector, not surprisingly, can be more nimble in creating new data sources. The official statistics, one piece that they really emphasize is continuity over time. And we have decades and decades of data, but that means you're somewhat constrained when the economy changes.

Gene Marks (21:17)

Yeah. You look mirror, right?

Claudia Sahm (21:19)

Right. Yeah. So, it's very exciting to see all of these different data sources. But this goes back to a comment I made before. You got to be a little careful with some of these, right. Especially ones that come out of particular, out of a particular company. It might not be relevant to your part of the world. We've seen the newspapers every day. There's another set of layoffs at a different company every month. There is a massive amount of job destruction and job creation in the U.S. economy. We don't get to see the so-and-so hired 10,000 workers. Right. The good news doesn't show up in the newspaper. Now, we have definitely seen industries recently shedding some workers like those layoffs do. The tech sector has really tightened up in terms of some of whether it's their hiring and also their firing. Okay. But the context of this is during the pandemic when we were all at home and using the technology, doing these kind of things, they hired a bunch of people thinking, oh, this was going to last forever. So what we're seeing now I wouldn't look to that tech, and there are other industries. I mean, Wall Street did a lot of hiring, too, and say, oh, this means everywhere it's spreading. Well, no, we had to do a lot of rebalancing. This was really disruptive, the pandemic. So you have to be careful if it's not your industry that you know, well, looking at some other industry, and that's where Home Depot coming out, you got to be careful because that may not be a sign of, oh, it's coming for me next. It could just be, yeah, that business overhired or, yeah, they've increased their prices so much that the customers are like, no, I'm done with you, I'm going to the other hardware store. So, I think that's one where contextualizing data is important. Being a picky consumer of data. I look at so much data, and yet I have rankings of them. Like, I filter different pieces of data. And I think having your go to data source, none of you want to deal with as many data sources as I am. But that's my job. Right, to do that. And it is exciting. There's a lot out there, and a business may find something that's much more pinpointed and has worked well for their sector.

Gene Marks (23:50)

Let's look at 2024. Are there any sort of warning signs or things that concern you about the economy this year? I mean, there's people talk about because of interest rates, people working from home, there's a real estate, massive real estate debt default that's on the horizon. Obviously, people are still worried about wars and shipping channels that could cause supply chain issues and spike the price of oil. Interest rates are still high, relatively, and some people are concerned that inflation has not been completely tamed. Are there any issues for 2024 that you're like, this is a concern of mine, or these are things that I'm really keeping my eye on.

Claudia Sahm (24:36)

Absolutely. The time we spend thinking about the risk factors, spinning out those stories is often the most productive time we spend. Because then once something starts going off the rails, you can be like, oh, yeah, that's what I was looking for. Let's switch gears. So, yes, I worry all the time about all kinds of things. You named the big pieces. My top risk factor for this year is the Fed. And there's an old saying that the Fed goes until it breaks something. The US economy remains resilient. Now, no buffer can hold out forever with these high interest rates. There is pressure. We are seeing delinquencies rising. They fell during the pandemic. So, we're not much above pre-pandemic. And interest rates are a lot higher. So, it's pretty remarkable that delinquency rates are as low as they are. But these are signs that there is stress on the system. My concern is more that something breaks in financial markets and then that feeds into the economy. I mean, the Fed works through financial markets, so it's not surprising. That might be where the trouble starts. We have consumer real estate we have talked about, bot consumer, sorry, it's commercial real estate. One of the risks in the financial markets that we have talked a lot about is commercial real estate. Now, that's been a conversation for a while. So you might think, oh, we've got this under control. And yet that's one that is a slow burn kind of industry in terms of the way the contracts are set up. So that continues to be a risk. There are other potentially in private credit markets, there's some nontransparent parts of the financial system that one always, like those are always suspicions. In general, the Fed, by raising interest rates so much, so fast, so unexpectedly in 2022, they created a certain degree of interest rate risk. And what we've seen with Silicon Valley Bank and some of the other bank failures around it, the market conditions are not kind to bad business decisions. Right. And so those two interacted, and that was the case of Silicon Valley Bank. So that risk is still there. I keep watching the Fed kind of nudging them with my arguments that it's time, it's time to start cutting. The Fed is going to drag its heels. They are not going to listen me, so that pushes every meeting. They wait and don't cut and don't start bringing interest rates down. That kind know ratchets up the risk. And so they're my biggest risk factor. In terms of the geopolitics, particularly with the Red Sea and the supply chains, the United States, that is not an important channel for our trade. And the other piece that makes me worried less about it is we don't have this massive demand for goods that we had early in the pandemic. And when things opened up. Right. And so, it was the two things crashing together, this massive increase in demand, and also supply chains that weren't working. Now, of course, if the events, if they spread, if they get worse, if they take longer, then, yeah, that's absolutely something to keep an eye on. I mean, geopolitics are always something to keep an eye on. This year, the fact that this is an election year, and it's a highly contentious election. I don't know exactly how that would feed through the economy, but it's a concern factor, like Congress not functioning. So we'll see.

Gene Marks (28:37)

You actually just brought up the question I just wanted to ask you. I mean, we are heading to an election year. It's not a political conversation per se, but you've spent a lot of time in government, both the Federal Reserve and at the White House. And do presidents matter when it comes to the economy, Claudia, it's like this ongoing debate. Does it really make a difference? You're sitting in the White House, or is it all just the economy happens regardless? What's your opinion?

Claudia Sahm (29:04)

So, yes and no.

Gene Marks (29:06)

Okay.

Claudia Sahm (29:07)

There is a popular perception and people will assign blame or cheer someone on, like the president. Like if the economy is good as you go into an election, well, people are going to say, "Hey, the incumbent president, they did a great job." Right. And potentially reward them at the ballot box. I mean, that isn't decisive, but I mean, there's a lot of research that shows that and vice versa. If the economy is bad, well, then the person running an opposition tends to get a thumbs up.

Gene Marks (29:40)

Sure.

Claudia Sahm (29:41)

So, there's this credit given. Now, is that justified? Probably not. Again, we have a $24 trillion economy. The people who are really making things happen are workers and businesses. So, the president really doesn't, it's not like they have a little button they can push, nor the Fed. Right. Neither of them are in control. Now, I will say that the president and Congress, the policies that are put in place during a period running up to an election or the four years of the presidency, those are important. Maybe people don't look at them and say, hey, that was a great policy. It made my life great, but it could make the economy a better place. And one could argue both. I mean, everything from CARES Act through the Rescue Plan were a huge relief. Getting money out to people in a crisis. 2020 was bad, objectively, but it would have been worse without the CARES Act. So, there's a benefit to say Trump and Congress, that was in place, and then President Biden put in the Rescue Plan. That was a big set of relief. Now, whether he's going to get credit for this, because we had good labor market and good inflation, it's kind of a mixed bag. But there were, and Congress, some of it bipartisan, passed. We had the infrastructure plan, the Chips Act, the Inflation Reduction Act. These are investments, too, that know they're going to pay off slowly over time, but they're out there in the economy right now, like in the first round. So the president and Congress do matter in terms of how the economy is working or not working, and yet the credit tends to be to the president. Now, this one is going to be really interesting and has been so far in that you have this split of inflation was high, it's coming down, but still prices are high. We're not going to reverse those prices because that's the Great Depression and we don't want that. Even though people say that they really don't. So inflation has been high, but the labor market, wages and job, these have been good. So it's going to be a judgment down to the wire of how do people do they say, "Hey, that's a good economy or that's a bad economy."

Gene Marks (32:04)

Are we better off or not?

Claudia Sahm (32:05)

Yeah. So, this one's a tricky one because there's some pretty big bad and there's some pretty big good.

Gene Marks (32:13)

Claudia Sahm is a former Federal Reserve economist, a columnist for Bloomberg, and also the founder Sahm Consultants, an economic advisory firm. Claudia, great information. How can we connect with you and find out more about you? Where are you?

Claudia Sahm (32:29)

The best place to see all the work that I do and other ways to contact me. I have a website for my consultancy, so it's Claudia Sahm, all one word. And that shows a lot of my writing at Bloomberg, my Substack, and just the kind of work I do in general with the macro analysis.

Gene Marks (32:46)

Fantastic. Well, hey, thank you so much for joining. It was a great insight and analysis. We'll definitely love to have you back.

Claudia Sahm (32:51)

Thank you.

Gene Marks (32:51)

Everybody, you have been watching and or listening to the Paychex THRIVE podcast. My name is Gene Marks. Thank you so much. Take care. Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR, payroll, benefits, or insurance services, see how Paychex can help. Visit the resource hub at paychecks.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care.

Announcer (33:37)

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