Managing inflation, with Dr. Ken Louie

Dr. Ralph Ford, chancellor of Penn State Behrend, talks with Dr. Ken Louie, associate professor of economics and director of the Economic Research Institute of Erie, about inflation, interest rates and economic growth. 

Transcript

Dr. Ralph Ford: 0:05

Hello, I am Dr. Ralph Ford, Chancellor of Penn State Behrend, and you are listening to Behrend Talks. My guest today is Dr. Ken Louie, an associate professor of economics in the Black School of Business, and director of the Economic Research Institute of Erie. Welcome to the show, Ken.

Dr. Ken Louie: 0:23

Thank you very much. Thanks for having me.

Dr. Ralph Ford: 0:24

Well, we appreciate having you here and you are a repeat guest. We wanted to talk about the economy. It's an interesting time. But before we go forward, I will just talk a little bit and tell our listeners about your background. So you're well known in the Erie region, but you hold a Ph.D. and a master's degree in economics from the University of Illinois Urbana-Champaign. your bachelor's degree was also in economics and was earned at Northwestern University. All very prestigious, great places. You visited China as a Fulbright scholar, and you were also a visiting professor at Johns Hopkins University. Here at Behrend, you have received many awards, including the Council of Fellows Excellence in Teaching Award, and the Guy Wilson Award for Excellence in advising. As director of the Economic Research Institute of Erie, you lead a team that collects and analyzes economic data that predicts the trends are as well as you can in Erie's economy. Your analysis has been featured on CBS News, CNBC, and NPR, among many other media outlets, truly tremendous background, we appreciate you being here.

Dr. Ken Louie: 1:35

Thanks again for having me.

Dr. Ralph Ford: 1:36

Let's talk a little bit about the theory economy, which is where you spend a lot of time what's your broad view? How are we doing?

Dr. Ken Louie: 1:43

Sure, first of all, at the national level, the US economy is still going very strong. In fact, just this morning, the Bureau of Labor Statistics reported that the US added 175,000 jobs just in the month of April, and the unemployment rate held steady at 3.9%, just slightly more than the previous month. So we're still fairly robust at the national level. At the local level, broadly speaking, the Erie economy also seems to be remaining steady and stable. Employment, in fact, locally has been increasing steadily since the end of the pandemic. So since April 2020, Erie has consistently added jobs. Although currently we're still slightly below the pre-pandemic level we're about at 98%. However, for the year, just past year, on year, as of March, the Erie economy out of 1,700 jobs, the biggest sector, fastest growing sector being the education and health services sector, but even manufacturing added 300 jobs, year over year as of March. So in terms of employment, we're still holding steady in terms of output, what we actually produce in terms of goods and services. We're also holding steady, although the increase in our output locally has been fairly modest. After dropping by 6%, due to the pandemic, we've gradually been creeping upwards. But last year, we only grew by less than 1%. And compared to the Commonwealth as a whole, and the nation as a whole, were a little bit lagging behind in terms of the growth rate. So good news is output is still holding steady. Finally, income may be the most challenging component of our local economic performance, both real per capita income and real median household income has actually fallen somewhat in recent years. So that's something to keep an eye on. But broadly speaking, once again, the economy seems to be holding steady.

Dr. Ralph Ford: 3:57

When you say per capita income is decreased, is that inflation adjusted? Or is that real dollars?

Dr. Ken Louie: 4:03

Yes, that's inflation adjusted what economists call real dollars. So on a per capita basis, personal income, for instance, was just under $49,000. And that is a somewhat of a decrease compared to years gone by. However, on a longer term basis, it has been going up. So if you go back to say 10 or 15 years, we're still at a higher level. But it's recently that the real income has been falling somewhat.

Dr. Ralph Ford: 4:36

So would you say Have we recovered or rebounded from the pandemic in your mind? Where do we stand relative to where we were prior to 2020?

Dr. Ken Louie: 4:45

Yes, as I said earlier, employment has bounced back quite nicely, although it's still only at about 98% of the pre pandemic level. In contrast, both in the Commonwealth and in the nation as a whole employment levels have gone beyond the pre pandemic level. So we're lagging behind somewhat, but the fact that we're so close to that pre pandemic level of employment is is good news. And as I said, that has been the result of this consistent upward trajectory since April 2020. When we were in the depths of the, of the pandemic. So yes, things do seem to be recovering quite nicely. We always hope it could be faster. We're moving in the right direction.

Dr. Ralph Ford: 5:28

One number that you quoted in there interested me, and that was the fact that in the last year manufacturing jobs grew. It's great higher ed, you know, education, where we're at and healthcare, that seems to be a continuing trend. The reason the manufacturing number struck me is that in a lot of the previous recessions or economic shocks, we've seemed to lose a lot in terms of manufacturing, is this time different?

Dr. Ken Louie: 5:54

Yes, it does appear that we are having a better experience recently. I think partly that's due to many of the adaptations that firms in that manufacturing sector have taken and have made strides to confront the challenges of structural change, technological change in the economy. So yes, I think it's really heartening to see that manufacturing is holding its own and in fact, steadily increasing. The other factor is that if you look at national statistics, there are some statistics that indicate this so called trend of reshoring. So that is manufacturing concerns are moving many of their jobs back to the US, given that traumatic period of COVID pandemic. And given all the supply chain disruptions that caused many firms to rethink, you know, disaggregating, their supply chain. So that's part of the picture as well.

Dr. Ralph Ford: 6:52

Is there any, any evidence so far, and I realized that maybe early, that the CHIPS and Science Act, and that that sort of that spending in that arena is having a difference making the difference?

Dr. Ken Louie: 7:02

Yes, I think it's a little bit too early to pinpoint quantitatively the precise impact. But I think if you look just anecdotally, all over the country, it's definitely having a positive impact in areas as wide ranging as increasing broadband access, repairing outdated infrastructure, bridges, highways, and so forth. So it's definitely having an impact. But it'll take some time before we can actually quantify the precise magnitude of the impact.

Dr. Ralph Ford: 7:33

Well, when we go back to the economy right now, what what are you going to be looking at in the next three to six months as indicators for turnaround or not a turnaround? What are the things that you're looking at right now?

Dr. Ken Louie: 7:44

Sure. So based on those statistics I mentioned, these are typically what economists tend to focus on employment jobs, output, what we actually produce an income, which is ultimately the purchasing power of average households in the area. So there is a turnaround in the sense that we're still moving upward, albeit very modestly. But I think the biggest challenge that we face in the upcoming months and years, is to speed up that process of job growth to create more jobs. And related to that not just any jobs, but taking advantage of technology so that the new jobs we create will be higher paying jobs. Because in addition to the sluggish job growth, as I indicated, income growth has also been fairly stagnant in these areas, I think those are the two biggest challenges, job growth, income growth. And we see this reflected in other statistics as well. So for instance, poverty levels are still somewhat elevated, it's, I think, something like 15%. And among children, it's actually over 20%. So those are some of the economic challenges that I think we need to confront.

Dr. Ralph Ford: 8:58

I think that leads perfectly into what I was thinking about next, which is the local investment. And we'll talk about different aspects of that. But as we all know, led by Erie Insurance, we have the Erie Downtown Development Corporation, the transformation that we are seeing going on downtown, it's still underway. But if you took a picture five years ago, and you take one today looks very different. How important is that?

Dr. Ken Louie: 9:21

Absolutely crucial. The partnerships that we have made in Erie partnerships, specifically among government, the private sector and universities is absolutely crucial. In fact, if you look at the history of the US economy, many experts point to the fact that the tremendous growth that we experienced after the Second World War was precisely attributable to this positive, favorable collaboration among the federal government, private businesses and universities that engaged in research and right here in Erie, Pennsylvania, we're doing exactly those things. So we have initiatives undertaken as you said by private companies like Erie Insurance, the medical centers, we now have a new company located right here in Knowledge Park. We have an open lab system where we try to encourage entrepreneurship innovation by people in the community that can contribute to the growth of the area. And then just recently, Governor Shapiro has announced a new initiative, I think the first major initiative to foster greater development in Pennsylvania and over 20 years. And specifically within that state plan, he's focusing on innovation as a main driver of that growth. So all the things you mentioned, I think, are positive developments. I'll make one final point, which is, given all these developments, we actually are held up sometimes as a model of economic revitalization. So there was a New York Times story just back in February, describing how Gary Indiana, a city in the Midwest, very similar to Erie with its historical emphasis on manufacturing. But Gary, Indiana is actually looking to Erie, Pennsylvania as a possible so called template for a strategy to revitalize their economy. So we shouldn't let all the negative attributes that we sometimes see overwhelm us, I think there are some positive developments and to the extent that others see us as a model of revitalization that I think should boost our confidence.

Dr. Ralph Ford: 11:32

A lot in there. And that's, you know, appreciate the really detailed response on that one of the things that, it seems to me that has to occur, and it's maybe an obvious thing that you don't always talk about is population growth, drives economic growth. And it's hard when you have a decreasing population in Erie has for the last 30 years. But it seems to me that it's slowed at least. And I've seen some of the projections from rural PA and the like, now, they're pretty far out to 2050. But if it is wonderful that we retain our own people, and we focus on that, but we have to attract new people to the region, I mean, how important is that?

Dr. Ken Louie: 12:10

It's also a very, very important variable, I teach my students as a matter of fact, that of all the economic resources that we deploy, labor is probably the most important resource, upwards of two thirds to three quarters of all of the income and economic activity that we that we generate is attributable to the contributions of labor, whether through physical effort or intellectual effort. So labor is really the key resource. And so that's why population growth is so important, because the size of the labor force is dependent on the growth of the population. So to the extent that you have population growth, you can expand those resources and expand the economy. This also feeds back to what I said earlier, which is, unfortunately, the major reasons why we're experiencing population decline is the rather sluggish growth in employment levels over the years and in terms of income levels. And so we need to, you know, do things that will turn around those two economic factors. I think, if that were to happen, the population growth, potentially can resume once more.

Dr. Ralph Ford: 13:26

It will follow at that point. Yeah, it's me, there's a lot to discuss her on that. In fact, Wall Street Journal just last week showed how you know, the replacement rates of birth rates in the US is continues to fall at alarming levels. I called my children told them both start having babies, they didn't like that, actually. But it is true without growth in population, you see places like Japan and others, and it becomes a long term struggle. And so what you're telling me though, is that it's not cliche when we leader say our people are our greatest asset, it is truly an economic factor as well. The more people you have, the faster your economy is going to grow. Absolutely, absolutely. Let's do things follow each other. Well, let's, let's talk about inflation. I mean, it is been something that's been with us in a way we haven't experienced ever since the pandemic. And, you know, I can, quote some numbers here. According to the Brookings Institution, rents have increased almost 20% since 2021. And that is amazing. Maybe not in a good way, airfares are up 23 and a half percent. Automobile Insurance is up, we could go on and on what's caused all of this to happen?

Dr. Ken Louie: 14:37

In the most recent period, the pandemic certainly has been the key culprit. In economics, we talk about demand and supply. Specifically, we teach our students that outcomes are going to reflect a so called shocks to the system demand shocks and supply shocks. Usually you have one or the other. But during the pandemic, we had really this unusual combination of a negative demand shock and a negative supply shock, the supply shock. First of all, due to the supply chain disruptions, the productive activity that was slowed down or halted altogether because of the pandemic, on the demand side, you had a drastic reduction in consumption as people, you know, sheltered in and didn't consume as robustly as before. So that combination of negative demand and negative supply shock certainly added trauma to the economy. And inflation ultimately, was the result. In order to address the demand shock, obviously, we know the government, the federal government provided massive financial stimulus. And so that sustained demand, and to some experts that stimulus to demand also as a contributing factor. But the other thing I would add, however, is those figures seem staggering when we compare how much prices have risen, let's say from 2021. But the good news is that the rate of increase has actually been falling. So for instance, if you look at 2021 to 2022, versus 2022, to 2023, versus 2023, to 24. In each successive year, the rate of increase in prices has slowed down. So that currently on a year over year basis, as of March, the inflation rate as measured by the Consumer Price Index is 3.5%. substantially lower than where it had been June of 2022, when it stood at over 9%. So yes, inflation is still a problem, the Fed has a target of 2% that it wants to achieve. And sell 3.5% is still above their target. But once again, the good news is that on a year over year basis, the rate of increase has been declining.

Dr. Ralph Ford: 17:03

Well that is good news is there. When you look at how much people have saved, I mean, I think one of the things I recall was the issue was people say ended up having a lot of disposable cash in their savings actually towards the end of the pandemic. So they decided to buy cars and homes. And are we seeing a change in that as well?

Dr. Ken Louie: 17:22

Yes. And many people point to the fact that the nature of demand is different during the pandemic, because people were sheltered in, they tend to buy a lot of goods, a lot of it online. And now that we're sort of going beyond the pandemic, the demand has gradually switched over to services. And I think, in fact, that's one of the main reasons why inflation has remained stubbornly above 3%, which is, although the demand for goods has been moderating the demand for services has been going up. For instance, we go out to eat more often now that the pandemic is behind us. And in fact, if you compare food prices, on the one hand, food prices for things we consume at home, versus food prices, when we go out to eat the ladder has seen a much higher rate of inflation. So I think that's keeping the rate of inflation higher.

Dr. Ralph Ford: 18:19

And it's hard because people just they want to get out. They want to live their lives, they want to visit places, and it just continues on. I mean, so the other interesting part of that is the economy has continued to grow. So there was this great concern that we were going to go into a recession, by and large that seems to have abated, although there are some who are saying that it's still coming along. I mean, GDP has averaged, you know, over 333 point 4% Unemployment has remained low. All these things are traditionally like, you would normally look at this and say this is an unbelievable economy right now.

Dr. Ken Louie: 18:55

Yes, it's really, overall a very, very good picture. It's never perfect, we can always improve upon certain elements in the economy. But broadly speaking, we are doing quite well. The growth rate, as you said last year average over 3%. It is moderating somewhat so in the first quarter of this year, the Commerce Department recently reported that we only had a 1.6% annual rate during the first three months of this year, so it's slowing down. But as you correctly point out, even that's good news, because the Feds policy of trying to reduce inflation by slowing down the economy seems to be working really just as they had planned. So they're not bringing the economy to a complete halt. But they're slowing down the economy to the point where we're growing more slowly. Inflation has been coming down year over year for the past couple of years. And this is really the ideal situation what economists call a soft landing remains to be seen whether that can continue and since inflation is still startlingly high, there is a fear that the Fed might continue to hold interest rates at the current level rather than reduce them. And so we can't be sure you know what, what definitely will happen in the next next few months?

Dr. Ralph Ford: 20:20

Well, you know, I told you, I wouldn't go here, but I'm going to the yield curve has, I think it is inverted. And I don't really, fully understand it unless I go, you know, Google and look it up. And then it reminds me what it is. But typically, whenever that is inverted, we've had a recession, but it's inverted. And is this like the first time it's possible, it may invert, and we don't have a recession?

Dr. Ken Louie: 20:40

Right, just very briefly, wian inverted yield curve refers to the following that typically, if you look at interest rates, and the rates that we pay, when we borrow money, or the interest rates we receive, and we deposit money into savings vehicles, those interest rates tend to be higher for long term financial transactions. And they tend to be lower for short term financial transactions. And that's a very, very common sensical phenomenon, that if you keep your money held in one particular asset for a longer time period, typically you tend to be able to command a higher interest rate, while an inverted yield curve simply refers to a situation where short term interest rates become higher than long term interest rates, hence, the term inversion. And as you correctly point out, ever since Second World War, economists have pointed out that whenever the yield curve has been inverted, that is short term interest rates higher than long term interest rates, that eventually has led to a recession. And just very quickly, the reason for that is that when there is that inversion, what it signals is that the monetary authorities are tightening up on the economy. And that's what's causing short term interest rates to rise that monetary tightening. And so that's really the reason why a recession typically as followed, but as you indicated, we haven't seen that recently, the inverted yield curve has been observed. And yet, we are not seeing any signs of a recession, at least not for the foreseeable future. So that is an unusual circumstance that is in contrast, what we've experienced historically.

Dr. Ralph Ford: 22:33

I'm going to stick with this a little further, not the yield curve. But one of the things that I'm curious about is when the pandemic first hit, I actually remember looking at GDP curves of when the great pandemic hit back in, you know, 1919 1920. And it's amazing how it dropped almost exactly like it did for us. But within a few years. And if you extrapolate the curve, GDP continues on or economic output. And it seems like that's happened again. But all these other factors were talking about in terms of inflation, and like, did the 1920s give us any indicator? Was the economy so different then?

Dr. Ken Louie: 23:05

I think you're right to point out that, overall, the trends seem to be broadly similar. Real GDP in the US fell by something like a third during the height of the recent pandemic. But right after that, literally the quarter after row GDP fell by a third, a real GDP rebounded really, really robustly. So it was such a short term dip, in fact, the recession that resulted because of that contraction only lasted for two months, from February to April. So the overall pattern, I think, is similar to what we've seen in the past, I think the nuance would be that we've learned so much, and the economy, I think is much more sophisticated in terms of technology in terms of worker skills, that our recovery, I think, is accelerated because of those positive trends. Whereas it would have taken longer in the past. Now it takes less time to recover from such a traumatic event.

Dr. Ralph Ford: 24:12

Well, let's switch a little bit, but talk about the fact that we're in an election year. And that makes everything political. It's always political, but the economy always is. And I hear different statements. I'm gonna take them from both sides, you know, and I'm not asking you to take a political position, of course. So the one argument is, from the Republican side is they hear gas prices are up this week. You know, it must be Joe Biden's fault must be the President's fault. And then on the other side, on the on the left or the Democratic side. Oh, no, this is all due to something called Green inflation and corporations that have record profits. So all of this is their fault. Care to help us navigate those waters. Do these things really matter?

Dr. Ken Louie: 25:01

Sure, I'll do my best. So There are certain forces in the economy that really work at a fundamental level that produce the outcomes that we see. And those forces are indirectly affected by the decisions of policymakers like the president. But the important thing to keep in mind is that the way the President can affect the economy really, is only in conjunction with congressional action. The main way in which the President affects the economy is through fiscal policy, but fiscal policy is implemented in the US by the President, along with Congress, those the two out of the three parts of our federal government that are responsible for fiscal policy. So that yes, the President indirectly has a role to play. But really, it's also in conjunction with what Congress either authorizes or refuses to authorize. So who's responsible for the outcomes that we see? Yes, there's this indirect responsibility, but it's on the part of both the President and Congress. And secondly, what's difficult often is we cannot disentangle the forces that I'm referring to, which is the forces of demand supply, consumption production. Those forces often cannot be disentangled from political events. And so that's why it's often hard to to gauge how much of this is due to politics and how much of it is due to true economic factors. That's a challenge for people like us to try to study and understand.

Dr. Ralph Ford: 26:44

Companies legitimately had super high changes in their costs. So they had to raise prices. And, you know, so it seems legitimate, that they would they would raise prices, but have they done it too much. Is there any indication when we look at the data that there's price gouging and other things going on? Right?

Dr. Ken Louie: 27:05

So I think our very own senator, Senator Bob Casey received much publicized press attention when he recently issued his report on reflation, but they go back to what I said earlier, there may very well be isolated instances where firms are deliberately raising prices and taking advantage of the current economic conditions. The difficulty, though, for researchers like us is that it's very hard to quantify and disentangle how much of that is due to true greed, right? True price gouging on the one hand, on the part of the firm versus how much of that is attributable to fundamental economic forces. So for instance, we talked earlier about the demand shocks and the supply shocks to the economy. Well, the fundamental forces that are at work, if demand shifts and supply shifts, fundamentally, that will produce price changes, and if a particular company happens to be producing a product that's affected by those supply and demand changes those shocks to demand and supply that can very well push up prices and allow those firms to earn higher profits who are in those markets. So how much of it is due to deliberate manipulation and greed and how much of it is due to fundamental market forces, very hard to ascertain? What I will add is also that if we are fearful that there may be instances of corporate greed or instances where companies are deliberately raising prices to take advantage of the situation, I think the appropriate response is really in the regulatory and antitrust area where we try to promote greater competition, because economics teaches us that the surest way to avoid having firms do things like that is to maintain a healthy degree of competition. So if you do see price gouging or or unfairly high prices, it's usually due to firms having excessive market power, where there's insufficient competition.

Dr. Ralph Ford: 29:18

This is very helpful. And I think the one big takeaway is always be skeptical of these political claims. The world is an economics are a lot more complicated. And while some of it may have merits, look deep at all of these claims, I think that's very helpful. Well, let's switch a little bit to your day job. You're a professor here, teacher at Penn State Behrend and why they should students study economics.

Dr. Ken Louie: 29:47

Wow, that's I think, the most important question students and by the way, not just students, I think everybody should study economics, even if they've never been exposed to economics before. I think there are two major reasons there are many many other related reasons but I think the two major reasons are for First, it helps us to understand society. And none of us not one of us lives isolated, apart from the rest of society. So whether it's production, consumption, income, employment, purchasing power, poverty, we affect the rest of society ourselves. And we are affected in turn by what happens across the society. And economics has the power to enable the person who studies economics, to understand some of these forces that affects society. So that's the first reason the second reason is at a more practical, more mundane level. economics teaches us how to make the best choices. It's somewhat common for people to associate economics with making decisions in the financial arena, what stocks to buy, what bank to go to, should I take out a loan, but really, economics, if you study it, you come to realize that it teaches you how to make the best decisions, even decisions that transcend ordinary financial kinds of choices. And so combined, I think that's a very, very powerful script to enable yourself to be a more productive and a more wise decision maker in our society, to understand society, and to know how to make the best decisions under different circumstances.

Dr. Ralph Ford: 31:41

Very well said, you know, I, I am fascinated by economists and economic thinking, truly, because I, as a young person, I'll give you my experience. And I think the one maybe people hear too much when they're in school, which is, you know, oh, my God, I'm going to take either micro or macro economics, which should I take, this is so hard, and you just make some choice, that makes no sense. Whereas once you start to really interact with economists, and you listen to them for a while, you realize all the things you just said, which it's about decision making applies to so many different domains in life. So I really appreciate you hearing that. Do you think we're getting the message out more and more to our students better than mine? I was a student. I don't want to date myself. But that's what I recall was it was the scary decision that I heard. And I hope we've changed the narrative by now.

Dr. Ken Louie: 32:28

Yes, I hope so as certainly here on our campus, Well, I'm going to give you the last word here. I will also note whenever we have open house or other events that in which we talk to students, we do try to impress upon them, the broader nature of economics, and certainly in the very first day of class. That's one of the first things I tried to tell my own students, which is that economics really focuses on broader issues, not just narrow financial sorts of questions. that today is the very last day of final exams, and we have commencement this evening. So we're sending another class of students out into the world. But any anything you'd like to add? I think the major thing I'd like to say is that we should feel good about how our local economy has withstood such a traumatic series of events related to the pandemic. And that despite that, like the national economy, we are resilient, things can always be better. But we are very, very steadily moving in the right direction. The initiatives that we've taken locally among the universities, among government, among local entrepreneurs and innovators, those all, I think, make me heartened that in the future, we will benefit from these investments and initiatives. So I think that's the major takeaway that I would get from looking all the data that I've been seeing recently.

Dr. Ralph Ford: 34:00

Well, you indeed get the last word. I'm Dr. Ralph Ford, Chancellor of Penn State Behrend, You have been listening to Behrend Talks. Thank you. Dr. Ken Louie has been my guest today, faculty member in economics in the Black School of Business and director of the Economic Research Institute of Erie. We'll get you back on the show.

Dr. Ken Louie: 34:19

Thank you so much. I appreciate it. Thank you.