Thomas Coleman Discusses an "Awkward" and Confusing Economic Landscape

Although gasoline prices have tapered down in recent weeks, inflation is at a four-decade high.

But unemployment is low, job growth is robust, and the stock market rallied in July for its best monthly performance in nearly two years.

Still, home sales are declining while interest rates inch up. In July, the economy shrank for a second consecutive quarter, fueling talk of a recession.

Welcome to what the Associated Press has called an economic “awkward, painful place.”

Tom Coleman, PhD’84, is here to make sense of it all. Coleman is Executive Director of the Center for Economic Policy at the University of Chicago Harris School of Public Policy. For more than two decades before returning to Hyde Park in 2012, he worked in the finance industry, with considerable experience in trading, risk management, quantitative modeling and fixed income derivatives. He also authored two books: Quantitative Risk Management and A Practical Guide to Risk Management. Coleman earned a BA in physics from Harvard.

In our conversation, Coleman sorts through the issues of inflation and recession, explains what’s happening in this confusing economy, and discusses whether recent, sweeping federal legislation on infrastructure, climate, and healthcare will improve the country’s long-term economic outlook.

We’ve gotten relief at the gas pump in recent weeks, but the U.S. is experiencing inflation levels unseen in about 40 years. Can we solve inflation and if so, how?

To curb inflation, we will have to assure people that the U.S. in the long term will get back to small primary surpluses that slowly repay debt. That’s our best shot.

Much of it comes down to what’s called the Fiscal Theory of the Price Level, which I think of as updating Friedman’s monetary theory. The gist is that inflation is not solely dependent on money. It’s also dependent on the overall liabilities of the government—its money and bonds. We have to think of inflation as a monetary and fiscal phenomenon. Fiscal theory has to be right and align with sensible borrowing and debt. Monetary and fiscal authorities need to collaborate.

You can get more details by reading this conversation from CFA Institute’s Enterprising Investor in July 2022 and this piece, also in Enterprising Investor in June 2022.

Speaking of recessions, are we in one now or not?

Almost certainly not – at least not at the present moment.

People use the rule of thumb of two quarters of negative Gross Domestic Product to determine if we’re in a recession, but it’s not the official measure. In fact, the definition of a recession is slightly vague. It's when the National Bureau of Economic Research reaches consensus, after looking at a variety of measures like manufacturing output, employment, personal income, and other indicators, and can say, ‘this downturn has been widespread across the economy for a long duration. We’re in a recession.’

Yes, the GDP has gone down for two quarters and that’s an important indication, but then you look at employment and it says the exact opposite. So, I would say pretty confidently that we’re not in a recession. Six or twelve months from now, I may be proven wrong, but it just doesn’t feel like it now.

Do you think we’re heading for a recession?

I would say that we will absolutely, positively, without question, be in a recession within the next 15 years. That’s a little like predicting we’ll definitely have a Tuesday next week, but that’s my way of saying I’ve learned enough from making recession predictions over the years that I really shouldn’t make any.

Whether we’re in a recession or not, what’s happening economically in this country?

It’s just a very confounding time, for three reasons.

First is inflation, which is upending a lot of people’s lives. It is disrupting our lives and is disrupting our perception of the economy’s health. And yet, when economists measure the cost of relatively modest inflation—two percent or five percent or even fifteen percent—they struggle to find its actual economic costs. Often, economists will look at inflation and determine that, relative to people’s real income, inflation doesn’t look that bad. But inflation is disruptive. A slight intellectual disconnect exists.

Second is the pandemic, which we’re still recovering from psychologically and economically. COVID-19 took more than 6.4 million lives around the world. That exacted a huge toll on our emotional, psychological, and economic equilibrium. 

Third is a confusing historical conflation that has occurred around the words “recession” and “depression,” which makes it difficult for people to put today’s economy in the proper context.

Before the Great Depression of the 1930s, the word “depression” was a descriptor for a type of recession stemming from a financial crisis—a serious downturn much more severe than a normal recession. The Great Depression appropriated “the D word” and changed its meaning forever.

Then came the recessions of the last 20 years, which I actually would argue resemble the historical definition of depressions. The 2008 recession was very severe—but not anywhere near the depth, breadth, and length of the Great Depression. Then we experienced the downturn of 2020-21, which was something unique and may not be in the formal sense a depression or recession because it occurred as a direct result of a pandemic. Still, it was a disastrous, if short, blow to the global economy.

Now, most people’s perceptions of recessions are linked to 2008 and 2020-21, which trigger memories of horrible times, when, in effect, most recessions throughout history have been milder—more along the lines of a very mild recession in 2001.

All that makes for a very confusing economic landscape.

What do you make of financial institutions such as Bank of America and Morgan Stanley predicting an impending recession and Goldman Sachs’ economists placing the likelihood at 50 percent that we’re heading into a recession in the next two years?

When investment bank economists or academic economists talk about recessions, they are referring to the historical definition of recessions—those milder, more run-of-the-mill kinds of recessions that we experienced in 2001, 1980, and earlier. They're doing their homework. They're not saying we’re going to experience the severity of what we did in 2008 and 2020-21, which are most people’s perception of recessions—and their fear.

So, where does all that leave us?

It would require another world crisis or economic shock, on the order of magnitude of the war in Ukraine, only worse, to make any imminent downturn a very severe experience. More likely, though, is that the economy simply adjusts, we go through the normal ups-and-downs of that cycle and have a milder downturn.

We’ve become so hyper attuned to whether we are in or about to go into a recession. It’s become more of an existential crisis because no one knows what’s about to happen with inflation. And recessions, in people’s minds—incorrectly but reasonably—are horrible crises.

What role does politics play in an economic moment like this? Is it as simple as Republicans saying the economy is heading for serious trouble or already is there and Democrats saying the economy is going through a rough patch but is not as dire as Republicans portray it?

My bias, and I think it’s justified, is that politics really doesn’t have that much to do with recessions. It’s noise.

What if anything can federal and state policymakers—the government—do about a recession?

Government policy doesn't generally cause recessions and it doesn't generally bring us out of recessions. Government policy can have a huge influence on longer term economic growth—say two to fifteen years, rather than six months to two years—in areas like productivity and competition. And that’s where we can have really instructive and valuable political debates.

Government also has an important influence on a recession’s cost to individuals through things like unemployment insurance and other remediating policies. But that has less to do with causing a recession or pulling us out of one than helping people affected by a recession.

Can you tell at this point what impact the recent Infrastructure Investment and Jobs Act and Inflation Reduction Act have on economic growth?

The first thing is that name: Inflation Reduction Act. The bill has nothing to do with inflation reduction. It’s BS, really. Politics.

I’m split 50-50 on whether the measures that are built into both will benefit the economy long term. I just don’t know enough about the bills. But I think there is a chance that what’s in both will increase productivity. The Inflation Reduction Act addresses climate change and decarbonization, which is good for the long-term economy.

As is so often true, the impact will depend on the details. There absolutely is potential for these pieces of legislation to spur economic growth, but I'm skeptical because politicians historically have not been very good at making productivity improving legislation.