[music]

Brian Lehrer: It's The Brian Lehrer Show on WNYC. Good Friday morning, everyone. There's breaking news on the economy this morning that caps off what feels like a consequential economic week. The monthly jobs report came out this morning showing continued stronger-than-expected growth in the number of jobs nationally, or as The New York Times put it a short time ago, employers added 311,000 jobs in February, the Labor Department reported, continuing a hotter-than-anticipated streak that has created abundant opportunities for job seekers while frustrating the Federal Reserve in its drive to contain stubborn inflation.

Now, this comes after yesterday's 500-point drop in the Dow partly because the four biggest banks lost tens of billion dollars in one day. We'll explain why, and President Biden unveiling a federal government budget proposal yesterday that launches a season of conflict with Republicans in Congress over taxes on the highest incomes, the federal deficit, Social Security and Medicare's long-term outlooks, plus social safety net programs that Senator Joe Manchin from Biden's own party bloc last year, especially childcare and eldercare care. Here's the President yesterday.

President Biden: We found that in the year 2020 when I got elected, 55 major corporations in the Fortune 500 companies paid zero in federal income tax on $40 billion in profit. I introduced legislation making sure that they had to pay a minimum 15%. 15% corporation. Just 15%. That's less than any of you pay.

[applause]

President Biden: Well, guess what? We did those things that grow the economy and create jobs again, working-class folks with a fighting chance, that paid for everything and still allowed me to reduce the deficit. Just begin to pay your fair share.

Brian Lehrer: Biden budget, some confounding new jobs and inflation numbers, $52 billion in one day lost by the four biggest banks, all of that in just one day's news. Let's try to make sense of all this and put it into larger context with Felix Salmon, chief financial correspondent at Axios. He also writes the weekly Axios Capital Newsletter. Felix, always great to have you. Welcome back to WNYC.

Felix Salmon: Awesome to be back, Brian.

Brian Lehrer: Let's start with the newest news, the February job numbers out this morning, plus 300,000 jobs. Usually, we'd say, "Hey, that's great news." With inflation, how do you see it today?

Felix Salmon: It's still great news. It's great that people are getting jobs. In terms of the inflation side of things, the wage pressures that came out this morning, we also get data on how much people are earning. We're seeing the lowest wage growth basically since the upcycle started at the end of the pandemic. A lot of that idea that wages feed into prices and prices feed into wages, that thing that the Fed is trying to make sure doesn't happen seems to be not happening. There are more jobs, but they're not necessarily better-paid jobs. That's what we all really hoping for. That's the famous soft landing where maybe we can bring inflation down without massively increasing unemployment.

Brian Lehrer: Were there certain sectors that hired especially a lot? Have you seen that yet? I did notice a corollary article, though it might have been written just before these numbers came out this morning, by business reporter Greg David in the publication The City that says, "New York City's jobs have almost recovered to pre-pandemic levels when they had been lagging the rest of the country for a while." I'm curious if that's reflected in national numbers with certain sectors now rebounding or growing.

Felix Salmon: I think if you have a big, broad-based city like-- New York obviously has its own idiosyncrasies, but it isn't an industry town. We have a lot of different people in a lot of different industries here. What we've seen is a lot of weakness in certain very specific industries like manufacturing, construction, technology.

I'm sure you've seen all of the headlines about the big tech companies laying people off, that kind of stuff, while the broad mass of jobs more generally is continuing to grow. If you are in a hot white-collar job, maybe in media, say, then you could maybe have not such a hot job market right now while, overall, most folks are still seeing jobs. Whatever kind of job they want, they can find. They're just maybe not going to be able to get a big pay raise for switching jobs.

Brian Lehrer: One of the things that I saw with respect to New York is that the hospitality industries continued to rebound, recovering further from the pandemic. Does all this mean that the Fed needs to hike interest rates more to discourage as much economic growth and job creation to tame inflation, or could it mean that interest rates are the wrong tool for the job, and raising them just hurts people who want to buy homes or start small businesses without actually accomplishing the mission of reducing inflation?

Felix Salmon: It's such a good question. Everyone's asking the Fed chair that exact question. The fact is that Fed policy works on a lag, right? It doesn't happen overnight. The thing that happens overnight is that it affects markets and affects mortgages. In terms of affecting broad economic growth, inflation, unemployment, the effects are slower. Inflation has definitely come down. It's come down a lot since it was high last year, in the beginning of last year. Is that because of the Fed? It's hard to tell to be honest.

There's this case to be made that it would have come down anyway even if it wasn't for the Fed hiking. You're quite right that maybe now that we're seeing less wage growth, fewer people quitting their jobs, fewer signs of heat in the price of labor, the Fed will decide that they can slow down on the rate hikes or even maybe eventually stop them. That said, the inflation is still way above where they want it to be, the headline jobs number that you led with this one and, quite rightly, was high at 311,000.

Jay Powell, the Fed Chair, really wants to keep on hiking and making it very clear to people that he's going to keep on hiking until the job is done. I have never been so unsure just before a Fed meeting, there's one just coming up, what they're going to do. It will be either a little baby hike of 25 basis points or it'll be a bigger one of half a point. It's really 50-50 now and it will all come down to the inflation figures to come out early next week to see which way they're going to tip, I think.

Brian Lehrer: Did you say the wages are now keeping up with inflation or they're not?

Felix Salmon: They're not. No, inflation is higher than wages now. In that sense, wages are disinflationary. Wages are where the Fed wants them to be.

Brian Lehrer: Yes, which is unfortunate because you want wages to go up. Of course, if prices are going up faster, then that's a bad thing, and that, I guess, is the paradox. Do you create more unemployment so that future wages can keep up with inflation? Is there a kind of normal level of interest rates that they should be aiming for? Maybe I'm remembering it wrong, but I think when I was a kid, interest rates were 5%.

Felix Salmon: [laughs]

Brian Lehrer: That wasn't considered a hit on the economy like 5% would be today. My mom took me to the bank when I was a little kid and said, "Hey, let's teach you about money. We're going to open a little bank account for you." She did that. It was 5%. That's what you get on a bank account or people who wanted to play the stock market could take those risks. Now, maybe the two decades of zero interest rates that we're coming out of is the weird thing or not. Is there something normal that's not zero, but that's not 20% like it was in the 1970s to curb inflation?

Felix Salmon: Right. You're absolutely right about that. If you look at long-term interest rates, which are the ones that really matter, historically, they have been in that 3% to 5% range. You can go all the way back to the 19th century. That's where they were and that's where they have been. On a very, very, very long, multi-century time horizon, that feels like a normal interest rate. You're right. Since the global financial crisis of 2008, we were in this weird aberration period of zero or you had negative interest rates.

That does seem to be decidedly over now. That feels healthy. Maybe we're going back to normal. Maybe rates are a little bit higher than that long-term rate would suggest. You can put your money in very short-term, very liquid, very safe Treasury bills right now and get more than 5%. That feels like, "Whoa, that's crazy." I think rates are high now, but you're right that they don't need to fall a lot to get back to something that feels like it could be long-term normal.

Brian Lehrer: Listeners, who has a comment or a question about the economy, about the jobs numbers this morning? Who wants to help us report this story and tell us something that you saw in February from your sector of the economy? 212-433-WNYC, 212-433-9692. Get into Biden's budget as well, which is where economics meets politics, with Felix Salmon from Axios.

Did anybody lose a lot of money because you own, I don't know, Bank of America stock yesterday? Something that I don't think generally goes down by a lot in a day. We'll talk about that issue, 212-433-WNYC, 212-433-9692, or tweet @BrianLehrer. Before we get into this weird thing with the banks yesterday, you have an article on what we've been talking about called The Permanent Recession That Never Comes. The Permanent Recession That Never Comes. Cheeky title. What are you getting at?

Felix Salmon: [chuckles] If you go back, basically, as long as they've been asking this question, which they haven't really been doing on a weekly basis for all that long. If you ask people in America, "Are we in a recession right now and today," a majority of them say, "Yes." They said, "Yes," before the recession hit in 2020. They said, "Yes," after the recession hit in 2020. They've been saying, "Yes," consistently for the best part of the year now saying, "We are in a recession." We are not in a recession. We were not in a recession. We have not been in a recession. The economy has been growing pretty well.

We have incredibly healthy labor markets as we've been talking about. The number of jobs has been going up and not down. There's a lot of heat in the economy. That's why we have an inflation, and yet there is this kind of vibe, right? People think things are bad partly because of inflation, partly because stocks might not be doing as well as they used to be. There is this general unhappiness with the state of the economy, which is weird when the economy is objectively doing pretty well, and certainly compared to almost any other country in the world you might care to mention.

Brian Lehrer: What happened with the big banks yesterday? We don't often see a headline that Bank of America and JPMorgan Chase lose tens of billions of dollars of value in a day.

Felix Salmon: Well, what happened with the big banks yesterday was there was one little bank that really imploded, and that's called Silicon Valley Bank out in California. There was a real bank run and it's not something which I-- just want one of the terms I use lately. People don't like to talk about bank runs on radio shows because it can cause people to panic. Don't worry. Your money is safe. Even if it's in Silicon Valley Bank, it's all FDIC-insured. You don't need to run together out. There was a bank run on Silicon Valley Bank.

It had a bunch of balance sheet issues that very nerdily, we could talk about. Basically, people were worried about it. It now looks like it's putting itself up for sale. It looks like it's very close to the first real bank failure since the financial crisis. Put aside that last bank, which also failed this week, Silvergate Bank. That was a crypto thing, so very idiosyncratic. Silicon Valley Bank is also idiosyncratic, but you get two major bank failures or close to bank failures in one week and people start worrying about the banking system.

Brian Lehrer: If it wasn't crypto-caused, what did cause Silicon Valley Bank to crash?

Felix Salmon: Well, they did a very bad job of managing their exposure to interest rates. We've been talking about how the Fed has been raising rates a lot. What that did was a couple of things. One, it had an effect on the technology industry. Silicon Valley Bank, as its name implies, has plans for overwhelmingly tech companies. The tech companies started needing to fall back onto their cash that they had raised rather than raising new cash.

As you probably heard, it's a bad time for tech companies to be raising money right now. They had money in the bank in Silicon Valley Bank and they started spending it, which meant that the deposits of Silicon Valley Bank were going down rather than up. That would normally be fine, except for Silicon Valley Bank had put all of those deposits into bonds. When rates go up, the price of bonds go down.

What happened is they sold the bonds so that people could take out their money. When they sold the bonds, they took a $1.8 billion loss. That's more than all the profits they've made in the past 30 years. It's idiosyncratic. It's very much about Silicon Valley and the dynamics of what's going on there. Yes, you get two big bank problems in one week. Yes, you're right. People started selling Bank of America, JPMorgan. Credit Suisse hits an all-time low. People aren't trusting the bank industry right now.

Brian Lehrer: Citibank comes into this in a particular way?

Felix Salmon: They're all banks, right? I don't think people are really distinguishing between them at this point. They're just saying, "Rates have gone up. These banks have a bunch of bonds and loans. Those bonds and loans, if you mark them to market, if you look at how much they're actually worth, aren't worth as much as this bank holding them on their book set." Maybe that's the bad thing. Now, there's a good reason why. According to accounting principles, banks don't need to mark their bonds and loans to market. Why they don't do that is they're like, "We're holding this to maturity. We can ride out the cycle. We are a big bank. That's our job," but investors get worried.

Brian Lehrer: You don't think we're at risk of a banking crisis on a national level like the financial crisis of 2008?

Felix Salmon: Absolutely not. Not even close. The banks are incredibly well-capitalized. They're very strong. There's no sign of any kind of big worrying uptick in default rates. We made sure after the banking crisis that we didn't have the enormous levels of leverage that really brought down a lot of banks in 2008. Yes, your bank, whichever bank it is, is fine.

Brian Lehrer: We're talking about the new jobs numbers out this morning, the implications for inflation. We're talking about interest rates. We're talking about these two small banks that failed this week and the implications of that. We will get to Joe Biden's budget proposal for the next fiscal year, in which economics meets politics with Felix Salmon from Axios, their chief financial correspondent. Ira in Manhattan, you're on WNYC. Hi, Ira.

Ira: Hi, good morning. Listen, the Axios guy's doing a very good job, but he should add one point on the wages. The reason why the percentage of increase in wages is going down, it's because the lower-income people are getting the jobs now while the big-income people or white-collar people like the Silicon Valley people are getting laid off. If you get an increase in jobs at the lower level that outdo the upper levels, the number of people getting jobs, your percentage increase will naturally be less. It's very good for what is happening to employment, especially for the city of New York because we need a lot of those bottom-income jobs.

Brian Lehrer: Ira, thank you. It's nice to know, Felix, that you have the Ira from Manhattan seal of approval on your work in general. How about his point?

Felix Salmon: This is called "The Great Contraction." Well, it's not maybe so great, but it's definitely happening. The people who were really struggling for many decades up until the pandemic have been doing incredibly well. The bottom half of the population in terms of income, broadly speaking, has never had it so good. We've seen minimum wage hikes go up a lot. We've seen the basic entry-level wage go from maybe, I don't know, $12 an hour to $18 an hour, something like that in New York, which is a big change and a big positive change.

We've seen a bunch of employers no longer requiring college degrees, so the people without college degrees are now getting pretty good wages and entering the middle class at the same time as employees of Facebook are being laid off. Now, they're going to be fine, right? Those wages, the high-end, six-figure wages that big tech companies and the like, they're not doing so well. Yes, we're seeing the people who need the money getting more, finding jobs more easily, the people who are already doing fine, maybe suffering most of the consequences of these rising rates. It's creating more equality. Equality is probably a good thing.

Brian Lehrer: Now, I think Ed in Brooklyn wants to know about what might be an investment tip that you inadvertently gave him a few minutes ago. Ed, you're on WNYC with Felix Salmon from Axios. Hi there.

Ed: Hello.

Brian Lehrer: Hello.

Ed: Hello. Hi, okay. He said something a few minutes ago that what is the instrument that he's talking about that you can get 5% and its federally insured and liquid, because I don't know such an instrument. What is it?

Felix Salmon: Treasury bills.

Brian Lehrer: Yes, Treasury bills. Which Treasury bills?

Felix Salmon: Well, the ones that people tend to be buying right now are 26-week, six months Treasury bills. Almost any Treasury bills, you can buy them directly on the TreasuryDirect website, which is a very clunky website, which is not easy to navigate, but you can just buy your government debt directly on that website. If you have a brokerage account, there's a good chance you can buy Treasury bills directly through that. There's an online brokerage account called Public, which allows you to just invest directly in Treasury bills as well. Those are US government securities. Full faith and credit of the United States. The most risk-free asset you can buy yielding over 5% right now.

Brian Lehrer: Now, everybody's going to go to TreasuryDirect after that and crash the website through demand.

Felix Salmon: [laughs] By the way, the website has been crashing. A lot of people have been doing this. The poor Treasury website, which feels like it hasn't been updated since 1998, is struggling under the stream.

Brian Lehrer: One more on this general topic before we move on to the Biden budget. Mark in Manhattan, you're on WNYC. Hi, Mark.

Mark: Yes. Hi, how are you? Talking about the banks, there's a connection here with real estate. Banks, bankroll, no pun intended, tons of real estate. They have billions and trillions of dollars in real estate in New York and in every city in the United States. Now, there's this whole deal now where people work from home. If you heard the news, the upgrade of Penn Station is put on hold now because the real estate corporation that was going to build towers around Penn Station have pulled back.

I guess because there's a situation where they're afraid they're not going to be able to fill them. Governor Hochul has to come up with a new plan to renovate Penn Station. I think this is a sign of the times. Is real estate going to collapse? Not necessarily the home real estate market, but the commercial real estate market. Is it going to collapse in this country causing more pressure on the banks?

Brian Lehrer: Mark, thank you. I don't know if this is in your portfolio, but it's certainly something we talk about a lot in New York economic terms. What's the long-term implications of work from home or hybrid work on commercial real estate?

Felix Salmon: No, it's something I've been looking at very closely and it's a great question. There definitely is this bifurcation that you are talking about between residential real estate, which seems to be doing fine in terms of values despite these much higher mortgage rates and commercial real estate, where we're seeing an uptick in defaults and lower valuations and empathy offices, especially in New York.

New York has really lagged the rest of the country in terms of returning to the office for various reasons. I would say that, yes, commercial real estate is struggling. It will probably get worse rather than better in terms of valuations. We'll see more changes of ownership of the buildings. Inevitably, yes, we're going to see less new construction of new commercial office buildings because we have too much office space already right now.

Is that going to be terrible? It's not necessarily a bad thing, right? If it becomes cheaper to rent an office in New York, if more smaller businesses can afford to do that, that could actually help to increase the vibrancy of the range of businesses that can raise in Manhattan. It could help the city out. I don't think that office taxes are a massive part of the city budget. I think we could probably cope in terms of the city budget if commercial real estate taxes came down a bit.

It would hurt if they came down a lot. The offices themselves aren't going anywhere, right? The offices themselves are always going to wind up having tenants in them, so that's not a problem. Yes, I think if you are a bank with a lot of exposure to commercial real estate, you're worried about that. Mostly, I think it's not less the banks and more the big investment companies like BlackRock who own that, and so they could be facing trouble.

Brian Lehrer: Well, there is a higher than usual vacancy rate in office buildings in New York City. If we have a glut of office space and a chronic shortage of residential space, there, of course, is all this talk too in New York of, "Can you convert office buildings to residential buildings?" It's not necessarily that easy because think about what a typical office building is like. It's not like a home. That's beyond the scope of this conversation, but that's obviously big topic for the city. Felix, go ahead.

Felix Salmon: There's a really big one who has just opened at 1 Wall Street, a big office to real estate conversion, which is lovely. It's expensive. It probably costs as much to do one of those conversions as it does to just build a big new residential tower from scratch. It's often worth it. The people doing these conversions are making money on them and there's a seemingly insatiable demand for residential. Yes, I feel like we will see more office-to-residential conversions. That's probably good, especially in the lower-grade, Class B office buildings, often pre-award that have smaller floor plates and they're easier to convert.

Brian Lehrer: All right, Felix Salmon is going to stay with us. We're going to turn to the big numbers that Joe Biden released yesterday, but we will ask, is this really for the 2024 budget or is this for the 2024 presidential race? Stay with us.

[music]

President Biden: Let me tell you what I value with the budget I'm releasing today. I value everyone having an even shot, not just labor, but small business owners, farmers, and so many other people who hold the country together who have been basically invisible for a long time.

Brian Lehrer: President Joe Biden from his fiscal 2024 budget address yesterday. Let's talk about what's in it and what it means as we continue with Felix Salmon, chief financial correspondent at Axios. Where do we start? There's so much in here. There's the Democrats' social safety net agenda. There is the question of deficits. There's the question of taxing income over $400,000. What's the first thing that you reacted to when you read the budget coverage?

Felix Salmon: Tax hikes. I think that was the thing that really caught my eye first was Biden's attempt to say, "I care about the deficit. I care about the debt. We need to get this under control. Instead of cutting spending, my solution is to try and raise taxes on the rich." There's no chance that that could get through Congress as it's currently put together, but that's clearly his fiscal priority.

Brian Lehrer: To do what? Raise tax-- By the way, can we make a distinction? I said this earlier in the week in passing, but you with your expertise in economics can maybe expand on it a little bit. When Biden talks about not raising taxes on income over $400,000, he's talking about income over $400,000. Even if you make $1 million a year, the first $400,000 would be taxed at the existing rates, right? It's not like from dollar one. If you make a lot of money, you pay higher taxes. It's on the income over $400,000, is that correct?

Felix Salmon: That's right. We're talking about marginal tax rates. This is one of the things that people find really difficult to understand. Yes, if you have all your income up to $400,000 taxed at a certain rate, all of that income up to $400,000 will remain taxed at that certain rate. If you earn $401,000, the only income you get taxed at the higher rate is that extra $1,000.

Brian Lehrer: Now, the President did link that to preserving Medicare for decades to come. He didn't propose anything to preserve Social Security solvency for decades to come. Did he take a dive on something that he should have stepped up to the plate on?

Felix Salmon: [sighs] Apologies for the big sigh there, Brian. Medicare is a real problem because there are real questions to how does the government practically pay for that if you can't direct money to it from various accounts. Social Security, I feel like there's ultimately old pensioners. Older Americans are going to wind up getting their checks one way or another. This is just more of a gut feeling for me than it is a sort of sophisticated economic argument.

Yes, both of them are seeing outgoings go up. The American population is getting older. That means we're getting sicker. That means more of us are retired and need Social Security checks. The number of people paying into those programs is not keeping up with the number of people who will be drawing down on those programs. There is a deep need for cash in both of those entitlement programs.

This is a start in terms of trying to put together a plan for how to deal with them. What this budget is not is a multi-decade, long-term solution to the solvency of both Medicare, Medicaid, and Social Security, right? As you said earlier, it's more of a political platform that Joe Biden can run on in the 2024 election, but at least it pays lip service to the fact that these things need to be solved.

Brian Lehrer: The Washington Post has an Article VII takeaway from the Biden budget proposal. One of them is Biden remains committed to the ideas Manchin blocked. It says, "Much of the president's first two years in office were spent trying to pass his Build Back Better agenda, which called for trillions of dollars in spending proposals on everything from childcare to housing to eldercare."

"While Democrats eventually approved a more limited package focused on climate spending and taxes and prescription drugs, objections from centrist senators, particularly Senator Joe Manchin of West Virginia, blocked most of Biden's initial ambitions. Still," it says, "the 2024 budget shows the White House remains committed to the ideas, at least rhetorically." I had this conversation with Senator Gillibrand this week. Isn't paid family leave a really popular idea across political sectors that they could pull out and force the Republicans to take a position on and either finally get it done or use it against them?

Felix Salmon: That's political tactics, right? I think, tactically speaking, you could well be right about that, that if you try and do these things one piece at a time, you can pull out the paid family leave part, push it forward as a bill, and then force the Republicans to come out against it and then say, "Why are you against this thing that everybody loves?" In terms of a grand budget for the country as a whole, it's hard to put together that on a piece-by-piece basis that way. The Biden budget was really just saying and a whole bunch of other things that we have been saying that we want since the 2020 election.

We still want them. We still believe in this agenda. We still believe that we can save the planet and increase the well-being of working families and reduce the deficit into all of these things at the same time. This is the agenda and we didn't get it through because of Joe Manchin, but we still believe in it. That is the big picture. I think you're right. There are definitely individual parts of it. Paid family leave is certainly one of them that it's politically really hard to oppose, including, by the way, Medicare, right? It's really hard to run on the platform if we need to cut Medicare.

Brian Lehrer: Right, rather than raise taxes on $400,000-plus income to keep Medicare solvent that way. We just have a minute left. We know that a lot of the Republican opposition is going to be, "No, we won't vote for that budget because of deficits." Can you give our listeners a 30-second thumbnail guide to figuring out the confounding question of how much deficit spending is healthy versus dangerous for the US government?

Felix Salmon: No is the short answer. [laughs] No, I can try.

Brian Lehrer: Well, goodbye. We'll talk to you in a month.

Felix Salmon: [laughs] No, the big idea is that every time the government deficit increases, a bunch of fiscal hawks come out and say, "Oh, this is going to be terrible. It's going to cause this long period of horribles," and then the parade of horribles never happens. One of the parade of horribles is always inflation. Don't ask me why deficits are supposed to cause inflation, but that's one of the things.

Right now, we do have inflation. It's higher than it should be. The people who want smaller government are pointing to inflation as a reason for cutting government spending and reducing the deficit that way. Ultimately, the government can print as much money as it likes. Historically speaking, if you look back over the past 20 years or so, every time they've done that and, mostly, it's been under Republican presidents, it hasn't caused inflation.

Reducing the deficit is important on the long term because it's like having a deficit that just grows and grows indefinitely until it becomes two, three times the size of the economy is clearly not sustainable. At some point, you need to get it under control. In the long term, it's important to get it under control. In the short term, it doesn't seem to make a huge difference.

Brian Lehrer: Somehow, they will have to compromise and hash out a budget for the next fiscal year by October 1st when that fiscal year starts. By that time, Felix, there will be televised Republican primary debates, [laughs] so just stay and buckle up.

Felix Salmon: The Republicans have the majority of five in-house, so this is all going to be really easy.

Brian Lehrer: Felix Salmon is chief financial correspondent at Axios and writes their weekly Axios Capital Newsletter. Great to have you on, Felix. Thank you very much.

Felix Salmon: Always a pleasure.

 

Copyright © 2023 New York Public Radio. All rights reserved. Visit our website terms of use at www.wnyc.org for further information.

New York Public Radio transcripts are created on a rush deadline, often by contractors. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of New York Public Radio’s programming is the audio record.