“Fault-Finder Is a Minimum-Wage Job”

I first met the economist Austan Goolsbee around 20 years ago. I was out at the University of Chicago, spending time with another Chicago economist, Steve Levitt, who would become my Freakonomics friend and co-author. Levitt could be shy and soft-spoken; Goolsbee was neither. He was a former debate champion; he had done improvisational comedy; in fact, Goolsbee did a lot of things that most economics professors didn’t do. So I guess I didn’t see him as a heavyweight, exactly. If you had told me back then that Goolsbee would go on to run the Council of Economic Advisors in the Obama White House — which he did — and that he would become president of the Federal Reserve Bank of Chicago — which is his current job — I would have thought you had the wrong guy. But plainly I’m the one who was wrong. Goolsbee has always been considered a top-tier academic researcher and professor; temperamentally, he’s a hardcore empiricist but he also has strong opinions. And so, as the Trump White House embarks on an aggressive overhaul of economic policy, I thought it might be a good idea to speak with someone from the Federal Reserve, and I suspected that Goolsbee might be very good. This time, I wasn’t wrong, as you’ll hear on today’s show. Goolsbee has been on Freakonomics Radio before — in 2018, talking about the 2017 Trump tax cuts; in 2020, talking about federal Covid stimulus, which was the biggest aid package in modern history; and also back in 2014, in an episode we called “Should the U.S. Merge With Mexico?” Goolsbee wasn’t a huge fan of that idea:

Austan GOOLSBEE: It’s worth contemplating as a counterfactual, but if you start thinking beyond the first stage, there are a whole bunch of costs associated with it. 

As for his current job, running the Chicago Fed: Goolsbee is part of a Federal Reserve System that dates back to 1913. It has a Board of Governors in D.C., currently chaired by Jerome Powell, and 12 regional banks across the country. Many people — including Austan Goolsbee — consider the Fed the most important economic institution in the United States. So what, exactly, does the Fed do?

GOOLSBEE: It does monetary policy, and that is a big part of the job. But underneath the monetary policy part, there’s monitoring financial stability, and we’re the lender of last resort. There’s supervision of financial institutions and banks. And there’s providing financial services through massive payments. We’re the biggest payments operator. We distribute all the cash in the economy.

If you look at the U.S. economy today by the numbers, it looks pretty good. Inflation has been trending downward since June of 2022; the most recent reading, in April, came in at 2.3 percent. Unemployment is also low, at 4.2 percent. But the Trump White House has introduced a high level of economic uncertainty, especially around tariffs, and as a result, the U.S. stock markets and Treasury bonds and the dollar have all taken wild swings lately. This puts the Fed on alert. When Goolsbee joined the Bank, two years ago, his senior colleagues wanted to know where he stood:

GOOLSBEE: From the beginning, they started asking, are you a dove? Are you a hawk? I don’t even know if I like birds. I just want to be a data dog. 

And what does it mean to be a data dog?

GOOLSBEE: There’s two main rules. There’s a time for walking, and there’s a time for sniffing, and the first rule is: know the difference. The second rule is, you never throw anything away. The diet of the data dog is, eat anything that hits the floor.

You might think of Austan Goolsbee as an unusual man who, in an unusual time, holds an unusual job:

GOOLSBEE: My wife once found a $100 bill in the street. She came to me and said, is there anybody at the Fed who can tell if this is real?

Today on Freakonomics Radio: what’s real, what’s not, and how to tell the difference.

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Stephen DUBNER: First things first — every time I say your name, like when I tell people I’m interviewing you, they all respond in the same way, like, “Goolsbee?” It just sounds creepy.

GOOLSBEE: Yeah, Halloween’s our holiday. 

DUBNER: Tell me about your name, the origin — you know much about it? 

GOOLSBEE: Many, many moons ago, they lived in the town of Golspie, Scotland. And that’s how they got the name and came to the U.S. Now, there’s some dispute. There’s also some town in northern England called Goulceby, with a C. But I prefer to think of it as the Scotland one being the origin. They came to Virginia way, way long time ago, 1600s. You know how people will look back and they’ll be like, Oh, in ancient Athens, the population of great philosophers was unbelievable? There were these periods in history where it’s like, everyone was amazing. And revolutionary America seems like that. Our people are proof that’s totally not true. They were there. They were standing around, but they didn’t do anything. They kept on moving. They moved to Georgia, Mississippi, Alabama. By the time they got to Texas, they were clearly illiterate.  

DUBNER: Your first name, Austan, sounds normal, but you don’t spell it normally. You spell it A-U-S-T-A-N. What’s the story there? 

GOOLSBEE: Yeah, that was my dad’s fault. I had just been born. My dad came in and said, “He’s going to be a unique person, he needs to have a unique name.” My mom said, “That’s crazy, they’re just going to misspell his name his whole life.” My dad said, “I won’t sign the birth certificate unless we do that.” She said, “I apologize to you. I was just too tired, it was 20 hours of labor, and so I just went along with it.” 

DUBNER: Can I just say? — they were both right. 

GOOLSBEE: To his dying day, my dad would say, “I was right.” And then my mom would always add, “And I was right, too.”

DUBNER: Now, I see that a woman named Linda Goolsbee recently ran for Congress in Texas as a Democrat, and got walloped. Is that your mom? 

GOOLSBEE: It was for state representative. It was my mom, at age 80. My father passed away and my mom decided to run for office in Abilene, Texas, that’s the first- or second-reddest city in America.

DUBNER: She got 19 percent of the vote, it looks like. 

GOOLSBEE: Yeah, I think Trump’s support was in the 80s. So she probably started behind the eight ball, but I was proud of her.

DUBNER: Okay, so Austan, where are you physically today? 

GOOLSBEE: I’m in the Chicago Fed Bank, the classic building. We got a vault with many tens of billions of dollars of cash down in there.

DUBNER: Do you use stacks of money as a sound muffler there? Is that what the recording studio is walled with? 

GOOLSBEE: I wanted it to be just piles of money, just open the door, but I was disappointed. It’s very organized. We have a lot of security, and a lot of cameras. All the cash in America, people don’t realize, it’s printed by the Bureau of Engraving and Printing, but all the cash is distributed through the reserve banks. The reserve banks are like banks for banks. So, the bank has an account, and they’ll say, we have too much cash, we want to send some back. Or, We need some for our A.T.M. machine, so we’re going to send a Brink’s truck over there and place an order. When things go wrong in the world — COVID, crises, Silicon Valley Bank, things like that — the demand for cash suddenly surges. So we keep a lot on hand, and we’re ready to satisfy that. 

DUBNER: Now, the Chicago Fed is one of 12 regional feds. How does Chicago compare to the others in terms of cash on hand? 

GOOLSBEE: Oh, I thought you were going to say how do we compare? And I was going to say, By wide acknowledgement, we’re the best of the 12 . But in cash on hand — we pay out about $140 million a day and we take in about $120 million. If you have one-dollar bills in your pocket on the left side, there’ll be a little circle with a letter in it and that tells you which bank it’s going on the balance sheet of. And we’re the seventh district, which is the G, the seventh letter. So, we’re the G money, couldn’t be better.

DUBNER: As president of a regional Fed, if you were not speaking with us right now, what would you be doing instead? 

GOOLSBEE: The thing about the presidents of the reserve banks is they’re also the C.E.O. There’s kind of a high-brow thinking about monetary policy, and then there’s a more operational role that the bank plays in payments, in bank supervision, in community engagement, community development, enforcing consumer protection laws, and then financial services of being a bank to the banks. 

DUBNER: In other words, you’re really a banker. 

GOOLSBEE: I guess I kind of became a banker — a scholar-warrior, economist-something in all of those.

Every six weeks or so, Goolsbee goes to Washington to participate in the meetings of the F.O.M.C., or Federal Open Market Committee; that’s where interest rates are debated, and determined. So what’s it like to be in this meeting?

GOOLSBEE: If you’re an econ nerd, it’s just about the coolest thing in the world. It really is exactly what you dreamed it would be as an econ grad student. There’s a huge table, there’s 12 reserve banks and 7 governors, including the chair. The shades come down so no one can spy on what’s happening, and then they go around the room. What do you think about the economy? What do you think? What do you think? And people say their piece. 

DUBNER: Give me a sense of what people are looking to you for, I mean, you’re in a relatively manufacturing-heavy region. You’re in the center of the country. Chicago is also a big city. You’re also a regional president who happened to have worked in a White House. So, I’m guessing that you have a perspective that would seem pretty valuable, maybe a little bit unusual.

GOOLSBEE: Look, I’m unapologetic about saying it, I believe that the F.O.M.C. is, in the 21st century, the world’s greatest deliberative body. No offense to the Senate, but you can turn on C-SPAN and judge for yourself . The thing about the F.O.M.C. is, you have people coming from different backgrounds and different perspectives, both regional and what was their professional background. So, I came as an economic researcher. I had done time in the government, and was interested in public service. But I try to come to the meeting very much with that economic research background. The Chicago Fed’s research department has always been at the forefront of economic research. They publish in top economic journals, so that was a good fit for me. 

DUBNER: When you’re in that F.O.M.C. meeting with your colleagues, you coming from an academic economics background, so if you call it the world’s greatest deliberative body — I’ve been in the University of Chicago seminar rooms where economists are giving papers and really tearing each other apart. It can be brutal. I’m guessing it’s not like that at the Fed.

GOOLSBEE: No, no. It’s nothing like that. I love and will love, to my last day, the University of Chicago, and the economists there are brilliant. It’s a smash-mouth football kind of a culture. And the Fed is not like that at all.

DUBNER: Do you have to tone yourself down, or no?

GOOLSBEE: I’ve always been on a nicer side of the continuum. The brutality part of that, I’ve never been a fan of. When I go to the meeting, I come from an academic background. You’ve got markets people, bankers, you got some academics, you’ve got people that were private-sector economists. And it’s really fun to hear their take on the economy and their take on rates. It takes place over two days. Day one is about the state of the economy. Day two is about what should we do with rates. Each district has some differences regionally. 

DUBNER: We should say, the district presidents like yourself — you are not appointed federally, you are essentially chosen and elected and vetted regionally, is that right? 

GOOLSBEE: Yeah, that’s exactly right. So let’s take a side trip down the structure of the Fed. There are 19 people around the table. There are seven members of the Board of Governors. They are political appointees chosen by the President, confirmed by the Senate. 

DUBNER: How long a term? 

GOOLSBEE: Fourteen-year terms. The system is set up to be independent from political interference in the setting of monetary policy as much as you possibly can in a democratic system. So first, seven people are political appointees, but they’re on 14-year terms that are staggered. Those governor terms run regardless of who’s in it. So sometimes you’ll be nominated and it’ll be just to finish out the last 2 years of a 14-year term. And the chair and the vice chairs, separate from their governor term, serve a four-year term as chair. It’s not timed to be on the presidential cycle, it’s two years later you change the Fed chair. Then there are 12 reserve bank presidents sitting around the table who are not political appointees at all. Those aren’t even government agencies. They each have their own board of directors composed of business leaders, civic leaders, bank leaders from the region. The seven governors vote every year, and among the regional presidents, the New York Fed votes every year, Chicago and Cleveland trade off voting every other year, and the other banks, every third year. 

DUBNER: Okay, this sounds like a system made up by somebody who’s inventing rotisserie baseball or something, right?

GOOLSBEE: It’s kind of a kludgy, rotisserie baseball system. But why does it exist? Why is there a Fed in Chicago? It is because in 1913, as today, people were deeply uncomfortable with the idea that Washington, D.C., plus Wall Street, would be in complete control of the financial system with no input from the rest of the country. So even though it’s a kludgy voting system, it actually works. We come from Chicago, and I’m out talking to business leaders, civic leader. Our region is basically 90 percent of the economy of Iowa, Illinois, Wisconsin, Michigan, Indiana. It’s more heavily manufacturing than any other district. It’s by far the most autos of any other district. So at times like this one, where issues of supply chain, tariffs, things like that come to the fore, I do feel like in the Seventh District we have more to say about that. If you want to know how will rare-earth metals embargoes affect fabrication of engines and motors, the Chicago Fed has a Detroit branch and that branch has a board, and we have our board people from the auto industry. We do our contact calls before every F.O.M.C. meeting, where we talk to a lot of different folks. We come with good regional information. I like to come to the meeting with aggrandizing tales of the seventh district, ways that we are singular, things that are amazing about the district. I’m sure that makes me unpopular with all the other presidents, but I don’t care. 

DUBNER: So you described the voting system, where the seven governors always have a vote on the F.O.M.C. And then there’s these rotating regional votes. What is the total then? If, let’s say, the seven are unanimous and most of the regionals are against, do they inevitably lose out, the regionals? 

GOOLSBEE: There are 12 voters, and that makes up the F.O.M.C. But there are still the 19 people around the table. And everybody speaks their piece, whether they’re a voter or not a voter. 

DUBNER: And are the votes made in that same session?

GOOLSBEE: The votes are made at the very end. Now, the thing about the voting is, it tends to be overwhelmingly based on consensus. So if you just look at the votes, there are very few dissents. It’s almost always unanimous.

DUBNER: But I’m guessing there are instances where either a regional Fed president like you or someone on the board of governors or maybe the chair himself, Powell in this case, might change minds or at least rally consensus. Can you give me an example of that? 

GOOLSBEE: I’m not allowed to give you examples of that because we’re not out of the period that the transcripts come out. But historically, yes, you’re correct. There are times when there are multiple dissents or there can be arguments and people can change their mind. There was one episode in the 1980s where new governors had been appointed. Paul Volcker was the chair. There was a vote where the chair was going to be outvoted, they were going to do the opposite of what the chair was advocating. That’s extremely unusual. And Volcker said, “Look, if this happens, I’m going to resign.” And they went back in, and they re-voted. In the 2000s, coming out of the Great Recession, some of the regional presidents disagreed with Chair Bernanke, and they dissented repeatedly. Not enough of them were dissenting to change the policy, but there were fundamental and lasting differences of opinion. 

DUBNER: And does that dissent filter back to the White House? 

GOOLSBEE: Filter back how? What — what do you mean? 

DUBNER: I guess what I’m thinking about is, there’s so much news going on right now. There are Congressional budget debates, tax debates, tariff threats, how much does current policy-making intersect with the Fed? Let’s say you personally, you’re looking at these policy proposals and as an economist, you’re envisioning — probably like a lot of the nonpartisan analysts are talking about right now — that this economic agenda might be incendiary down the line, in which case the Fed may end up being the fire department. That’s my outside view. I’m guessing it’s wrong, but tell me what the inside view is. 

GOOLSBEE: Okay, let’s back up to the founding of the Fed, and what is the Fed’s job. The Federal Reserve Act gives the Fed two jobs when setting monetary policy. 

DUBNER: This is your famous dual mandate. 

GOOLSBEE: The famous dual mandate. It says right in the law, we are to maximize employment and stabilize prices. That’s the job in its totality — nothing more, nothing less — in the setting of monetary policy. So anything that affects prices or employment, we are required by law to think about it. 

DUBNER: I can imagine some people hearing that as a fairly narrow prescription, and some people hearing that, as, well, that’s everything?

GOOLSBEE: And they’re both right. As we say in Chicago, there’s no bad weather. There’s only bad clothing. You tell us the conditions, and we’ll figure out what’s the correct jacket to put on. And that’s true at the Fed, too. Conditions change all the time. Sometimes it’s policy. Sometimes it can be geopolitics. The productivity growth rate can change. We can have excess demand, animal spirits, you think we have a bubble. There are things happening all the time. That’s why we meet every six weeks at the F.O.M.C., to be the tip of the spear of economic stabilization. Now, graft onto it policy changes, periods of major policy uncertainty. We have to think about it, because if those policies are going to affect employment or prices, the law says that’s what we’re supposed to look at. We’re not in the elections business. And it’s not the role of the Fed to express opinion about fiscal policy. There was a time in my life when I was in that business, and once you’re a sworn member of the Federal Reserve — it’s like the Night’s Watch or something — you’re out of that business. We have to think through — if it’s tariffs, I go out and I talk to the auto executives. Well before April 2^nd, the people in the district — who are, granted, more manufacturing-intensive, more supply-chain- intensive than other districts — they were expressing, “If these tariffs of this magnitude come in, we are afraid that this is going to take us back to the period of a few years ago, where costs are out of control” —

DUBNER: From Covid, supply-chain issues from Covid. 

GOOLSBEE: So, there was an inflationary period in ‘21, ‘22. And there was a Covid disruption period of 2020. They said, this might take us back to the ‘21, ’22, where inflation from costs is raging. Or if they’re as big as what some of them are advocating, it might take us back to 2020, where we just couldn’t make the product because we couldn’t get the parts. 

DUBNER: So, as you gathered this information in your role as the Chicago Fed president, you’re talking to people who have experience, they have stature, and they have skin in the game, what purpose does that information ultimately serve? You bring it to the F.O.M.C., and then what? 

GOOLSBEE: Hopefully, whatever I get, people will listen to, and collectively, we got to decide. At the end of the day, the Fed, in a grand way, has only one tool, and that’s the interest rate. We have a balance sheet, we have different things, but they’re fundamentally about credit conditions and financial conditions in the economy. I think of it as a screwdriver, Hey, if things start getting too loose, then you tighten it. And if things are too tight, then you loosen it. But if it’s, you know, can you make us breakfast? No, we basically can’t. We don’t have a tool to do that. We try to think through not just backward-looking, but also forward-looking for the economic outlook. What are these changes going to do to employment, or to inflation? 

DUBNER: But it’s a waiting game then, because you’re not a policy-making arm? But I would imagine it’s frustrating, especially because you as an economist who has done a lot of policy analysis, a lot research over the years, part of the challenge of doing that research and part of the fun is trying to estimate effects of different causes. As we’re talking today, you know, Moody’s recently downgraded U.S. debt. And it set off some alarms. A lot of the budget and tax proposals being discussed on the Hill right now are expected to contribute substantially to federal debt. So, these all seem like upstream events that are theoretically — especially in the mind of an economist like you — going to have potentially major downstream consequences. I would see the Fed at the end of that, in two or three or five years, needing to respond to those events. Is that what you do, you kind of wait?

GOOLSBEE: The thing about the data — the official data come out with a lag. So they’re one month, one quarter, one week later. If you committed to never think about the outlook, only to look backward, you would miss a lot of things. You would be behind the curve multiple times. Policy is just one of an infinite number of shocks that you have to think through. It’s not special in that way. If there’s a war in the Middle East and the price of oil goes up $30 a barrel, we got to think about that too, and not just wait to see what it does. In my view, there’s a great success story of the last couple of years that’s worth thinking about, which also makes me somewhat comfortable that ChatGPT is not going to replace the central bank and the F.O.M.C. anytime soon.

DUBNER: I was going to ask you whether A.I. would be at least a useful tool in monetary policy. I would assume so.

GOOLSBEE: It might be a useful tool. You’re never going to hear me say we should throw away tools. But A.I. is only as good as the training sample. Take the beginning of 2023. That’s when I joined the Fed. Inflation is still well above the two percent target that the Fed has laid out. There are a number of smart people saying you cannot get the inflation rate down without pain, serious pain. You had Larry Summers saying unemployment would have to go above six percent for five consecutive years before you would see inflation come down. ChatGPT would have looked at the historical record and said, “What should we do?” It would have said, “Jack the interest rate up to 15 percent, and have a recession, because that’s how you get rid of it.” But the economic analysis said, This is a very weird business cycle. So those previous business cycles might not apply. And if you could heal the supply chain, you might be able to bring down inflation without a recession. And they did it! So, in 2023 — I said it was a hall of fame year because inflation fell by close to as much as it has ever fallen in a single year, and not only was there not a recession, the unemployment rate never even got above four percent. That’s a triumph for economic analysis, not just historical patterns.

DUBNER: Now, to be fair, most economists were predicting recession. In fact, there’s the old joke about economists have correctly predicted 19 of the last 3 recessions, right?

GOOLSBEE: Yes, and look, the Bloomberg economists predicted in December of ‘22, there was a 100 percent chance of recession in 2023. But it’s because they were thinking historically. They’re not wrong. In the past, that wasn’t wrong.

Will Donald Trump’s so-called “maximalist embrace” of tariffs cause a recession? And will the Fed be able to maintain its political independence?

GOOLSBEE: There’s close to unanimity on the importance of Fed independence — mostly rooted in, just go look at countries where they don’t have it.

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I’m speaking today with Austan Goolsbee, president and C.E.O. of the Federal Reserve Bank of Chicago.

DUBNER: The second Trump administration, even more than the first, has upended all sorts of political norms, right? A place like the Fed is built on political norms. So I’m curious how you and your colleagues are approaching that. I mean, the President of the United States, Donald Trump, has called your boss, Jerome Powell, a man he appointed, he’s called him “a fool,” a “major loser.” I can’t imagine that, as much as one might intellectually try to insulate oneself from the noise, that it’s possible to do so entirely. So how does that affect the function of the Fed?

GOOLSBEE: The rules of the Fed, the rules of the F.O.M.C., say I’m not allowed to speak for anyone else, I’m allowed to not speak for the Fed. I can only speak for myself. I would just say that, before I was ever at the Fed — just go ask economists, they’re unanimous that it’s critically important that the central bank be independent of political interference when setting the interest rate. That’s the notion of Fed independence. If you want inflation to come back, go take away Fed independence, and you’ll get inflation back. It makes me uncomfortable if people are truly advocating not having central bank independence. You know what happens when there’s political interference. Their incentives are different than long-term price stability and maximizing employment. Independence is never won for all times. It has to be re-earned in every generation, it seems.

DUBNER: But let’s acknowledge — or I’ll acknowledge, at least, that Fed independence has come under attack from the current administration. So what role do regional Fed presidents like you — as opposed to the D.C.-based governors — have when it comes to ensuring and continuing Fed independence from the executive branch?

GOOLSBEE: The role of reserve banks is critically important to be independent monetary policy voices on the committee. They have played that role over the 112 years that the Fed has been around. There are many examples where important ideas about monetary policy, or about the state of the economy, came up through the reserve banks. I don’t agree with all of my colleagues all of the time, and they don’t agree with me. A key part of what makes this as important a deliberative body as it is, is exactly this, that we’re coming from 12 different regions, plus Washington, D.C., to express independent views. If you take it away, you should fully well expect inflation to be coming back.

DUBNER: I’ve heard you cite a mentor of yours, the economist Jim Tobin, as saying that economics is most useful in a crisis. You talked about 2023 as being a weird business cycle. When you look at the U.S. economy today, do you see a crisis and if not, what would you say are the characteristics about this economy that make it significantly different, or confusing, from the past?

GOOLSBEE: The thing that fundamentally made this period — let’s call it from 2020 to today — extremely unusual is that, normally the business cycle is driven by the most cyclically sensitive sectors, and those are the most interest-rate sensitive sectors as well. Durable goods manufacturing, business fixed investment, large consumer durables purchases, autos, stuff like that. Those are very cyclical industries and they’re ones where the interest makes a big difference. As we go into 2020, it’s the first and only recession ever where demand for housing, durable goods, cars — all of that went up in the downturn. And a bunch of stuff that is normally recession-proof, has nothing to do with the business cycle — like going to the dentist — all of those services dried up. So we had a business cycle that looked nothing like a normal business cycle. And it was a business cycle where if you say, What is the interest-rate sensitivity of having elective surgery? Nobody ever asked that question before. Then it was like, Well, you stupid Fed, why aren’t you predicting what’s going to be happening? In large measure, it’s that this business cycle is really weird and people’s spending shifted heavily to physical goods and away from services, which was fighting against a 80-year trend. And now as it comes back, we’re still living with that, to say nothing about the supply-chain disruptions.

DUBNER: Where are we in relation to normal now in that regard?

GOOLSBEE: We’re mostly back for the consumer share, we’re mostly back to the heavily dominated services. 

DUBNER: So this question is maybe too reductive or maybe unanswerable, but how do you, as a Fed president, see the Trump tariff policy? And I realize that there are, you know, 1,800 different components of that. How do you think about that, especially compared to supply-chain disruptions that were created by Covid? Do you see this as potentially a second wave?

GOOLSBEE: There’s kind of two parts about it. The first the President and Congress, in their wisdom, can pass any tariff policy they want. That’s a straight fiscal policy. That becomes a condition that affects prices and affects employment. And if it does that, then the Fed has to think about it, the law says we have to think it. I went out and talked to business people and consumers throughout the 7th District, that made me, even before April 2nd, nervous. The Econ 101 version of what tariffs would do, might not be subtle enough to capture what was happening. The Econ 101 version says tariffs that are permanent — there’s no retaliation, there’s no escalation, they’re just a one-time increase in the cost — that should be a transitory shock to inflation.

DUBNER: Transitory just meaning it’ll come, and then it’ll get absorbed and fade away.

GOOLSBEE: Yep, so if you put in a 10 percent tariff, inflation should be 10 percent in the first year, and then there would be no further inflation from the tariff. If you have a transitory shock, the Fed in many ways should see through it or should not be counting on that as a lasting, persistent inflation shock. And you would more be looking at, Well, what is it going to do to output, employment, and what might it do to productivity or the economic potential? The thing that got me nervous when I would talk to people is that they thought that view of tariffs — the pure platonic tariff with no retaliation, no escalation, and no spillovers on the supply chain — they thought that was hopelessly naive. They said, We just went through a period with supply-chain disruption that they said as it was happening, this would probably be transitory, because the supply chain will just fix itself. And it took years before that worked its way through. At the end of the day, imported goods are only 11 percent of G.D.P. in the United States. So even sizable tariffs would be noticeable, but might not have a material aggregate impact. But if they were too big, then they threaten to relearn the lessons of Covid, and the inflation period. If they truly disrupt the supply chain, it could be a mess and it could last a lot longer than the textbook says. That was going to be even more problematic if there was retaliation, if the tariffs were going to apply to parts, components, and supplies, and if there were escalations. So far, there’ve been all three of those. That kind of just threw dust in the air. Now, before April 2nd, I was saying many times that, we’re basically at stable, full employment. Unemployment rate around four percent, strong job growth. Inflation looked to me to be heading back to two percent. And if you just looked at the so-called dot plot, where they ask all the members of the F.O.M.C., Where do you see rates, what do you think will be the appropriate rates next year, the year after? If you look at the long run, the vast majority of the committee believes that rates could be well below where they are right now. And I thought rates over the next 12 to 18 months could come down a fair bit more. This threw a lot of dirt in the air. And so it’s hard to know exactly what it is, but I still think underneath there, if we could get the dirt out of the air, I still think we’re basically in that spot. It’s kind of like, at one point I went to the trainer and they said, “Well, what are your goals?” and I said, “Well, do you think I could get a six-pack?” And the trainer said, “We all have a six-pack of muscle underneath.” And that’s the problem is, what’s on top of it. We’ve layered this thing on top of what I still think underneath there is a healthy six-pack economy. We had a big “Fed Listens” event where we brought in a bunch of folks a couple of weeks ago. One of them, he was running a construction company, he said, “For us, this is a ‘put-your-pencils-down’ moment.” We just have to wait to get some resolution. Because even when you announce, Okay, we’re not going do the tariffs, we’re going to revisit this decision in 60 days, and we might do them then — everybody’s just going to wait. That’s the fear.

DUBNER: So Austan, I understand that the Fed has been losing a lot of money, or at least returning much less to the Treasury than it used to. And of course the Fed spent a lot of money after the Great Recession on what’s called quantitative easing — buying up bonds and mortgage-backed securities to pump cash into the system. And then that strategy was used again during Covid. Why hasn’t the Fed fully wound down that portfolio by now? 

GOOLSBEE: There’s two things at work with this. The people saying the Fed is not turning over as much money as it did before, and is losing money, are not counting all of the money that the Fed made over the years. In the financial crisis and then again in Covid, the Fed expanded the balance sheet. Now, because the interest rate, the short-run Fed funds rate, which the Fed normally sets, was zero. And there’s a big problem when the rate is zero, because what do you do? I would have said negative rates are impossible, but you actually saw some countries have negative rates. And so they expanded the balance sheet in a big way to prevent something worse happening in the economy. But if you do that, you know that it’s going to lose money. The reason that you’re buying at a point where the bonds are really valuable is you’re trying to cut the rates. Everyone understood that they’re not going to make money on those investments because they were done as emergency measures. Then there’s a whole second thing, which is the Fed, since 2008, has changed the way that it conducts monetary policy to, instead of being in the so-called scarce reserves regime, in which the Fed has a small balance sheet and they engage in monetary policy through open-market operations, what the Fed does now is, banks have an account, and they pay interest on the reserves. And so banks are no longer in a scarce reserves regime. The interest on reserves rate that we set allows us to influence the interest rate even in weird environments where the normal open market operations were problematic. And as a result, if you’re going to be in an ample reserves regime, people just need to know the Fed will always have a larger balance sheet than it had in the old days, because that’s the way we do monetary policy now. So look, I’m sympathetic to evaluating all of the Fed’s actions, and hold it accountable. But I don’t want to hold it for accountability on things that aren’t bad. They are not conspiracies. The Fed is not the bad guy. We are the Guardians of the Galaxy. $5 trillion per day of payments, for example, go over Fed rails — wire transfers, ACH direct deposit, FedNow instant payments. Five trillion dollars a day. If you abolish the Fed, what would happen? People haven’t thought it through.

DUBNER: One question along those lines: Trump has proposed lowering reserve requirements at banks. Does that intersect heavily with the Fed?

GOOLSBEE: It intersects with the Fed. But the thing to know about the reserve banks is that the 12 banks, we do the actual bank supervision to check that they have the capital, but we do not set the policy. This is delegated from the Board of Governors. They enact the policy and tell us what we’re supposed to enforce. And we do it well.

DUBNER: But assuming lower capital requirements, are you expecting, for instance, a rise in bank M&A or something like that?

GOOLSBEE: If they change the capital requirements, we make sure that the banks in this district are safe and sound. We’re not going to be apologetic if somebody’s engaged in behavior that looks like it’s threatening financial stability or to the safety and soundness of that one bank, we’re not going to be shy about highlighting that. But we don’t weigh in on, Is this a good idea? Is this a threat?

So why does a Fed banker like Goolsbee not think that consumer vibes are all that meaningful? Also, if you want to hear some other conversations we’ve had with Fed people, check out episode 229, called “Ben Bernanke Gives Himself a Grade,” or episode 390, called “Fed Up,” with San Francisco Fed president Mary Daly.

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DUBNER: So Steve Levitt, our mutual friend, told me that while the two of you were Ph.D. students together at M.I.T., that you were one of just a handful of economists who saw the relatively new internet and thought that it would radically reshape at least parts of the economy. I know you wrote a well-regarded paper, I guess this came out in 2002, it showed how price-comparison sites reduced life-insurance costs by quite a bit. I’m curious how you feel that research of yours has aged, especially as we’ve moved into an era of algorithmic pricing. Do you see that technology is continuing to make markets more competitive, for consumers especially, or not so much?

GOOLSBEE: That’s a fascinating area of question. In the late 90s and early 2000s, the first boom of the internet, the argument was basically, Who does the internet give power to? Is it going to change the balance of power between customers and merchantsmanufacturers? In the early period, I was associated with the, This is going make it more competitive and give more power to the consumers, that it might shrink the margins for business by giving more information to consumers. That paper showed that that’s basically what had happened to life insurance. It does feel like in the decades that have passed, and especially in the last four or five years, the empire strikes back. They’re getting better at gathering information about the consumers and using that to tailor bespoke offers and products.

DUBNER: “Price discrimination,” you guys call it.

GOOLSBEE: Yeah, price discrimination in our economist language, and if you take a casual look at business margins, they’ve gone up. In the last decade or so, they’ve gone up quite a lot. I don’t know that that’s precisely or majority-caused by algorithmic pricing and the internet, but it’s worth thinking about.

DUBNER: Let me jump to another topic that economists historically were pretty united around, which was that globalized trade and labor, admitting China to the W.T.O., offshoring a lot of our manufacturing, was going to be a net win — certainly for China, but also for the U.S. And there’s been a lot of revisionism in the economic literature in the last maybe 8 or 10 years, to notice that there were consequences of offshoring all that labor that really changed the economic and social and labor fabric of this country. I bring this example up to show that even when really smart and well-educated economists reach a similar conclusion, that we shouldn’t necessarily accept it as truth, especially if it’s a prediction about the future. And I bring that up because I’ve been picking up lately a vibe, in Washington especially and elsewhere, that the kind of research that economists like you have been doing for decades is not to be relied on, at least as a foundational input in making policy decisions. I read a position paper by an incoming F.T.C. commissioner, Mark Meador. It was called “Antitrust Policy for the Conservative.” And he said that we need to “reinvigorate how we think about concepts such as competition, consumer welfare, economics, efficiency, and innovation.” I’m going to read a little bit more. “The fundamental tension,” he writes, “within the antitrust project is that the law is and must be oriented toward consumer welfare, but human beings are not just consumers, they are embodied souls seeking communion with their fellow man and their creator. Human welfare cannot be accounted in dollars and cents or purely materialist renderings of the good.” So to me, that sounds like an indictment to some degree of what you’ve built your career on. I’m not asking you to respond to Meador directly, but I’m curious to know how you feel that economic research is valued these days, in Washington especially.

GOOLSBEE: I don’t know that I have insight into the communion of minds or whatever they call for there. I’m interpreting the spirit of the question somewhat broadly. This brings us to the distinction between the hard data and the vibes. So you say, look, what if the hard data were good, but people say they just don’t feel it? They don’t feel like it’s good.

DUBNER: Sounds like you’re describing 2023.

GOOLSBEE: Yeah, 2023, 2024. If you look at consumer confidence measures, they were quite poor. The first thing, and I recognize it’s a little bit of a dodge, the Fed’s job, we have to think about the hard data. That’s what the law says. So we’ve always been interested in sentiment, primarily as an indicator for what’s going to happen in the hard data. For a long time, it was the case that if consumer sentiment went way down, then people were about to stop spending, and recession was on the way. Something’s happened in a lot of the measures of vibes that have broken down that relationship. Just in the last few months, you’ve been getting immense plunges in the University of Michigan’s consumer confidence survey. Some of the others, the drop is not as big, but they’ve all been falling. I just wanted to know how much of a signal is that. If you’re making a forecast, how much better is the forecast if you include, along with the hard data, you include this sentiment data. In the last 15 years or so, the sentiment data has added very little beyond the hard data, and that in last couple of years, it actually makes the forecast worse. So, I do seek out information from consumers and from businesses. But I don’t want to overstate what the vibes say. If you look, for example, at the University of Michigan survey — which is in our district, so I’m prone to like it — they have moved recently to an all-online survey. My characterization — maybe this is unsophisticated — people online look like they’re grumpy, and just the overall level is lower.

DUBNER: Are you positing a causal relationship there, that being online makes you grumpy?

GOOLSBEE: I don’t know if it just attracts the worst in us, or if it was already there. But the data on sentiment and the communion of minds is harder to put into practice. I think economic research on both theory and data has proved really important for understanding the world, and understanding conditions where we’re in moments of transition. Like in 2023. Or like now. Or, like Covid. They’re weird moments of transition — business cycles that look nothing like previous business cycles. You got to at least have the discipline to go back and do some real economics and actually look at what happens. You’ll see people say things like, We should abolish the Fed. The thing is, there have been times when we got rid of the central bank. The Second Bank of the United States, the charter elapsed in 1836. There’s a reason there was a panic of 1837. The economic research imposes a discipline. It’s not always right. A lot of academics, including Nobel laureates, they don’t agree with each other. We go to a seminar where they’re arguing vehemently. But that process of disciplining your thoughts with either economic theory or with the data, I think it’s super-important. I’m open to critiques of economic research, but the field is open to critiques, too. And the rise of behavioral economics, there were a lot of insights that were not accepted. Many economists did not like or agree with the behavioral bent, but that debate was really helpful.

DUBNER: Including you to some degree, if I remember correctly. Like in your textbook that you wrote with Steve Levitt, you didn’t want to give a whole lot of credence to the behavioral revolution.

GOOLSBEE: We have a chapter in there, and I think it’s a good chapter, it goes through, Here’s what’s strong about it. There’s one sentence, that goes something like, Well now we just taught you all of this and it seems to contradict the first 16 chapters, so do you regret having got the book? And then it goes through, ultimately economics is meant to be about understanding human behavior. If the behavioral insights help you understand human behavior, help you to understand the data, then they’re great. We should look at that. But I personally have less patience for people who, in the words of my dad — he used to always say, “Fault-finder is a minimum wage job.” For the people who are just want to say, Well, economics is horrible and we should look to something else — you’ve got to have something else. It’s not enough to just say, I’m not going look at the data, I’m not going to look at the economics.

DUBNER: Let me ask you another inflation question. We’ve been told forever that inflation is bad, above a certain level. We’ve also been told that deflation is bad, but that stagflation may be the worst of all. So can you describe the golden mean? Where is the place that a well-functioning economy wants to sit and considering the Fed’s dual mandate, how do you think about getting to that place?

GOOLSBEE: What is the greatest of all the inflations? If too much inflation is bad and too much deflation is bad, and stagflation is even worse, the answer is: exactly 2.0 percent personal consumption expenditure inflation. Because that’s what we said the target is. Alan Greenspan famously said way back when, when they were debating should there be an inflation target, they debated, What is the meaning of price stability? Is that literally zero percent inflation? Which is hard to hit. And his statement was, “Price stability is when people don’t have to think about inflation.” It’s not factoring into their business decisions. It’s not factoring into people’s consumer spending decisions.

DUBNER: And that implies that wages are keeping up.

GOOLSBEE: It implies wages are keeping up, and that people are not thinking about it. The Fed decided that that should be, like several other central banks have, an explicit target for one measure of inflation — not C.P.I., but personal consumption expenditure inflation, would be 2.0 percent. So that’s the target. Then the art of central bank management of monetary policy is, well, how do you keep us around that target? You remember the Apollo 13 image where they’re like, okay, you just need to keep the moon right in there and fire the thrusters. Then it’s wildly spinning around, and they’re trying to control it. Sometimes it can feel like that around the inflation target. If there’s war in Ukraine and Covid and tariffs and this, how are you going to keep it at two percent? There are market measures of inflation expectations. What do people think the inflation rate is going to be five years from now or 10 years from now, as opposed to just a measure of what is inflation today? In a world where the central bank is credible, and people believe it when it says, We will get inflation back to two percent no matter what, there’s an important threshold. In the case of the United States in the 70s, inflation expectations became “unanchored,” in the economist language. If you asked people, the actual inflation rate was 10, 12 percent, and if you asked them, What do you think inflation will be five years from now, they would say, I think it will still be 10 percent. Why that matters is because then when they’re going down and negotiating the wage for next year, everybody wants to say, look, if inflation’s going to be 10 percent a year for the next five years, you’re going to have to pay us to compensate us for that. And you can get in a spiral that’s very difficult to get out of. This time, it made it easier that the expectations never got un-anchored. Actual inflation was almost double digits, but people looked out the window and could see inflation is raging.

DUBNER: How during your career as an economist do you see, let’s call it public sentiment, especially through media — whether mainstream media or social media — how do you see that having changed the way elected officials and policymakers approach economic policies in ways that are, let’s say, detrimental to the economic reality? Do people get blown too hard off course by sentiment, in other words?

GOOLSBEE: Frequently, it feels like it. I think your observation that the media is involved, we have known about for a long time. This isn’t new with the Trump era. It wasn’t new in the Obama era.

DUBNER: It wasn’t new in 1890.

GOOLSBEE: Yeah, it wasn’t new in 1890. If you’re old enough to remember the 1992 presidential election, you will recall that the entire thing was about “the economy, stupid,” It was all about the mismanagement of the recession. Go back and look at the data. There was no recession in 1992. The recession ended in 1991. 1992 was actually a perfectly fine growth year.

DUBNER: But Jim Carville had a good idea.

GOOLSBEE: It was in the media, it was all anyone was talking about. that’s just one example that we’ve seen many times, that what people read about in the media does influence their opinion about the economy. Fast-forward into a world of social media and many different channels and it feels like everybody’s set up a news feed to give them the news they’re both interested in and that agrees with them. Maybe that very feature of the media environment is what has scrambled and made the consumer sentiments less indicative of economic behavior than they were before, but I’m not sure.

DUBNER: Hey, listen, next time I’m in Chicago, will you show me around your vault?

GOOLSBEE: I would love to take you around. We got machines and they count the money and they pull out the counterfeit, and everybody’s got to be certified every six months to detect counterfeit. I can show you what the markers are.

DUBNER: So should I bring some counterfeit money and see if you can sniff it out?

GOOLSBEE: Well, do you want to be arrested by our L.E.U. officers? That’s the Law Enforcement Unit. The Feds, each of the Feds, has a police force and they protect the assets, both physical and human.

DUBNER: I assume the answer is, No, I don’t want to be arrested by them, right?

GOOLSBEE: No, you don’t want to be arrested.

DUBNER: What share of bills in your machines turn out to be counterfeit? 

GOOLSBEE: Very, very small, very small. If I had to guess, I’d say it’s 10 to 20 bills a day. Now, the banks are supposed to catch it before it gets to us, because if we get counterfeit, then we call the bank. We’re like, we’ve giving you no credit for that money you sent, because that was fake money.

DUBNER: It does suggest that it might be a fun hustle for the bank to try to be the counterfeiter, to pass it off against you guys.

GOOLSBEE:  If you are a banker listening to this program, I strongly advise you not to do that, because you’re going to get in big trouble.

That, again, was Austan Goolsbee — longtime University of Chicago economist and now President and C.E.O. of the Chicago Federal Reserve. I’d love to know what you thought of this conversation; our email is radio@freakonomics.com. Until then, take care of yourself — and, if you can, someone else too.

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Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Theo Jacobs, with help from Dalvin Aboagye; it was mixed by Jasmin Klinger, with help from Jeremy Johnston. And we had nice assists from Pete Klenow and Matt Grossman. The Freakonomics Radio Network staff also includes Alina Kulman, Augusta Chapman, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippin, Morgan Levey, Sarah Lilley, and Zack Lapinski. Our theme song is “Mr. Fortune,” by the Hitchhikers; and our composer is Luis Guerra.