Economic Take Podcast Transcripts

Hi there, this is Jim Glassman, Head Economist for JPMorgan Chase Commercial Banking.

Before we dive in to this week’s episode, first a show note. This will be our last episode of Economic Take. We’ve had an excellent run, and I’ve loved sharing these updates with you. But after roughly 30 years at the bank, and more before at the Federal Reserve, I’m retiring soon and starting my next chapter.

This is my swan song.

If you’re looking for more economic and market insights, no need to worry: You can always find them at jpmorgan.com/cb. Or, if you prefer audible updates, check out the firm’s new “Making Sense” podcast series. 

Now, in honor of my years covering many market cycles and economic booms and busts, this episode will reflect on how the economy came to be as it is today—and how the past might influence where we go next.

To cut to it: I’m optimistic about the future.

The past 50 years have witnessed an extraordinary economic transformation. The nature of this transformation is analogous to a warming pot of water—not apparent at any moment and difficult to appreciate amid so much social, cultural and political melodrama.

This history has an important message for how to think about the next 50 years amid the pessimism that dominates the national conversation.

The memorable economic stories of the past half-century are many, but all interconnected. I’m going to dissect a handful of major shifts and the ripples they caused.

Let’s start in the 1970’s with a look at energy.

First, innovation unlocked vast new sources of energy, and that opened up alternative technologies that shifted the power source from the gasoline tank to the electric utility generating the power.

Alternative renewable energy sources helped shrink the transportation sector’s hydrocarbon footprint. I remember the 1970 predictions of the Club of Rome, that the world would run out of petroleum by 1990. 

This shift underscores the importance of economic incentives, technology and rising living standards to secure a more sustainable environment—something relevant to today as we think about climate change.

Rising living standards are key because they enable societies to tend to issues beyond economic survival. It’s not a mystery that the American electorate didn’t embrace the Clean Air Act until 1970, despite severe pollution across the country. 

Closing out the 1970s, we saw the Federal Reserve’s brutal-but-successful October 1979 anti-inflation campaign. It set the stage for a secular decline in interest rates for the next several decades, an equity bull market, rising real estate prices, a surge in household wealth and, consequently, a decline in household saving to half that seen in earlier decades.

The associated wealth effect led to a rise in the share of consumer spending from 60% of GDP to 68% over the course of the 1980s and 1990s, and also where it remains today. 

Around that same time in the 1970s and ’80s, we witnessed a surge of pent-up economic energy after regulations inherited from the Great Depression were dismantled.

Beginning with airlines, trucking, railroads, natural gas and oil industries and wrapping up with sweeping deregulation of the financial industry in the early 1980s— that’s the Depository Institutions Deregulation and Monetary Control Act of 1980—these initiatives increased competition, spawned an explosion of financial innovation and broke down barriers to global competition. 

This deregulation in the 1980s paved the way for the rise of securitized finance, instruments like credit default swaps, high-yield bonds and the securitization of loans, bringing vast benefits to borrowers and lenders.

Fast-forward to just two decades ago, securitized finance is often unfairly blamed for the housing speculation that resulted when house prices rose far out of line with customary lending standards. 

Heading into the 1990s, the collapse of the Berlin Wall in November 1989 and demise of the Soviet Union in 1991 allowed nations to reduce defense burdens, freeing resources for other uses.

It’s worth noting the U.S. defense burden was cut in half, from 6% of GDP to 3% in the 1990s, and that briefly generated a rare federal surplus.

To expedite recovery, the European Union was born in 1993 to tie Europe’s economies together. The integration of Europe’s economies has brought enormous economic benefits to its half-billion residents..

All of these things—energy shifts, deregulation, economic policy changes—set the stage for the new millennium.

In some ways, around 2000 we codified a global awakening, as digitization created new connections. Globalization is often viewed unfavorably, because it is blamed for the social and economic upheaval. But that has more to do with disruptive technological innovation than globalization.

Globalization has accompanied a growing shortfall of available workers, created vast new economic opportunities for businesses and fueled the fragmentation of American manufacturing that allowed businesses to break up the process and offshore lower-value-added segments to emerging economies.

By many measures, globalization has shrunk global poverty. All considered, despite today’s supply chain bottlenecks, we will not see a reversal of globalization in coming decades. 

Now, nearing today, we’ve seen a few key innovations in economic and monetary policy from central banks that are worth noting.

Asset purchases and quantitative easing is a novel one, but for me, I believe the formal embrace of a 2% inflation goal by the Fed is truly innovative. 

Targeting an average rate of inflation, presumably over some period of time that would span a business cycle, is a powerful idea given the cyclical, natural ups and downs of inflation, that if actually put in place would make monetary policy less myopic and lessen volatility.

Lastly—and you’ve heard me talk about this before—is a silent influencer across the decades: demographics. 

It’s slowed the economy’s potential growth rate in this millennium. At first, this was misinterpreted as secular stagnation, a label more appropriate for the Great Depression’s prolonged period of stagnant aggregate demand.

The decline in unemployment in this millennium to half-century lows despite slow growth speaks for itself.

Paradoxically, it’s the robust demand for workers, despite slowing aggregate demand growth, that reflects the global economic wakeup and rising living standards elsewhere that has fueled the demand for goods and education and financial services provided by America and other developed economies.

One thing I didn’t mention but is worth calling out: equities.

These economic stories are the building blocks of the equity market’s rising valuation in recent decades beyond historic norms. Even though the market is down this year from all-time record highs, for understandable reasons with the war in Ukraine and Federal Reserve policy in transition, the value of the stock market has climbed in this millennium to one-and-a-half to two times the size of the U.S. economy.

Historically, the value of the stock market could be expected to match the size of the economy in goods times. In other words, the broad trends in the equity market seem to be supporting the idea that the evolution of the economy is like a warming pot.

And that pot is still warming.

The story of the past 50 years is at odds with the pessimism that permeates popular views about the direction of economic life in America. The backstory is a hint of the benefits of economic liberalization, which has made the U.S. economy ever more flexible and resilient. 

It’s a reason to believe that the next 50 years will be even better, as the successes of the advanced economies spread to others.

The fiscal challenges—that is paying for the promises made in the past century—that many see as a threat to future economic progress are not as daunting as they assume, because the solution lies not in raising taxes and cutting promises, but in promoting more economic energy to counterbalance America’s demographic drag.

The grim fiscal outlook that the Congressional Budget Office projects would vanish if pro-growth initiatives lifted growth.

To put it simply: I’m optimistic about the economy, even if today seems a bit glum. 

Again, as this is our last episode, I’d like to say thank you for listening, whether you’ve been with us from the beginning or joined me more recently. 

And, have a great summer.

Jim Glassman:

Hi there, this is Jim Glassman, head economist for JPMorgan Chase Commercial Banking. 

We've seen and heard news coverage about higher education a lot lately, when it comes to student loan forgiveness. The JPMorgan Chase Institute has done some interesting research in this arena. It brings to mind the larger role that higher ed plays into macroeconomics and the state of the industry. And everyone is aware of the high cost of college education and wonders if the return on the investment can cover the cost. 

As a percentage of GDP, the U.S. spends more on post-secondary education than most other countries. The extraordinary demand for U.S. college education by foreigners says a lot about how others view the value-added of higher education. 

Today, let's dig into the trends affecting higher education institutions. 

I'm joined by colleague Kerry Jessani, Head of Healthcare, Higher Education and Nonprofit Banking for Commercial Banking. Welcome, Kerry. 

Kerry Jessani:

Thanks Jim, it's really great to be here. Thank you for having me. 

Glassman:

First, let's set the stage and look at the industry's big picture. We're largely talking about public and private universities and community colleges. Some people might think that the volatility of capital markets may not impact them, but it does because it affects the health of their endowments. College enrollment is falling, reflecting our demographics and maturing of two population trends that have been driving the demand for college education: women and foreign students. What challenges are schools facing, and how are the leaders adapting to these changes? 

Jessani:

So, let me take the first part of your question first, which is really around the volatility of the markets. You're absolutely right. When it comes to the volatility of the equity and debt markets, it really impacts their endowment valuation. But also, if you think about the debt capital markets and the uncertainty now with the cost of issuing debt is going to be and how much they can raise, that really impacts their funding of expansion projects. Not just physical buildings, although that's a big part of it, but also technology improvements and enhancements, which gets to your second question, really around adaptation. 

I would be completely remiss if I didn't point out that for many universities, before we get there, their endowments really act as their equity layer within institutions. As we saw during COVID, there's a lot of uncertainties out there, and nonprofits need to have preparation around that. But they don't have the ability like public companies in the stock market to issue equity and raise capital that way. Instead, they really rely on those donations and that endowment piece. 

To your point around the population shift and the way the universities are focusing on that, they're really looking at a couple of different things. One, it gets back to what you said in the very beginning here, looking on the international side. So how can they expand who they reach out to as potential students or potential customers within their universities. But then also, when we look at the higher education mix on what's been undergraduate versus graduate programs or secondary education certificate programs, there's a lot of focus within the industry on using that as a method of really backfilling some of that decline on the population side. Because you're absolutely right, whether it was the number of women that had increased that have been going to school over the past couple decades. But then also just our general population growth is very different today than it was 20 years ago. 

Glassman:

You know, we've known about the demographic trend. If you look at younger populations, you can sort of see what the schools see, that the growth of the population for the younger ages is slowing down dramatically. But we've been surprised though, for the last 10 years or so, that we weren't really seeing a big impact of the demographics on the higher education, and the way I understand it, it seemed like when you really think about the demand for higher education, these demographic factors probably have been tempered a little bit by the surge of women going to college and the foreign student population. 

And it's really striking how the gender roles have changed. More women going to college now than men. And the number of men and women with college degrees is kind of equalized now. I think as economic opportunities opened up for women in the workforce, the return on that college education made a lot of sense. But it looks to me now when you look at these trends, it seems like the big influx of women into college and maybe even foreign students happened about a decade ago. And it seems like things are beginning to mature there. Does that seem right to you? 

Jessani:

It does. And, and I would also break that out into two different segments, because within the higher education industry, you obviously have huge differences between community colleges and some of the high endowment private institutions that are out there and obviously the publics as well. So, you see the trends differentiated quite a bit across what kind of school, what kind of university. You're seeing more of the impact on the population shifts on the community colleges, especially when we had a booming economy versus the Ivy League or the private institutions.

To your point around international students, I would say COVID the past couple years was a pretty interesting case study for that, because there's been a number of institutions that actually pulled back on how much that they were marketing to and reaching out to international students to help fill some of that enrollment. But now we're seeing that trend come back quite a bit. So yes, I agree. And I think a big part of it is also breaking it down where within the university scale we're talking about.

Glassman:

Yeah, I suppose the pandemic impact has been really disruptive. As we normalize, we might see some of this reverse, but fingers crossed. Today's inflation brings to mind the health of household finances. Beyond possible increases in operating costs, could inflation impact philanthropy and donations to higher-ed institutions? That can be a critical funding source for some.

Jessani:

Absolutely. And it's something that we're watching very, very closely. The JPMorgan Chase Institute does tremendous research on this. What I will say is we haven't seen that impact yet. But as we continue along, you know, throughout this year and then next, it's definitely something that we're going to be monitoring pretty closely. When you think about inflation, increase in the percentage of our incomes that we're spending on food and energy and living expenses, that will absolutely impact our percentage that we have on philanthropy and giving.

The interesting thing here is you saw philanthropy increase a lot during COVID, especially for universities. And so that trend will likely shift back to a more normalized rate. I would also point out here that the universities themselves are getting impacted by inflation. Again, food costs—but also labor costs. And so, there's a lot of discussion right now on what that tuition increase will be. And that'll also impact household finances as they think about sending children to school or by taking out loans to get yourself through university.

Glassman:

That makes a lot of sense. Shifting gears a little bit, beyond the economy. The last few years have challenged the industry to accelerate a move to digital and embrace new technologies for a lot of our business clients, and we've seen that big-time for smaller businesses. Looking ahead, what trends do you think are going to shape where higher education goes in terms of innovation?

Jessani:

So, this is really fascinating to me to see—there's a little bit of a stigma around universities and higher education. That they are slow to adapt to change, that these institutions are incredible, and that the fact that they can plan for the next 100 years, that that means that they don't necessarily have to change this year. COVID completely dismissed a lot of that discussion that's been happening.

These universities all had to pivot very quickly and embrace technology, just like the rest of us did, whether that was using Zoom to talk to our doctors, but also, obviously, the hybrid learning environment that a lot of the universities went after and had with their students.

What I would say is around the industry itself that the momentum behind using technology to really focus on the customer experience is absolutely top-of-mind within the higher-education space. The same that it is across all industries, right? 

You talked about the small businesses, but also the Amazon experience. How do we take out friction from universities, stakeholders? Whether that's the students themselves, but also the staff, parents, the donations coming in from donors right from alumni—and that trend is absolutely continuing and accelerating and seeing how we can figure out how to help universities with that customer experience. 

The other piece there that I would focus on is around how banks are working or partnering with universities to really get some of that friction out of the customer experience, right? How do you become cashless? How do you make social fundraising programs more efficient?

And that, again, is a trend that I'm talking to all our clients about. And it's something that they're focused on especially in light of the tight labor market that we have right now. So how do they improve the experience not only of their students, but of their staff as well?

Glassman:

I'm curious to know how technology has changed life for students.

Jessani:

The big switch, I think you'll see even in a post-COVID era, is really the focus on that hybrid learning. In the past, it was absolutely expected that a freshman would sit in a classroom of 300 people, right? To have these big lecture halls. And then to do the work afterwards.

Where the trend is going is: We can do that part maybe on Zoom, and meet in person in small groups to have real discussions around it. So, different universities are embracing this in different ways. Some are looking at, "How do we also have online classes while maybe there's an internship in a different location than where the university sits?" 

It will absolutely be fascinating to see how that technology is really changing that student experience as we continue to go.

Glassman:

Interesting. The digitization story is an interesting one. From your point of view here at J.P. Morgan, part of our work with higher ed focuses on moving money amongst all the stakeholders. What's the opportunity there?

Jessani:

So, it's getting back to that trying to make it as frictionless as possible at the same time being as secure as possible. Not surprisingly, we have seen such a high increase in the number of cybercrimes that have been going after our university space within the United States. And so really making sure that that money—that cash that's flowing—is secure throughout, but also is a great experience for all of those stakeholders is really where we're spending a lot of our time at J.P. Morgan as we go forward today, but also future-proof business for the next disruption that will happen.

Hopefully, it won't be another pandemic, but there's constantly change that's happening, and really thinking about what's there. 

So, Jim, while we're talking about this, I would love to ask you a question with regards to the trends that you're seeing across all businesses versus the university space. And where do you see some of that crossover happen as we have such a labor shortage right now in the economy, and where the value-add from the university is working with the business community?

Glassman:

You know what? Feels like what's really driving the big challenges on the labor side is demographics. We're starting to feel what Japan has been dealing with for a while, what several European countries have been dealing with.

For example, our working-age population, you know, until about a decade ago, was growing about 1.25% annually every year. It has slowed down to zero. And you know, what's interesting, we've always known about this. We've always known there was a baby boom phenomenon coming, that when all those people who were born after World War II started retiring, everything was slowed down.

But we never thought in the U.S., we would have to think about this, because we're relatively open to immigration. That's not been happening. And that's why everywhere you look, you see this problem, businesses are all complaining they can't find people, they have 11.5 million jobs they can't fill. The healthcare sector is worrying about this. And the thing that's interesting about it, the lack of available workers really cuts across all states, all industries—which tells you this is a demographic thing. And it touches so many parts of our economy. 

So, you know, for business, or anybody in the goods world, they can figure out how to get around this by automating or by shipping production to other parts of the world. But in the service-oriented businesses—healthcare, higher education—it's very difficult. It's a very people-oriented business. 

And I think people are getting the idea that this is not going to go away anytime soon. We may be kind of in the seventh inning of the baby boom migration. People do work a little longer, but we still have some time to go before we're going to see this whole thing stabilized.

So, I think it's going to be with us for a long time.

Jessani:

I very much agree with you. And if you talk to many of the C-suite and the CFOs within the university community, there's a lot of focus right now on what the next five- to seven-year strategic plan is, and how they can use their buildings more efficiently. But then also talking about how to get more throughput through the institution that they have using technology or shutting down certain areas and focusing on others given the demographic shift. It is definitely top of mind and what is being discussed over the next five to seven years.

Glassman:

You get the feeling this is going to be a pretty challenging environment, particularly for smaller colleges and universities that don't really have the endowments to help bring people in. 

Jessani:

I would agree with that. But I would also say that what you've seen during the pandemic, but also the financial crisis, is the ability of these universities—and the smaller ones as well—to really pivot and take costs out when they can. There's been a discussion that there's going to be a lot of pain for a while, especially in the small liberal-arts space that we actually haven't seen. So, it'll be something to continue to watch. 

Glassman:

Anybody who has to deal with competition and is competitive, has to figure things out really quickly. 

The one industry in our economy that seems like it's slower to adjust is the healthcare sector, and for economists, it’s not really a mystery why. There are a lot of barriers to competition, and you have a lot of support from the government maybe.

But higher education is no different than running a business. It's a very competitive system, and the need to survive can inspire a lot of clever ways of things to do.

Jessani:

Absolutely, especially with all the technology advancements that we've had over the past 10, 20 years.

Glassman:

This is all very interesting, Kerry. Thanks so much for joining us. It's going to be important to watch the trends in higher-ed. Lots going on here.

Well, folks, you can find more economic analysis at jpmorgan.com/cb.

Welcome! I’m Jim Glassman, Head Economist for JPMorgan Chase Commercial Banking.

Like everything else about the broad economy, the federal budget deficit has fallen back to where we were prior to the pandemic.

In the 12 months through May, the deficit was down to $1 trillion, where it was in the 12 months ending in February 2020. This brings up some big issues related to fiscal policy.

Fiscal activism makes sense. Not everyone agrees, of course. Many cringe when they hear this. I remember when Nobel Prize winners argued strongly against fiscal activism back during the housing crisis in 2008-09. But here are four things to consider:

First, one gets to the “stitch in time saves nine” idea. Of course, it’s impossible to quantify the costs of inaction or a tepid response to an economic crisis. But common sense tells you the slower the economy recovers from an economic crisis, the slower the recovery of government revenues and the worse the outcome for the federal budget deficit. For that reason, the more aggressive the policy response to a crisis, the quicker the economic recovery and the better the outcome for revenues and the deficit. 

Nothing makes this point better than the return of the federal budget picture to where it was prior to the pandemic, despite the eye-popping financial resources Congress unleashed during the pandemic and the explosion of the deficit back then to $3 trillion in 2020.

Second, economic crises are socially disruptive. Because we live in a democracy, thank God, voters cry for prompt help in times of financial distress. As we’ve learned, however, many policy efforts to help people in times of economic distress often lead to policies—however well-intentioned—that impede economic progress when the crisis passes. It took years to dismantle many of the regulations inherited from the Great Depression. When they were dismantled in the 1970s and 1980s it unleased a burst of economic energy.

Third, in an economic crisis, the economy, left to its own demise, destroys the wealth of the nation. How? It’s very difficult to recoup the lost work when workers are idle and unemployed. We can’t make folks work more than 24/7 to make up for lost work. Businesses slash capital investment plans in the face of economic crises, shrinking the stock of productive capital. It’s difficult to rebuild that stock of capital to where it would have been in the absence of an economic crisis.

Lost economic opportunity harms asset values and the wealth of households; that is difficult to recoup when the crisis passes. Although it’s always difficult to weigh the counterfactual, policy actions that aggressively counter economic crises minimize the damage to the wealth of the nation.

Washington’s response to the pandemic in a politically polarized environment is strong evidence that finally after a century of dealing with economic cycles, we implicitly understand the costs and benefits of policy activism.

Fourth, bond yields don’t fear fiscal activism. That’s important, because the bond market is the jury in these matters. You may be aware that interest rates tend to fall during economic crises, even though deficits soar in those times. In fact, bond yields are inversely correlated with the fiscal deficit. 

So, do deficits matter? Of course they do. But not the deficits we see every day. What matters is the deficits that budget forecasters see in their minds’ eye when the economy is expected to be on a sustainable path and not in a crisis—that is, fully employed.

I think the invention of the Congressional Budget Office, like the creation of the central bank, is one of the great innovations of our time. Because this agency provides, among much important analysis of congressional initiatives, an opinion about future fiscal trends beyond those of the moment that are often distorted by short-term cyclical crises. And the CBO’s work ties together consensus views of experts about the performance of the economy to budget trends.

As you may know, the Congressional Budget Office projects that going out into the future, the fiscal trends are not on a sustainable track. The main thing to know about this is that the reason the future fiscal trends look so dire isn’t because we’re on a spending binge. It’s because the CBO’s analysts, correctly so far, are assuming that because of our demographics, the economy is not going to be able to grow as quickly in the coming century as it did in the previous century. 

Real GDP grew roughly 3.5% every year on average in the 20th century. You may have noticed that we’ve slowed down in this millennium, to a little less than 2% annually on average. Why is that?

Well, the growth of the working-age population has slowed from 1.25% annually back then to 0% currently. The CBO has been warning about this issue amid a great deal of skepticism. And going forward, the CBO is assuming that the economy will only be growing about 1.75% annually on average, half the pace of the 20th century.

Long story short, a slower-growing economy means that the government’s revenues won’t be growing as fast as they were when the government created all of those social safety nets: Social Security, Medicare and Medicaid. It’s not that we overpromised. It’s that the economic reality may be changing.

Big question: Why do bond markets not seem to care about this story? Conventional wisdom about our fiscal picture is that the only way to “fix the debt” is to cut the promises and/or raise taxes.

Economists know that this won’t solve the problem and would probably worsen the picture, because it would drain energy from the economy. Bond investors know that, too. But bond investors know there is a third way out, and they might be assuming that one day we’ll get there. The third way out is to counter the demographic drag that is causing the U.S. economy to slow down by promoting pro-growth policies like immigration reform, infrastructure investment and maybe tweak retirement ages of the Social Security to keep it in-line with the trend in life expectancies.

In other words, there’s no obvious reason to think that we won’t eventually come up with a more rational way to fix the deficit.

On another note, a thought on the drama playing out in the financial markets. Folks are worried that the Federal Reserve’s decision to raise rates more aggressively than they had planned will raise recession risks. This is going to be the dominant conversation this summer. We don’t know where this will be leading, but it’s possible that rather than aiming for a more restrictive posture, the Federal Reserve has just decided to withdraw its accommodative policy more quickly than it had been planning. If so, this would be helpful for the economic outlook—and not threatening.

Take a look at our internet site, jpmorgan.com/cb, for more analysis.