Claudia Sahm is a former Federal Reserve and White House economist. She is best known for creating the Sahm Rule, which signals the start of a recession based on changes in the unemployment rate. Sahm developed it to act as a trigger for distributing relief, such as stimulus checks during a recession, thereby taking the politics out of such actions. Today she consults and writes about economic policy and macroeconomics on her accessible and self-referential Stay-At-Home-Macro substack.
Kate MacArthur: Is there a way to plan better for healthy economies and help people and companies be resilient through those situations?
Claudia Sahm: Yes. What’s really going to be important over the next several years is the extent to which we take the lessons from this crisis and do better. In some ways, we’re learning the true cost of the low prices that we’ve had. Globalization is a very good thing, and it has many plusses. But one thing that we’ve seen is we have global supply chains and just-in-time inventories, which are a great way to run lean and keep costs at a minimum — as long as they work.
MacArthur: What about resilience?
Sahm: We have to make sure that the systems are resilient to shocks like a pandemic, and we need to think really hard about these global shocks, things like climate-related disaster. What we’re realizing is there is a structure to the economy. In the global financial crisis, we came to understand how interconnected our financial markets were. Without the regulation, there were some real weak points, and it affected everyone. This time we’re learning that our physical infrastructures are not up to the task. They can’t endure a lot of pressure. There are so many lessons to be learned, and some of them are sinking in. This will come again, and maybe not be exactly the same pressure points. But this idea of how can we stress test, be resilient? What’s the weakest link in how we’re doing our business or being a family? Clearly, one has to get a little creative because things broke this time that were taken for granted that they would work.
MacArthur: How does housing fit in?
Sahm: One of the big contributors to inflation is housing costs. We went into the financial crisis with a massive underbuild of housing. So that’s where these two factors collided, and the response should be, “Let’s go build more housing.”
MacArthur: How should stimulus payments be used to help consumers in a recession if inflation were high?
Sahm: There’s a way to do the stimulus checks — spread them out, make them smaller — that would be less inflationary. But, if they do any form of stimulus checks, some people will be highly critical of anything like a stimulus check. I would be more in favor of better unemployment insurance benefits. The stimulus checks, they send them out in large part because they’re relief to families. It’s not just about getting the economy going faster. There are two pieces to it, and the relief is important.
MacArthur: Futurists love universal basic income. Should there be a role for it in the future?
Sahm: I think so. I am somewhat skeptical and yet I am open-minded about UBI. I’ve worked on some research on the macroeconomic effects of UBI. I’ve done a lot on the child tax credit, which is close to UBI for kids because it was a flat transfer. I’m very much in favor of the child tax credit. It is targeted to young people; you’re doing investments, education, helping people raise kids. To me, the goals are reducing child poverty, making sure that you can make investments in children that have future benefits for them. The cash transfers do a good job of solving that problem. I’m less convinced that UBI is the path to addressing income stability in the future.
MacArthur: You’ve written that the Fed needs help from Congress, the White House and businesses. How should businesses help?
Sahm: Probably at least half of the inflation that we’re dealing with is related to some type of a supply disruption. It’s businesses that are going to make sure supply chains are more resilient. They are the customers of the supply chain. It is clear in some sectors, people don’t want to come back to these low-paid, part-time service jobs and there are customers [to serve]. Well, that is a good case for making investments in technology. If you have shortages, address them, if you have things like the supply chains that have broken down, address them.
We have a $25 trillion economy. The federal government is not going to make all these solutions. The Fed has a very blunt tool. Businesses make a lot of decisions. They make the investments, they figure out how to structure how they produce things, who they hire. They can really move the needle. It’s the same thing about learning the lessons from this time. I would like them not to develop an inflationary mentality and try and keep raising prices. But I won’t do the Jimmy Carter [thing] and be like, “Don’t raise prices.”