31st Annual Automotive Insights Symposium | Austan Goolsbee: Lessons from the Supply Side

KRISTIN DZICZEK: Excellent. So welcome back from a nice little break, I hope. You got some snacks. We try to keep you going. So thanks so much for coming back and for being here with us. It's my great honor to introduce our keynote speaker, Chicago Fed President and CEO Austan Goolsbee. His face, or maybe his voice, is familiar to you.

Austan's an economist who happens to be a popular commentator. He kind of has a knack for explaining complex economic topics in a way that's both accessible and funny for the-- droll economics can be really hilarious when you're talking to Austan.

For me, one thing that was really memorable was when he was asked to talk about an economic concept, and he started off by talking about his Uncle Bob using a high-powered plunger to clear a kitchen drain clog. And it all came back of the end. So his storytelling and his humor may be a little unconventional, but it surely gets the job done. As regional bank president, Austan is a member of the Federal Open Market Committee. The body many of you think about when you hear the Fed in the news, that's our country's monetary policy body. He just wrapped his second year here with us at the Federal Reserve Bank of Chicago.

Previously, he was the Robert P. Gwinn professor of economics at the University of Chicago Booth School, where he joined the faculty in 1995. He also served as the chair of the White House Council of Economic Advisors, and was a Presidential Cabinet Member, among many other roles and positions. He earned his PhD at MIT and his undergrad and master's degrees at Yale. He was also a Fulbright scholar and an Alfred P Sloan Fellow. And as a girl from Flint and people in the auto industry, you may be familiar with Mr. Sloan, the longtime president and CEO of GM and the guy who instituted annual styling changes. But I digress.

In his research, Austan has written quite a bit about the role of industry in the economy, from airlines to AI, technology, insurance, and even the auto industry. He even cited some of my past research in a context that he didn't really agree with my conclusions and those of my co-authors. But I have no hard feelings at all, because I was just happy to get a Goolsbee citation in my Google Scholar. So I'm very happy about that. Remember, you can submit us questions through the attendee portal. We'll have time to take just a few questions after his speech.

We're on a little bit of a condensed time frame here, so we're going to fit in as much as we can into the amount of time Austan has to spend with us. So let's get to it. Please welcome Austan Goolsbee back to Detroit for our keynote address. Austan.

[APPLAUSE]
 
AUSTAN GOOLSBEE: Thank you, Kristin. And good afternoon, Motor City. Welcome to Chicago's 31st-- Right? 31 years in a row, Annual Automotive Insight Symposium. Now, before I jump in, I want to thank all of you for joining us today. You know this is one of our biggest events every year, and we love hosting it here at the Detroit branch.This year, the in- person tickets sold out almost immediately. But I'm going to be honest, the fact that the hottest ticket in Detroit this week is to come to our symposium, and not to go to the Superdome in New Orleans, that cuts me bad.

You know that our K-9 bomb dogs here at the bank, Vice and Fox, they moonlight on Sundays as the bomb dogs at the Lions games. So they're just as pissed off as you are. Last year, I said publicly that if the Lions beat the 49ers and went to the Super Bowl, I was going to give the two dogs steaks. They lost. Then there was an uprising of the employees here at the bank. They said the dogs didn't go for it on fourth down. It wasn't their fault that they lost. They wanted them to get the steaks anyway, so we gave them the steaks.

I feel like Auto Symposium not so bad for a second best option. Definitely beats watching the Eagles. For everybody out there online who could not get a ticket into the room and you're tuning in hybrid, thank you for joining us. Unless you're an Eagles fan and you are offended by that last bit. And I will just tell you, read the room, people. We don't want to hear from you. OK, lastly, and most importantly, I want to thank, especially, Kristin Dziczek, as well as Martin Lavelle, Thomas Klier, Rick Mattoon, Kristin Broady, the whole Fed team.

You know they do an amazing job with the AIS year after year. And they've done it again this year. So please join me in giving them some thanks.

[APPLAUSE]

All right, before I say anything, let me officially state that these remarks reflect my own views, and not those of anyone else on the Federal Reserve System or the Federal Open Market Committee. Big sigh of relief from my colleagues once I say that. The theme of my remarks today are going to be about the supply side of the economy, and especially about supply chains and the stages of production for key industries like autos. And getting real, I would say, until pretty recently, economists basically paid not that much of attention to supply chains.

And then, of course, in 2020, they found out the hard way how much those supply chains and supply side can matter for the economy, for inflation, and everything else. My thesis is that as we seem to be entering a new period of risks to the supply side and the global supply chain, several of the lessons that I think we learned during the COVID-19 pandemic episode may indeed have a direct bearing on monetary policy decisions that we're going to be making in the coming months.

Before we get into that, let me give you the top-- or the starting high-level recap of just how strange the last five years have been for the economy, and especially for monetary policy. Now, normally, the Fed and the business cycle move together. And by that, I mean, the most cyclical industries of the US economy are also the most interest rate sensitive sectors of the economy. So if the Fed sees the economy is overheating, the Fed raises the rates and it slows things down. If things look bad, the Fed lowers the rates and tries to juice it back up again.

And the Federal Reserve Act basically explicitly directs us to use monetary policy to maximize employment and stabilize prices. And that's how we do it. And that's how it normally worked. So when the COVID crisis begins in 2020 and we face a massive economic downturn, you can see why the Federal government passes a massive stimulus, and the Fed cuts rates very significantly. They're trying to counteract the slump. Now, some said that it was too much and that the economy could overheat, and that it would ignite inflation.
 
And the counterargument was, don't worry. Any inflation like that should be transitory. And plus, the Fed could always just raise the rates and put us back on track if something went wrong. OK, but somewhere along the way there, things started getting weird. 2021, inflation begins soaring. Indeed. But the unemployment rate is still above 6%. As that happens, and macro 101 basically says, that's not supposed to-- that's supposed to be impossible. OK, if the unemployment rate is that high, you're not supposed to be overheating.

Then the inflation breaks out around the world, in other countries where they don't even have much COVID- related stimulus, or they didn't lower rates by very much. By the next year, 2022, became clear the inflation has not gone away, even as the stimulus rolled off, even as the Fed raised rates quite a bit. And at that point, the mood seriously darkens among the economists. Because if inflation is not temporary and transitory, then getting rid of it has always required substantial pain.

Bloomberg economists forecast a 100% chance of recession in 2023. In December of 2022, a prominent economist and former Treasury Secretary summarizes the view and says, unemployment will need to go above 6% for the next five consecutive years before inflation will come down. Some days after that, I take the job at the Chicago Fed asking myself again and again, what have I done? What is this? What will happen? But then in 2023, an unprecedented thing happens.

Was it an economic miracle? Maybe it was an economic miracle. Inflation falls close to as much as it has ever fallen in a single year. And not only was there not a recession, but for the entire year, the unemployment rate never goes above 4%. Which is a level that most people viewed before that time as the minimum it could go to be sustainable, full employment. I start describing 2023's experience as the golden path, and nothing like that has ever happened. It was without precedent.

The critics said, just wait. It takes a little bit of time, but it's coming. We complete 2024. Again, no slowdown. So you can basically see, as we go into 2025, nothing in the last five years has looked anything like the traditional historical patterns. And we have collectively, basically, been trying to understand, what the heck just happened, ever since then. OK? My view is that when we look back, my overwhelming takeaway is that the disruptions to the supply side of the economy, including to the supply chain, were the most important drivers of inflation over the last five years.

And that that, the damage to the supply side and the healing of the supply side, explain almost all of the weirdness that we've seen in the last five years. The damage that the pandemic did to supply was the thing that made the economy overheat even when the unemployment rate was high. And it's the same thing because those supply chains are global and interconnected. That is the same thing that caused inflation to start rising simultaneously around the world, even in places where they did not have substantial stimulus.

And on the other side, when the supply chain began to heal, that is what allowed inflation to come down without there being a recession, even though that was without historical precedent. As they started disparagingly calling it, but then they had to admit it was true, the immaculate disinflation. The thing that allowed the Immaculate disinflation was the fact that the supply chain was healing. And so for the people who study the economy, in a way, I think it's not that different from the 2008 financial crisis.
 
By which I mean, before 2008, macroeconomists largely had little appreciation for how financial interconnectedness and the financial markets could cascade into serious macroeconomic problems. And then all of a sudden, they had to take that into account. And quickly, the economists and the central bankers began incorporating that kind of financial stability concern into their thinking about the economy. And a little over one decade later, a new crisis put a new, overlooked consideration front and center to the business cycle. And that was the supply side and the supply chain.

Nobody knows that better, nowhere is it more important or better illustrated than here in the auto industry. So let me describe a couple of lessons that I took out of the pandemic about how the supply chain affects inflation in the economy. And then we'll say, what do those lessons say for 2025? Remember, at a basic level, the economic theory says, the impact of supply disruptions on prices or on the economy fundamentally depend on how easy is it to find substitutes. And that when there is no alternative, that is when the prices go up the most, or the disruptions can be the toughest.

The first lesson that I took from the COVID times about supply is that in the short run, the supply chain was far more specialized with fewer substitutes, and therefore, more fragile and subject to disruption than we would have assumed. And I want to start our thinking in this space with products that have a really simple supply chain. So take yourself back to the spring of 2020. The economy has just gone into lockdown, and we are all living through the toilet paper apocalypse.

The grocery stores are completely stocked out of toilet paper. Big box stores, to the extent they have them, are rationing them one package per customer. There are Charmin-induced fistfights breaking out across the country. And everyone is blaming their neighbors for panic buying and using up all the toilet paper. The economists are confused because they're just asking themselves, what is stopping them from just making more toilet paper?
Almost all the toilet paper in the United States is made domestically. So it's not an import problem. It's not that the ports are clogged.

Most all of the toilet paper production plants-- yeah, they clogged. I see what you did there. Get your mind out of the toilet. Look, most toilet paper production plants are in rural areas. They're out where the trees are. The COVID prevalence is relatively low. The lockdowns haven't gotten there yet. People are still showing up to work. That's not the problem. The problem is not panic buying. It's not that your neighbors down in their basement building a little fort out of all of their Charmin rolls. It's that there are two completely different toilet paper supply and distribution chains.

There's one for home, and there's one for the office. The home toilet paper supply, it's fluffy. It's on little cardboard rolls. It's distributed through grocery and big box stores. The office toilet paper is rough, is often recycled paper. It's single ply. It's on those massive plastic dispenser rolls, and it's distributed through office supply firms. Those are two specialized products. And in the short term, it's not that easy to substitute one for the other. And so when 2/3 of the country in a one-week period stops going to the office and starts conducting all of their business at home, the demand for home toilet paper goes bonkers.
 
Like nothing they've ever seen, and no grocery store can get it. They all run out of paper. Meanwhile, back in the office segment, it's the Great Depression of the bathroom. There's no there's no demand at all. They're like, what are we going to do with these huge plastic rolls? And what it takes to fix that problem, you will remember, is that it just takes some time to ramp up the right kind of production and fill the inventory. And once that happens, which in this case takes a few weeks, maybe a couple of months, the problem goes away and it's never heard from again.

The same thing happens with beef. I'm not a biology expert, but all the beef comes from a cow. I'm pretty clear on that. Despite all the beef coming from the same animal, it turns out restaurant beef and grocery store beef are not the same. They have different cuts. They come in different sizes of cuts. They have different packaging, different labeling requirements, and different distribution channels. So one, COVID hits, nobody can go eat in restaurants. So the demand for restaurant beef craters to almost nothing.

Instead, everyone wants to go buy beef to cook at home. The retail price of beef soars 25% in a single quarter. So toilet paper and beef are two products with really simple supply chains. You would think a lot of substitutability.
And yet, not. In the short run, much more problematic than you would think. So now think about the mother of all the supply chains. The automobile industry, where one single car model can have 30,000 different components and parts. Every single one of those parts with its own supply chain story. Many of those parts shipped multiple times through multiple stages of production, each of which can face a significant adjustment problem in the short run.

You may remember the Bloomberg story in 2017 where they tracked-- at pre-COVID, they tracked one capacitors journey through the entire supply chain just to illustrate how many steps and how complicated it was. It was made in Asia and shipped from Asia to an importer in Colorado, who then sent it to Ciudad Juarez in Mexico to be put on a circuit board. That circuit board then got sent to Matamoros, where it got assembled into an actuator that could be used to adjust a car's front seat.

The actuator got sent to the seat manufacturing plant in Mississauga, Ontario. From that seat, it was then sent to an auto assembly plant in the United States, where they put it in a new car and sent it to the dealer, and somebody bought it. That multi-step, it's getting shipped from one country back into the US, out of the US, back into the US, that leads directly to my second supply lesson from the COVID times. The complexity and the interdependence of the supply chain meant that problems anywhere spilled over into other markets. And it took far longer to resolve than you ever would have thought it would take.

And autos, at the start of lockdowns-- I heard somebody say, chips. At the start of the lockdowns, the auto makers predicted that with nobody going to work and everybody quarantining at home, the demand for autos was about to crater. So they reduced their orders of computer chips. Some time goes by and they realize, actually demand is up, not down. So they scramble back. No, no, no. We want those chips. But by this time, the chip manufacturers have diverted the production to Pelotons, to TVs, and a bunch of other high-demand, high- margin items.
 
So the chip manufacturer supply chain suddenly becomes a huge bottleneck to producing new cars. Now the spillovers begin. New car inventory disappears. New car price inflation soars. When that happens, the no new cars problem means that the rental car companies have a shortage. So the price of rental cars goes through the roof. When the rental car company prices go up and they realize their shortage, they decide, we're going to hold on to our existing cars for as long as we possibly can, no matter how many miles it has. So the supply of used cars dries up.

Now the supply of used cars, the price of used cars starts to soar. The delivery and logistics companies that are relying on new and used cars as one of their main inputs, seeing their costs rise, their prices start to soar. And so on and so on and so on. And that plays out over not weeks, not months, but years. In some places, that's still playing out many years later. And that brings me to that third lesson of the COVID times, which is that the supply side disruptions had a material impact on aggregate inflation.

They're not always what economists tend to assume. Hey, these are small, idiosyncratic industry level disturbances that are going to just average out and wash out in the macro economy. We learned it's dangerous to ignore these industry impacts. My longtime colleague at the University of Chicago Business School, Chad Severson, summarized this by, he looked at the inflation episode in COVID and post-COVID by looking at the prices across all the US industries that are in the data.

And he showed, quite convincingly to my eye, that the inflation did not look at all like what you would expect if it was just macro overheating of the economy. Which is basically the price of everything goes up because there's just too much money chasing too few goods. The inflation was dominated and much greater in exactly the industries where there were supply disruptions that taken collectively, the supply side disruptions were having a big aggregate impact. So those are the three lessons.

The supply chain in the short run is more specialized and more fragile than you might think. The supply side problems, because of the long supply chain, can spill over market to market when they start going wrong. And they can take a lot longer to resolve than you thought. And three, if it starts happening, it can have an aggregate impact on the state of inflation for the whole economy. So let's think about, what does that mean for 2025?
Coming into this week, if we were having this discussion last week, I would say, we have a strong economy.

The job market feels pretty settled at a level that I would think we would plausibly call full employment. Inflation has come way down, looks to be on Path to the 2% Fed target. Growth is strong. The supply chain looks strong. Mostly healed back to normal. This looks good. Rates will likely come down to something like normal. Yet now, we face a series of new potential threats to the supply side and to the supply chain from natural and man-made disasters.

From fires and hurricanes to collisions with bridges that take out major ports. Or with the side of canals, and blocking anyone from going by, threats of dockworker walkouts. Geopolitical commodity disruptions. And of course, now the threat of large tariffs and a potential for escalating trade wars with major trading partners. Each of these doesn't feel like it is of the scale of what occurred during the COVID period. But I still caution anybody that forget-- just assuming away the potential consequences, I think is a bad mistake and it's taking a risk.
 
Each of these raises a key question. Shouldn't central banks react differently to supply disruptions than they do to other kinds of business cycle fluctuations? Take tariffs as an example. Stylized view of tariffs, at risk of oversimplifying, the pure purely economic theory says, if there's no retaliation, it's not escalating, and it's a one time increase in costs, its impact on inflation, as opposed to the price level-- its impact on inflation should be-- wait for it-- transitory. It says, this kind of tariff inflation is not a sign of overheating of the economy. And so mostly, the central banks should just ignore it when it sets monetary policy, because it should go away on its own.

The data-minded folks would also say, yeah, and if you go back and look at 2018 when we had a trade skirmish and we had some tariffs, yes, they increased the prices for the affected goods. But overall, it didn't matter that much for aggregate inflation, which remained quite modest. But be careful if you're thinking in either of those two lanes. I think it's dangerous to assume away the supply chain issues again. Don't forget the initial stages of COVID. And don't forget that compared to 2018. These tariffs may apply to more countries, more goods. They've talked about higher rates than they were in 2018.

Any of which could turn out to be larger and longer lasting effects than they were before. And that we saw in the COVID times that lesson number two, that the more complex the supply chain is, the longer it takes to work through shocks. Shocks that may start as transitory, at best, turned into transitory. And at worst, turned into permanent. So what matters for tariffs and their impact on inflation is that degree of substitutability that we talked about.

If since last time, companies have in fact diversified their supply chains over the last five years and made them more resilient, it is possible that they might be able to avoid the impact of tariffs without much increase in prices by shifting production from tariff-hit places to other places, or to different production channels. But let's say in 2018, companies shifted all the easiest things to shift out of China. Then what's left are the things that are very difficult to shift. And if that's the case, then the impact on inflation from passing tariffs today is going to be much bigger than it was in 2018.

And it is worth remembering that almost half of US imports are intermediate goods. That is parts, components, and things that are not final goods going to the consumer. Tariffs on intermediate goods raise the cost of production for domestic manufacturers, period. So the inflation impact from tariffs like that are unlikely to stay only in the directly affected products. For industries with long supply chains that cross borders multiple times, recall that journey of that one capacitor, this kind of tariff can stack tariff upon tariff, and the impacts can be well more lasting than you would first estimate.

When we've talked to auto industry participants-- and the ones we talked to are probably in this room, right, Kristin? But when we have we've asked many times, how much of a tariff do you think would get passed into prices and how quickly? And I would say that the opinions differ widely on that point. Some of the participants at the OEMs and others believed that they would rapidly go into prices and mean pretty quickly higher consumer inflation. Many of the suppliers think that the OEMs would not allow their prices to rise by very much, and that the suppliers themselves would have to eat much of the cost.
 
And the suppliers do not have much margin for error these days, as you know. And many fear that would lead to a wave of bankruptcies. So where does that leave us for monetary policy? We already went through the Fed, by law, sets monetary policy to stabilize prices and maximize employment. That means that we are required to take into account anything that's going to raise prices. If we see inflation rising or we see the progress on inflation stalling in this year, the Fed is going to be in the difficult position of trying to figure out if the inflation is coming from overheating, or if it's coming from tariffs or some supply disruption.

That distinction is going to be critical for deciding when the Fed should next act, or even if the Fed should next act. And that fuzziness of the data that we're going to have to untangle these components brings me to my-- is it my final? It's my one research plea. Which is, the only way to understand the dynamics in a time like that is to delve into the industry details. In other words, look under the hood. The supply side of the economy cannot be an afterthought for macroeconomics.

We will need to rely on industry expertise to figure this out, which means economic experts that are working side by side with business and industry contacts-- you know that here, the Detroit branch has been central for the Chicago Fed, maintaining its expertise and its network in the auto industry specifically, as an example. The AIS is one of our biggest events of the year for a very good reason. What Saudi Arabia is to the oil business, that's what the seventh district is to the auto business. And we know that the Chicago Fed has a long history of housing, a top-tier research department, universally respected, with expertise in industrial organization and productivity.

We're proud to have staff dedicated to understanding these issues. And we benefit from the industry collaboration and the insights that we get from you. I think collectively, we're going to need to tap into that kind of expertise for all the relevant industries, autos and everything else, as we're going to face these supply-side realities in the coming year. So in closing, I just want to thank you for joining us here at the AIS. Let's keep these conversations started. The ones that we begin here, they're just the beginning. Let's keep this thing rolling for another year. Thank you.

[APPLAUSE]

KRISTIN DZICZEK: I need the stairs. Sorry. Austan, I want to thank you for ending with that, because that's where I-- people always say that when they get on our panel, that these are the best chairs. So if you're not a panelist and you want to come sit--

AUSTAN GOOLSBEE: It's like a waterbed of a chair.
 
KRISTIN DZICZEK: These are great.

AUSTAN GOOLSBEE: Yeah.

KRISTIN DZICZEK: So every year, these are the chairs you get to sit in. So Yay. When I did my remarks this morning, I also made a plea to folks that we are going to need that information from you. Martin Lavelle, who you saw earlier, and I are tagging that for Detroit. Please talk to us. We need to know what's happening as the ground starts to shift.
 
AUSTAN GOOLSBEE: Yes.
 
KRISTIN DZICZEK: So thank you for reinforcing my point, Austan. I want to start with, we've got a couple questions in and we got a little bit of time, right?
 
AUSTAN GOOLSBEE: Yeah.
 
KRISTIN DZICZEK: We've seen supply chain disruptions before. In the auto industry all the time, there's a strike, there's a natural disaster. There's all kinds of things happen every day. We've got contingency plans from A to Z. But what was really unique about COVID? Why did it break this way?

AUSTAN GOOLSBEE: A couple of reasons come to mind. One, it was huge. Bigger than a lot of previous shocks. And two, a lot of it goes back to this substitutability point. If you have whatever, earthquake in Fukushima and it shuts down some plant, which affects some specific part, they can, in a short period, be disruptions. But quickly, they kind of reroute, redivert the bridge collapsed in Baltimore. They're like, hey, can you give us some more space at some other port? If it's all happening simultaneously, it's much harder to substitute.

That does make me nervous. If you said, we're going to put a 50% tariff on the nation of Vanuatu, it's going to stink for Vanuatu and whatever they're sending from Vanuatu. But it's going to be very small. If you say we're going to put a 50% tariff on all countries at the same time, now we're getting back to these lessons of COVID, I think.
 
KRISTIN DZICZEK: Great. I want to remind people we're going to use the portal. If you guys have questions, I've got a couple here, but I'd like to see a few more. I should have started with this question, but you spend a lot of time, yourself, and we here in the Detroit office and in Chicago, we meet with business leaders across this district.

AUSTAN GOOLSBEE: Yes.

KRISTIN DZICZEK: And when you have those questions, what kind of information are you looking for? And what do you want to hear from people? And what really helps you make those better decisions at those eight times a year when you go to Washington and meet with your friends at the FOMC?

AUSTAN GOOLSBEE: Meaning like what data series to look at?

KRISTIN DZICZEK: No. When you're meeting with people, what do you want to hear from them? What kinds of information helps you make those decisions better?
 
AUSTAN GOOLSBEE: It feels like it's somewhat depends on the moment.
 
KRISTIN DZICZEK: Yeah.
 
AUSTAN GOOLSBEE: Right now, I'm trying to understand some of these issues like, are tariffs as threatening as what they've kind of been describing? I'll cross-check information. If I spoke to company A and they say, if tariffs come in on the question of, how much of the strong auto sales number, for example, in December, can be accounted for pre- demand that consumers were thinking, tariffs are coming so I'm going to go buy the car now? If a lot, that implies consumer spending might fall off now in the first quarter.

If not, then it goes in the category of, maybe the consumer spending is so strong, it's even stronger than what we thought. And so we better keep an eye out for overheating in the first quarter. We can't get that from the official data. The official data come in with a one month, one quarter, some lag. And so that's an example of a thing where we're out talking to executives. What do you think? What have you heard? What do the dealers say?

Have you been able to move parts and supplies forward, build up a little inventory that if there were a trade disruption, how long would it go before it really started to bite? Things like that. Those are mostly supply side concerns. Other times, it's demand side concerns or financial concerns. I will say if we backed up to the-- we're 31, if we were at the 24th Annual AIS summit, and I told you the Fed is going to raise the interest rate 500 basis points in a single year, what do you think is going to happen to the auto industry?

People would be like running for the exits. Oh, my God. We're going to be dying.

KRISTIN DZICZEK: That's the freak out channel.

AUSTAN GOOLSBEE: That's the freak out channel. Normally consumer durable goods and especially autos, one of the most cyclical things there is. One of the most interest rate sensitive parts of the economy. So you would have thought if I told you, hey, do you think we're going to have a 17 million SAR in December after that happens? You'd be like, what planet are you on? And so trying to understand that, is it something about the business that's changed? Is it something about demand is weird? What happened? Why didn't the bottom fall out on automobile purchases when rates went up like that?

I still think that's kind of a puzzle. And that's another category that I'm interested in.
 
KRISTIN DZICZEK: And we have to spin stories of This from the data, from what we hear from people. What does that all together mean?

AUSTAN GOOLSBEE: My thing is, call Kristin. What you ask is helpful to me.
 
KRISTIN DZICZEK: Great. Excellent. Well, let's see. So with the benefit of five years of data, what does an optimal monetary policy response to this next COVID-like shock that may be coming look like?
 
AUSTAN GOOLSBEE: I think it very much depends on, is it a temporary shock or is it permanent? So we've got to get a handle on, is this a one-time increase in the level of prices? Or is this a thing that's a persistent inflation shock? It's not easy to figure that out. And is this a thing that's deteriorating, and then it's going to fix itself? Or is this a thing that's deteriorating and it's going to be higher for permanent? The answer to what's the optimal monetary policy response, that's what the question asked, depends on your answer to that question.
 
If it's transitory inflation shock, or it's something that you think is going to go away, I think it argues for a much more circumspect monetary policy that's like, don't overreact. And in a way, backing up and seeing that inflation is blowing up all around the world in every country by approximately the same amount. Even in countries where they were dramatically raising interest rates when the US was not raising interest rates, we were keeping it very low, kind of suggests that the Fed or the central bank is not the center of the universe in moments where the supply chain is going. You kind of got to let that play out.

KRISTIN DZICZEK: And those determinations of, it's transitory, It's longer term. Those can change, right?

AUSTAN GOOLSBEE: Yes. But you got to get out there-- the press started asking me as soon as I got there. Are you a hawk or are you a dove? And I said, look, I'm not a bird of any kind. I am a datadog. And we got the a group of dogs is either a pack or a kennel. And so I started calling it we're the kennel of the data dogs. And the first rule of the kennel is there's a time for walking and there's a time for sniffing. And you need to know the difference. When supply shocks are hitting, that's a time for sniffing.

That is, go find all what data you can find and be open to changing your mind of, is this temporary? We think it's going to be temporary. Transitory. And as Chair Powell said, there were many people on the good ship Transitory. And you know, then they got to some point, it was like, we got to get off this ship. And that's when rates started going up.
 
KRISTIN DZICZEK: So Austan's first visit to Detroit, he got to meet our dogs. Our retired dog, Krill--
 
AUSTAN GOOLSBEE: Krill.

KRISTIN DZICZEK: --licked him.
 
AUSTAN GOOLSBEE: Licked me in the face. That's right.
 
KRISTIN DZICZEK: And he was thrilled. You love this picture.

AUSTAN GOOLSBEE: I love that picture.
 
KRISTIN DZICZEK: And I'm thinking, well, we didn't know that's what you wanted.

[LAUGHTER]
 
AUSTAN GOOLSBEE: Rick, who's here in Detroit and you probably know. Rick was like, I'm not going to greet you as enthusiastically as Krill did. But I am happier here.
 
KRISTIN DZICZEK: We had no idea you wanted that. So we can make Fox and our other dogs do that. So I'm going to ask the last question here. So since you came to the Fed two years ago--
 
AUSTAN GOOLSBEE: Over two years.
 
KRISTIN DZICZEK: Oh. Well.
 
AUSTAN GOOLSBEE: Yeah.
 
KRISTIN DZICZEK: Yeah?
 
AUSTAN GOOLSBEE: January 9th.

KRISTIN DZICZEK: Yeah, you're right. January 9th.
 
AUSTAN GOOLSBEE: Day that will live in infamy.
 
KRISTIN DZICZEK: Yeah, because my three years coming up Saturday.
 
AUSTAN GOOLSBEE: Nice.
 
KRISTIN DZICZEK: Since you came here, how has your perspective changed about the auto industry?
 
AUSTAN GOOLSBEE: Chris and I worked together. I was in the Obama administration when there was the auto rescue. And so I had thought a lot about the auto industry in crisis moments.
 
KRISTIN DZICZEK: Back when we didn't agree on some things.
 
AUSTAN GOOLSBEE: Yeah, we didn't always agree, but we agreed on some.
 
KRISTIN DZICZEK: Yeah.
 
AUSTAN GOOLSBEE: I would say my perspective-- I did not understand-- you understood, but I did not understand the complexity of the supply chain. And for sure the COVID times. Did it disabuse me? Something. It educated me about that. The sheer magnitude of the auto industry as a share of US manufacturing, I've gotten more appreciation of since coming to the Fed. And this thing of like, we're the Saudi Arabia of auto production, it makes me look good. It gives me street cred.

Everywhere I go, I'm like, well, I've been talking to the auto industry and we're by far the biggest auto production in the whole country. And here's what I'm hearing. It's more than a cultural impact, because as I say, it is a large share of manufacturing. But the way in which the auto industry is tied to the regional economy and is really tip of the spear, one of the most cyclical, most interest rate sensitive indicators is good. I feel good to have that be so concentrated in this district. It's kind of changed my perspective on it.

KRISTIN DZICZEK: Cool. And you come to Detroit a lot.
 
AUSTAN GOOLSBEE: I do come to Detroit a lot.
 
KRISTIN DZICZEK: It's great. So Austan, thank you--
 
AUSTAN GOOLSBEE: They gave me a-- I am a Bears fan. It's been a tough couple of decades for Bears fans. They gave me a Detroit Lions with a number two for the 2% inflation target jersey. And I have it at home. And I was wearing it at the Lions game. But that was a--
 
KRISTIN DZICZEK: We gave him a Tigers hat, too.
 
AUSTAN GOOLSBEE: And a Tigers hat.
 
KRISTIN DZICZEK: Yeah. So we're making inroads.
 
AUSTAN GOOLSBEE: And I'm a White Sox fan. And they just set the record for the worst team in the history of baseball. So go Detroit.
 
KRISTIN DZICZEK: It's good that you have two cities to bounce between.
 
AUSTAN GOOLSBEE: I did make a bet when the Tigers-- you guys are costing me. You guys are costing me. There's a new president at the Cleveland Fed. And Cleveland was playing Detroit. And I said something to the effect of, nobody wants Cleveland to win. Everybody wants the Tigers. And I bet that the Tigers, though they were underdogs, would pull it out. And I lost. So I had to send a Detroit pizza to the Cleveland people.

Detroit pizza's good, as you know. I don't know if several hours old, it might not have been as great as if you got it fresh. But I did do that.
 
KRISTIN DZICZEK: Austan, thank you very, very much.

AUSTAN GOOLSBEE: And thank you all for--
 
KRISTIN DZICZEK: Really appreciate you coming.

[APPLAUSE]