The American economy is growing, and, in many ways, it’s looking a lot like the 1990s. Upward trends in productivity growth and employment paired with downward trends in inflation are cause for optimism. The question is whether we will maintain this trajectory or be derailed by this emerging era of uncertainty.

Today on Faster, Please! — The Podcast, I talk with Skanda Amarnath about trade policy, fiscal and monetary policy, AI advancement, demographic trends, and how all of this bodes for the US economy.

Amarnath is the Executive Director of Employ America, a macroeconomic policy research and advocacy organization. He was previously vice president at MKP Capital Management, as well as an analyst at the Federal Reserve Bank of New York.

In This Episode

* The boomy ’90s (1:24)

* Drivers of growth (7:24)

* The boomy ’20s? (11:38)

* Full employment and the Fed (22:03)

* Demographics in the data (25:37)

* Policies for productivity (27:55)

Below is a lightly edited transcript of our conversation.

The boomy ’90s (1:24)

The ’90s stand out as a high productivity growth, low inflation, high employment economy, especially if we look at the years 1996 to the year 2000.

Pethokoukis: What got me really excited about all the great work that Employ America puts out was one particular report that I think came out late last year called “The Dream of the 90’s is Alive in 2024,” and hopefully it's still alive in 2025. By ’90s of course you mean the 1990s.

Let me start off by asking you: What was so awesome about the 1990s that it is worth writing about a dream of its return?

Amarnath: The 1990s — if you're a macroeconomist, at least — had pitch-perfect conditions. Employment was reasonably high, we achieved the highest levels of prime-age employment relative to the population. We had low and declining inflation, and that variable that we use to say, this is the driver of welfare over time, productivity outcomes, the amount of output we can spin up from finite inputs, was also growing at a very strong rate, and one that we haven't really seen replicated since or really in the decades before.

The ’90s stand out as a high productivity growth, low inflation, high employment economy, especially if we look at the years 1996 to the year 2000. We'd had high productivity maybe even afterwards . . . but that was also a period where a lot of that productivity was gained from the recession. When employment falls really quickly, productivity can go up for illusory reasons, but it's really that ’90s sweet spot where everything was kind of moving in the right direction.

Obviously, over the last several years, we've seen a lot of those different challenges flare up, whether it was employment during Covid, but then also inflation over the last few years. So . . . a model to build towards, in some ways.

Some of us — not me, and I don't think you — remember the very boomy immediate post-war decades. Probably many more of us remember the go-go 1990s. One thing I always find interesting is how gloomy people were in those years right before the takeoff, which is a wonderful contrarian indicator that we had this period [when] we appeared to have won the Cold War but we had a nasty recession early in the decade, kind of a choppy recovery, and there was plenty of gloom that the days of fast growth were over. And just as we sort of reached the nadir in our attitudes, boy, things took off. So maybe that's a good omen for right now

If we're a contrarian, and if the past can be present, maybe that is a positive indicator to consider. In some ways, it's a bit surprising how much you hear the talk about growth [being] stuck in a very low-growth environment. Over the last two years, we have seen above-trend real GDP growth, above-trend productivity growth. We're going to get some productivity data revisions tomorrow. Again, this measure of productivity is output per hour, so it's basically, to a first approximation, real GDP divided by hours worked. We've seen that the labor market has, largely speaking, held itself up over the last few years, and yet, at the same time, real output has accelerated.

So that's at least something that suggests better things are possible. It's a sign that productivity can accelerate, and with the benefit of revisions tomorrow, we are likely to see at least . . . I'd say if you take a fair reading of the pre-pandemic trend on productivity growth, so five to 15 years, maybe you want to include the financial crisis and what happened before, maybe you don't, but you end up with something like 1.4 percent is what we were seeing. 1.4, maybe 1.45, that's a pretty generous view of pre-pandemic productivity growth.

I would like to do better than that going forward.

I would too. And since 2019 Q4, with the benefit of data revisions, until now, we're likely to see something like 1.9 percent — 50 basis points higher, 0.5 percent higher, we could ideally like to do even better than that. But it's 0.5 percent better over a five-year horizon in which whatever labor market weirdness spanned Covid, we've largely recovered from that. Obviously, there are a lot of different things that have changed between now and five years ago, but at least the data distortion issues should hopefully have been filtered out at this point. And yet, we probably are posting much better real output outcomes.

So through a lot of this turbulence, through a lot of the dynamism that's kind of transpired over the last few years, especially in terms of business formation activity, there was a high labor turnover environment in ’21 and ’22. That churn has come down in more recent quarters, but we have seen better productivity outcomes.

Now, can they sustain? There's a lot of things that probably go into that. There are some new potential risks and shocks on the horizon, but at least it tells you better things are possible in a way that if — I'm sure you've had these discussions throughout the previous decade, in the 2010s, when people made a lot of claims about why productivity growth was destined to be stuck, that we were either not innovating enough, or we were not able to capture that into GDP, or else there are just some secular reasons, and so I think it's an instructive moment. If people are actually looking at the data, the last two years, real output and productivity growth has been very impressive, objectively. And it's not just about, “Hey, we're reverting to the pre-pandemic trend and nothing more.” I think there are signs that this is something at least a little different from what an honest forecast pre-pandemic would've suggested.

Drivers of growth (7:24)

The three-legged stool is one where you want have a labor market that's strong, fixed investment that's growing (ideally faster than usual), and on the third leg it's the set of things that you can do to control really salient costs that everyone's paying.

Let's talk about those signs, but first let's take a quick step back. When you look at what drove growth, and productivity growth, specifically, in the ’90s, give me the factors that drove growth and then why those factors give us lessons for policymaking today.

I think there are three drivers I can point to that are a little bit independent of each other.

One is we had — I don't want to say a tight labor market, but especially a fully employed labor market is helpful in so far as, and we see this now over multiple episodes, especially when you're at high levels of prime-age employment, that's typically a point when there's a lot of human capital that's accumulated. People who have been employed for a while, they've been trained up, there's a little more returns to scale, they can scale revenue, they can scale output better. You don't need to add an additional worker to add additional unit of GDP.

In the more tangible sense, it's that people are trained up, they have more tangible experience, productive experience. You're able to see output gains without necessarily having to add hours worked. We generally saw over the late ‘90s: Hours worked slowed down, but real GDP growth held up very well.

The labor market wasn't contracting by any stretch, it was just, largely speaking, finding an equilibrium in which employment levels were high, job growth was solid if not always spectacular, but we were still seeing that real GDP growth could still be scaled up in a lot of ways. So there is a labor market dynamic to this.

There is a fixed investment dynamic. Fixed investment growth is very strong in the late ’90s. That was about information processing equipment, IT, software. We did telecommunications deregulation in 1996, which is meant to really expand and accelerate the rollout of things. That became the fiber boom. We saw a lot of construction that went into those sectors, and so we saw it really touch construction, we saw it touch equipment, and we also saw it effect intellectual property.

An investment to prevent the millennium bug?

There was probably a lot of overinvestment that also was born of some of that deregulation, but at least in terms of it adding to our welfare, making it easier for us to use the internet and the long-term benefits of that, a lot of that was built in the late ’90s. You could probably point to some stuff in policy, obviously interacting with technology that was very favorable.

The third thing I would say is also probably underrated is inflation fell over that whole period. While some of that inflation falling would've been some fortuitous dynamics, especially in the late ’90s around food and energy prices falling, the Asian financial crisis, there were also things that were very important for creating space for the consumer to spend more. Things like HMOs. Healthcare inflation really fell throughout the ’90s.

Now, HMOs became more unpopular for a lot of reasons. These health management organizations were meant to control costs and did a pretty good job of it. This is something that Janet Yellen actually wrote about a long time ago, talking about the ’90s and how the healthcare dynamic was very underrated. In the 2000s, healthcare inflation really picked up again and a lot of the cost-control measures in the private sector were less effective, but you could see evidence that that was also creating space in terms of price stability, the ability for the consumer to spend more on other types of goods and services. That also allows for both more demand to be available but also for it to be supplied.

I think with all these stories there's a demand- and a supply-side aspect to them. I think you kind of need both for it to be successful. The three-legged stool is one where you want have a labor market that's strong, fixed investment that's growing (ideally faster than usual), and on the third leg it's the set of things that you can do to control really salient costs that everyone's paying. Like healthcare, obviously there's a lot of cost bloat, and thinking about ways to really curb expenditure without curbing quality or real consumption itself, but there's obviously a lot of room for reforms in that area.

The boomy ’20s? (11:38)

Right now, you have still an increasing number of people who have had meaningful work experience over the last one, two, three, years. That human capital should accumulate and be more relevant for GDP growth going forward . . .

So you've identified what, in your view, is a very successful mix of these very critical factors. So if you want to be bullish about the rest of this decade, which of those factors — maybe all of them — are at play right now? Or maybe none of them!

Right now, the labor market is still holding up rather well. While we may not be seeing quite the level of labor market dynamism we saw earlier in this expansion, at the same time, that was also a period of great turbulence and high inflation. Right now, you have still an increasing number of people who have had meaningful work experience over the last one, two, three, years. That human capital should accumulate and be more relevant for GDP growth going forward, assuming we don't have a recession in the next year or two or whatever.

If we do, I think it obviously would mean a lot of people are probably likely to not be as employed, and if that's the case, their marketable and productive skills may atrophy and depreciate. That's the risk there, but, all things considered, right now, non-farm payroll growth has been roughly speaking 160,000 per month. Employment rates adjusted for demographics are a little higher than they were before the pandemic. It's pretty historically high. That's not a bad outcome to start with and those initial conditions should hopefully bode well for the labor market's contribution to productivity growth.

The challenge is in terms of real GDP growth. It's also a function of a lot of other factors: What are we going to see in terms of cost stability? I would generally say there's obviously a lot of turbulence right now, but what's going to happen to a lot of these key costs? On one hand, commodity prices should hopefully be stable, there's a lot of signs of, let's say, OPEC increasing production.

On the other hand, we have also things about tariffs that are pretty significant threats on the table and I think you could also be equally concerned about how much this could matter. We've already had a bigger run-through of this with a lot of this supply chain turbulence, pandemic error stimulus, and how that stuff interacted. That was quite turbulent. Even if tariffs aren't quite as turbulent as that, it could still be something that detracted from productivity growth.

We saw, actually, in the first two quarters of 2022 when inflation exploded, there were a compounding number of shocks on the supply side with the demand side that it did have a depressing effect on productivity in the short run. And so you can think if we see things on the cost side blow out, it will also restrict output. If you have to mark up the price of a lot of things to reflect different costs and risks, it's going to have some output-throttling effect, and a productivity-throttling effect. That's one side of things to be concerned about.

And then the other side of it, in terms of fixed investment, I think there's a lot of reasons for optimism on fixed investment. If we just took the start of the year, there's clearly a lot of investment tied to the artificial intelligence boom: Data centers, all of the expenditures on software that should change, expenditures on hardware that should be upgraded, and there's a whole set of industrial infrastructure that's also tied to this where you should see capital deepening really emerge. You should see that there should be more room to scale up in capital formation relative to labor. You can probably point to some pockets of it right now, but it hadn't shown up in the GDP data yet. That was the optimistic case coming into this year and I think it's still there. The challenge is there's now other headwinds.

The tariffs make me less optimistic. I really worry about the uncertainty freezing business investment and hiring, for that matter.

I share your sentiment there. I think we learned in 2018 and -19, there were tariffs being implemented but on much smaller scale and scope, and even those had a pretty meaningful or identifiable impact on the manufacturing sector, leave aside even the other sectors that use manufactured inputs from imports or otherwise. So these are going to be likely headwinds if you're any kind of company that exports at any point in time to something across borders, you have to now incorporate higher costs, more uncertainty. We don't know how long this is supposed to stick. Are you supposed to assume this is going to be a transition period, as Treasury Secretary Bessent said, or is this something that is just like a little negotiation tactic, you get a win and then we move on?

I don't think anyone's quite sure how this is supposed to play out and I worry both for the manufacturing sector itself because, contrary to the popular conception of it, we still export a lot of things. We still export, and the most competitive industries are exporting industries, and so that's a concern for whether you're a manufacturing construction machinery, you’re Caterpillar, or if you're agricultural machinery and you're John Deere, you have to start to think about this stuff more and the risk that's attached to it. The hurdle rates to investment go up, not down.

And on the other side of the ledger then we have, or at least in terms of the sectors that use manufactured inputs. Transformers are really important for building out the energy infrastructure if we're going to have load growth that's driven by AI or whatever else, we're kind of entering more uncertainty on that side as well, and not really clear what the full strategy is. It strikes me as going to be very challenging.

And then on the monetary policy [side], and this is the difference, you had in the ’90s a Federal Reserve which seems to have defeated the Great Inflation Monster of the 1970s while the Fed today is battling inflation.

What do you make of that as far as setting the stage for a productivity boom, a Fed which is quite active and still quite concerned about that inflation surge and perhaps tariffs further playing into it going forward?

I think the Fed's stuck in a hard spot here. If you think about a trade shock as likely being some mix of — well, it could be output throttling. Maybe the output throttling and the effects in the labor market are more outsized than the inflation effects? That was what we saw in 2018 and 19, but it's not a given that that's going to be the case this time. The scale of the threats are much bigger and much wider, and especially coming through a period now where there's higher inflation, maybe there's more willingness to raise prices in response to these shocks. So these things are a little different.

The Fed has basically said, “We don't know exactly how this is going to play out and we're going to need to watch the data, keep an open mind, be pretty risk-averse about how we're going to adjust interest rate policy.” We've seen evidence of inflation expectations going up. That will not give the Fed a lot of confidence about cutting interest rates in the absence of other things getting worse. What the Fed’s supposed to do in response to supply shock is almost a philosophical question because you obviously don't want to break things if there's really just a supply shock that is a one-off that you can see through, but if it starts to have longer term consequences, create bigger pain points in terms of inflation, it's just a tough spot.

When I try to square the circle here — and this will be no surprise to the listeners — I can't help but thinking, boy, it would be really fantastic if all the most techno-optimist dreams about AI came true, and this is not just an important technology, but an unbelievably important technology that diffuses through the economy in record time. That would be a wonderful factor to add into that mix.

If there are ways for that to be a bigger tailwind — and there could be, I wouldn't be too pessimistic about how that could filter through even the GDP data amidst a lot of these trade policy headwinds, we're expected to see a lot grand buildout of data centers, for example. There's an energy infrastructure layer to that.

But even beyond the investment side, actually being used, improving total factor productivity. Super hard to predict, and no one wants to do a budget forecast under the assumption we're going to be doubling a productivity growth, but it would be nice to have.

Sure would. I will say about one of the things on the inflation side, especially with the Fed, we've come through a period now where the Fed has kept restrictive interest rate policies, but only more recently have we seen a little bit more of that show up in financial markets, for example. So the stock market over the last two years has ran up quite a bit, historically, and only now we've seen some signs of maybe some pricing of risk and some of the issues around the Fed.

Inflation data itself coming into this year, relative to the Fed's target on the Fed's gauges, it was right now about 2.6, 2.7 percent. Most of that reflects a lot of lags of the past, I would say. If you look through the details, you see a lot of it in how inflation is measured for housing rent. How inflation is measured for financial services really tracks the stock market, and then there's obviously some other idiosyncratic stuff around where they're using wages as the measure of prices in PCE, which is the Fed's inflation gauge. If you take that stuff out, we still have a little bit of inflation work to do in terms of getting inflation down, but it would sound pretty manageable. If I told you, actually, if you take away those lags, you probably get some only 2.2 percent, that seems like we're almost there.

Let's take away a little more, then we get to two percent. We can just keep cutting things out

And there would probably be conditions for a lot. But if we can give the benefit of the time and do no harm, there's probably a positive story to be told. The challenge is, we may not be doing no harm here. There may be new things that rear up, to your point. If you start just deducting stuff just because you think it lags, but you don't think about forward-looking risks, which there are, then you start to get into a more challenged view of how things improve on the inflation side.

I think that's a big dilemma for the Fed, which is, they have to be forward-looking. They can't just say, well, this stuff is lagging, we can ignore it. That doesn't cash when you have forward-looking risks, but if we do see that maybe some of these trade policy risks go away, if there's a change of heart, a change of mind, I think you can possibly tell yourself a more positive story about how maybe interest rates can come down a bit more and financial conditions can be more supportive of investment over time. So I think that that is the optimistic case there.

Full employment and the Fed (22:03)

Taking people away from their job and then trying to just bring them back in several years later, don't expect the productivity dividends to be quite the same.

For someone who cares about full employment, how would you rate the Fed's performance after the global financial crisis? Too tight?

It was too tight and also it was an environment in which the Fed, at various points from 2010, maybe 2009, through to 2015, they were very eager to try and get interest rates up before the economy was giving their hard signal that it was time to raise interest rates. Inflation hadn't really reared its head, nor had we seen evidence of really strong labor markets. We were seeing a recovery that was very gentle, and slow, and maybe we were slowly getting out of it, but it was a slow grind. GDP growth was not particularly stellar over that period. That's pretty disappointing, right? We don't want do that again. Obviously, there are things like maybe fiscal policy could have been done differently, as well as monetary policy on some level, but I think the Fed was very eager to get off of zero to the point where they weren't looking at the data, just didn't like the fact they were at zero.

Coming out of it, now it's like that recovery is a lot of wasted output. We lost a lot of output out of that. We lost a lot of employment out of that. It's kind of just a big economic waste. Obviously, this past recovery has been very different and Covid was a different type of shock relative to the global financial crisis.

The thing that worries me is actually, when we start to look at the global financial crisis and we look at, say, even the recession from the dot com boom, or even the recession, to your point, in the early ’90s, prime-age employment rates took a long time to recover and it's not ideal from a productivity perspective that you want to have people out of the labor force for long periods of time, people out of employment for an extended number of years —

Also not good for social cohesion.

The social fabric, yeah. There's a lot of stuff it's not great for. We don't want hysteresis of that kind. We don't want to have people who are, “Oh, because I lost my job, I'm not going to be able to get a new job in the foreseeable future.” A lot of skills, general intangible knowledge, that's kind of part of how people become more productive and how firms become more productive. You want that stuff to keep going on some level. That's also probably why even Covid was very turbulent. It's a lot of things that we kind of have in motion, we just switched it off and then switched it back on. Even that over a short horizon can be very disruptive. There was a reason, on some level, to do it, but it is also something to learn from: Taking people away from their job and then trying to just bring them back in several years later, don't expect the productivity dividends to be quite the same.

So I look at those three recessions at least to say, if we're going to have slow recoveries out of those, it's going to cause problems. So it's a balance of Fed and fiscal policy, I'd say, because there are certain things — there was a 2001, -2, -3, there were attempts to lower taxes at the same time. That actually may have been the key catalyst, more so than the Fed cutting rates, but when you think about how the Fed is sometimes antsy to get off of low rates when the economy is depressed, that's not great. Right now the Fed has a very different set of trade-offs. Thankfully, on some level, for full employment especially, [we’re] not in that world, we're now more trying to defend full employment, protect full employment, ideally not have a recession now, would be great.

Demographics in the data (25:37)

When you see how population growth has a twofold dynamic, we typically see in periods of high population growth are the periods also where you tend to see both strong investment but also inflation risk.

I would love to avoid that. That’s the last thing we need.

I have two questions: One, how much do demographics, and there’s been a lot of talk about falling fertility rates, is that something you think about much?

I think demographics play a lot of tricks on the data itself. When you see how population growth has a twofold dynamic, we typically see in periods of high population growth are the periods also where you tend to see both strong investment but also inflation risk. Obviously, when you know that there's a bigger base of people who you can sell your goods and services to, you might be more inclined to go forward with a longer-dated investment with some confidence that there will be growth to validate it. On the other hand, it's also because there's more spending that's happening in the economy, that's higher growth, there might be more inflation risk.

I think that those background conditions then filter in various ways. You can kind of see how Japan and Europe have, generally speaking, at least maybe prior to this pandemic-era episode of inflation, are seeing lower inflation rates, lower growth rates, though, too. So lower real growth, lower inflation, real per capita outcomes are always hard to square in terms of Japan's population is declining, but also Japan's real GDP, is it declining as much more or less? These things are very hard to identify going forward.

I think it's going to just muddy a lot of different math as far as what counts as strong investment. We've gotten used to a world of non-farm payroll growth every month in the job report. If it's like 150,000 to 200,000, that's pretty solid and great. Do we need to change our expectations to it being a 100,000 is good enough because we're not actually expanding the working age population as much? Those things are going to have an effect on the macroeconomic data and how we evaluate it in real time. Even just this year, because for some people's assessments of what counts as strong payroll growth, there was a sense that payroll employment was strong in ’23 and ’24 because of immigration. I'm a little bit more skeptical than most of those claims, but if it's true, which I think it's still possibly true, that it’s then the case right now if we do see less immigration, is that the breakeven, the place where what counts as healthy employment growth might be a lot lower because of it.

Policies for productivity (27:55)

Healthcare cost growth and managing it will be important both in terms of what people see in the budgetary outcomes, but also inflation outcomes.

My last question for you, I'll give you a choice of what to answer. If you were to recommend a pro-productivity piece of public policy, either give me your favorite one or the least-obvious one that you would recommend.

Right now, I'd say the things that worry the most in productivity, and it's on the table, is the trade policy. This stuff has adverse impacts on prices and investment, and it may have impacts on employment, too, over time, if they stick. We're talking about really high, sizable numbers here, in terms of what's threatened now. Maybe it's all bark and no bite, but I would say this is what's on the table right now. I don't know what else is on the table at the very moment, but I'd say that's a place where you have to wonder what's the merits of any of this stuff, and I think I'm not seeing it.

I am more intellectually flexible than most about where sometimes some very specific, targeted, narrow trade barriers have a lot of sense in them, either because solving a particular externalities, over-capacity kind of problem that might exist. There are some intellectualized reasons you can offer if it's narrow and targeted. If you're doing stuff at a really broad-based level, the way it's currently being evaluated, then I have to ask, what are we doing here? I am not sure this is good for investment, and investment is also part of how we are able to unlock a lot of general corporate technologies, able to actually see total factor productivity growth and increase over time. So I worry about that. That's top of mind.

Things that are kind of underrated that I think is really important over time, that'll probably be also important, both for people who are thinking about efficiency, thinking about where there's room for public policy to support productivity growth, I'd say healthcare is a really prominent place right now. Healthcare cost growth and managing it will be important both in terms of what people see in the budgetary outcomes, but also inflation outcomes. There's just a lot of expenditures there where there's not a lot of incentive for rationalization that needs to be brought. And there's a way to do it equitably. There's a lot of low-hanging fruit out there in terms of ways we can reform the healthcare system. Site neutral payments, being one easy example to point to.

The federal government itself and private insurers, both of them, though, in terms of paying for healthcare, how they pay for healthcare and actually ensure cost control in that process, if we're able to do that well, I think the space for productivity is pretty underrated and could be quite sizable. That's also, I'd say, an underrated reason why the 2000s became far less productive. Healthcare services inflation, healthcare cost growth really exploded over that period, and we did not get a good handle on it, and we kind exited the ’90s productivity boom phase. It was more obvious towards the latter half of the 2000s as a result.

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