That’s how much new investment President Trump claims to have brought into America since he took office in 2025. Sometimes he says $22 trillion; sometimes $18 trillion.

It doesn’t really matter which of those he picks. They’re all wrong. By a lot.

Fact-checkers and wonky economists have contradicted these claims, but this isn’t just a fact-finding mission. The number the president claims is also contradicted by the White House’s own website. Let me level with you: once you try to make sense of this, you’ll realize it’s nonsense resting on absurdity.

But our goal today isn’t just to debunk a number. I want to give you a toolkit for assessing claims like this one. When people in power wave around these big, unbelievable numbers, they’re counting on one thing: that you’ll be impressed — and maybe intimidated — by all those zeros. They think you won’t look any harder.

I reckon we can do better than that.

From New York City to the solar system

Here’s the trouble with millions, billions, and trillions. They sound like neighbors. They’re big and serious — and, of course, they rhyme.

But they’re not neighbors. Each “-illion” is a thousand times bigger than the one that came before it. So, let’s try to visualize the difference.

Imagine you’re laying dollar bills end-to-end. If you did that, a million $1 bills would get you just under 100 miles. That’s New York to Philadelphia. Or Sydney to Newcastle, or Montreal to Ottawa. Take your pick.

It’s a long walk, but it’s not an unimaginable one.

Now let’s try for a billion. Stand at your front door and point the money whichever direction you like. Your billion-dollar line now wraps around the planet roughly four times. If you aimed straight up instead you’d get about 40% of the way to the moon.

Now a trillion, which is the unit the president is talking about. A trillion dollar bills, end to end, runs about 97 million miles. Start at your front door and you end up past the sun.

So going from a million to a trillion is like going from New-York-to-Philly to New-York-to-the-Sun.

And $21 trillion? The amount the president is claiming? That line of bills would run you about 2 billion miles. That’s past Mars, past Jupiter, past Saturn, past Uranus, and most of the way to Neptune.

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Compared to what?

The first question to ask of any big, flashy number is “what’s the scale?” Once you’ve got that fixed, ask yourself: “compared to what?”

A billion dollars would be a fortune to you or me. In the federal budget it’s a rounding error. Without context, the number doesn’t tell you enough.

And here’s the thing: Americans really do invest amounts of money that could reach across the solar system. Our economy is that big. Every year, U.S. businesses and families spend roughly $5 trillion building things like factories, offices, data centers, machines, and houses. Four years of that and you’re at roughly $20 trillion.

So $21 trillion over a presidential term isn’t a crazy number on its own. It’s roughly what everyone in America invests, in everything, total.

But that’s not the world the president is claiming. He’s claiming that there’s $21 trillion in new investment on top of everything else. That would mean doubling investment, overnight, and sustaining it for four years.

You wouldn’t need a speech if that were happening. You’d see it. Cranes on every skyline. Construction crews working around the clock. They’d make so much money that I might quit teaching and join them. The local workwear store would sell out of steel-toed boots!

Addition is a secret weapon

The White House’s website claims to list all the investment pledges behind Trump’s number. If you add them up, and take them at face value (which isn’t really a great idea), they total $11.3 trillion.

And so even by the White House’s own math, the president is roughly $11 trillion short. That’s enough to pay the grocery bill for every American, every day, for a decade.

And the $11.3 trillion doesn’t hold up either.

Per year, or total?

The third question you want to ask is about the timeline. If I promise you a million bucks, you want to know when I’m going to deliver. Maybe I’ll give you one dollar a year for a million years.

Political pledges usually stretch over years and get announced like they land tomorrow. The United Arab Emirates’ $1.4 trillion pledge is spread over 10 years, which means $140 billion a year — a tenth of the headline.

And listen to the verbs. The president has hedged it as money “invested or committed to invest.” Invested money is in the ground. Committed money is a promise. You may have noticed that promises can be broken.

Does the label match the contents?

The fourth question is about labels. To an economist, investment means spending on stuff that helps us make more stuff. Factories, machines, data centers, and so on. Much of this list is not that.

The White House describes Qatar’s $1.2 trillion as “economic exchange.” Suppose we flew Qatar a fleet of jets full of $1.2 trillion of gold, and they flew it straight back. That’s a $1.2 trillion economic exchange where no one ends up better off. We burned a lot of jet fuel for nothing.

India’s $500 billion is really a goal to double trade by 2030. Trade is great — we should encourage it — but if India sends us $500 billion, it’s because they’re buying our wheat, soybeans, and technology. A foreign airline ordering Boeing jets is an export. It’s not an investment. And this doesn’t even cover the old projects re-announced with shiny new stickers.

Bloomberg’s economists went through this with a fine-toothed comb and found real investment closer to $7 trillion, and even that was shaky.

Did anyone sign the dotted line?

The fifth question: does whoever is promising this money actually have it?

Saudi Arabia pledged $600 billion. That would take something like $150 billion a year, or roughly one-eighth of the entire Saudi economy (every year!). Researchers at the nonpartisan Peterson Institute concluded that several Gulf pledges were incredibly large relative to those countries’ resources. More tellingly, the pledges aren’t binding.

To be clear, a pledge of that scale isn’t automatically impossible. Countries with giant sovereign wealth funds can invest out of savings (this is what economists call a stock versus a flow).

But then there’s the paperwork. I just signed a two-year lease on an electric car. I initialed so many pages I felt like Taylor Swift at an album release party, and that was just for a five-figure sum. The president is claiming a 13-figure sum without any proper paperwork. If that comparison feels absurd, that’s the point.

A real investment comes with a contract: a company, a site, a dollar figure, a timeline. Much of what’s being counted here is a press release and a handshake.

Don’t confuse a rising line for proof

The last question: is someone conflating “something happened” with “I made this happen?”

Investment in America is undeniably up. Big tech spending on AI infrastructure has roughly tripled since 2024, to a planned $725 billion this year. But that boom is measured in hundreds of billions, not trillions, and those data centers would be going up regardless of whom the president meets in the Gulf.

Your fake-trillion toolkit

Here’s the part of all this I love. It’s small-d democratic. Asking these questions doesn’t require a graduate degree. And they’re relevant for claims that anyone makes — not just the president, but also politicians, CEOs, and yes, even economists. I hope you’ll hold me to it.

What bothers me most about the $21 trillion claim isn’t the size. It’s that it isn’t designed to be checked. It’s designed to sound like a lot, with the assumption that folks like you are too tired or too bad at math to notice it’s off by $11 trillion.

I don’t buy that. People are a lot smarter than the folks talking at them give them credit for.

That’s what Platypus Economics is about. Not to tell you what to think, but to hand you the tools to think it through. The next time someone sends a line of dollar bills out past Saturn, you can check it. And if it doesn’t hold up, you’ll know just how unserious the people making the claims are.

I argued that the 30-point gap comes down to how little confidence people have in the government’s economic management.

You can catch up on that here:

Now it’s time for The Professor Is In, where I sit down with my producer Augusta Chapman to answer your questions. Think of it like office hours. The door’s open, come on in.

I have to be honest — I’m excited about this one. It’s not often I think I’ve cracked a case. Augusta came armed with your questions, some of which were meant to poke holes, and that’s great. In economics, poking holes in an argument is a sign of respect.

Which way does the causality run?

Augusta’s first question was about the source of the sentiment. She asked which way the causality runs here. Maybe people aren’t gloomy because they distrust the government. Maybe they’re just gloomy, and they blame whoever happens to be in charge.

These two stories make different predictions, and we can check them.

If Americans were simply in a bad mood, then their distrust of economic leadership should line up about equally well with all the different measures of economic sentiment. A general bad mood wouldn’t discriminate.

That isn’t what we see in the data. Questions that ask people to look into their economic future track their trust in leadership closely. Questions about a specific market (or the present moment) track it much less closely. “Is now a good time to buy a house?” is one of those questions, and people’s opinions swing widely, and in ways unrelated to their distrust of our economic leadership.

Look, I can’t be certain that I’ve nailed the correlation-versus-causation thing. That’s not the claim I’m trying to make. Let me be more modest. I’m saying: here’s a candidate explanation, it’s plausible, and it fits the key facts.

Put another way, consumer sentiment is falling short of economic fundamentals by exactly the amount you’d predict based on how little people trust leadership.

Is this puzzle worth solving?

Augusta’s next question: does this matter? If people say they’re miserable, but they keep spending and working, maybe sentiment just isn’t a useful measure.

There’s a serious tradition that echoes that skepticism. Many economists believe that you get closer to the truth if you watch what people do than listen to what they say. It’s called revealed preference: sticks and stones may break my bones, but words don’t hurt the economy.

I’m a teach-the-controversy guy, so here’s the other side.

There’s evidence that consumer sentiment helps forecast where the economy is headed. It’s not overwhelming, but it’s mostly believable. At the very least, sentiment carries information. How people feel about the future shapes what they do. The evidence linking how you feel about the economy to the choices you make is thinner than I’d like. The problem is that we rarely ask the same people what they think and then go on to watch what they do.

Keynes thought animal spirits were among the most important drivers of economic activity. If he were around today, I suspect he’d point you to the University of Michigan’s index of consumer sentiment.

Or forget measurement entirely. Say you run a business, and you expect economic policy over the next few years to be a mess. Do you build a factory now? Or do you wait, see what the mess looks like, and maybe build it in two years?

That’s a way sentiment matters, and it matters whether or not anyone actually measures it. It’s why presidents can matter for the economy. Once in a generation you get one who’s perceived as a chaos monkey. That can make it hard for businesses to plan.

More questions on sentiment

Other questions Augusta asked:

• Is the hard economic data wrong, or just missing something?

• Why should economists trust survey data at all?

• Could other fields use an injection of economic methods?

• Could this all be the phones?

Finally, why the post-2020 gloom?

The drop in trust in economic policy explains a lot of the past year and a half, but there was a gap before that. It opened up in 2020.

Lots of things broke that year in ways we still haven’t come to terms with. We see it in fertility statistics and national discourse. I see the echoes in the students I teach. I don’t think we’ve fully realized how much of our world was affected.

There’s also a boring possibility. My University of Michigan colleagues, the ones who collect these data, recently switched from telephone interviews to web interviews. That change mattered, especially when it came to questions about how people feel. We corrected for it in our analysis, but I think it’s an important change that might affect the numbers in some unexpected ways.

Whatever broke in 2020, the gap of the past year and a half has a more specific cause. People are looking at the future and don’t trust who’s steering. Until that changes, a lot of factories may stay on the drawing board.

Watch the full episode for the rest.

This time we got into a puzzle. Support for immigration seems to be rising in direct proportion to the brutality of the administration’s immigration crackdown.

My explanation of this is simple. It’s easy to vilify a group in the abstract. Then the policy hits in real life, and your neighbor disappears. The people being hit might be from your church, they might be your kids’ teacher, or maybe they’re your grandfather’s caregiver.

Oh, you think to yourself. I didn’t mean that bloke.

We’ve seen this before. Not long ago, it wasn’t hard to whip up hysteria against gay men, lesbians, and the rest of the rainbow flag. There were whole elections built around it. Then every family discovered that it had a gay niece or cousin or neighbor, and those people turned out to be perfectly nice folks just trying to get on with their lives. The single best cure for vilifying a group is meeting someone in it.

Charlie and I also talked about how this immigration policy is a sharp turn for Republicans. Reagan liked to say that you can live in France and cannot become a Frenchman, but anyone can come to America and become an American. Both President Bush and his son, President Bush, took immigration seriously as a way to make the country richer, in every sense. This is an abrupt break.

Then there’s a word I’d like everyone to watch: “illegal.” Whenever I talk about the virtues of immigration, someone comes in and says, “No, Justin, you don’t get it. The problem is illegal immigration.” That position has a logic to it, and as someone who’s stood in the immigration queue myself, I have mixed feelings about people jumping it.

But let’s set the many nuances of that aside for a second. The administration is going after legal immigrants, too. It has revoked more than 300,000 visas. It has shut off legal immigration from many countries. It has been consistently capricious, and getting into the country is no longer any guarantee of being treated fairly.

It has made it very hard for students to get visas. And those who do come are scared to return home for the holidays in case they can’t get back in to complete their degrees. This is lunacy. Students from all over the world want to pay us $70,000 per year to sit in a lecture with 500 kids at the University of Michigan, and that money funds better classrooms, more financial aid for local students, and lots of excellent research. Plus, when those students return to their home countries, they return with a love for the United States, and an appreciation of our values.

Yet the administration’s answer is: we just don’t want them here.

I also confessed something to Charlie about my wardrobe. I don’t usually wear political t-shirts, but I had one specially made on this topic. It’s blue and it says “immigrant” on it.

It’s simple, and I like it, because when people are anti-immigrant, they’re not usually picturing blokes like me: white, moderately successful, nonthreatening. But I am representative. My immigrant friends do the same things I do. They wake up, go to work, raise their kids, and (if they’re citizens) they vote their conscience, just like you.

I hate that admitting I’m an immigrant has become subversive. The Somali immigrant the president singles out has no less dignity than I do.

You can tune in for our full conversation above.

It’s a good question. Earlier this year, consumer sentiment hit an all-time low. It’s bounced around since then, but it’s still sitting at the sort of level you’d expect from a serious economic crisis.

The following comparison makes the point.

In May of 1980, the University of Michigan’s index of consumer sentiment sat at almost 52. This summer — 2026 — that same survey put consumer sentiment at just around 52. So, nearly identical levels of pessimism. The difference is, in 1980, unemployment was at nearly 8%. Today it’s about half that. Then, inflation was running around 14%. Today, it’s roughly a quarter of that.

This is a longstanding mystery that I’m hoping to solve. My prime suspect: An overwhelming majority of Americans rate economic policy under Trump as poor — the worst it has ever been — and they worry what this means for their economic futures.

Here’s the evidence.

First clue: open the survey

My colleagues at the University of Michigan who conduct the consumer sentiment survey ask five questions about how people feel about financial conditions. Most of these questions aren’t just about the present. They ask people to look ahead.

For half a century, if you were trying to understand swings in consumer sentiment, you could often explain them by looking at the economy. Sentiment tended to be low when prices rose too fast, or when work was too hard to find.

To quantify that relationship, I used straightforward statistical techniques (linear regression!) to estimate how these data had historically risen and fallen together. That allowed me to ask: Given the inflation rate and the unemployment rate, where would you predict consumer sentiment should normally be at a time like this?

For the summer of 2026, based on actual economic indicators, that model says consumer sentiment should be at about 82.

The actual number is 52.

That’s a 30-point gap, and it’s the mystery we have on our hands today. The usual economic indicators simply can’t explain that gap.

Our prime suspect

That same Michigan survey asks one more question that got me really interested. It asks folks how they evaluate the job the government is doing on economic policy. You can see why this might matter: If policy is good, you might be optimistic about your economic future. If it’s bad, you’re likely more pessimistic.

I’m going to call that answer America’s confidence in our economic managers. To turn it into a single number, take the share of people who say the government is doing a poor job and subtract the share who say it’s doing a good job. When that number rises, it means Americans are handing down a harsher verdict.

In late 2024, the verdict stood at +14. That means 14 percentage points more Americans thought the government was doing a poor job than a good one.

By May 2026, it had hit +66.

That’s the highest reading in the history of the question (by a lot). The previous record was +52 and it was set during the 2011 debt ceiling crisis. At that point, Congress was flirting with the idea of not paying the nation’s bills. We’re now 14 points worse than we were then.

Now for some detective work. I took the history of consumer sentiment, and I stripped out the ups and downs that are explained by the usual suspects of unemployment and inflation. What’s left is the mystery we’re trying to solve: those movements in sentiment that are not explained by actual economic conditions.

Then I plotted America’s verdict on the quality of our economic leadership next to it.

The two move together. And they move together remarkably closely.

The clearest way to see that is a scatterplot (my favorite kind of plot!). Every dot is one month all the way back to 1978. The vertical axis shows the part of consumer sentiment that inflation and unemployment can’t explain. The horizontal axis shows the public’s verdict on our economic managers. I never imagined the fit would be so tight!

A 10-point worsening in the verdict goes with about a 4.5-point fall in consumer sentiment. This suggests that our feelings about economic policy are a powerful lever shifting consumer sentiment. (I’m not going to do the correlation-versus-causation dance here; I’m just trying to find a plausible suspect that fits the facts.)

The data we all lived through

The months since the 2024 election sit at the extreme end of that scatterplot for a reason. Our distrust of our economic managers has risen sharply, and it is at a record high. Even so, those dots land remarkably near the historical line of best fit. It follows that, given how badly Americans now rate the people running our economy, today’s sentiment is pretty much exactly what we’d expect.

Why the loss of faith? Rather than guessing, we can turn back to the survey for more details.

Michigan asks people, in their own words, what economic news they’ve heard recently. In 2025, the number of people voicing concerns and complaints about the government hit a record high. Tariffs dominated those answers. In 2026, those tariff mentions had faded in favor of complaints about high prices and gas.

People are taking all of this in and they’re putting it together. They arrive at this darker view of the economic future at the same time and in the same way as they arrive at a darker view of the people in charge.

Could we have seen this coming?

Now I’m going to do what economists do and urge us to be careful. A pattern that looks obvious after the fact might just be a good story that we invented once we knew the ending. A much tougher test: could this theory have predicted the collapse in sentiment before it happened?

I reckon it could have.

Here’s how I checked. I estimated how consumer sentiment typically moves with inflation and unemployment (the usual suspects) plus the public’s verdict on economic management (my additional factor). I used only data through October 2024. So this model received 46 years of history, from high inflation and recessions to recoveries and triumphs. It saw presidents from both parties making all kinds of decisions. But, importantly, it didn’t see anything after the 2024 election.

Then I made two forecasts.

First: The naive one. I told the model what happened to inflation, and what happened to unemployment, and I asked it to predict sentiment. I even tried adding the stock market. It didn’t make much of a difference.

Between late 2024 and this summer, inflation rose by less than a percentage point and unemployment barely budged. This naive forecast said that sentiment should have fallen by about two points.

It actually fell by much more, by 17 points.

Second: Let’s make a forecast that also accounts for how Americans feel about the quality of economic policy. From 2024 to 2026, that verdict worsened by 45 points. If you feed that into the model, which still only has pre-election data, you get a very different picture. Here’s the arithmetic: 45 points of harsher verdict, times roughly 0.45 points of sentiment per point of verdict, predicts a decline of about 20 points.

In economics, we don’t call that a near miss. We call it nailing your forecast.

Looking for confessions from the usual suspects

To actually earn trust with this theory, we need to interrogate serious alternatives. If another explanation fits the facts better, we drop mine. So let’s try to destroy this finding.

Suspect one: partisanship. There’s good (and perhaps unsurprising) evidence that Democrats feel better with a Democrat in the White House, and the same pattern holds for Republicans.

So let’s look at people who don’t cheer for either team: independents. Since the election, independents have had about the same drop in confidence in America’s economic leadership as everyone else. Alongside that confidence drop, their sentiment has fallen. And the pre-election relationship model predicts that change almost perfectly.

Republicans offer a smaller but still useful piece of corroboration. After the election, their optimism surged, with their guy in the White House and their party running both chambers of Congress. But over the past year (and especially through 2026) they’ve soured on the administration’s economic management. Republicans’ verdict has worsened somewhat less than everyone else’s, and with that, their sentiment hasn’t fallen as far. That’s exactly what the theory predicts.

Suspect two: bad vibes. Maybe everyone is just in a foul mood, so they think the government is doing a terrible job.

The data rule this out too.

The public’s verdict is a very helpful tool. It sharply improves our ability to explain views about national business conditions over the next five years. It also gives us insight into expectations about real incomes. But it doesn’t explain expectations for interest rates or people’s ability to buy a house. So, this isn’t just a fog of grumpiness. It’s directly tied to a broad sense of where things are headed — not just to judgements about particular markets.

Suspect three: the survey changed. My colleagues at Michigan used to conduct this survey via phone, but nobody answers the phone anymore. So they switched to surveying folks online. People surveyed online tend to be more pessimistic, and so I adjust for that difference throughout.

More importantly, both ends of the decline I’m explaining were measured online. The switch happened before the election. So it can’t explain why sentiment fell so dramatically at exactly the moment distrust in management soared.

One more cautious note. Prices are still well above where they were pre-pandemic, and living costs are high. I think those forces explain a different puzzle: why sentiment has been weak since 2020, under both a Republican and a Democratic president.

My claim here is narrower than that. Americans’ verdict on economic management explains a huge chunk of the falling sentiment over the past year and a half.

Is that the whole story? I’m not sure. If you’ve got a better one — a different suspect, something I missed in the data — leave a comment below. I mean it. I’m always happy to run the numbers.

A suspect caught at the scene

This leaves us with a very likely suspect. But it also gives us a hint that economists need to add something when we talk about the business cycle. Textbooks teach monetary policy and fiscal policy, which means taxes, spending, interest rates: the levers government pulls to shape economic life. But there’s another part of the story.

That part is whether people think the folks pulling levers know what they’re doing.

So the next time someone points a camera at me and asks why Americans are so gloomy when the numbers look fine, here’s my answer. They’re not misreading the economy. They’re reading the people running it. And their verdict today is the harshest on record.

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And one more word for my nerdiest Platypals

Today’s post includes a paid partnership with Stata, the software I use to crunch the numbers in my posts (and my research).

I used it here to do my own calculations on consumer sentiment. And if you’re really nerdy, you can use this worksheet to follow along! Or if you’re an economics or econometrics instructor, you might find this useful for class.

That’s the highest we’ve ever had outside of a recession or a war.

You might look at that and think: the government must be responding to some terrible emergency. Or you might think: they’re being wildly irresponsible. And it’s very much that latter.

At the same time, corporations are hitting record profits. They’re also paying less and less in taxes.

Side note — remember some of the economic promises the president ran on? No tax on tips, no tax on overtime, and no tax on Social Security? Those policies were implemented differently than described, but the important thing to remember is that even in their limited form, those benefits will disappear after the next presidential election. The tax cuts for the rich are permanent.

Stephanie wanted to know: how does this affect the average American?

If someone’s not paying taxes, and we keep spending money, someone else is going to have to pay for that. If it’s not corporations, it’s you.

It might not be this year. It might not be next year. It might get pushed past the midterms or to the next president or to an even longer time in the future, but every dollar we spend, we eventually repay.

We’re already beginning to see some of that. Cutting Medicaid and booting people off food stamps are taking services away from those who need them the most. Remember, those cuts aren’t paying down the deficit. They’re going towards tax cuts for the rich.

So where do Americans feel this? Imagine you’re in a line at the bank. The government runs to the front of the line and screams, “I want to borrow as much money as you can give me!”

If you’re borrowing for a mortgage, for college, or for a car, you’re competing against the government. The fancy name for that is “crowding out.” The result is the headlines you’re reading about higher bond yields.

And this isn’t an abstract notion only affecting government finances. As government bond yields go, so go other interest rates, like mortgages.

This means that for a lot of families, once they’ve paid their mortgage, there’s going to be less left for them at the end of the month.

You can tune in to our full conversation above.

Before we dig into it: we’re announcing our first-ever Platypus Economics Halloween costume contest! These are economics costumes, so dress as the invisible hand, a deadweight-loss triangle, or Handsome Kevin (if you’ve got the looks). Submit a photo or a short vertical video at platypuseconomics.com/halloween by October 31. You get the chance for fame and fortune as the world recognizes your spooky economic genius. The winner also gets a limited-edition Gus the Platypus pillow.

And if you don’t plan to compete but you’ve got costume ideas, leave those in the comments.

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Now back to it. Here are the issues worth a deeper dive this week.

Inflation was worse than expected, and that worries me. The annual inflation rate came in at 3.7%. That’s uncomfortably high. Alan Greenspan once said that you want inflation to be so low you barely notice it. Well, people are noticing.

Energy prices

These are the villains of the inflation report, because they’re driving everything up without an end in sight. Gasoline is up 34% from a year ago. The wholesale numbers in the producer price index, which tell you what’s coming next, are even worse. Diesel is up 115% over the year, and heating oil is up 117%. Expensive heating oil hasn’t hurt much yet, since few people have the heat on. As it gets cold, though, this could mean hundreds of dollars more per month for some folks, particularly in the Northeast, where heating oil is widely used.

The energy story isn’t just about heating our homes and fueling our cars. It’s an input into the rest of the economy, too. Stacey traced a single truckload of Halloween costumes on their way to a Spirit Halloween store and found fossil fuels in the tires, in the asphalt, in the wax lips, in the candy dye, and even in the fertilizer that grew the wheat that went into the truck driver’s sandwich.

Six months ago, I might have suggested looking past the higher oil prices because the war was meant to be temporary. Blips happen. But it doesn’t feel so temporary anymore.

There is a bit of good news

At the start of this year — before the war — the price of a barrel of oil was around $60. Let’s say you take 10% of the world’s oil off the market. That would push the price up to around $100 a barrel. If the world remains in this geopolitical stalemate, unable to get oil across the Strait of Hormuz, then supply will remain restricted and prices will stabilize around this high level. And once prices stop rising, energy stops pushing up the inflation rate, even if the cost of living remains high.

Inflation, Outback style

Imagine Stacey runs an Outback Steakhouse. (By the way, Outback was founded by Americans. No Aussie would put a dessert called Chocolate Thunder From Down Under on a menu.) Anyway, when the economy runs hot, Stacey raises her menu prices. Say the Bloomin’ Onion goes up by 10%. Each server now brings in 10% more revenue, so they’re more valuable (in nominal terms) to Stacey. She has to raise their pay or risk losing staff to her rivals who are also flush with customers. The result: prices and wages rise (roughly) together. That’s the story of demand-pull inflation.

But there’s another inflation story, and it’s more relevant to our current moment. Stacey’s costs suddenly rise, perhaps due to tariffs, or higher energy prices. She raises her prices to protect her profit margin. But higher costs won’t make Stacey’s servers more valuable to her. When one of them asks for a raise, Stacey says no. Her profits haven’t gone up! So prices rise, and wages don’t keep up. That’s called cost-push inflation: it’s all onion, no bloom.

That, unfortunately, is where we are. Wages are rising slower than inflation, so the average American is falling behind. Energy and tariffs are both supply shocks. The Fed can raise rates, but it can’t eliminate tariffs, and it doesn’t control oil prices.

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Chart vs Chart

My absolute favorite part of the week is when Stacey and I try to best each other with economic data. We describe our economic lives… in a chart. This week I stripped it back to a single, simple and (I think) elegant chart. Stacey brought Count Dracula. Don’t forget to vote!

Justin’s chart

Recently, The Wall Street Journal asked economic forecasters to grade Fed Chair Kevin Warsh. You can see the results below — at this point, “too early to tell” is its own verdict. Personally, I’d give him a B, with a note encouraging him to knuckle down in the second half of the semester.

Stacey’s chart(s)

This spring, the lines crossed. Consumer prices are now rising 3.7% a year and wages 3.0%.

Then Stacey went back for seconds and added wholesale prices (aka the producer price index), which are up 6.3%. Those costs often reach store shelves with a lag:

The real horror may still be ahead.

Now it’s time for The Professor Is In, where my producer Augusta Chapman brings me questions from the audience. Think of it like office hours. My door’s open, come on in.

Augusta brought me one question that many of you asked. Prices feel like they’ve gone up way more than 3.7%. How can that be the official number? Isn’t it way too low?

I believe this number

Measuring the cost of living is hard. You might think we’d do it by simply counting what everyone buys one month and then doing it again the next month (and the next). But what about when strawberries go out of season? Or the old iPhone gets replaced? And how do you deal with prices that rise every winter? The consumer price index handles all of that, using the best methods available. For the average American consumer, the cost of living rose 3.7%.

You may not be the average American. Most of us aren’t, and your own rate depends on where you are and what you buy. Augusta doesn’t own a car, so skyrocketing gas prices don’t affect her directly. Her inflation rate is probably a bit lower. I live in the suburbs in Michigan, where we drive everywhere, so mine is probably a little higher. As a guess, most people are experiencing personal inflation rates somewhere between 3% and 4½%.

But why does it feel so much higher than that?

Three reasons.

Reason #1: Six-foot-tall prices

There are some prices that whisper and some prices that shout. Gas prices are, quite literally, six feet tall, and you drive past them every day. People’s sense of the economy rises and falls with the price at the pump.

There are things I spend more on than gas. One is health insurance. I honestly don’t track how much that costs — it’s a deduction that comes out of my paycheck each pay period. And I know I should check my pay stub, but I don’t. (Don’t tell my employer.)

Reason #2: Loss aversion

Behavioral economists have taught us that the sting of a loss is sharper than the joy of a gain. A rising price makes you feel like you’re getting ripped off, but a falling price just slides by. TVs have never been cheaper, or better, and they used to be something you had to save up for. Nobody throws a parade for that.

Reason #3: The $7.26 cappuccino

The third thing that makes inflation feel so high is something I’ve fallen for myself. Survey researchers call it telescoping.

I was recently at the Detroit airport. I went to the airport Starbucks and ordered a cappuccino. It cost me $7.26! That’s about $10 Australian. My first thought was: doesn’t Starbucks cost $3.50? Wow, coffee has doubled in the past year.

It hasn’t, though. My memory of a $3.50 cappuccino is real, but it doesn’t come with a date attached. It might be from 2022. Or from 2015.

Survey researchers are very familiar with this problem. Ask people about prices over the past year and they’ll reach for a memory without too much concern about whether it fell within a twelve-month window. History casts a long shadow in our memories, and sometimes it feels more recent than it is.

So when the official statistic doesn’t match your gut, it’s a good time to check the timestamp.

More on the September inflation report

Other questions Augusta asked me:

• The producer price index is up 6.3% over the year. How is that connected to consumer inflation? Is this a preview?

• Does diesel really matter so much for consumer prices?

• What’s going on with the changes in how the government calculates inflation?

Finally, what happened to all that tariff gloom?

Augusta’s last question: There were so many predictions of dire economic consequences when tariffs were first announced. What happened? Shouldn’t inflation be at 7% or 10%?

What I say now — and what I said then — is that a lot of public commentary about tariffs was misinformed (on both sides). There’s some simple arithmetic here. We’re a remarkably closed economy. We buy a lot from elsewhere, but it’s Michiganders importing from Ohio (or everyone importing from California), rather than from abroad. In total, around one-tenth of what we spend goes on imports.

Apply a 20% Liberation Day tariff, assume it’s all passed on, and the cost of living rises roughly 0.1 × 20% = 2%. Reduced competition from abroad may also lead domestic businesses to raise their prices on American-made goods a bit more. Spread these price changes over a year or two, and inflation runs maybe 1 or 2 points higher than it otherwise would.

Tariffs are problematic for a number of reasons, but inflation’s not the main one. Or not in the ordinary sense. The real problem is that they reduce real incomes. That’s because tariffs are a supply shock. With a more typical demand-driven inflation, demand rises, your boss charges higher prices, profits rise, and competition for workers heats up. Ideally wages catch up within a year or two.

With tariffs, your boss’s costs rise, and their profitability falls. A price rise restores their profitability, but the business is not better off than it was before, and so there’s no reason to pay higher wages. As a result, that raise never comes. Being 2% poorer for a year is a bad thing, but being 2% poorer for a whole career is far worse.

Watch the full episode for the rest.

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The headline: Inflation is worse than we thought and higher than it ought to be. No one is going to be happy about it.

This probably doesn’t come as news to your wallet. This report describes your reality this September. What the report gives us an update on: how widespread the pain is, if it’s easing, and what the Federal Reserve is likely to do about it.

Too high and worse than expected

Over the past year, consumer prices rose 3.7%. For context, the Fed aims for an inflation rate around 2%.

There are three ways to read today’s number.

First, in absolute terms: It’s too high.

Second, in terms of trends: Headline inflation isn’t coming down. Because of energy prices, year-ended inflation might even be trending up. At best, it’s stuck at a troublingly high level.

Third, relative to expectations: Again, too high. Wall Street folks were expecting something a little lower, around 3.5 or 3.6%. That’s the real news today. Inflation is high and we all know that. But we didn’t know it would be higher than expected. When the data surprise you, that’s when you should update your story about the economy.

In September alone, prices rose 0.6%. That’s after rising 0.4% in August. If inflation kept running at that pace — and hopefully it won’t — the annual number would become very, very troubling. There’s little in this report to suggest inflation is easing.

Over the next few days, you’ll see commentators and talking heads pointing to one price that rose a lot, or another price that barely moved. Whenever someone does that, ask what story they’re selling. You can bend data to fit a political moment by cherry-picking. The top-line number measures cost of living, so it’s best to start there.

Core inflation is stuck

Economists closely watch what we call core inflation. Core inflation takes food and energy out of the picture. That’s not because food and energy don’t matter (of course they do). It’s because their prices are incredibly volatile. A drought, bumper crop, geopolitical tension: these things can whipsaw prices. If you strip them out, you often get a cleaner read on the broad underlying inflationary momentum in the U.S. economy.

Core inflation came in at 2.6% over the past year. That’s below 3%, which is good news. But we can’t seem to get it below 2½%. That’s bad news. 2.6% is also hotter than Wall Street expected and suggests that there’s more underlying inflationary momentum than forecasters thought.

In September, core prices rose by about a third of a percent. If we have a few more months like that then core inflation will be above 3%. And this is one more disappointingly high reading in a long run of disappointingly high readings. Whatever progress we made in bringing core inflation back to normal seems to have stalled over the past year.

Winter is coming for heating bills

Core inflation doesn’t count energy, but energy finds its way in, because it’s an input into almost everything businesses produce. When firms’ costs rise, they may eventually pass that on in the form of higher prices. Since January 2025, energy prices consumers are paying has risen by about 20%.

I was just in Texas, where it was beautiful and warm. What a blessed life my Texas friends have around this time of year. Then I returned to Ann Arbor, Michigan, where the sky is gray and a winter chill is already setting in…

And so for those of us in the Midwest and Northeast, our heating oil bills are about to rise dramatically with the onset of winter. The cost of heating oil has gone up sharply — about 40% — in recent months. For folks who use this to heat their homes, this is going to be a very long and expensive winter.

The current administration has recently become very focused on energy prices — and especially diesel — in the run-up to the midterms. This has led to all sorts of shenanigans. Trump floated an export ban, pushed a temporary tax deferral on red-dyed diesel, talked about a deal to buy diesel from Russia, and invoked the Defense Production Act.

Diesel matters to the American economy, but it is mostly used to power trucks, farm equipment, and machinery. That matters because the “C” in CPI stands for “consumer.” Because consumers don’t buy much diesel, it only gets a tiny weight in the CPI. So even if all this monkeying about brought down prices on diesel (which I doubt) it would barely move the CPI.

Wages aren’t keeping up with prices

Here’s the number I most want you to remember from this report. Prices rose 3.7% over the past year. Wages rose 3%.

That means real wages, which is what your paycheck can actually buy, fell over the past year. That’s not normal. Normally, economies grow, incomes rise, and workers share in that growth. But workers are slipping behind.

And 3% is only an average. Workers who switch jobs tend to get bigger raises. Many of those who haven’t switched would be thrilled to get 3%; their purchasing power has fallen even further.

The October coin flip

This read on September inflation is worse than we’d feared. It follows a jobs report that suggests the economy is doing okay, but not so well that the Fed would need to raise rates. The expectation was that the Fed would hold off until after the election.

Well, that expectation just got shaken. Imagine you’re a Fed governor who drew a line in the sand. If inflation isn’t too hot, no hike. If it is, hike. This report showed inflation that’s higher, more persistent, more troublesome and more widespread than expected. This might push you right over that line.

Federal funds futures are a market where traders bet millions of dollars on what the Fed will do. Before this morning, those traders put the odds of a hike at the October meeting at 22%. Now they’re at 44%.

And that 44% is awfully close to 50% (yes, I’m rough and ready in my economic analysis), so it’s basically a coin flip, which is about as uncertain as you can be.

My guess is that, whichever way the coin lands, there will be someone dissenting. The last decision was unanimous; it’s very hard to imagine that this time.

Heads rates rise today, tails we hike rates next time

Some things here aren’t really a coin flip. Fed futures markets also put the odds of a rate hike before the end of the year at 94%. There’s even a chance the Fed raises rates twice.

So the question isn’t whether rates will go up. It’s when and how far.

The coin is in the air for October. But, whichever side it lands on, the direction of travel is clear.

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And one more word for my nerdiest Platypals

Today’s post includes a paid partnership with Stata, the software I use to crunch the numbers in my posts (and my research).

I used it here to do my own calculations on the September CPI. And if you’re really nerdy, you can use this worksheet to follow along! Or if you’re an economics or econometrics instructor, you might find this useful for class.

You can catch up on that here:

Now it’s time for The Professor Is In, where I sit down with my producer Augusta to answer audience questions. Think of this like office hours — my door is open, come on in.

The high prices question

One question Augusta asked me: If high prices are a way of rationing scarce diesel, is there any economic case for politicians pushing prices down?

My answer: there’s only so much diesel (at least in the short run). If you make it cheaper for truckers, they buy more, and that leaves less for farmers. If you make it cheap for everyone, you get long lines, where whoever is first is not necessarily the person who needs it the most. High prices shout: who really needs this?

But there’s an asterisk.

The Kim Kardashian Problem

Imagine this. It’s Thanksgiving, and there’s one slice of pumpkin pie left. Everyone around the table has already had their first helping. So your mum — who is a very good economist — holds an auction. She’s going to sell this pie to whoever values it most. I bid $5, you bid $10 because you love pie, and so you get the pie. Fair enough.

But what if Kim Kardashian is also at dinner? She doesn’t even really like pumpkin pie (I don’t either, for the record). But she bids $20, just because she can. The pie means almost nothing to her, but neither does holding on to another $20 bill. So she wins the auction, and the pie goes to her.

The problem is that markets allocate goods to those with the greatest willingness to pay. But this blends two different things: how much you want something, and how much money you have.

Efficient doesn’t mean ethical

Diesel is mostly bought by businesses, and so there, I’m fairly relaxed. If an extra gallon of diesel can make your company an extra $10 in profit, you’ll probably bid for it, whether you’re a big company or a small one. For consumer goods, I’m more worried. When economists call an outcome “efficient,” we’re saying that goods go to whoever is willing to pay the most. There are values hidden inside that definition. Those values may not be yours. They’re often not mine.

A market will reach an equilibrium. Is that equilibrium fair? That’s a different question. Kim getting a slice of pie while someone else goes hungry could be an equilibrium, but it’s also kind of bad.

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More on tax-free diesel

Other questions Augusta put to me:

• Who pays for roads if diesel taxes are forgiven?

• Is a fuel tax an efficient way to pay for roads?

• How on earth can I not like pumpkin pie?

Finally, how should voters weigh October surprises?

This red-dyed diesel relief runs October through December. The G7 diesel announcement landed just before the midterms. And we’ve resumed buying diesel from Putin with the first tranche due to arrive just before the midterms. This is after we decided not to fund a regime at war with Ukraine.

It’s never my job to tell anyone what to think. I can only offer a framing. As voters, we are the bosses of politicians. The president, congress — they work for us.

A policy that arrives the day before an election is often an admission: I could have dealt with this problem earlier… but I didn’t. Or normally I would think this is bad policy, but I’m okay with that if it helps me get re-elected. It treats voters as if we’re short-sighted, and easily fooled — that a last-minute pre-election promise of goodies will make us forget about the pain we endured during the rest of the year. It’s disdainful, and I don’t enjoy being treated with disdain.

Being the boss means deciding if you want serious governance. If so, don’t be impressed by gimmicks in October. If anything, it makes me feel resentful.

The oil and diesel crunch is a product of the war in Iran. The time to think about how oil markets would react to the war with Iran was a month before it started. Not seven months into a “four-to-six-week” war. When you’re playing with people’s lives, you have an obligation to at least do your homework.

One more request as we head into fall: I still need a theory of why anyone likes pumpkin pie. You can explain it to me in the comments.

Watch the full episode for the rest.

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Nobel Prize Day is a day that economists celebrate. We take our field’s great thinkers and we celebrate the lives they’ve led, the impact they’ve had, and their extraordinary ways of coming up with new research, new ideas, new ways of understanding the economy. We haven’t sorted everything out yet as a field — we’ve got a long way to go — yet we should still celebrate progress along the way.

The prize was officially awarded for “microeconomic foundations of macroeconomic stabilisation.” Also, for those doing a very close read, it is formally called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. But nobody calls it that, except insufferable pedants.

How to decide what to buy

First, let me take you back to the ancient past. This is 60 years ago, when dinosaurs roamed the earth (okay, intellectual dinosaurs). Back in the day, macroeconomics was dominated by what we called large-scale macroeconometric models. The idea here was to stack up as much time-series data as you can — consumption, and investment, and wages, and inflation, and exchange rates, and imports and exports, and monetary policy, and fiscal policy — and throw it in the cauldron. There was some economic theory involved in all this, although it was pretty much like my approach to adding spices to my cooking. Why not add it and see if it helps?

The point was to try to understand the statistical relationship between all these things. When this series wiggles, what follows and how soon? These got really big and sometimes involved dozens of variables and even hundreds of equations. Lawrence Klein actually won a Nobel Prize for exactly this.

It’s a program based on statistical regularities. And the problem with statistical regularities is that they keep working until the day they don’t.

Let’s take an example here, but we’ll switch contexts to make the point. U.S. News & World Report publishes rankings of colleges and universities. To make those ranking, it tries to figure out various statistical clues that will be meaningful for students and parents. For years, one of those was the percentage of admitted students who actually attend the school. They measure that by looking at what proportion of applicants a school accepts who go on to enroll. That’s called the school’s yield, and it’s a pretty sensible way to go about measuring which schools students tend to pick.

But the moment you start measuring like that, universities start acting differently. They quickly figure out how to manipulate the rankings. Now, if you’re a university that’s pretty good, but not great, you stop admitting the very best students. You want to avoid admitting anyone who will turn you down and make your yield rate look worse. Now the yield rate tells you how much colleges reject strong students, instead of how much strong students reject pretty good colleges.

U.S. News & World Report was trying to figure out how the yield rate was related to university quality. The problem here is that, once you start relying on that statistic, then it’s vulnerable to manipulation in important ways. Then that relationship breaks down. Thankfully, they dropped this measure in 2004.

Another economist, Bob Lucas, won the 1995 Nobel for work that made exactly this point, but in the context of macroeconomics rather than picking colleges. This idea is often called the Lucas critique, in his honor. That critique essentially said: correlation ain’t causation. Sure, you can find correlations in the macro data from the past, but what’s to say they’ll be useful in the future? Change the rules, and people can change their behavior. To understand that, you need to understand how all those millions of people think as individuals. Lucas’s suggested that rather than combing through historical associations, macroeconomists should work to understand the more foundational drivers of human behavior.

Economists call this insight the microeconomic foundations of macroeconomics. It’s the research program that won today’s prize, and it’s the thing today’s laureates have in common.

The most successful failure in economics

Bob Hall’s most famous work is about consumption, which is an economics term for how much you and I — and other consumers — spend each month. And his approach was audacious.

Hall took consumption, or total spending in the economy. Then he tried to predict changes in it. And then he put all the different variables that you or I might be able to think of in order to explain those changes. And — this is the best part — he failed.

His most famous work is a failure. But it’s a constructive failure.

Hall essentially said, look at all this stuff you might think predicts changes spending over time. Notice how it doesn’t. That’s important, because we economists thought we understood this. In my first macro course as an undergraduate, I learned the Keynesian consumption function. The point of that function is to look at how much income there is in the economy, and then use it to predict exactly the level of consumption. Seems pretty straightforward.

Then Hall comes in and says that if you want to predict changes in consumption, the usual suspects — recent changes in income, past changes in consumption, and so on — don’t really explain it at all well. Crikey, what’s going on here?

What Hall was showing goes back to that statistical breakdown I showed you earlier. When people make decisions about what to buy, they’re not just thinking about what’s in their bank account today. They’re thinking about what comes next. In other words, people spend based on their own forecasts of the future. So what drives changes in consumption is changes in expectations.

If your forecast is smart (economists say “statistically efficient”), then you can’t predict how it’s going to change. If you could see that revised, improved forecast coming, well, you’d just make it now.

So follow that chain. Changes in spending follow changes in forecasts. Changes in forecasts are unpredictable. So changes in spending should be unpredictable, too.

That is exactly what Hall found. His failure to predict consumption was evidence that his model was right. To an economist, that’s magic.

A footnote here, since the field has kept going since this. Not everyone can spend more today based on learning that the economy will be stronger in the year 2056. Some people can’t get credit, others aren’t forward-looking, and there are those who simply check what’s in the bank. Economists call these households hand-to-mouth: this week’s income determines this week’s spending. Now we work with a more blended picture, where some households live hand-to-mouth and others plan ahead and respond strongly to expectations. There’s a rich and interesting program around all that, and it all starts with Hall.

When your local restaurant predicts inflation

Mike Woodford works in the same tradition, but he took on a bigger project. His goal was to put together all of the pieces of the economy, where each piece is itself built up from its microeconomic foundation. He’s the central figure in what’s called the three-equation New Keynesian synthesis.

That’s a lot of words. Let’s break them down. “Three equation” just means that we’re looking at three sets of issues. “Keynesian” means in the tradition of Keynes, who took seriously the idea that markets aren’t always perfectly adjusting, that people may not have full information, that prices and wages sometimes change slowly, and small mistakes add up to big effects that shape the whole economy. “New” means we take the Lucas critique seriously. We need to understand how each person thinks about their choices, and we can build our picture from that.

So what are our three issues here?

First: monetary policy. You may have heard of John Taylor and the Taylor rule. That rule tells central banks, like the Fed, how to respond to swings in inflation and the broader economy. When inflation is too high, raise rates. When the economy is struggling, lower them.

Second: inflation and how it works. Think about a local restaurant. It only changes prices occasionally. When owners do change prices, they’re thinking about whether ingredients will be more expensive, whether their landlord is going to raise rent, or whether it will it be hard to find good workers. That means prices might rise now if they expect costs to go up in the future. You can see how inflation today depends on what people expect inflation to be tomorrow. Add math, stir, and you’ve got yourself the New Keynesian Phillips curve.

Third: the rest of the economy. Back in the old days, we called the bit about how much spending is going on the IS curve. This part is built on Hall’s insight: when people decide how much to spend, they’re thinking about the future, interest rates, and the state of the economy. Hall gave us micro foundations for consumption; my old grad school teacher, Dale Jorgenson, did the same for investment.

The old models had dozens of equations. Woodford got it down to three core ideas which were each built on individual people and businesses making decisions. With these models, you can ask real questions. What if the Fed raised rates? What if it targeted inflation? Would people end up better off or worse off? Economists call that welfare economics, and these models make it possible.

The universal language of central banks

Hall’s view of consumption is now simply how we all think about consumption. The next generation added rigor, depth, new observations, and new data. But it’s all built on Hall’s forward-looking approach.

Woodford gave economists a common language for talking about the ups and downs of the business cycle. That’s the Fed, fiscal policy, and predicting a recession. Walk into any Fed building or central bank around the world and this will be the language they speak. Read the newspaper closely and you’ll see it there too.

This is also why central banks share so much about their plans. If households and businesses are forward-looking, then telling them what you’re up to changes what they expect. That change in expectations can actually move the economy. (Silent Kevin seems uninterested in using this tool.)

From research to classrooms, via textbooks

Beyond this Substack, I have another job: I’m the author of a (the?) leading undergraduate introductory economics textbook, together with my partner, Betsey Stevenson. And we made it our mission to translate the cutting-edge work done by these laureates in such a way that these insights can be taught to freshmen.

If you learn macroeconomics using the Stevenson and Wolfers text, you’ll learn about Hall’s approach to understanding consumption. If you’re teaching freshmen right now, you can point out that they’re learning the approach that just won the prize.

And we also have a chapter called “The Fed Model,” which is an Econ 101 version of Woodford’s synthesis.

There’s a bonus to this approach. Traditional macro can feel like watching an economy that’s somewhere out there. You’re not part of it. In this version, the version in which macro is built on microeconomic foundations, you’re a player. The theory of consumption is not just a theory of others, but also a story about how you might think about making the best spending choice you can make. Ditto for investment. Suddenly the study of macro is not about what’s “out there,” but rather folks like yourself, making important decisions.

Trying to boil this cutting-edge research down to its key intuitions was hard work. I first encountered the ideas of Hall and Woodford in graduate school, and quickly learned that when you’re trying to describe the decisions of forward-looking people, the math suddenly gets a whole lot trickier. Explaining it is a wonderful intellectual challenge that all of us who teach economics take up. The result is we can bring intro students into the work that won today’s Nobel.

On a personal note

I know Bob best here. He’s been a friend since I was just a baby economist, and he’s been a favorite of young economists his entire career. He approaches life and economics with tremendous tenacity. While many of his generation of economists rested on their laurels, Bob wanted to stay on the cutting edge. We worked together at Stanford and he’s been a part of the Brookings Panel on Economic Activity, which I used to help run. His students include Valerie Ramey, Pete Klenow, Marjorie Flavin, Hanno Lustig and Stijn Van Nieuwerburgh. And almost every macroeconomist of my generation would count him as a mentor and an inspiration.

Mike is no less beloved. His papers are more dense, more serious, even as he loves a laugh. You can read one of his papers, think you’ve got it, and then go back and read it three more times. He is the intellectual father of a generation of leading thinkers on monetary policy, including Gauti Eggertsson, Stephanie Schmitt-Grohé and Martín Uribe, Marc Giannoni, and my good mate Bruce Preston in Australia.

Bob and Mike were both graduate students at MIT, though 16 years apart. This was during an era when there was a lot of excitement about macroeconomics. They both had the great Bob Solow as a thesis advisor. In fact, Bob Hall’s thesis committee — Bob Solow, Peter Diamond, and Paul Samuelson — all won Nobels. Now Bob’s won one himself. Mike was also advised by Tim Kehoe, which is where you see the deep technical prowess and mathematics.

This prize is also a prize for a community. John Taylor and Guillermo Calvo, who worked on how sticky wages and prices work. Greg Mankiw, my friend and occasional co-author, a central figure in the New Keynesian economics. Another central figure there was David Romer at Berkeley, along with Christy Romer, and also Janet Yellen. Jordi Galí and Mark Gertler. My thesis advisor Olivier Blanchard, one of the truly great New Keynesian economists, has been there at every part of this revolution. Stan Fischer. Nobu Kiyotaki. Julio Rotemberg, who is no longer with us, and my colleague John Leahy, who we lost late last year. And there’s a whole Nobel waiting to be written about how and when and where firms adjust prices.

I’m happy today. I love celebrating when my field actually moves forward. I know that we have got so much work to do, but I also know there are excellent economists who wake up every day wanting to make the world better. They work hard, burning the midnight oil, and wake up the next day to train a new generation of students. They help people around them better by creating a research program that’s not about winning a funny-looking medal, but instead about making the world a better place.

Congratulations to Bob Hall and Mike Woodford for the 2026 Nobel Prize in Economics.

You can catch up here:

Now it’s time for The Professor Is In, where I sit down and answer questions from the audience. Think of it like office hours, where my producer Augusta asks me about things you want to know.

Augusta opened with a big question. At the scale of the oil crisis we’re dealing with, is there anything meaningful governments can do? Or does it all come down to ending the war?

I answered with the most obvious thing first. Sometimes, one has to do that. This one is so obvious it sounds boring. But it’s also worth saying, and then maybe saying again.

Not invading other countries is a really good way to avoid these kinds of problems.

Give peace a chance (economically)

Here’s the simplest economic theory of war.

Say Augusta and I are about to get into a fight. We yell and shout and call each other bad names and say things we can’t take back. Essentially, we wreck our friendship. And then, at the end of all that, I say: You’re right. I was wrong on Tuesday. I’m sorry.

Economics says there’s a better way. I think about what I know, forecast where we’ll end up, and jump there. I say: Augusta, let’s not fight. I’m sorry about Tuesday. I was wrong.

To prove I went to graduate school, I’ll tell you the fancy name for this. It’s called efficient bargaining. If Augusta and I are going to have a big donnybrook along the path to getting to our outcome — in which I apologize — then why don’t we just skip to the apology? The fight is pointless and costly and hurts both of us. Starting at the end avoids those costs. You can see why we call it efficient: Same outcome; less pain along the way.

This same logic applies to many forms of conflict. Think about labor strikes. There, workers refuse to turn up to work, demanding a better deal. The factory shuts, so the boss loses valuable output, but she also doesn't pay the workers while they're striking, and families go hungry. At the end of all that pain, one or both sides will make some concessions. Maybe it’ll be a pay rise, but not as large as workers hoped, or maybe it’ll be new workplace rules. Both sides are better off if the bosses just say: I realize you can do a lot of damage. And the workers say: If I don’t work, I won’t make money, and that will hurt me. And so they can both bargain knowing that, and jump straight to where they would have landed after the strike.

You still need to know the outcome

Augusta had a follow-up question. Doesn’t this theory of conflict imply you know who’s going to win? Isn’t the conflict part a step in getting to the outcome?

Yes. If each side can see the other’s military power, strategic assets, and willingness to persist when everything seems pointless, then both sides make their forecasts based on the same info, and if they’re smart that’ll lead them to the same forecast of the eventual outcome. When this happens, peace talks are easy.

But when the other side can’t see your strength, it’s possible they’ll lowball you. And then the only way to get to an outcome commensurate with your strength is to show them that you do in fact have some power. In a military setting, that might involve an invasion, even though an invasion hurts both sides.

In my class, we cover these issues during the week on information asymmetry. It’s an economic theory that explains how war might not be the dumbest thing in the world.

I still think it is. The costs being borne by folks in both the United States and the Middle East — and indeed, the rest of the world — are both terrible, and avoidable.

And I don’t think information is our problem now. Iran holds the Strait of Hormuz, and it has shown some leverage. Americans understand that some concessions will eventually have to be made. Maybe the president won’t admit it and maybe politics will get in the way. It might take us ten years to get there.

Let’s not waste those ten years.

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Pretending to release oil doesn’t do anything

Back to oil. After the OPEC shocks of the 1970s, rich countries formed the International Energy Agency so they’d all hold emergency stockpiles (rather than everyone hoping someone else would). These emergency stockpiles are a tool for dealing with a temporary disruption. In March, when the Iran war was framed as a temporary four-to six-week disruption, relying on those stocks looked sensible (if small). Re-announcing the same barrels in October — which is really what the president just did — doesn’t actually change anything.

The longer-term fix is reducing our exposure to these shocks. My family has a very cool blue minivan — perfect if you want to look like a dad driving to soccer — and it runs on gasoline. We just got a second car, and it runs on electricity. As a result of that we’re less exposed. “Reducing dependence on foreign oil” used to be a campaign slogan on both sides, but it’s gone out of fashion lately. Even if politicians aren’t pushing it, individual families and businesses can make their own plans to reduce their vulnerability to oil disruptions.

More on the G7 (and some tangents)

Other questions Augusta brought:

• Who is coming out ahead here? Oil producers? Anyone?

• Would it be good policy for every American worker to own stocks (like the Australian retirement model)?

• Does investment like that create a fight between the young and the old?

• How do you even pronounce communiqué? (Answer: My thesis advisor was Olivier Blanchard, who is French, and so there’s exactly one word I can say in a convincing French accent. It’s “Blanchard.”)

Finally, is this promise worth anything?

The communiqué also had countries pledge to avoid energy export restrictions. Does that hold up?

Yes… and no. It’s a promise, but it’s a promise not to do the dumbest thing in the world. When I hired Augusta, I didn’t make her sign a contract promising not to do the dumbest thing in the world. Some promises are self-enforcing.

For our allies, a U.S. pledge like that has some value. That’s because we are liable to do things that might hurt both Americans and foreigners. For the United States, extracting a pledge from our allies not to do the dumbest thing in the world isn’t so necessary. Our allies are sophisticated. So we don’t get much out of this.

All told, this G7 “oil thing” is a press release that looks like a deal. If it helped the president not do the dumbest thing in the world, then I guess I should be happy.

The bigger lesson here isn’t that. It’s that if you can jump to the final outcome, then jump.

Watch the full episode for the rest.

Here’s what the order does. It takes a bunch of diesel that farmers use, and it opens that pool up to truckers. Then, it promises those truckers a tax break. That’s a tax break only Congress can actually deliver — and Congress isn’t the one making the promise here.

When this is all done, the President will have addressed everything except the underlying supply problem. And we will get a bunch of painful unintended consequences for our trouble.

This is the most recent in a line of attempts by the president to bring prices down. Earlier this week I dug into the G7’s recent announcement that they’re going to release 100 million barrels of oil over the next four months. Trump has been touting that as a way to bring prices down too, but surprise: there’s less there than meets the eye, perhaps even nothing:

By now, the administration’s fuel policy announcements have addressed nearly everything except the thing that pushed prices up in the first place. The war in Iran continues. On the home front, the president is trying to deal with high prices by changing tax rules around a product most people have never heard of.

Don’t feel bad if you’re one of those people. Red-dyed diesel isn’t mysterious. It’s diesel… with red dye in it.Same socks in different colors

Nearly everyone who drives on American highways pays a federal tax to fund those roads. That tax goes towards building roads, repairing roads, maintaining roads, and so on. When trucks fill up with diesel, there’s a federal highway tax of 24.4 cents per gallon already built into the price.

Most of us never see this tax. That’s because the driver doesn’t write the check. Instead, it gets collected way back up the supply chain, when fuel leaves the terminal on its way to the pump. By the time you see the price, it’s already got the tax factored in.

Now for the twist that makes this all possible. Not every American vehicle is meant for the road! Tractors, combine harvesters, bulldozers, mining equipment; these all run on diesel and do their main work off the highway. They’re also important pieces of equipment. It wouldn’t be quite fair to charge them a highway tax… and so, we don’t.

This creates a tricky situation. You’ve now got the exact same fuel, selling at two different prices. How do you stop someone from buying the cheap, untaxed stuff and using it to drive on the highway?

You dye it red!

Imagine a parent with twins. They buy a 10-pack of white socks and dye half the pairs. Now it’s easy to tell them apart at a glance and you know which belongs to whom. But they’re still exactly the same socks.

Red diesel like that, but for diesel. It’s ordinary diesel, and the government’s dyed it so you can tell right away if the tax on it has already been paid.

And by the way: the government does check. Inspectors dip a stick into a truck’s fuel tank and see what color comes out. If it’s red, you owe the tax, plus a penalty of $1,000 or $10 a gallon, whichever is bigger.

Fun fact: This is where the term “caught red-handed” comes from.

Okay, no, it actually isn’t. I’m an economist, not an etymologist. But it’s a nice metaphor for visualizing it.

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I read the order so you don’t have to

With all this in mind, why is anyone fiddling with diesel colors? The answer: diesel is crazy expensive right now. A few weeks ago, the national average hit a record $6.52 a gallon. It’s eased a little since then, but it’s still roughly two and a half bucks more than it was a year ago. People are hurting. You might be one of them.

So, here’s the plan. For a limited time, truckers can fill up with red diesel and no one will penalize them for it. The White House says that this will save a trucker 24.4 cents a gallon, which, depending on the size of the tank, is about $60 a fill-up.

The hold on that penalty runs from October 5th through December 31st. October to December. Which month falls in between those two? Oh right: November. I will leave it to you to read between the lines on the significance of that month.

The White House’s logic goes like this: give truckers access to the diesel that doesn’t have a 24-cent tax on it, and the price they pay for diesel will fall by 24 cents.

That is not how economics works. Everything is connected. What the White House is doing, economists call partial equilibrium analysis. That really just means you’re telling the first chapter of the story. The cheap diesel now available to truckers has to come from somewhere. But where?

Two pools with limited water

Picture two swimming pools next to each other. They’re almost touching. The only thing between them is a wall.

The pool on the left is clear diesel. That’s where the truckers swim! The pool on the right is red diesel. That’s where farmers, miners, and construction crews swim. That wall in between them is tax law. Truckers aren’t allowed in the red pool.

By the way, I don’t endorse swimming in diesel.

What the president has done with this executive order is knock down that dividing wall. Now the water sloshes around between the two pools and truckers can swim wherever they like.

But how much water is there in the pools? Exactly the same amount as before.

And that water level is already low. Diesel is expensive because there isn’t enough of it, and that’s not because of tax law. The war with Iran knocked out refineries across the Middle East and Ukrainian drones have taken a chunk out of Russia’s refining capacity. In places where crude oil is flowing, there aren’t enough refineries that can turn it into diesel.

You don’t fix a shortage by rearranging what you’ve already got.

If there’s no new diesel, then every red gallon a trucker takes is one a farmer doesn’t get. This is a crucial time of year for the people using diesel. October means Halloween, and Halloween actually began as a harvest festival. This is harvest season, and combines are running from dawn to dusk. Combines use a lot of diesel fuel right now.

While all that is happening, truckers are going to start pulling up to the farm fuel depot.

What happens when more people chase that limited supply? The price goes up. Red diesel gets a whole lot more expensive. In some places farmers may simply not be able to get it. That push and pull keeps going until the two pools find their level. Red gets more expensive, clear gets cheaper.

So what does all this splashing around do to the cost of living?

Not much.

Truckers pay a bit less because they can now buy red diesel. But then red diesel gets more expensive, so farmers pay a lot more. Most of this policy is a transfer from farmers to truckers. That’s good if you’re a trucker and not so good if you’re a farmer.

What about everyone else? Diesel runs through the whole supply chain that gets food to our grocery stores. This policy cuts fuel costs for the people driving the food to the store, but it raises fuel costs for the people growing that food. The cost of growing food and getting it to market doesn’t really fall for the rest of us.

By the way, farmers aren’t the only people losing here. If you heat your home with heating oil, that’s a substance pretty close to diesel. It's basically red diesel. Your heating bill will be going up too. You can feel good, though, knowing you made a trucker better off.

Here’s the really strange part of all this. We don’t have enough diesel. So we put in a tax break for truckers… which makes them more keen to buy diesel. That raises the demand during a shortage. So the diesel price for sellers, on average, rises.

Which means that the big winners here are the people who don’t actually need help. Diesel suppliers are already making enormous profits because of high prices. This policy boosts their prices and their profits while the rest of us struggle with bills.

Saying that cutting taxes for truckers addresses cost of living is nonsense. It’s the kind of nonsense one could imagine being bought and paid for by diesel companies.

Congress has the power of the purse

Now it’s time for me to back up and admit something: I’ve oversimplified a bit. Let’s get back into the weeds.

At his rally, the president called this tax-free diesel. The executive order says something different. It calls this tax deferred. And it also says the president wants this tax to be forgiven.

The president — any American president — does not have that power. The Constitution says that decisions about taxes rest with Congress. So the president is kind of, sort of, maybe, pinky-promise saying that he’ll work with the next Congress to forgive these deferred taxes. He doesn’t know who he will be in the next Congress. Will it be his friends? Will they cooperate?

When you buy red diesel for a truck that drives on the highway, you still owe that highway tax. That’s still the law, even with this order. The difference is that you can pay it later — after the election! It’s buy now, pay later, for diesel. Four easy installments.

When exactly is “later”? No one’s quite sure yet. Treasury has until this weekend to work out the details. I know — you’re surprised that they announced a policy without figuring out the implementation. So am I.

What happens next depends on who believes the president. If you’re a trucker and you think the president’s tax forgiveness will go through, then red diesel really is 24 cents cheaper. You come cannonballing into the red pool. Truckers win, and farmers lose.

Now let’s take what I think is a more likely scenario. Truckers mostly don’t believe the tax will be forgiven. In that case, red diesel isn’t really cheaper than the regular clear stuff. You might save 24 cents at the pump today, but you owe 24 cents to the IRS later. Why do all that extra paperwork for no savings? In this world, nobody switches and this order does basically nothing.

In reality, we’ll probably land somewhere in between. No matter where we land, this policy does not address the underlying diesel shortage.

Keep reading past the first chapter

Here’s what I want you to take from this. When a politician promises to make something cheaper, that’s usually because they’re doing partial equilibrium analysis. They tell you what’s in the first chapter — that’s the “partial” here — and they hope you don’t keep reading.

You deserve the rest of the story. And you can get it by asking a few questions, like: Where is the diesel coming from? Is there actually any more of it? If not, then who is going without or getting less? If there’s no more diesel, we’re just reshuffling this problem. We’re not solving it.

There isn’t a drop of extra water in the pool because of this order. But you don’t need me for any of this. We walked through this together and you did the economics yourself.

America doesn’t have a shortage of red dye. We have a shortage of diesel.

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You can tell a lot of stories with data

Consumer prices rose less than analysts had expected in August — only 0.4 percent — but they’re still up 3.4 percent from a year ago. Consumer spending was also up, personal savings was down, and inflation is still running above the Fed’s target. Ed wanted to know: what do I make of this report?

My answer: this is a great report if you’re a storyteller. There’s a lot of places to take it.

Ed’s story was that 3.4% is greater than 2%. True, though an LLM might sometimes get that wrong. Another story from the past few months is that underlying price growth is closer to two-point-something percent. Then there is the story that’s most important for markets: the number came in better than expected, so you should be a little more optimistic. You can think inflation is too high and still feel better about where it’s heading.

Then, Ed pivoted to the bond market. 10-year Treasury yields have been hitting new highs, and Ed wanted to know what I make of it. I pointed out that inflation expectations, the Fed and bond markets are often mentioned in the same breath, and while that’s not wrong, it can cause a lot of confusion.

Let’s start by taking inflation out of the equation. The yield on inflation-indexed bonds has risen almost one for one with the regular 10-year bond. If the current run-up in bond yields were about inflation fears, those two would have pulled apart, but they haven’t.

Okay, so now we’re looking for factors that could shift the real interest rate.

In the short run, the Fed sets interest rates. That means they nudge them above or below the “neutral (real) rate” of interest. Economists call that r-star, because the more jargon we have, the more we can charge people to listen to us explain what’s going on. Those nudges to interest rates cool or heat the economy. Importantly, over a decade or so, those nudges roughly average out. So these Fed-induced nudges can’t really be much of the story about what’s going on with long-term bond yields.

The story for the long term requires looking at deeper market forces.

Here’s where we dust off our old friends, supply and demand. There’s a market for loans, and the interest rate is the price of a loan. When a price goes up, it’s either due to more demand or less supply. The AI build-out has boosted the demand for loans by hundreds of billions of dollars. The U.S. government is borrowing about 6% of GDP a year. That’s another demand shock. So the story is simple: When the demand for loans increases, so does the price, which is the interest rate. That’s what’s driving the long-term bond yield up.

Where is manufacturing, and why manufacturing

Then I was back on The Trump Report with Maddie Hale. She brought up a striking number: 21,000. The U.S. now has about 21,000 fewer manufacturing jobs than it did when Trump took office. What happened to that manufacturing boom?

I asked a different question: why does anyone want a manufacturing boom?

Manufacturing used to be a path to the middle class, in the 1950s and 1960s. But American workers are now highly educated and more productive in other areas: they write code, invent a new iPhone, start the AI revolution, and so on. Manufacturing wages have fallen below average wages. Pushing workers back into factories now means pushing them toward lower-paying work.

This isn’t the first time we’ve seen this play out. Two hundred years ago, most Americans worked on farms, but then farms got so productive that that division of labor didn’t make sense anymore. Now about 1% of Americans feed everyone else. We could force people back on the farm… but do we need more lettuce? Factories follow the same path. A modern factory is more robots than people and it can make all the dishwashers and car doors we need.

Do factory workers want their kids to grow up to work in factories? When you ask them, they say no. They want them to have office jobs where their backs don’t hurt.

Manufacturing is work rich people think poor people want. But, when you ask them, poor people want to do the work rich people do.

You can tune in to both conversations above for the rest.

Except, when you look closely, almost nothing new has happened. The G7 — that’s Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States — agreed to do something they’d already said that they’d do.

The concession they won here? The U.S. agreed not to do something it should never have contemplated doing.

I don’t want to be too cynical. Gas and diesel prices are at near-record highs, and people are hurting. Taking action on that is good.

But in this case, the action the G7 took seems to mostly be leaders agreeing that leaders should be seen as trying to solve the crisis that leaders caused.

Actually doing something? Well, that’s probably going a step too far.

The road to the crisis

On February 28th, the United States attacked Iran. Shipping through the Strait of Hormuz quickly became hazardous, which was a problem, since nearly a quarter of the world’s oil and petroleum products passed through the strait in 2025. Once that became dangerous, the world’s energy markets were thrown into chaos. You’ve probably noticed that if you’ve tried to fill up your gas tank any time in the past seven months.

Enter the International Energy Agency, or IEA. The IEA is basically a club of the world’s advanced economies. When the world is hit by an energy shock, the IEA gets together to respond. Back in March they convened and agreed to draw down their emergency stockpiles and make 400 million barrels of oil available.

When they published the country-by-country plan a few days later, it actually added up to more than that — 426 million barrels total. That was the biggest emergency release in the agency’s history.

How large it was relative to the problem the war caused is something we’ll get into in a bit.

The thing I want you to notice for now is that this March agreement was agreed to in March. And that was a while ago.

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Enter Donald Trump. Global disruptions mean that diesel prices keep rising. That hurts truckers, farmers in harvest season, construction firms, basically anyone who runs a big diesel engine. Oh, and if you hadn’t noticed — there’s a midterm election coming up.

So Trump floated a plan. Or sort of a plan. And he sort of floated it.

The president announced that he was going to ban exports of diesel from the United States. This is after he banned diesel exports from Russia and Iran. If you’re noticing that the president gives the same treatment to our own country as he gives to our enemies, that’s well-spotted. The plan was not well received, and I actually wrote at the time about what a bad idea it was:

A week later, Trump said he was still thinking about the plan. A few days after that, he said he’d never really been serious. So the administration’s position seems to be that it had a plan that it liked and disliked and was going to implement but that it was never serious about.

Then, last week, the leaders of the G7 met by video conference. Trump’s version of the story is that he dropped the threat to ban U.S. diesel exports, and in return, Europe agreed to release a massive amount of diesel.

That’s what he said. Perhaps more relevant is what the actual announcement says. It pledged a coordinated release of 100 million barrels of oil, diesel, and other fuels over four months. There was also a pledge that G7 countries will do their best to avoid energy export restrictions.

But what does this really mean? Who committed to what, in response to what, and does any of it matter?

Things start to get mushy

The world’s leading economies had already agreed to release 400 million barrels back in March. They hadn’t fully delivered on that pledge. So did Trump’s posturing get us anything new? Or is this just a promise to finish the earlier job?

Let’s look carefully at the G7 communiqué (and let’s all appreciate that I finally got to use the word “communiqué”). The key sentence says that, taking into account commitments that have already been fulfilled, the G7 will implement its commitments.

Read that slowly. They’re going to implement their commitments, taking into account commitments that have already been fulfilled. I read that sentence several times, and it had the warm, gooey texture of bureaucratic oatmeal.

Here’s what I think it means. Countries promised roughly 400 million barrels in March. They’ve delivered a lot of that, and there are roughly 100 million barrels left in the commitment. So the G7 is now saying, hey, let’s deliver the rest of what we already agreed to deliver. And we’ll try to get it done within the next four months.

This is an agreement to agree that they agree about the earlier agreement. Glad we agree on that.

There’s also a timing problem. The White House said that this was going to be a four-to-six-week war. We’re now seven months in. The emergency release, which was agreed to in the war’s first two weeks, will finish at the end of this new four-month window. So, close to the war’s first anniversary. Good work, everyone.

There’s one more wrinkle here. On September 29th, three days before the president called this a massive European contribution, the U.S. Department of Energy asked oil companies whether they wanted to take up to 40 million barrels from America’s emergency reserve. The department described this as part of completing America’s 172-million-barrel commitment that came under the March agreement.

That leaves us with an awkward question. Are those 40 million American barrels part of the G7’s 100 million? If so, when the president takes credit for Europe’s 100 million barrels, roughly 40% of them may be American oil we already owed.

I’ve dug into this pretty deeply. The honest answer is, it’s hard to tell. I’m pretty confident the U.S. is delivering another 40 million barrels from storage to the world market. The only thing I’m unsure about is whether that American 40 million is part of the G7’s 100 million barrel package. It’s impossible to say more, because neither the G7 nor the IEA has told us who owes the 100 million barrels that are meant to come online. Maybe the U.S. owes 40 of that 100. Maybe not.

Maybe you should interpret this lack of clarity as speaking to a lack or seriousness about this agreement. Maybe not. But it is striking to me that when I recently sought a travel reimbursement from my university, it involved a lot more paperwork than this 100 million barrel “commitment.”

The milk jug and the bathtub

Let’s take the most generous version of this for a second. Let’s say all 100 million barrels are new commitments to deliver extra oil to the world market. If that’s true, is it a lot?

I want you to build a simple habit here. Don’t be impressed by the number of zeros on a commitment. Compare it to the size of the problem.

The world produces about 100 million barrels of oil a day. So, this package equals roughly one day of global production. The release is spread over four months, which means that over the next 122 days, the world will get 123 days of oil supply. That sounds absurdly small because it is absurdly small.

The scale of the problem looks like this: before the war, the Strait of Hormuz carried about 20 million barrels a day. In August, which is the last month I could find good data for, the strait carried about 8 million. That’s a gap of 12 million barrels a day. The G7 package works out to about 0.8 million barrels a day (100 million over roughly 122 days). The daily gap is 15 times larger than the fix.

Imagine a bathtub with a huge drain. It’s draining 12 gallons a minute, which is enough to fill (and refill) a kitchen trash can. The G7 arrives, heroically, to refill the tub. To do it, they bring a single jug of milk that isn’t even full.

A commitment without commitments

There’s another word for a commitment without real commitments. It’s called a hope. You could also call it a wish, or maybe an intention. Here, we can use the term “press release.” Or in french, communiqué.

The communiqué promises a “front-loaded substantial diesel release” within 20 days. That sounds reassuring until you start asking questions. How many barrels will be diesel? Which countries will release the fuel? Which barrels are new and which are left over from March? When will each country deliver, and what happens if they don’t? The “agreement” doesn’t answer any of these questions.

“Substantial” isn’t a number. It’s an adjective.

A real commitment has teeth. It comes with a public scorecard, one that lets the U.S., Germany, France, Japan, the IEA, and the citizens of these countries all check whether the countries involved did what they promised. This deal has none of that. It doesn’t have a supply plan. Instead, it has a headline and a deadline.

That deadline presents a calendar of its own. Twenty days after the October 2nd announcement is October 22nd. The U.S. midterm elections are on November 3rd. The G7 doesn’t explain why it’s so important to get diesel to market just before the American election, but I suspect you can work out your own theory here.

Follow the money (or the people with money).

You don’t have to take my word for any of this. The people who trade diesel futures don’t care whether a press release sounds strong. They care about the price of a gallon of fuel. So let’s see how they reacted.

On the morning of October 2nd, the president got ahead of the G7 announcement by posting to Truth Social that Europe had agreed to release a “massive amount” of diesel immediately.

After this, diesel futures dropped fast. About an hour later the actual communiqué arrived with no diesel quantity, no country allocations, and no evidence the barrels were new. Within hours, futures had climbed back to about $4.55 a gallon wholesale, fully undoing the earlier drop.

Traders liked the possibility of a massive European diesel release. Then, they read what the G7 had actually committed to and realized that nothing much had happened. By the end of the day, the price was essentially unchanged.

The futures market also gives us a longer-term read. Before the Iran war, traders expected diesel to wholesale around $2.35 a gallon for years. The day before the G7 announcement, they expected near-term prices of roughly double that, easing gradually but staying well above pre-war levels. On the next trading day after the announcement, the curve had barely moved.

Diesel is expected to stay expensive for years. That’s the market’s verdict. The underlying shortage persists, even if some barrels shift over the coming weeks.

New compared to what?

Much of the media reporting on this deal breathlessly emphasized the size of the release while missing the problems. There’s no new oil, the barrels barely make a dent, and the promise is a vague statement of intentions. I don’t say that with malice. Journalists are generalists, and 100 million barrels has a lot of zeros. Economists spend years learning to be unimpressed. Instead of admiring the zeros, we count them.

You can do that too. When someone — especially a politician — waves a number at you, you should ask three questions. Is it new? Is it large? Is it enforceable? To answer those, you need to know what you’re comparing the number to.

This announcement fails on all three. It isn’t new, it isn’t large, and it isn’t enforceable. It’s the appearance of doing something without the thing actually getting done.

Now it’s time for The Professor Is In, where I sit down with my producer Augusta to take your questions. Think of it like office hours — my door is open, come on in.

And if you missed the post on the jobs report, you can catch up on that here:

Where are these revisions coming from?

One question Augusta brought me was about revisions to the jobs report. When we got the September numbers, we also got revisions to the July and August numbers. Those new numbers show that, contrary to previous reports, very few jobs were created this summer. Actually, the economy probably lost jobs in July, and the August boom was smaller than first reported.

Augusta wanted to know: why all the revising? And should we put any weight on the earlier, more optimistic, numbers?

Nothing in the world is accurate

Let’s zoom out for a second and think about how we measure things. Height seems like an easy thing to measure: you just get a tape measure and stand up straight. Well, I might do that and find that I’m 5’11 and a half, but actually, that number isn’t quite right. I’m probably closer to 5’11.487. Or maybe it’s 5’11.678. I could even be 5’11.821. Measurement always comes with error.

That’s especially true in the economy. We don’t have a tape measure for employment — we can try to line up 340 million Americans and ask about their work, but by the time we finish, many folks will have changed positions or retired.

So instead, we talk to — that is, survey — a subsample. Then we ask: is this sample truly representative? Did we cover enough people, enough of the time? Did we count the people who were hiding from taxes or immigration authorities? Do we have the information we need?

More data means more precision

The jobs numbers come from something called the establishment survey. The government reaches out to a fairly large sample of businesses and asks how many people were on their payroll in a specific week. They make sure they’re talking to a big chunk of the really big businesses, so that the survey is representative of the U.S. workforce.

But sometimes, the government calls and asks for that number while the owners are out at lunch. We all miss an email sometimes. We also might put things off past their deadlines. That includes responding to the establishment survey.

And so the first round of jobs numbers we see is based on the businesses that respond on time. The Bureau of Labor Statistics (which publishes this survey) adjusts for the fact that some businesses have yet to respond, but effectively they’re forced to extrapolate what non-responders would have said.

Eventually those businesses get around to sending in their report of how many folks are on their payrolls. And that’s what a revision is: moving from an incomplete sample to a more complete one.

Don’t split the difference

You might be tempted to think that, because the first jobs number was high and the second number was low, the truth is somewhere in between. That’s not right. The revised number includes everyone in the first round plus the late responders. It’s a bigger sample and a more representative sample. That’s why the revised number is always and everywhere the better guide.

Some people are trying to undermine faith in government statistics. They point to the revisions as “evidence” that something is wrong with the data. On the one hand, yes, something is wrong with all data. On the other hand, no, no and no. Revising your estimates when you get new information is always the right thing to do.

I don’t think of this battle over revisions as being in good faith. It’s a political claim that tries to exploit people’s naïveté about statistics to paint revisions as problematic. Think of it as part of a broader effort to undermine faith that there is a truth at all. This dismays me deeply.

A statistical agency that revises its data is much better than one that doesn’t. It’s like a person who admits their mistakes: they’re more honest than someone who denies ever messing up.

Parsing the jobs report

With that in mind, a monthly jobs report contains three independent sources of information:

• The household survey

• This month’s payroll survey

• New responses to the previous months’ surveys

This month, the household survey was okay. The payroll survey was weak — and so were the revisions. Hence my mood. Not ecstatic, not miserable.

More detail about what’s happening in our economy

Other questions Augusta brought me:

• What’s the big picture on all the hiring happening in healthcare? When did it start, and what does it mean?

• The world has gotten so much better at making stuff cheaply. So why hasn’t healthcare gotten less expensive?

• How did I break my rib in Australia? (The answer is a little embarrassing.)

Finally: is AI taking our jobs?

Augusta also asked about some specific job losses in this report. These are the ones in sectors we might call “AI exposed.” Those are industries like financial services, information, and professional and business services, all of which have been shrinking.

Is that AI at work? If it is, would we even know?

My friend Erik Brynjolfsson at Stanford is one of the leaders in the economics of AI. He’s convinced me that, right now, we don’t have the statistical infrastructure to know the answer here. What does “AI exposed” even mean? We know which firms say they’re adopting AI, but adopting has many definitions. It doesn’t necessarily mean replacing.

A surprising amount of our tracking of AI relies on intuition. For instance, our intuitions say that white-collar desk jobs will get hit first. But our intuitions aren’t always right. Early in the AI revolution, computer scientist Geoffrey Hinton argued that we should stop training radiologists entirely. He thought it was completely obvious that AI would replace them — reading an X-ray is pure pattern-spotting, which is what computers are best at.

My son broke his arm a couple of weeks ago. AI did not read the X-ray. In fact, the number of radiologists has risen since Hinton declared radiology dead. Reading the X-ray turns out to be part of a bundle. Radiologists also talk to specialists, talk to patients, and handle special cases, all crucial parts of practicing medicine.

The strongest forecast anyone made turned out to be exactly wrong.

The last wrinkle

AI may be doing something else we don’t see in this data. It could be kicking away the first rungs of the career ladder. Jobs that used to go to a 23-year-old research assistant now may be going to Claude. That’s great for productivity: instead of one assistant, a senior researcher can have ten Claudes. But it’s bad for the young people who would previously have taken that job. They were trying to gain experience and build intuition and judgment — which AI doesn’t have. Job growth amongst young college graduates has fallen pretty dramatically.

The economy has settled into what folks call a low-hire, low-fire environment. And this is another factor that might really be hurting young people. After all, if no one’s hiring, that’s got to be hitting folks at the start of their careers. Point is, it’s hard to distinguish the effects of AI from an overall slowdown of hiring.

So the honest answer here is we only have hints about how AI is already reshaping work. The uncertainty each of us faces about the future of our careers is far bigger than anything in the September jobs report.

And if the evidence changes, I’ll revise my answer. That’s what good statisticians do.

And one more word for my nerdiest Platypals

Today’s post includes a paid partnership with Stata, the software I use to crunch the numbers in my posts (and my research).

I used it here to do my own calculations on the jobs report. And if you’re really nerdy, you can use this worksheet to follow along! Basically, I want to show you how you can do an insta-analysis of the jobs numbers before FRED has updated its numbers. Or if you’re an economics or econometrics instructor, you might find this useful for class.

My answer is based on an idea that I first encountered in graduate school. The idea is called the “envelope theorem,” and I’ll admit that it took me years to fully grok. My classmates were a lot quicker, so what I lost in speed I made up for in enthusiasm. I now love this mathematical idea so much that I explain it whenever it might be remotely relevant. And I guess I did that to Mary.

Mary started by setting the scene. Kevin Warsh and the Fed recently raised rates — which will raise the cost of paying your credit card, your car loan and your mortgage. By her telling, this is an odd response to the reality Americans are already upset that the cost of living is so darn high.

I took Mary for a walk up a hill. Metaphorically. Let’s imagine the top of the hill is the best possible outcome. When you’re standing at or near the summit, a step to the left or the right barely changes your altitude. When you’re halfway up, every step is a big change.

The envelope theorem builds on this simple fact about hills: Climbing hills is important work, but when you’re near the top, small changes in where you stand don’t much matter. As long as you’re near the top of the hill, the fight about exactly where the summit is doesn’t matter quite so much.

My best guess is that the optimal interest rate for our economy is somewhere between 3½ and 4½ percent. The Fed has us in that neighborhood, and it’s only looking to make the sorts of small changes that will keep us in the neighborhood. Fights about where in this nearly optimal range we are just don’t make that big of a difference.

Likewise, when the state of the economy changes — and it’s always changing — people’s well-being doesn’t change much due to the Fed shifting from being near the top of the old hill to the top of the new hill. (The fact that economics conditions change does matter — that’s what moves us to a new hill. But the Fed’s response isn’t the problem.)

By contrast, there is a fight that really matters.

The president has suggested the Fed ought to cut interest rates to 1%. That’s a long way from the top of the hill. That mistake would be incredibly costly.

And that’s why I worked to refocus our discussion. It’s tempting to spend most of your time arguing about a quarter point here or there within the range of reasonable. Honestly, this just doesn’t matter that much.

The really important monetary policy issue is that interest rate decisions are roughly reasonable. In institutional terms, this means that rate decisions must be made by qualified Fed governors who will keep us near the top of the hill, rather than an idiosyncratic president whose political interests lead him away from the hill altogether.

Driving our economic car near the top of the hill

To be clear: I’m not saying the economy is perfect right now. Rather, I’m suggesting that our current interest rate settings make sense — are nearly optimal — given the economic shocks buffeting our economy.

The Fed has what’s called a dual mandate, which means that Congress tells it to care about two things. First: unemployment. Right now that’s a little over 4%, which is low by both international and historical standards. It’s also been pretty stable. The second part of the mandate is inflation. Right now, that’s at 3.4%, and it has been above the Fed’s target of 2% for five years.

So one part of the dual mandate — the unemployment bit — is basically okay, and the other — the inflation bit — isn’t. The Fed then needs to turn its attention to the bit that’s out of whack. That means it ought to lightly tap on our economic brakes to get inflation under control.

Keep in mind, Warsh says he hasn’t actually tapped the brakes yet. He thinks of his recent rate rises as simply taking his foot off the accelerator. Silent Kevin also insists he isn’t signaling an upcoming hike. No one believes him, of course. There will very likely be another rate hike by the end of the year.

And all of this is normal(ish)

Mary pointed out that we’ve spent more than a decade in the land of cheap money, so higher interest rates feel scary. That’s fair. Then she brought up Ghostbusters, where Dan Aykroyd complains about a 19% mortgage! Call that the Ghostbusters Era. The next era following, and from the mid-80s through 2007, inflation averaged around 2% and interest rates ran a few points above inflation. I think of this as the Normal Era. From 2008 through roughly 2022, things were weird, but a different weird. The economy got hit by two “once-in-a-century” shocks within 12 years, and so interest rates were forced to be nearly zero for over a decade.

The point of this history is to remind you that higher rates are mostly a return to normal.

Could this round of hikes tip a weak economy into a recession? It’s possible. But Paul Volcker pushed rates into the high teens, and these moves are enormously less dramatic. A crash like the one in the early 1980s is very hard to see.

To be clear, the envelope theorem isn’t saying it’s okay that we have a tariff shock, a fiscal shock, and an energy shock. That’s not okay. It says that, given that we have them, the Fed is in the neighborhood of the best response to the lousy hand the president dealt us.

Now, aren’t you excited to tell your friends all about the envelope theorem?
✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌✉️💌

The proportion that goes to workers is called labor’s share of income. And it just hit an all-time low.

If you take the entire U.S. national income, a larger share than ever of everything we earn as a nation goes to owners. Put differently, workers are seeing a smaller share of the general prosperity than ever before.

We dug into the why of all this a few weeks ago.

Is this something to worry about?

That’s what Stacey Vanek Smith asked me at our first-ever live Off the Clock podcast. This was at Stanford’s Initiative for Financial Decision-Making. Stacey wasn’t being glib. She’s an amazing financial journalist, so she has to ask the hard questions (and she works at Bloomberg — someone has to stand up for capital).

You can watch the episode here:

Let me preview my answer in text form. For most families, they get most of their money from a paycheck. It’s how they pay their bills and survive. By contrast, capital is highly concentrated. When the workers’ part of the pie shrinks, most people’s slice shrinks with it.

Stacey brought her own illustration of this. It came from The Simpsons.

Some background: An Atlantic writer named Dani Alexis Ryskamp went through old episodes to work out how much Homer made at the nuclear power plant. In today’s dollars, it comes out to about $55,000. When the show started, CEOs earned about 60 times what their average worker earned. Now they make 325 times as much. Call this the Mr. Burns-Homer Simpson ratio.

Stacey pushed back further. What’s actually wrong with concentrated wealth? Elon Musk is the first trillionaire. Love him or hate him, he has created a lot of jobs. Stacey pointed out that’s more economic good than she would have done with the money (though I’m not sure that’s true — she would have created more public radio stations, which sounds like a pretty good world).

What a trillion dollars can buy

When you ask economists why billionaires are a problem, we often struggle. There’s an easy answer, which is that more money in the hands of the middle class instead of the ultra-wealthy means more joy. If Homer got a little more, it would make a much bigger difference to his life than if Mr. Burns got that money instead. But a direct answer about billionaires is harder.

Take Elon Musk. In the last election, he gave $250 million to one side of politics. That side subsequently won the election by 230,000 votes in three key states — Michigan, Pennsylvania, and Wisconsin. Even if he spent $1,000 to secure each vote, that was enough that his dollars made all the difference. And the bloke has a trillion dollars, so buying this election didn’t cost him much of his wealth. Indeed, if he wanted to, he could afford to buy 3,999 more U.S. elections.

Stacey wasn’t fully convinced. She doesn’t believe that you can buy a vote. (Every political candidate who has ever asked for a donation disagrees.) But she accepted the broader point: Concentration of wealth is also concentration of power. I’m not sure that’s good for capitalism, and I’m quite sure it’s not good for democracy.

The thing about that level of wealth is that there isn’t much else it gets you. With $99 million, I could buy anything I wanted: fancy clothes, gorgeous cars, that small private jet with a Platypus on the side.

The next part I may have put too provocatively, but I think it’s part of the struggle we have with this question. If there’s nothing left to buy above $100 million, why let anyone get there? Once you’ve got that kind of coin, the only extra thing you can buy with that extra money is power.

Stacey said that was the kind of claim that got dangerous fast. Too many restrictions on the rich can simply push them to move somewhere friendlier; and there are plenty of places that would like to have them. That’s a fair point and an argument for another day. But I’ll say this: if I were the captain of the billionaires’ club, I’d be calling an emergency meeting right now.

A few other hot topics

We covered lots of other topics during our live show. We talked about AI and labor via the “StaceyBot 2000,” which is a robot that can do Stacey’s work. Does it make her better or worse off? I explained why Keynes was right about labor and wrong about how productivity would mean we’d all work 15 hour weeks. (If you’ve never read Economic Possibilities for our Grandchildren, let me give you the link, now.)

And in a lighter moment, Stacey took the great iced-coffee-in-job-interviews debate and made it all serious again, arguing that the very fact of this debate reveals something about the difficult job market facing young people.

Thanks to Annamaria Lusardi and Stanford for having us. This experience got me fired up about so much, including the idea of doing more live shows.

If you’d like to see an Off the Clock near you, or if you’ve got a question you’d like Stacey and me to answer, please let me know in the comments.

That’s the headline from the jobs report, which came out early this morning. It’s the last jobs report before the midterms, and it’s an important one. But that 29,000 number doesn’t mean much without context, so today, let’s look at three different ways you can make sense of this headline number.

First: ask what the number means on its own terms. The economy is creating jobs, but barely. There are 340 million Americans, so this is a very small fraction.

Second: compare this with what we expected. As of last night, forecasters thought that this jobs report would show 80,000 or 90,000 new jobs added in September. So by any measure that’s a disappointing shortfall.

The third way, and the one that I really care about: ask about the story these numbers tell us. How does this change what we’ve been telling ourselves about the economy?

Should we be worried?

On one front it’s more bad news. In addition to low job growth, this jobs report also revises the prior two months’ reports. That’s just the addition of new data businesses sent in after the Bureau of Labor Statistics deadline. August’s jobs report was revised down by 29,000 jobs. July’s report was down by 31,000. With these revisions, it now appears that the economy actually lost jobs in July.

Here’s the thing that’s hard to square. The unemployment rate barely rose, from 4.1% to 4.2%. It’s been stable for a few years now, and 4.2% is low, both by historical standards and compared to other countries. For most of my career we’d have been delighted with an unemployment rate that began with a four.

How is job growth weak while unemployment is low? Think of the economy like a treadmill. With a growing population, we have to create jobs at a certain pace to keep unemployment steady. That rate is what economists call break-even jobs growth. A few years ago, it was around 200,000 jobs per month.

But the president’s crackdown on immigration has changed that. Now there are more deportations, people leaving the country, and far fewer foreign workers and students arriving. The U.S. is now close to having no population growth for the first time in a long time.

That means the treadmill has slowed. Break-even jobs growth has most likely fallen, possibly dramatically. It might even have fallen to where we are now. So, today’s “disappointing” jobs numbers may just be our new normal. At least, they’re a new normal amidst so much anti-immigration action.

Healthcare vs everyone

Another interesting story in this report is where the jobs are coming from.

Effectively all net job creation since January 2025 has been in healthcare and social assistance. More than all of it, actually. That sector has added nearly a million jobs to the economy, while everything else has shed about 220,000 jobs.

Healthcare is the little engine that could. It’s a relentless source of jobs.

And yet, you’d never know that from our political debates. We hear about tariffs, oil, steel-toed boots and blokes in hard hats. We don’t hear about the healthcare sector, even though it is radically transforming our economy.

It also explains a striking fact. During President Trump’s second term, 8% of job growth has gone to men. They’ve gained about 65,000 jobs. Women have gained about 711,000 jobs.

We dug into the why of all of this a few months ago, and it mostly comes down to the fact that jobs are being created in sectors where women already work. Healthcare is an obvious example.

Meanwhile, other sectors are losing jobs — information (10,000), finance (7,000), professional and business services (9,000). It’s not hard to notice that all those sectors are highly exposed to AI. So does that mean AI is quietly showing up in the jobs data? Maybe. I honestly don’t know if firms are replacing workers, holding out on new hires, or if something else is happening — and the data just isn’t good enough to tell us yet.

And then there’s your paycheck. If you feel like you can’t keep up, you’re not imagining that. Average hourly earnings are up just 3% over the past year. That’s the slowest wage growth we’ve seen in years. Prices are rising faster and wages aren’t keeping up.

What does this mean for the Fed?

Finally: the Fed. All of this matters when it comes to rate hikes. A week ago, inflation looked hot and the job market looked healthy. Markets put a 64% chance of a rate hike at the Fed’s October meeting (the last before the midterms).

Then Wednesday’s Personal Consumption Expenditures inflation numbers came in — that’s the Fed’s favorite flavor of inflation — and they were softer. The odds of a rate hike fell to 24%. Now, with job report in, they’re down to 20%.

Hikes are still coming — later. Markets are now predicting October’s hike has been pushed back to December. But a hike before the election looks less likely.

Weak wages are, oddly enough, a help here. Labor is the biggest cost most businesses face. Slow wage growth gives the Fed a little more confidence that inflation will keep easing.

Wall Street actually seems pleased, which might seem odd, given that we learned that the economy is a bit weaker than we thought. Investors are fixated on the Fed. A delayed hike looks good for profits. I am a bit more focused on Main Street.

Technically, we’re fine

So what does this report tell us about November? Well, it says that the economy is kind of, sort of, somewhat okay.

That qualification should tell you a lot. Jobs growth has slowed sharply and wages are falling behind prices. But this isn’t a reason to panic. We’re adding jobs, and unemployment is low and stable. Still, if people say they’re worried, I won’t argue with them.

This also tells us something politicians rarely mention. Our economy is hitched to one little engine that could: healthcare. Well, it’s not such a little engine anymore. That’s worth keeping in the back of your mind when anyone tells you what this economy is “really about.”

One last thing for the nerdiest of my Platypals!

Today’s post includes a paid partnership with Stata, the software I use to crunch the numbers in my posts (and my research).

I used it here to do my own calculations on the jobs report. And if you’re really nerdy, you can use this worksheet to follow along! Or if you’re an economics or econometrics instructor, you might find this useful for class.

After my talk, Annamaria Lusardi and Michael Boskin asked me some questions, then took some from the audience. This was a room full of economists who teach personal finance, so it was a great place to argue for a topic I care about.

Economics isn’t just a subject. It’s a toolkit. If you understand how to use those tools, they can improve your whole life.

You can save money by learning

Michael Boskin asked me how to drive home the broadly important concepts of economics. So I got to turn it around on him. My first teaching job was at Stanford in the business school. I was 27 and scared, and I’d see this intimidating bloke on campus who had a death stare and asked hard, penetrating questions. That bloke was Michael!

The business school was a good education for a young professor. Freshmen tend to write down what you say because you’re the teacher. PhDs write down what you say because they want to be you when they grow up. MBA students — well, they think those who can, do, and those who can’t, teach.

So I taught them differently. I always led with the payoff. “Here’s why what I’m going to show you is important.” Then I’d teach. At the end of class, I’d come back to the beginning and say: look how much you just saved because you learned this.

I do the same thing in Econ 101. It’s harder, but it’s worth it. And if you’re a teacher — and we all are, whether we have the job title or not — you can do the same thing.

Dating lessons from economists

When I teach the sunk-cost fallacy, I give this example: we all have a friend in a long-term relationship with a guy who’s a bum. Or maybe he’s not the problem, and she’s just not the right match. But they stay together. When you ask why, they say “Well, I’ve put so much into this. I just want to see if I can make it work.”

That is the sunk-cost fallacy in action. That time isn’t coming back, no matter what happens next. The only question that matters is whether the future looks better together or apart. If you’re partnered with Mr. or Ms. Wrong, you’re only making yourself — and them! — miserable by sticking it out. Once a student works through that logic, I can tell them honestly: I’ve just saved you three years in a bad relationship.

In human terms, that’s a massive payoff. The folks in that room at Stanford are in a great position to do that work. They’re teaching personal finance, so every mistake they talk a student out of is literally measured in dollars.

Economics beyond the textbook

Michael then drilled down into a great example: options and futures. He teaches them, but not because he thinks all his students are going to end up derivatives traders. They have a broader application. By learning them, students learn about optionality — the practice of keeping your options open until you’re more sure of the best move. That idea matters in life. How should we take these ideas beyond finance?

I’m of the generation of economists that came up after Gary Becker. Becker taught us that there are a small number of economic principles that can be applied relentlessly across many domains of human behavior. So I teach that to my students. I give them a small number of principles, and then the rest of the semester I describe as going to the gym. You know the basics, and now you’re getting stronger. As you apply the same ideas to new topics, you’re building your intellectual muscles.

Once you embrace this idea, you start to see the power of economic logic in places you’ve never seen it before. When I was a student, I was taught comparative advantage as the theory of international trade. One country is good at one thing, another’s good at another, let’s specialize and sell each other our best stuff back and forth.

That’s not wrong. It’s just too small. Comparative advantage is the theory of how to assign tasks efficiently. The logic that says people in the United States should design the iPhone and folks in China should manufacture it, also shapes who does what in a household. My better half, Betsey Stevenson, is a public finance economist. I am not. I know what a consumption Euler equation is. She knows which bank our money is in… and that’s comparative advantage at work.

So I don’t teach personal finance modules in Econ 101. Every time I teach a principle, I show three different sets of implications: financial, personal, and policy. Three ways you can use economics, all for the price of one idea.

That does make the job harder for everyone who teaches this stuff. I told Michael I wasn’t sure whether I should thank him or be annoyed at him for the lessons I learned teaching at Stanford GSB all those years ago.

But here’s the thing about the sunk-cost fallacy. It doesn’t care what you’ve sunk into other ideas. Neither do any of the other tools. They’re just there, waiting to be picked up and used. Teach the principles well and your students can spot bad relationships on their own. Then they can figure out what to invest in next. That can be in their portfolios, in their careers, and yes, even in their love lives.

Watch the full talk for more.

I just got back from Stanford’s Initiative for Financial Decision-Making, where I gave a keynote speech. My host was Annamaria Lusardi, who is the world’s leading scholar of financial literacy. The conference was attended by economics professors from around the world. These folks are teaching how people can use economics to make better choices in their personal and financial lives. So the stakes here – for them, their students, and for you – are high.

My role was to get folks fired up, and provide some advice on how we can be more successful in our role as financial educators. So I centered the talk on one big question: how do we convince people to wash their (financial) hands?

Financial education is failing

Right now, most people aren’t practicing good financial hygiene. Many don’t use their employer’s retirement match. They carry credit card balances with exorbitant interest even as they’ve got cash in savings accounts earning nearly no interest. They pay excessive fees to stock pickers, even though that typically leads to lower returns.

When you ask Americans simple questions of financial literacy, many do not understand the basics. They don’t know if germs exist — or how they should be fighting them.

Why are we failing to teach simple and important truths?

One problem we’re facing here is that people don’t trust economists. One survey said 3.7% of folks trust us a great deal. Another 26.6% trust us somewhat, and my guess is that group is mostly our parents. Everyone else is unconvinced. A separate survey in the United Kingdom compared economists with others, and we come out ahead of only one group — politicians. That’s it.

So how do we get people to wash their hands?

Principles for doing better

I offered the group some economic principles.

First, consider opportunity cost. Academics are used to only stepping forward when our analysis is close to perfect. That’s what our training drills into us. But every time experts don’t step forward, someone else does. Oftentimes, in the personal finance space, that “someone else” will try to rip off the next people in line.

So, step forward.

The second principle: jargon is a tax, and prices matter. “APR” doesn’t mean much to most people. “Interest rate” does, and “monthly bill” really does. When our ideas are a hassle to understand, that’s a tax. Shame especially keeps people away. Be clear and compassionate. Don’t increase shame.

Third: comparative advantage. You’re not a guru. You’re an economist. When someone asks for a stock pick, that’s a teaching opportunity. Pivot and explain why this year’s top stock pickers don’t have any special insight into next year. They’re asking you the wrong question, and you can redirect it into good information.

Fourth is that we’re in a repeated game. We’re experts. The folks who want to sucker our friends and family — and I’m using loaded language here intentionally — those people just want to get in, get a commission, and get out. We can play the long game. That means always telling the truth.

Why I talk about cats when I teach economics

The talk — if you watch it — quickly moves on to some advice about how to communicate more clearly.

Some of this is pretty basic, and we understand it in our personal lives, but forget it the moment we’re at work. Start with the question the person actually asked. Answer it with one lesson and one action. Tell actual stories. I don’t teach the consumption Euler equation. I describe what it would be like to meet your future self. How would the two of you work out how to share your money?

Instead of teaching the efficient markets hypothesis, I tell people about Orlando. He’s a cat who beat three professional stock pickers in a British newspaper’s contest. I let them wonder how that happened.

Analogies also need to do real work, not just be cute. They can’t only be memorable. They should also be true.

Finally, talk like a person. Don’t say “labor supply decisions among low-income households.” Say “a single mom working two jobs, trying to figure out if she can afford child care.” Dollars are in people’s wallets. Percentages aren’t. Try to stick with what resonates.

Big feelings on the plane ride home

I left this conference inspired. There’s a community of people trying to help folks live better, richer, fuller lives. They believe that a bit of financial literacy goes a long way. The whole event radicalized me into realizing something I should already have known: The work of teaching the world economics should extend to teaching financial literacy. It can empower people to make better choices and live better lives, and that’s what Platypus Economics is all about.

I arrived home and immediately called my team. We’re talking about doing more to teach financial literacy and personal finance. We’re still figuring it all out. I want to hear your thoughts: What works, what doesn’t, what do people need more of, and where might Platypus Economics fit in? Platypus Economics isn’t a thing; it’s a community and a conversation, and it evolves, and I would love your help in figuring out next steps.

And if you want to hear the full argument, watch the talk.