A Conversation with David Malpass

A Conversation with David Malpass

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from C. Peter McColough Series on International Economics

Last month, policymakers at the Annual Meetings of the International Monetary Fund and the World Bank Group expressed cautious optimism about the state of the international economy and predicted continued growth around the world. Undersecretary David Malpass discusses this global economic growth and the Trump administration’s economic agenda.

KEENE: I’m going to start a few minutes early because of the times we’re in right now every moment with Mr. Malpass is exceptionally important. With the news flow today, and as we’ve seen over the last number of weeks what’s going on in Washington, so much here is just timely and we’ll just get right to it and move as quickly as we can.

This is a great honor to be here today with my colleague, Kathleen Hays. It is the C. Peter McColough Series on International Economics with the esteemed David Malpass. Full disclosure, I’ve known him for years. He wrote a chapter for a book of mine years ago. And I’m thrilled to be with David Malpass, private citizen, and David Malpass, serving the public now in a very stressful job. His frequent flyer miles are incalculable. (Laughter.)

This is on the record. That is a critical issue. This is on the record. And of course, we look for your good questions to drive that conversation forward. As members, so many of you have heard this so many times, but I’m going to have my own members questions. I can’t do two questions anymore. I don’t know how presidents do that. So you get a question. You get an observation. I’m going to call on Professor Buiter. He gets different rules. He can say a little more. But I want to get in as many questions as possible, as we can. And please, not two questions, because I know David can’t remember the second one. (Laughter.) And I’m certain I can’t remember the second one either. And so only the—and we’ll try to end sharply at 2:00 as we can.

There is a biography for David Malpass. I’m going to dispense with it. I’ll touch on some of the high points, but I think it’s important to frame who he is. I said this years ago, that Mr. Malpass has the greatest English skills of anyone I’ve ever seen in market economics. His articles in The Wall Street Journal were exceptional. I literally used to read them for the sentence composition, not just the economics and the thoughts. But they were just extraordinary. I told this years ago to David. He invented, as far as I’m concerned, with Edward Hyman, what I call chart, paragraph, chart, paragraph, chart, paragraph. This is ancient history, years ago, but it’s the way modern Wall Street reads now. Give me a chart, give me a paragraph, with a directness that we’ve always known from David.

It is the most interesting time for international relations politics and economics. So what we need—we all know that—we need physics. And we get that today from the physics major from Colorado college. At Bear Stearns, but so many other places, he crafted economics. He’s been right. He’s been wrong. He owns the word in market economics, “fast.” Every David Malpass research report somewhere has this little, small word, “fast.” And that means many different things. And maybe we’ll hear it today, as he talks about tonight’s vote and tomorrow’s Senate votes. He’ll say, they’re going to happen fast. I don’t know if you want to go there, David.

And finally, he did what others do. They talk, but he did. He sought office for the Republican Party in New York State. Anybody seeking office today understands that workload, that effort. And David chose to do that. And I don’t have here the notes on the outcome. I’m sorry, David. I didn’t see that. In his political economics, he is our undersecretary for the Treasury for international affairs. He has been, as he says in his speech today, pragmatic. He has been realistic. David Malpass. (Applause.)

MALPASS: Thank you very much, Tom. That’s too kind. It’s such a great pleasure to be here today and to see many friends. It’s an honor, a true honor to see so many people that I’ve worked with over the years. I want to give you an update on the administration’s international economic policies. I’m going to talk fast, so we’ll get through it. (Laughter.)

One of Secretary Mnuchin’s and the Trump administration’s top objectives is to implement sweeping reforms that achieve faster U.S. and global growth, and higher after-tax wages for American workers. This involves ambitious reforms for taxes, regulation, trade, the budget, energy, financial regulation, infrastructure, and international relations. So we do have to move fast. Accelerating our own growth will strengthen global growth and reinforce our international leadership. Those are important benefits of these reforms. The challenge of achieving faster global growth is critical. Following the 2008 financial crisis, there was an unusually weak recovery—both in the U.S. and abroad. Per the IMF, the world dollar GDP, which stood at $73 trillion in 2011, was stuck at 74 trillion (dollars) in 2015 and 75 trillion (dollars) in 2016. So global growth had stalled.

For the U.S., the post-2008 recovery was the first in U.S. history to actually result in lower real median income. The recent acceleration of U.S. growth to 3 percent in the second quarter and 3.3 percent in the third quarter—despite the hurricanes—is a welcome upswing. With policy reform underway, we are enjoying strength in manufacturing services, housing, and business investment, and very low formal unemployment. I expect the economy to accelerate further as tax reform moves forward—moves toward enactment. We need that additional growth. U.S. wage growth hasn’t accelerated enough, and the labor participation rate remains low. Regulatory sprawl hurts small businesses in terms of hiring, taxes, and access to credit. President Trump has been adamant that these improve.

Monday’s Wall Street Journal headlined one of the major barriers to growth, saying that loan growth hits a rut. Growth in commercial and industrial loans, one of the key components of new business formation and economic dynamism, grew only 1.2 percent over the last year—well below historical norms, especially at this point in an expansion. This will require improvements at multiple U.S. regulators, as well as a more growth-oriented approach in multilateral regulatory institutions, and at the Federal Reserve—at the Federal Reserve. President Trump conducted a very successful trip through Asia earlier this month. He promoted security in the Indo-Pacific region, growth, investment, and trading relationships that are—that are fair and reciprocal.

It’s clear that the U.S. benefits from freer, more prosperous neighbors, trading partners, and like-minded societies around the world. We welcome the recent upturn in growth in many parts of the world. The major currencies are relatively stable, and the IMF is having to provide much less financing than in many past years. It projects that world GDP is likely to rise to 79 trillion (dollars) in 2017 and $84 trillion in 2018, with increases in median income resuming after the stall earlier in the decade.

In this context, now is an opportune time to discuss the concerns about the rapid increase in globalism. I want to make a clear distinction between isolation, which we oppose, and our view that multilateralism has gone substantially too far—to the point where it is hurting U.S. and global growth. This viewpoint is sometimes mislabeled populism, but I think it is a pragmatic, realistic response to a multilateral system that often drifts away from our values of limited government, freedom, and the rule of law. As multilateral structures have grown larger and more intrusive, the challenge of refocusing them has become urgent and difficult, since multilateral structures and dependencies have become so entrenched. I’d like to mention several challenges, recognizing that there are dozens more.

We’re working to encourage focus at the Financial Stability Board. It coordinates world financial regulators. The regulatory compliance industry has become one of our nation’s biggest growth industries, biasing our business climate toward litigation and large-scale businesses at the expense of growth. We’re working to help the FSB focus on effective regulation that meets the requirement of safety while encouraging more growth, especially for smaller businesses. Financial regulation should be tailored to the size and complexity of the institution, should be transparent, honor the rule of law, and meet a cost-benefit standard.

Second, Brexit will be a major challenge, both in terms of international organizations and U.S. businesses and their jobs. Government regulators are vying with each other to lay claim to new territory in Europe, in the U.K., and in the U.S. The uncertainty in that process poses risks to growth and vulnerabilities from market dislocations.

Another challenge from multilateralism involves the expansion of the multilateral development banks and their loan programs at a time when market financing is generally plentiful. I testified at the beginning of November on some of our policy changes in this area. To give a sense of the magnitude of the sorting-out that is needed, Treasury’s Office of International Affairs, which I head, is currently participating in nearly 100 international organizations and working groups. Each requires staff time, energy, and often travel. There must be a process to focus, prune, and streamline so these organizations make sense. This is especially true in a world of heavily-indebted governments that face rapidly-aging populations.

The World Trade Organization has shown an inability to resolve disputes, limit subsidies, or draw China into the market status that was envisioned when China joined the WTO. When China entered the WTO, it was not intended that China would continue requiring intellectual property to move to China and then be absorbed by China, nor that heavy export subsidies would be maintained. I’ve expressed substantial additional concerns about China’s direction. We are concerned that China’s economic liberalization seems to have slowed or reversed, with the role of the state increasing. As its portion of the world GDP increases, China’s market liberalization is a critical factor in whether global growth will be sustained well into the future. And we invite market-oriented economies around the world to work with us to find constructive responses. State-owned enterprises have not faced hard budget constraints, and China’s industrial policy has become more and more problematic for foreign firms. Huge export credits are flowing in non-economic ways that distort markets, and leave borrowers burdened with ineffective projects and heavy debt burdens.

As a final section, the year 2018 offers major challenges and opportunities for the Western Hemisphere as well. The biggest events include the Summit of the Americas in Peru, the G-7 process hosted by Canada, and the G-20 process hosted by Argentina. These will provide opportunities for constructive change. We’re renegotiating NAFTA to see if it can work in a more balanced manner. We see opportunities for faster growth throughout the Western Hemisphere. The Northern Triangle of Central America faces particular challenges which we think deserve the concerted efforts of the entire region. Non-democratic governments in Cuba and Venezuela are dragging down their people and neighbors leaving poverty. Many countries are working hard to stop the damage by those governments, and we have hope that the Western Hemisphere will be freer as the decade progresses.

In conclusion, the administration wants economic growth not only for the U.S., but for the whole world. It’s not a zero-sum game where our achievements must come at another country’s expense. Sustainable and inclusive prosperity builds on itself, and is critical not only for climbing out of poverty and creating wealth, but also for global security. U.S. leadership and strong relationships with our allies and partners will be critical to advancing a policy agenda that contributes to rising median income, a level playing field for American firms, and prosperity that contributes to national security.

Thank you for your time, and I’m looking forward to the discussion. Thanks very much. (Applause.)

KEENE: Again, we’re on the record, and I’ll make some terse questions here to Mr. Malpass. And then we have some wonderful guests in this room today, members in this room I should say, and we’ll get to your important questions.

We were in the back room, and you and I were looking at David Rockefeller, Mr. Rubin, and others that have made the Council on Foreign Relations in New York and Washington so important. You just mentioned it’s not a zero-sum game, and there’s the notoriety of Ross/Navarro, Navarro/Ross, and the continuing idea of an adversarial trade relationship and all the emotion that’s come out of this. Have you observed Ross/Navarro in action since you’ve taken this office? And what does it mean for a mercantilistic tendency of this administration?

MALPASS: OK, and thank you, Tom. So you’re referring to Wilbur Ross and Peter Navarro, both in the administration. I know them well from the campaign and from subsequent.

So mercantilism, I think, isn’t the right word. The way I think about what’s going on is the world after World War II embarked on a trade liberalization process that the U.S. led, and that in the end got off-track. And so, as you think about NAFTA—in my prepared remarks, I don’t know if people have them, I pointed out that when we negotiated NAFTA, the peso was at 3.5, and yesterday it was at 18.55. And so, if you think about how—what the—what the trading relationship is between two partners when you have such a big move, it’s going to have changed. And over those years, the 25 years or so since NAFTA was concluded, it wasn’t maintained, and so that means imbalances built up. One of those occurred in the auto sector in auto parts, which Wilbur has explained very carefully. It wasn’t the intention when NAFTA was negotiated that there would be a big imbalance in autos and auto parts. That came about. And so, as you think about trading relationships, as—I think we should be looking around the world and identifying things that don’t make sense, and then having a process that works to fix them.

And I mentioned here WTO. When China entered WTO, there was the expectation of a continued liberalization process. That hasn’t really materialized, so you end up with a framework for relationships that didn’t work out. And so we need to work on that relationship.

KEENE: Well, let’s start with NAFTA here and the basic statement—I simplified it—the president says we need to get rid of it if they don’t agree with us, which seems to be a negotiating stance. There have been many critics of this. We can take two tacks. One is labor and the core constituency of the president that feels NAFTA’s been harmful, but the other is almost, David, technological process in manufacturing, in processes that we didn’t know back in NAFTA. What can we negotiate, given the new technological processes of manufacturing as one example?

MALPASS: Well, so that’s a challenge for the negotiation. USTR leads it. Bob Lighthizer has been the driving force for the negotiating process. So I—you know, I think that kind of issue needs to be put into the negotiating process.

And so we have to look at it as there are a lot of people that didn’t want any negotiation at all. And what I’m observing is that the situation has changed over the decades, and that’s in part what led to Trump’s election, and that’s something that needs to be addressed by the administration, by Congress, and by our trading partners. So—

KEENE: Are you optimistic we can see a reformed NAFTA that benefits the three nations?

MALPASS: Absolutely.

KEENE: Why do you say that? And what outcome do you see there without falling upon these other institutions trying to get this done?

MALPASS: So, just as we’ve identified things that aren’t working for us, you can imagine that Canada or Mexico could identify things that aren’t working for them. And so, as you maintain and update an agreement, it can get better for all parties. It’s not a—it’s not a negative-sum game. And with the U.S. being the biggest of the three by a long, long shot, you can imagine lots of things that will benefit Canada and Mexico in a—in a revised, update NAFTA.

KEENE: You have an exceptionally important position, literally in terms of going out and showing the flag. That’s what the undersecretary of international affairs does. How are you greeted in China right now? You were recently in Vietnam, but the president’s there with all the pomp and circumstance, and comments about former presidents, et cetera, et cetera. How would you be greeted in China now, and particularly with what we’ve seen in North Korea in the last few days?

MALPASS: So I’ve had many meetings with the Chinese. Yesterday in my office was a delegation from the Chinese—the head of their committee—their committee on financial and economic legislation. So China has a rule-of-law process where they consider ways to change their financial markets that will make them work better, and so we had a long conversation on that, and with many other parts of Chinese society. So we have very good dialogue, and the president showed that on the trip—on his trip in Beijing. But the challenge—I don’t want to sugarcoat it—we’ve got North Korea, which is a very real problem that has to be addressed, and it’s frustrating sometimes that China is not doing more that would fix that problem.

And then, with regard to market liberalization, China’s not moving as fast as it needs to. And the world should look at that and see, as I—as I point out, as their share of world GDP goes up, you’ve got a non-market player allocating resources, and so more and more of the world’s resources then get allocated in a way that some narrow part of the Chinese Communist Party is choosing to go into, whether that’s certain kinds of infrastructure, whether it’s a type of lending practice, and so on. And so that should cause the world to look and say, wait, we need some new rules here, we need some new processes to make this work better.

KEENE: I’d continue on international, but I know that everyone’s focused on the legislation in the battle, I should say, in Washington right now. Part of that—and I say that with Martin Feldstein here today from Harvard—is over our fiscal affairs and our fiscal responsibility. Are we going to end up with a piece of legislation where you’re going to be writing five years from now about a substantially larger deficit-to-GDP?

MALPASS: Well, five years from now is not very long from now. And so a challenge for everyone is the way the budget was done in the last three years or so created a narrowing that wasn’t sustainable. And so, if we look back a year ago at CBO projections for the out years, there was a substantial rise in the debt-to-GDP ratio five years out. So I think the answer is there is going to be a higher debt-to-GDP ratio because that was already baked into the way that government had scored things.

KEENE: Fair. In fact, it was in that direction, sure. But what is this legislation going to do about debt, and particularly about the motion of the deficit-to-GDP?

MALPASS: So, importantly, the tax reform that’s going through will contribute substantially to economic growth. And that, over time, improves the functioning of the economy in many ways. So it’s consistent, as you have a better tax code, it helps you move toward a plateau in the debt-to-GDP ratio, and that’s my expectation for this—for this bill.

The reason I’m being a little vague on the 10 years—

KEENE: You’ve got about eight reasons to be a little vague right now. (Laughter.)

MALPASS: OK. Let me—let me name mine.

KEENE: OK. (Laughs.)

MALPASS: Economic projections are notoriously inaccurate as people’s behavior changes.

KEENE: Fair.

MALPASS: And so it’s a frustrating process that we have now, where we’re allowing—where legislation gets written based on computer models that pretend to be precise about what the effects will be, when what we know—and I think it’s better to really speak in some generalities—35 percent corporate tax rate was one of the highest in the world, and doesn’t work at all for the U.S. economy, for workers, because investment is done somewhere else because there’s a better tax treatment. So, as that error, that problem—it was really a bipartisan—you know, Ron Wyden had a bill that was to lower the corporate tax rate because it needed to be lower. And so it’s a—there’s a general point of view that the corporate rate needs to come down and that will benefit the economy.

And so I think as people try to then say, well, by exactly how much will it benefit the economy isn’t really the right way to think about it. The code—the tax code has gotten so off-track that it’s going to be better as the legislation goes—

KEENE: Within this—and let’s frame it within the debate of your good colleague with the administration, Dr. Hassett—chairman of the President’s Council of Economic Advisers—and I’ll just pick on Lawrence Summers of Harvard as maybe on the other side of this debate. What I see interview to interview, David, is it’s not so much the idea that growth will occur; everyone agrees that’s true. But on the X axis, on the temporal space, do we get the growth temporarily? Or can you really say that this—whatever we end up two days from now or after conference and at the president’s desk, can it move out the X axis to a permanent and good feature of the American economy?

MALPASS: Clearly it can, but I think you’re being too nice to the other side. The argument that has been made is that changes in tax rates don’t add to growth. And so I think that’s wrong, and people need to stand up and say wait a minute, we’ve got rates that are too high, and it’s clearly going to be better for the economy to have the rates lower. So—

KEENE: I would say, David, that every interview I’m in everyone takes your point on that, but the money, et cetera, et cetera.

MALPASS: Well, except that there’s been a lot written by people saying no studies have shown the benefits, which simply isn’t correct.

KEENE: But can you get the magnitude, the amplitude of growth, and then take it out in time, as is required for this nation?

MALPASS: Yes. And the reason for that is if you can demonstrate a process that improves the tax code, you get the benefits, and then those are—the investment that comes from that creates future growth. But you also have the opportunity to continue improving the tax code. I really think the U.S., we have to look at this as a continual process of improvement of our policies.

KEENE: I have five minutes left and then we’re going to get to your good questions. And we could go here for three hours today without a question and—I do want to get to something you mentioned to me before, and we saw this with Secretary Clinton and Ambassador Hormats and with other administrations, this odd relationship of Treasury with State. Now, we’ve learned some form of news flow. Kathleen, help me with the Bloomberg news flow as you can right now. I don’t know what’s happened in the last 20 minutes at State. Something happened. But you can’t do your job without a properly staffed, well-run State Department. What has it been like for you, say, over the last 90 days?

MALPASS: (Laughs.) I don’t know what news has happened in the last 20 minutes. But—

KEENE: Kathleen, help us, please. (Laughter.)

MALPASS: So, you know, the government actually, despite what you—what you may have in your mind, works as a team, where you have to work together on individual countries around the world. And that means trying to have diplomacy moving from the State Department, additional help from the Treasury Department.

And so right now—I mentioned in my remarks the problems in Cuba and in Venezuela moving away from freedom. There needs to be a coordinated global effort. We can lead some of that from Treasury with people in the region. For example, in October we held a meeting of the Friends of Venezuela at the Treasury Department. Secretary Mnuchin led, and we had very senior people from Venezuela’s neighbors. So it was a diplomatic effort. And those neighbors often are urging us to do even more as part of trying to bring Venezuela back to democracy.

And so we really need a broad U.S. government effort. And that just means, I think, more people, more appointees throughout the government, even in my areas.

KEENE: Within the process.

MALPASS: I’m still looking for senior people in various spots.

KEENE: Any resumes here today, please bring them forward when we’re done. (Laughter.)

MALPASS: Because think of the sprawl. I didn’t go through chapter and verse in my—in my remarks there, but I have—I have four people today in Bariloche, because Argentina is the G-20 host for the coming year. Secretary Mnuchin may go to Argentina—have to go three times in 2018. The president wants—I’ll go some. And it’s because of a sprawling G-20 process that generates workstreams that don’t end. Brisbane, Australia hosted the G-20 in 2014. And the workstreams are still going on now. So people around the world are working on things that were set up in—that were actually initiated in 2011. So there are reports being written on reports that already came out. And nobody—

KEENE: Is this a criticism?

MALPASS: Nobody has an incentive to stop this. So the point here is that you need a group of people to make change from inertia. Otherwise, the inertia takes over.

KEENE: OK. I suggest baseball hats. Mnuchin can afford it. Make G-20 great again. (Laughter.) I think that’ll work.

I want to go to your speech—and this is important. We got through this entire thing without bitcoin. We’re going to stay on that track. We’re going to be bitcoin free. But you are focused on dependable currencies. And the great surprise that I saw in interview after interview in the spring, was the certitude of strong dollar. And we want to weight that with—weigh that with a really tangible weaker dollar trend over the summer into the autumn. And now the chart sort of looks like a little messy, et cetera. You want dependable currencies. That sounds very Treasury. What do you mean by that phrase?

MALPASS: Well, so over the long run, the best way to get growth and investment is to have dependability in the long-term environment. And one of the key parts of that is on currencies themselves. So in the IMFC communique that we did in October, it noted that exchange rate stability contributes to growth and investment. And so that’s an important way to think about the responsibility of governments—whether it’s ours or other countries’ governments. So I’m happy with our current state in that many of the world’s major currencies are at levels that are relatively stable now. And that actually is one of the contributors to the growth upturn that we’re seeing right now.

KEENE: One final question, and then I’m going to go to Professor Buiter here to begin our questions. This is critical. A lot of us in the room lived 2007, lived the financial crisis. You lived it three-dimensional at Bear Stearns. (Laughter.) You went through it. You experienced what we talked about within the media. If the president was to visit you at Treasury right now, is there an understanding of how quickly instabilities come? What would you say to the president about creating international stabilities, with the humility that we never know what’s coming the next day?

MALPASS: Right. I laughed there, because part of the three dimensions was the crash at Bear and the stock price. And so we know how quickly it happens. And Dr. Feldstein in today’s Wall Street Journal, gives a very good rendition—or, I mean, explanation of the vulnerabilities or concerns about financial stability. And that actually is one of the responsibilities within the Financial Stability Board. So one of the big organizations in the world, based in Basel, is the Financial Stability Board, which looks at vulnerabilities. So, as I see what’s happening, and Marty went through it in detail this morning much better than I can, we’ve got equity markets, bond markets, real estate markets that are at high valuations. And so that presents just a starting point for people to think about vulnerabilities.

I mentioned Brexit in my remarks. So there’s—you know, discontinuities lead you in this work—

KEENE: Right. Jump conditions.

MALPASS: So—

KEENE: I mean, is Brexit a jump condition? I don’t want to get you in trouble.

MALPASS: Well, so, you know, Brexit is still coming together. I think it will—it will proceed. And it’s between the U.K. and the Europeans to figure out a way to do it. But it’s taking a while. And what’s at stake there is trades are being cleared at huge volumes in London. And there’s not a clear sense of where that’s all going to change.

KEENE: I guess one more quick questions. When Vice Chairman Feldstein goes down to Washington here in the coming weeks, we seem to be having a new Fed—whether it’s Marvin Goodfriend or whatever’s going on. Do we need a more rules-based Fed? Does that fit into your view of fast?

MALPASS: So I think the Fed can do things that will lead us to strong, sustainable growth. And so it may be that the policies looking back—and the Fed does introspection sometimes—may not have been optimal to get us to strong, sustainable growth. We know from the last few years that the growth rate was well-below. And we’ve created this odd situation where CBO forecasts have 1.9 percent per year for the next 10 years, which—how do you—how do you put that into any context given the U.S. history, which shows faster growth? So I see the word “fast”. And as far as how that’s achieved, I—you know, I mentioned the challenge of small business lending. There has to be a process that looks directly at CNI loan growth, which is slow right now—

KEENE: It’s really slowed down, yeah.

MALPASS: Very slow. And I’ve been writing about it for years, that we’re just not getting the through-put through the banks into the small businesses that allow job creation for people coming into the labor force, which is what we need.

KEENE: Yeah. Shameless plug, I’ll mention that Lloyd Blankfein and a former mayor of New York talked just about this today.

I’m going to have the first question with Professor Buiter, formerly with the London School of Economics. And so do you have a question, please, for David, Willem?

Q: Thank you. I’d like to focus on fiscal issues. Just one very short recommendation for a trade. Why not ask the U.K. to join NAFTA, right? Four is better than three. OK. (Laughter.)

But there’s no doubt, I think, that this country needs tax reform badly—both personal income tax and business taxes. It is an incredible mess. My wife and I are both Ph.D.s in economics. We can’t do our U.S. taxes. Absolutely no hope, right? (Laughter.) And also, it needs infrastructure investment. But what it does not need is a fiscal stimulus, right? This, what is being proposed, looks like being highly procyclical, risking provoking the Fed into being tighter than it—than it would otherwise need to be, and basically ending this cyclical recovery sooner as otherwise would have been the case. The sovereign debt buildup will also add to the finance fragility of the country. It’s a longer-term problem.

One other problem I see, in the way that the—especially the corporate tax reforms are being sold, is that things are being said that—especially one thing—that is known to be nonsense, right, by everybody who has done econ—not econ 101, not econ 1, econ 0.1. (Laughter.) And let’s take the corporate tax rates, 35 to 20. And a full expensing of investment. Let’s assume it’s gross investment for simplicity. Undoubtedly, moving from not completely full expensing to full expensing will boost capital formation, real wages, and all that. But once you have full expensing, cutting the corporate tax rates does nothing to capital formation, the incentive to invest in real wages. The intuition is basic, right? If you can deduct all your capital expenditure from the corporate tax base, reduce the corporate tax rate, does not affect your incentive to invest, end of story. So why give this nonsense story? You’re trying to get it twice, in other words. Credit for two things when you only have credit for one. Thank you.

MALPASS: OK.

KEENE: I think with his question you may be out of a job tomorrow. (Laughter.)

MALPASS: OK. So as far as free trade with the U.K., that would be great. And they’d got to work out their situation with Europe and then we’d—I very much look forward to working with the U.K. on trading relationships.

As far as us not needing stimulus now, I disagree with that. So, you know, the participation rate is still low. There are a lot of people—there are millions of people in the U.S. who want jobs that are not invited into jobs because small businesses aren’t really forming very quickly. And so we’ve got lots of room for making a better economy. And therefore, I really think we should do the basic thing, which is separate spending from taxes, and say we need a tax code that works. And then we need to restrain spending, but that’s a topic for another—I’ll come back, if we can talk about that.

So on the tax code then itself, I’ll strongly defend the 35 percent down to 20 percent, plus expensing. And the reason for that is it’s not the same companies. You’ve got to get the top marginal rate for corporations down in order to have companies stay in the U.S., invest in the U.S., new businesses form. And then separately, you’re right, that some businesses will benefit from both the lower rate and the expensing. But that’s good. That means it’s a dynamic, strong tax reform that we’re talking about.

KEENE: Just percolating in the last few days with Dean Baker and Dan Alpert and some others’ writing is the idea that 20 percent, 22 percent isn’t low enough to really create incentives to drive business back to the U.S. Have you seen work on that?

MALPASS: Well, I was with someone last night who in the—who in previous years had done work on the capital gains rate. There is some work that shows that a lower capital gains rate actually generates more investment. And so—and Hong Kong, we have to say, is an example where a 10 percent rate seems to generate lots of investment year after year.

KEENE: That drives me nuts, because I look at the geography of Hong Kong versus the geography and culture of the U.S.

MALPASS: Well, OK. So we’ve never been—I mean, I don’t know never—we have had a high corporate tax rate for a long time. So we don’t have the data to show how effective. But each time we allow the tax rates to go into a better area, you get a positive response from an economy.

KEENE: Dan.

Q: Thank you, Tom. David, privileged to see you in the position and here. Thank you very much.

MALPASS: Thanks, Dan.

Q: Topic that we have talked about before. Has to do with structural headwinds to employment growth, not only here but impacting all of our trading partners, including China. Can you talk a little bit about what work the Treasury is doing on that? I know that the secretary was initially skeptical about technology displacing jobs. But it does seem to be happening across a bunch of different industries, kind in real time.

MALPASS: Thank you, Dan.

Well, I’m going to duck in the following way: Right now, there’s a big focus on repairing the tax code. That’s been an obstacle to U.S. growth and business formation for years. And so we need to get that done. And then regulatory reforms, which are underway. And then check back at the problem that you’re—that you’re talking about. My view is that we will see lots of people finding skills once their businesses have some money left over from what they’re paying into the federal coffers. So to the—I mean, if you think about it, lowering the corporate rate leaves more money at the corporation for job training to bring new people into the labor force. And let’s try that and then how—what type of structural problem is left over from that. That doesn’t mean go to sleep. That just means we’re at a very fast-moving legislative process right now. I’d like to see that go in and then see what the structural areas can be improved on.

KEENE: Martin Feldstein of Harvard, please.

Q: Thank you for putting me back at Harvard, rather than the title that you gave me a few minutes ago—(laughter)—as chairman or vice chairman or something.

KEENE: I think you’d look awfully good in the White House.

Q: I would look great. But anyway, I’m not going there. (Laughter.)

So, first, a comment about the tax bill and then a question more about trade. So on the tax bill, I think it is a very important bill, a very good bill. I think that it will lead to increases in capital coming into the corporate sector, partly from repatriation of funds as we move to a territorial system, repatriation of future profits, foreign companies wanting to invest in the U.S. because our tax rate will be less than theirs. So I think the prospects of all of that leading to big growth of the capital stock, and therefore of productivity, are very substantial.

But my question is about trade. So as you—as you look around the world, you see countries with very large trade surpluses. You also see large bilateral imbalances with the U.S. Are those helpful in thinking about where you want to go to make reforms? Or are those the actual outcomes of market processes?

MALPASS: Well, there’s some of both. And so, for me, the way I think about that question is not so much in economic terms but in trade terms. So, if there is a large imbalance in auto parts with Mexico, then that bears digging into and seeing what might be going on with regard to—with regard to what has changed over the last 20 years that is—that is contributing to that. And was that envisioned in the original NAFTA? And so you can go around the world and just think about that.

Let’s talk about Germany. They have a big bilateral trade surplus with the U.S. and with other—with countries in Europe. And so one thing I’ve advocated is that—or, one thing I would like to see economics do more of is look at the value-added tax rate that is ending up being an obstacle to normal market behavior. It’s hard for us to imagine what it would be like to live in society where 19 percent of each purchase of goods and services is supposed to be turned over to the government right away—to the central government. Not to your local government for education, but to the central government. And yet, that’s what they’re doing in Germany.

The IMF then is one of the multilateral organizations that I mentioned in my remarks, has encouraged Greece towards a 24 percent value-added tax. This is a country where the average person’s income has gone way down, and then you add to that a 24 percent tax at the get-go as they buy food, as they buy basic services. And so this is—so there’s a big divide going on between the way the U.S. views taxation and growth and the way slower-growing Europe has been viewing that. So I would try to translate trade data into some insight into what economic policies are—

KEENE: We had a pause for Professor Feldstein. Some good comments on corporations. Fine. Why is this pending bill so unpopular?

MALPASS: Well, wait, it seems very popular. It’s moving—

KEENE: It’s popular in this room, I get it, but—

MALPASS: It’s moving fast through the Congress.

KEENE: It’s moving fast? Come on, David. It’s going to get through Congress, but all the polling I see, this is not a popular piece of legislation.

MALPASS: Well, and so one can wonder—you know, communication is a challenging field. Harder than—(laughter)—harder than economics.

KEENE: Somebody in the back, please. I don’t want to go—you know. In the way back, the gentleman—right. Hand him the mic, please.

Q: Hi, David. Zachary Karabell.

So, on the pragmatism versus principle question, we can probably all agree that there is vast amounts of bureaucratic waste with a lot of multilateralism that could be improved for the efficiency of everybody, and probably better economic outcomes. But why then move to the principle part of it, particularly when—I mean, unless you want to disagree with the prevailing sense that a lot of the people that we would partner with bilaterally are interested in multilateral agreements. So we’re not in 1950, where we could have dictated the nature of these relationships much more effectively. So why not approach it from the pragmatic, which is if the partners that you want to engage with are more interested in engaging in a way that you don’t want to engage them with, what exactly do you plan to do about that?

MALPASS: Huh. Good. Leave it to Zach to give us a concise challenge. I think that’s a good way to think about what challenge the U.S.—how we should think about globalism. And so in my testimony earlier in the month I laid out for—I focused in that testimony on the World Bank and the IMF. The World Bank had been thinking about a capital increase. And what we’ve seen over the years—and included a graph in that testimony—that the multilateral development banks every few years get a big boost in money, and then that becomes self-fulfilling in terms of the expansion of the whole operation. So what we’re challenging them to do now is to lay out a course into the future where they—where they find their size, a plateau, and then make the best out of that. That’s the only way—it’s only when you have a budget that you can maximize the activity that you’re doing within that budget.

So we’ll see how that works, but that goes to your issue. In other words, I would like to work with my counterparts in the U.K., in Germany, and so on, that we have a plateau in size. And let’s figure out where the best kinds of loans are around the world, whether in Africa—you know, the World Bank’s biggest borrower is China. Well, China has plenty of resources. And it doesn’t make sense to have money borrowed in the U.S., using the U.S. government guarantee, going into lending in China for a country that’s got other resources and access to capital markets. Another—other big borrower is Brazil.

And so one of the things we’ve challenged the World Bank to do is graduate countries, that as they are successful, let’s reduce the lending there and allow more lending to countries that need it.

KEENE: What’s been the response of that within the bureaucracy of Dr. Kim’s bank?

MALPASS: A lot of resistance, but we’re having a good dialogue with them.

KEEN: Sir.

We can go another couple of hours here. We’ve got a lot of good questions here.

Q: Nick Brant with Lazard. Thank you for your comments.

Given the dynamism of the Pacific Basin, wouldn’t it have been more sensible to try to negotiate terms of the TPP, which we find acceptable, rather than walking out, particularly given that, as I understand it, some of the terms that are being negotiated in the NAFTA agreements were actually some of the features that were incorporated in the TPP by the United States?

KEENE: We can end now if you don’t want to answer that.

MALPASS: No, that’s a good—

KEENE: That’s a good question.

MALPASS: That’s a good question. So we’re using language from TPP in the language that—the parts of TPP where we think the language was beneficial. And so some of that has been put on the table in the NAFTA negotiations.

But if you take TPP as a whole, there was not only the individual chapters, but the whole way that 11 countries could possibly work together in that framework. So that gets into how are you going to resolve disputes. There’s a big issue that the U.S. tends, because we’re a litigious country and we tend to abide by agreements, of asymmetrical compliance with various agreements. And so TPP had other objections.

I don’t think you can look at it paragraph by paragraph and say, boy, that one was a good idea, why didn’t you do the whole thing? So looking at TPP as a whole, it didn’t make sense for American workers, so the U.S. isn’t participating. And separately, there’s some good ideas in there that we want to preserve.

KEENE: But, David, to this wonderful question and your good response, there is an ancient American tradition of coopting the previous administration’s legislation and pull it into yours. Are we doing that with TPP right now?

MALPASS: No, but what we do recognize—and I struggle with this all the time. There were good things—there were good things going on in certain spots in the previous administration or ones before that. So it’s not just the Obama, but look into the Bush 43, look into even the Clinton. And so we don’t want to throw away good work just because it wasn’t invented here.

KEENE: Right.

I want to sneak this one question in from a person we’ve got—I see a lot of hands up.

I’m going to go to you, Michael, in a bit.

I want to get this in with Leland Miller.

I saw “Empire of the Sun” with my youngest daughter last night, Spielberg’s wonderful movie on China. And you get there the complete separation of us from China. We have Leland Miller with us today who’s made a cottage industry of this, of looking at China.

Leland, do you have a question, please, for David Malpass and what you see in China right now and how it fits into his work?

Q: Sure. (Laughter.)

MALPASS: Since you’re on the spot.

Q: I think one of the questions people have right now: North Korea has stopped the United States from having a more robust trade—more aggressive trade strategy with China. The president knows we’re going to need China if we’re going to be able to come to some sort of resolution at some point with North Korea.

North Korea also cannot be solved in 2018. I don’t think there’s anyone who thinks it can. If the president is going to have a more aggressive strategy as we approach the midterm, at what point does he lose faith, at what point does the need to have the more aggressive trade strategy vis-à-vis China take precedence over the need to play nice to China in the coming months?

MALPASS: I think we should—in the U.S. we can prioritize national security and recognize that we also have to be strong economically. And so the two are together and we can have two thoughts at the same time on occasion. And China in the same way, I really think China can understand our concern about North Korea and separately can try to have a trade relationship with the United States where they have different ideas on where they’re going.

And so that’s the state that we’re at now. But the world should be clear on the critical importance of North Korea and the frustration that we have that China could be doing more and needs to be doing more on that. And then at the same time, we also want to have a trading relationship that works in a more balance, reciprocal way. And China can do that.

Now, this goes to the positive sum. Just as we can have an agreement with Mexico and Canada that benefits all three of us, we certainly want to have developments in China that benefit them and benefit us. So, you know, that’s a key point, getting them to that point to recognize that simply putting more and more subsidies onto state-owned enterprises is not good for them, not good for the world markets, and could be stopped.

KEENE: Michael, please.

Q: Mike Skol of Skol and Serna.

David, you mentioned that you’ve been having meetings on Venezuela. The U.S. policy up until this year was to support negotiations which had zero possibility of bearing any fruit whatsoever. What do we do with Venezuela? There is a monstrous economic and humanitarian disaster awaiting. And as you mentioned, the surrounding countries really want the United States as the only country that can do something to do something. So what do we do?

MALPASS: Yeah, thank you, Ambassador. So there are multiple people in this room who I’ve worked for. So Mike Skol, State Department, we worked together in the long time ago.

KEENE: That’s when all the offices were full, right? (Laughter.)

MALPASS: That’s right. That’s right. When they had enough people at State to really do a good job, we were there. (Laughter.)

KEENE: Thank you. And you can quote him on that.

MALPASS: So one thing the world should recognize is that the U.S. is one of the most generous, outgoing, helping nations. It’s in our own self-interest to see neighbors do well, and we do it because it’s part of being a global leader. And we believe in freedom for people around the world and for ourselves.

And so as President Trump has articulated the policy at a United Nations speech, he explained that we think governments should be trying to do well by their own people, and in that way that’s going to help us all do well together as a world.

So let’s apply that to Venezuela. Their government is not doing well by their people. We have sanctions, a number of detailed sanctions I’ve been quite involved with in trying to force the government of Venezuela or encourage and guide them to start being democratic. What they’ve done is gone in the other direction. And you see it, almost every week there’s a further deterioration.

So we’ll be ready to try to help the people of Venezuela when the government allows a democratic process to resume there. Venezuela has an old, long tradition of being a democracy. And it’s in—it’s in abeyance right now, and I would like to see it start up again.

But Cuba, you know, is also in a position where the people of Cuba would be much better off if they were—if they could have freedom. And that’s where the United States stands. We stand for freedom and growth in the Western Hemisphere.

KEENE: Yes, sir.

Q: Thank you. Deroy Murdock with the Atlas Network. David, great to see you and congratulations on your position.

Dr. Feldstein mentioned the word “repatriation” a little bit earlier. I wonder if you could expand on that. Could you possibly envision for us some of the domestic consequences of that policy if it went through? And are you at all concerned that the inflow of perhaps $4 trillion from overseas would have any inflationary effect in this country?

MALPASS: Oh, I thought you—OK. Thank you, Deroy.

So the U.S. has had not only a 35 percent corporate rate, but the oddity of deferral of taxation, where if you leave it abroad it’s not taxed. And so it’s been two strikes and that’s burdened the economy. So several aspects—we still have a Senate bill and a House bill and they’re not the same—

KEENE: Really? (Laughter.)

MALPASS: —but in different—there will be a lot of work to put them together and a lot of, I’m afraid, lobbying to be done on putting them together. In some way, they will encourage repatriation of a large amount of money that’s abroad.

Now, my view is that will be beneficial to the U.S. economy, but not that disruptive in an inflationary way because a lot of that money is stored in U.S. dollar instruments abroad. And so because of that, as you bring it home, you’re changing the housing of the bank account. The benefit is that it makes it that much easier for that money to get invested in good projects. So I don’t—I don’t think of it as inflationary.

As long as the money goes into investment that creates usable products and so on, that by itself is not new money or inflationary money within a monetary policy sense. So I think we should just put it down as one of the benefits of the bill. So if you think about it, you’re getting benefits from the lower corporate rate, from the expensing, from the repatriation of the funds. From the long-term prospect, the U.S. corporate sector will be competitive.

Then there’s the small-business aspects of the tax bill, which are a passthrough or a lower rate for smaller businesses, to encourage new businesses to start up. And then there’s middle-class or rate reduction for parts of the code. And then, I mean, not to mention the simplification that is somewhere going to be in that.

KEENE: Somewhere it’s out there.

MALPASS: Yeah.

KEENE: Within this, David, is research showing what incentives corporations have to move money from point A to point B? Do you have—what’s your level of confidence that all that money coming back is going to go to a certain point here or there or over there? Do we know or are we just guessing?

MALPASS: There are strong incentives in some versions of the final product that will strongly encourage the money to be—I don’t have—

KEENE: You’re not up at night worrying about this.

MALPASS: It’s going to be moving its housing to the U.S. And that will be beneficial because it opens new—it makes it that much closer to where the investment is that you want to achieve.

KEENE: OK.

Sir.

Q: Nise Agwha (ph) of Pace University.

Good to see you again, David. Thank you.

MALPASS: Very good to see you.

Q: I would actually like to ask you whether you can connect trade policy with health care policy. As you know, there is a significant gap in terms of health expenditures as a percentage of GDP in the U.S. versus the rest of the world, especially Western Europe. Do you think part of that is due to the fact that we subsidize R&D in terms of drug development with the rest of the world? And is that part of a trade negotiation? Thank you.

MALPASS: So that’s obviously a very good question. And I can’t answer that. I’m going to make a very—the very general point that competitiveness for countries is a sum of a lot of different factors. So on the one hand, the U.S. is carrying a heavy burden for innovation in pharmaceutical development by paying the full—the full costs in the U.S. And that’s not always done abroad.

On the other hand, we have very good health care on the—on the—on the frontiers, on the—on the margins. You see odd things in the press of saying the U.S. system is not as good. But people that have gotten care here versus care abroad really understand, I think, the preference. So we’re paying for something, it’s expensive, and so where does that altogether go together in competitiveness?

We know that lots of people want to move to the U.S. because we have freedom, we have property rights, rule of law, we have a chance to have advancement within the society. So I think our goal right now needs to be just make us more competitive wherever can, primarily 35 percent rate is the bull’s eye of the target there.

KEENE: David Malpass, thank you.

MALPASS: Thank you, Tom.

Thanks, everybody. (Applause.)

(END)

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