Robert B. Menschel Economics Symposium: Economic Decision-Making During Times of Uncertainty

Tuesday, June 6, 2023

Inflation, the possibility of a recession, concerns in the banking industry, and implications of geopolitical conflicts, among other factors, contribute to a growing sense of economic insecurity. The 2023 Robert B. Menschel Economics Symposium discusses economic decision-making and how individuals, corporations, and governments weigh risks during times of economic instability. A full symposium agenda is available here.

Robert E. Rubin, Author, The Yellow Pad: Making Better Decisions in an Uncertain WorldChairman Emeritus, Council on Foreign Relations; Former U.S. Treasury Secretary (1995–99)

The Robert B. Menschel Economics Symposium, presented by the Maurice R. Greenberg Center for Geoeconomic Studies, generates critical thinking about the consequences of herd mentality behavior in global economics. This symposium was established in 2014 and was made possible through a generous endowment gift from Robert B. Menschel while a senior director at Goldman Sachs. Since Menschel’s death in 2022, the symposium continues in his honor and memory.

Session I: Weighing Economic Risks Amid Instability

VELSHI: Thank you, everybody. Welcome to those of you here in the room and those who are joining us electronically. It’s great to be with you this evening.

My name is Ali Velshi. I am the host of a show called Velshi and the chief correspondent at MSNBC and I’ll be presiding over today’s discussion. This is—today’s meeting is a session of the Robert B. Menschel Economic Symposium: Economic Decision-Making During Times of Uncertainty.

This symposium is made possible through the generous support of Robert B. Menschel. Since his passing in 2022 the symposium continues in his honor and memory. The audience today consists of Council members across the country who are joining us online as well as here in the room—thank you—and I am joined for this conversation by Şebnem Kalemli-Özcan, Michaela Pagel, and Jason Schloetzer for this session on “Weighing Economic Risks Amid Instability.”

So thanks very much. Thanks to my panelists who are here,

Şebnem, thank you for joining us from away. I want to start with you, actually, because when we’re talking about times of uncertainty one could wonder whether this title of this talk could be at any time ever.

But this is an unusual piece of uncertainty. There are a lot of different things going on in the world that affect our economics. So I want to start at a macro level with you, Şebnem, about uncertainty with governments and central banks and around inflation.

You know, on a very political level locally people blame each other for inflation, except if you look at it as a macro problem it’s global. Some of it’s pandemics. Some of it’s pandemic policy. Where do you stand with where we are in terms of certainty or uncertainty around inflation?

KALEMLI-ÖZCAN: Thank you, Ali. It’s a pleasure to be here today with you even though I join online. I hope you can all hear me.

Decision making under uncertainty is a topic dear to my heart. Actually, this is, you know, very close to the title of my dissertation from twenty years ago. It was economic growth under uncertainty where I really study how agents do decide when they face with uncertainty.

Now, again, this is something that I have been working a long time in that sense. But you’re exactly right, the current period is very, very unusual. Why is that? Because the current period—and I said current period going back to 2020 and the last three years—is just characterized by a higher uncertainty than what we are used to and that is because of the nature of the shocks.

I mean, we just experienced shock after shock, which is generally not the case when, say, we talk about, you know, uncertainty related to financial markets or uncertainty, you know, related to, you know, war somewhere or uncertainty related to an energy shock linked to OPEC and so forth. And in this period which we live through since the 1970s, those type of uncertain moments, but what we were living through since 2020 is something very unusual and it is, you know, a shock of a century, I mean, if you ask me.

So let me give you a very short narrative—a macro narrative on this. So the original, you know, source of uncertainty is really the COVID shock, right. So if you remember the days of March 2020, April 2020, we didn’t even know how to characterize the COVID shock. Was it a shock to demand? Was it a shock to supply?

I mean, it took us some time to figure this out. Of course, now, you know, hindsight is 20/20. Now we know COVID constitute a series of sectoral demand and supply shocks played out globally. So you need to be, you know, remembering those days of 2020 till today.

Originally, of course, we didn’t have the vaccines and demand—and I say sectoral demand that shifted from consuming services to consuming goods. What does it mean? You didn’t want to go to restaurants. You didn’t want to go to gym. You didn’t want to consume these close contact activities.

But you, you know, locked yourself in your house either government mandated or by your own choice, depending on which country you are living in, and you decided to consume more of goods, right.

Like, say, you bought a(n) exercise bike or you did a home office or you bought another computer for your children because they were being homeschooled. So all these things have this consumption pattern shifting from services to goods.

Then, of course, the second shock came, which is the policies—policy response, and the policy response in terms of both health policies, again, played out differently across countries, and fiscal and monetary policies. Fiscal and monetary policy respond in a stimulatory way. Why? Because these original shock, even, you know, you shift your consumption from services to goods still it is lower consumption and lower activity and countries went to recession, right, and that’s why fiscal policy and monetary policy stimulated—tried to stimulate the activity.

So and then we started living through the second year with the vaccine discovery. Now, suddenly, we are going to recovery both because vaccine allowed to go out again and policies gave us money, right—remember those checks—and they played out differently in different countries but now we can consume more of everything.

So this means not only that we can consume more goods but also we can shift back to consume services, like, we can travel again, we can go to the restaurants again, and so forth and that, of course, because it played out unevenly by sector, by country, created this inflation problem.

We end up being—living in a world where we want to recover very quickly and we want to consume very quickly because we locked ourselves, like, you know, a year and that, of course, supply couldn’t keep up with that and that created this inflation issue, and that’s basically where we are right now.

These things just happened so quickly. Literally, everything happened within these two years, the health shock, the policy response, and then the third round policy response try to now curb that inflation back and that is the current monetary policy tightening, which is about, of course, trying to slow that demand, which, you know, reacted, like, super fast to these stimulative policies that tried to recover countries from the original COVID shock.

So this is, in a nutshell, a summary of the last, you know, two and a half years and, you know, agents do decisions in this environment and, unfortunately, when agent decisions decentralize, hit the policy decisions where policy is trying to achieve certain things for—you know, at the aggregate level for the countries we had a lot of unevenness and asymmetries, you know, in the economies. Not just the United States, in other economies, too, and that led to these price pressures.

Yeah, let me stop here. Just so—

VELSHI: Wow. Şebnem, that’s amazing. I lived through this. We all lived through this, and listening to you it’s like somebody narrated a great movie about this thing that happened. I’m listening to you and I’m thinking to myself as you’re describing it how I bought everything that was available on Amazon. We stocked up on stuff. You know, I used it as an excuse to replace everything. But what—listening to you articulate how that all happened is amazing.

Jason, let’s go from the most macro—the public sector and governments and central banks—to firms—corporations and firms, and about where they are now in terms of making decisions. Şebnem makes it sound very simple, that in two years she’s going to have two more minutes to that thing and we’ll have known how it turns out, but we don’t know that now.

And so I think the point that Şebnem made, which is really interesting, is that people make decisions anyway. But you want to make decisions with as much information as you have and we’re in this moment where you just don’t know what percentage of the totality of information you actually have in terms of where things are going in growth and recession and inflation and employment.

SCHLOETZER: Yeah. I mean, it’s natural for people, for businesses, to want to make decisions with as much information, as perfect information, as they can in order to make the best decision possible. You’re in an environment now with imperfect information and complete information. You need to make decisions.

So what you end up doing is either delaying the decision to decide in the first place. You’ll ask yourself questions, oh, if I wait another week will I get another piece of information that will help me make a better decision.

So you need to overcome that kind of situation where there’s a hesitation to make decisions in the first place, and we see, you know, some organizations, in hindsight, hesitated and the decision to not make a decision hurt them. If you look at ride sharing, for instance, you have a dominant player who decided to move into delivery. You have another player who decided to wait and see whether delivery was a temporary situation or a permanent shock to the marketplace and I think we’ve seen how that played out.

Now the one who, you know, couldn’t decide to decide is trying to catch up to the one who saw this as a strategic change in the marketplace. You know, so you need leaders at the firm level to be able to kind of make those types of leaps. You know, these leaders—once you make a decision you have to have an action plan.

You know, the organizations that I talk to, you know, the—maybe the more thoughtful ones are thinking of scenarios much more so than they used to. I mean, if we think of our typical budgeting process or forecasting process, for example, we oftentimes forecast one potential outcome like an average outcome and we don’t necessarily think about the potential range of outcomes that we could see, and even when we do we usually underestimate how bad things could actually be or how good things could actually be.

So, you know, you see some thoughtful organizations thinking around action plans a little bit more, the timeline to actually implement these action plans. Of course, under uncertainty it’s difficult to know the time frame at which different kinds of actions can be implemented.

The natural response then is, well, let’s shorten the time frame. If we make a more tactical decision, a more shorter-term kind of decision, we can make those decisions with better information but they may not be the best decisions for us in the long term, you know, and an example that would tie into the inflation idea is, you know, it’s pretty easy to raise prices in this kind of environment.

But what you would also like to see is, you know, organizations making investments to change their cost structures in the long term, pairing a little bit of a shorter-term decision, a tactical decision, with a more strategic longer-term type of decision.

And then the accountability dimension that’s something that I spend a lot of time thinking about in my own research, and some of the interesting things that you see on accountability is organizations trying the best that they can to back away from focusing on outcomes and instead of focusing on the quality of the decision process that was made in order to—in order to move forward and thinking a little bit less about the outcome.

So, for instance, you’ll see some evidence that, you know, at least in this period right now, you know, some organizations are backing away from earnings-based performance targets in annual bonus plans and instead moving a little bit more toward discretion. You know, discretion is a terrible word when it comes to compensation of executives. But, you know, you see it happening. You see people providing themselves some flexibility in order to focus more on the decision and a little bit less on the outcome right now. Yeah.

VELSHI: I want to now move to Michaela, where we’ve looked at what countries might be thinking about. We’ve looked at what firms might be thinking about .There’s obviously a lot more on all of these topics, which we’ll get to.

But, Michaela, ultimately, in relatively free economies it is not scientific. It’s behavioral. What people decide is going to happen is what is going to happen, and they may not know they’re making those decisions in the moment but all that stuff that Şebnem just talked about over three years people made decisions. They made decisions to stay home. They made decisions to buy new computers and exercise bikes.

How are people—how are consumers and workers, frankly, calculating all of this? Because there are a few things at play. The prices are higher. Jobs are more plentiful. Wages have been increasing. There’s a lot of things going on to try and figure out how to make your own decisions in your own household.

PAGEL: Yes. So my research is looking at what people do, their financial well-being, what they spend on, how much they save, and right now it is a really high uncertainty period, a sort of strange period where you have on the one hand very high inflation and very quickly raising interest rates, which historically has often caused, like, some overshooting in terms of the raising interest rate by the Federal Reserve and, therefore, a recession.

So people are worried about that outcome. At the same time, we have a labor shortage. We do see wages, especially for lower-income, lower-education people rising in the past, which is very, very nice to see because for a very long time we sort of saw the opposite. We saw stagnating wages for the more lower-income, lower-education populations and we saw sort of very fastly rising wages for the highly educated, the relatively wealthy and well off people.

So we see a little bit of reversing trends with the rising interest rates now and at the same time we saw asset prices come down, right. We saw the stock market—we saw some correction in the stock market with the rising interest rates. We saw some correction in the housing market with rising interest rates.

At the same time, the housing market specifically is in a very sort of slow stuck situation where a lot of people have locked in low mortgages. At the same time, to originate a new mortgage seems very expensive right now, right. The same monthly payment for a 2 million (dollars) home two years ago is now, like, basically, a 1 million (dollars) home.

Now, most of my research is looking at people’s bank accounts. I use a lot of bank account transaction-level data. And here what we saw since the pandemic is the stimulus payment, which translated into a lot more spending, especially for the lower income people but for some of the more higher income people translated into additional savings.

So now I would say that sort of additional spending from the stimulus payment add a little bit, right. Also the child tax credit, like, the extra unemployment, the—some of these policies now stopped so we don’t see nearly as much fiscal induced spending.

At the same time, what we see in bank accounts is that the inflation did cause, like, some extra spending, right. Now, at the same time people don’t seem to be worse off, though, because the labor market has been pretty tight. Wages have been rising a little bit.

Now, I will say there was a little bit of a period where the extra inflation, the extra costs, were taking over a little bit. The wage increases were rather slow because employers are a little bit slower often to adjust nominal wages relative to grocery prices, for example.

So we saw a little bit more financial hardship, though that seems to sort of, now that inflation has leveled a little bit, been evening out with the additional wages that we see because of very low unemployment.

So I would say households all in all seem to be reasonably well off and so far all economic indicators are going strong. So my hope is that the Federal Reserve sort of, like, struck a nice balance between raising interest rates, slowing down inflation, by not causing a recession so far.

VELSHI: Thank you for that. This is great.

Şebnem, I want to go back. I love that we’re moving between 500 feet and five thousand feet and fifty thousand feet. Let’s go back to fifty thousand for a second for policymakers.

When you underscore the fact that things are different today they’re really different—more different than they’ve been in fifty years, right. We’ve not struggled—you’re from Turkey. So, obviously, Turkey has got an intimate relationship with inflation right now. But the rest of the world has not struggled with inflation, much of it—the developed world has not struggled with inflation for about fifty years.

We have war in a way that is consuming the world. It’s an isolated war but everybody’s involved in it. We have political uncertainty all around the world, ideological forces at the extremes of the ideological poles going at each other. We’ve got real questions about whether democracy is at risk in the world.

How do you—do you—how do you evaluate those things? Are they similar in weight? Do some of them not matter at all? Do some of them matter more than others when it comes to uncertainty or certainty?

KALEMLI-ÖZCAN: Right. No, these things all matter and let me actually try to explain how these things all matter and also come down from this fifty thousand feet a little bit below to what my fellow panelists were talking about.

Now, and this is going to require a global look here. We really cannot think just in terms of United States or just in terms of China or, you know, Argentina and Turkeys of the world and that’s exactly the problem, right.

Originally that’s how everybody talked, even though the primitive shock was the global health shock. I mean, we faced a global health shock but everybody went their own way as if we are like a bunch of islands—all the countries are a bunch of islands and everybody went with whatever vaccination policy they want, whatever, you know, fiscal or monetary policy they want, which was a mistake from the start.

Let me just explain this and this is going to explain, actually, pretty much the entire issue right now why inflation is sticky, why we still have this very strong labor market and all that. So we did several papers on this. We did several papers on this and then starting 2020 starting with, you know, the global vaccinations and how this is going to lead to losses. When China locked down that means a loss to the United States and inflation in the United States.

So we explain all this and, finally, we also quantified the drivers of the inflation coming from supply and demand side and now, moving forward, it is going to be very important in terms of all these uncertainties because that is going to tell us if we are living in a fragmented world or not and that really, again, full circle going back to the beginning.

So OK. The entire issue is about why, you know, the forty years we didn’t live in a high inflation world is because, A, you know, we know how to deal with demand shocks. Think something like 2008, right. Demand collapses. You stimulate the economy. You recover. Fine. You don’t have an inflation problem, right?

Or we also learn how to deal with standard supply shock—oil shock—right, as, you know, we explained in ’70s and ’80s if it’s an oil shock, you know, what happens. If it is about the supply we think about the other, you know, supply sources like, you know, shale gas and you kind of deal with that.

The problem this—with this shock and the 2021—2021 is the year the inflation missed, right, so I want to focus on 2021 first and then 2022 when the Russia-Ukraine war added to everything, right?

In the 2021 we had both a demand shock and a supply shock but not, like, a financial crisis 2008 demand shock and not like a 1970s, you know, energy-supply shock. What happened is really a labor supply shock because the shock is a health shock today, OK? And this happened in an integrated role.

Now, think about this. So your labor—and it’s not just about people dying. It is about people being sick and it’s about people not working to their full potential, right. And then that happens at different times in the world and, you know, when your production needs both labor and capital and an import from China.

So you’re producing a car in the United States. You need labor, you need capital, a factory, and you need some imports, steel and plastic, coming from China, right. And all these processes are disrupted and that production is going to go down.

Think about what happened with the used cars early on, right, and that’s exactly why inflation started. This combination of, you know, you need three things—labor, an input coming from a foreign country, and capital, your factory—and then you need to combine all these three things and if that doesn’t work like that then you are, of course, going to see the price pressure.

That’s how the inflation is going to start. It is more prices feeding into wages other than the other way around. As I said, the price-wage spiral, not wage-price spiral. That’s how it started.

Then that combined with the restructuring of the economy—and airlines, you know, fired half of their workers, right? Now they want them back. I’m sure you’re all traveling, and how many times in the last six months of your travel is a plane and you waited for the pilot and the hostess telling you, oh, we have a pilot shortage. There’s not a pilot shortage. There’s still aircrew shortage, right? I mean, we are living still through this, and that’s your labor supply shock and labor shortage.

Now, this is, like, 2021. 2022 then we are now, you know, readjusting to this. The Russia-Ukraine thing that’s now an added supply shock, an energy shock, that is going to be affecting some countries more like Europe that are energy dependent and, you know, some countries like U.S. where U.S. doesn’t depend on Russia.

So that is the second, you know, supply shock coming through energy where the first one coming through the labor supply. So that is 2022, and now we are in 2023 where monetary policy now reacting. But, of course, monetary policy can only work on the demand side. So that is why when these central banks speak Powell, Lagarde, they always talk about bringing demand and supply to balance again by contracting the demand. But they cannot—(inaudible)—on the supply side. And on the supply side we had two shocks, right, First through COVID with the labor and then the energy coming from Russia.

Now the third shock, I mean, combined with monetary policy—the monetary policy trying to decrease demand—is this political/geopolitical issue that Ali raised that we call the fragmentation led by geopolitical risk, right? This, you know, you can think as a tariff shock, you know, targeted to China; you know, a continuation of the Russia-Ukraine war and, you know, having that war spill over. A lot of uncertainty.

But all those type of shocks, like geopolitical-led fragmentation of the global value chains or any other, you know, instance of Russia doing, you know, another invasion of another country, there are going to be additional supply shock. Any of those shocks are going to be additional supply shocks, meaning we are going to keep living in a high inflationary world regardless of where you are because these are going to global nature and they are going to feed through through these global supply chains and the value chains. So—because at the end of the day we cannot turn the clock of globalization overnight and we can just make ourselves, like, all islands and—(inaudible).

So in that sense I think at this point there is a lot of uncertainty. But as—and on the political side, you know, I don’t know how those things are going to resolve. But as an economist, I can tell you if we go down the path of being in a more fragmented world, more and more supply shocks, that world is going to be more inflationary. That I can tell you.

VELSHI: So let me ask you then, Jason, because I know economists don’t like to delve too far into the political stuff, but you take all that stuff Şebnem says. Now you’re talking about a corporation in America. On top of that you have—well, let’s—not on top of it. We got the labor issue, right. Everybody’s got that issue. Everyone is trying to hire people in a 3.7 percent unemployment world.

Then you have policy issues. To the extent that we still deal with economic policy in this country, which we don’t do all that much, but to the extent that we still do companies are interested in being at the front end of that and seeing how taxation pressures and stimulus will affect them.

And then you have political pressure that companies are being asked to be involved in. For the last several years, whether it’s been voting rights or gay rights or trans rights or whatever it happens to be there have been studies done—Edelman study indicates that in some cases Americans trust their corporate leaders more than they trust their political leaders and in a low unemployment world the worker has some leverage with their own company to say, maybe I don’t get the raise I want, maybe I do, but I want you to take a position on X, Y, and Z.

How does this all fit into decision making in uncertain times?

SCHLOETZER: Yeah. It’s an interesting time when labor or employees have some leverage over their working situation and we see this kind of playing out in the return to office situation. If you—if you kind of look at some of the data and look at a paper that I have right now, you know, you see that kind of the biggest contributor to job satisfaction of an employee is whether they feel valued at work, OK, and if you’re not feeling valued at work you’re looking for other kinds of alternatives that help you feel more valued.

For instance, if management is not going to let me work at home the number of days that I would like to I feel less valued. That makes me feel less satisfied. I’m going to look for someplace else to go. I’m going to look for a place that—where I’ll feel more valued.

If management isn’t reflecting the values that I have based on political or geopolitical issues that are out there circulating in an uncertain environment I’m going to feel like, well, I’m not valued at work. They don’t care about my DEI initiative. They don’t care about the political positions of state and local governments in the jurisdiction that I happen to work in.

So it is increasingly interesting when workers have the ability, OK, to apply some leverage they can extract more wages. OK. They can move and change jobs. They can change their working condition—I would like to work from home versus working at the office.

So from a management standpoint, you know, it’s a little tricky to deal with all of this, and you also see some rise in unionization as well inside the current business environment. And if you talk to some managements—OK, if you talk to the management side of things there’s some executives, for instance, that that think, for instance, the Elon Musk approach is something that they would like to take themselves where they’re just kind of like, look, you know, there’s no decision making. This is the decision. I have made the decision. You will abide by this decision.

There are managers who feel like they would like to manage in that kind of style but they’re kind of—I’ll use the word stuck with this negotiation dance between the situation that workers are in right now with a little bit of leverage and what management would actually prefer to do, and some management would actually prefer to just let’s get on with it.

VELSHI: Right. In a moment I’m going to turn to our members for questions both in the room and remotely. So get your questions ready.

Michaela, I want to pick up right where that—where Jason left off there. The minimum wage in this country—the federal minimum wage in the country is still $7.25. The effective minimum wage in a place like New York is probably more like $15 an hour.

We’ve seen major corporations state a higher minimum wage than their states or the federal government require. We have seen an increase in unionization. We’ve got a couple of major strikes going on in the country right now. We’ve got UPS and its workers thinking about whether there’s going to be a strike, which would be a remarkable supply shock to the country.

Workers do have a little bit of juice right now. Tell me how that plays into the psyche.

PAGEL: Yes. So I agree. So the people—some of the labor shortage that is going on was also that people are just looking and demanding back better working conditions than—and they are now in a position to do that, and it is a little bit of an open question, sort of like how much of the inflation was caused by the fiscal stimulus payments, for example, that, you know, cost shifting and demand and then the general shift in demand because of the pandemic, now on top of that the labor shortage, and what we see, right, is, like, increasing wages, especially for the lower income population, it’s—you know how it plays out in terms of the hardship that they face because of the higher inflation. You know, it’s, like, not clear exactly.

But I do think that also politically, you know, if you think of, like, people’s well being and there are things like, for example, the political divides in this country then, you know, the fact that we are right now living in a period where it seems like we experienced, like, quicker wage growth for the lower income population than—that we didn’t have for a while so that might also be good. Just, you know, for example, the political divide, for example, or the unhappiness of, you know, some populations versus other. So I can see that economically, definitely, the economics have a big impact on the politics.

VELSHI: Let’s turn to the members. There’s, obviously, so much we haven’t even touched on here so feel free to go wherever you’d like. Where are we—in the back, right in the back there. We’ll bring you a mic. Please tell us who you are.

Q: Thank you. Very fascinating. Paula DiPerna, NTR Foundation and Carbon Disclosure Project.

Where—like, the great uncertainty of getting insurance if you want to buy a new house in California, climate extremes interfering with supply chain, where—what kind of uncertainty factor is that?

VELSHI: That’s an excellent question. That’s an excellent question. It’s the one hanging over all of us.

Şebnem, I do want to start with you on that one because climate is this thing that didn’t just change since 2020. It’s the thing that over the last forty or fifty years that we’re talking about has become substantially more central. It’s this thing that we’ve got some degree of consensus now around the world, certainly, in the scientific community around.

How does that affect uncertainty in decision making? Just in the last two weeks we’ve had both these—in California insurers pulling out but also these warnings from scientists around the world that we are beyond the tipping point.

KALEMLI-ÖZCAN: No. Exactly. I mean, this is the major failure of global governance, of course, the whole climate issue and, I mean, we are too late but this doesn’t mean we shouldn’t be doing anything and now all governments are trying to take action.

I would say European governments are ahead of the United States here. But, clearly, you know, we are—also started doing things. But this is not going to help those vulnerable areas like California or Arizona. But one thing, of course, we also know that these insurance markets are going to develop, right.

Yes, the insurance right now seems like we are not going to do this anymore because that doesn’t make sense for their business plan, given their portfolio. But there will be another insurance company that would like to do—provide that insurance—at a higher risk premium, of course.

So the—I mean, this is exactly going to be now the new business. And I think why we are not seeing these businesses/these markets develop is because higher regulation is not clear yet, you know, how the ESG is going to be rolled out and all that. But this is developing now in Europe, and the vulnerable places are going to pay a higher risk premium for those insurance than the less vulnerable places.

And that is going to be, of course, the consumer’s choice, right? If you want to live in a place like California or Australia, I mean, like, you know, a more vulnerable place then you are going to accept the fact that you’re going to pay a higher premium for insurance relative to somebody living in a place like Norway.

But these markets, you know, they are going to develop at the global level and I think they’re already starting to develop in Europe, and at some point this is going to integrate, which is why we didn’t—you know, the reason why it’s not happening because the regulation is not integrated yet, which, of course, should, right. That’s—and the same side on the financing side, you know, how we finance these green transition and those markets are now developing. Those products are developing and that is also not integrating yet.

But this is what we are going to live through and, you know, there are going to be, obviously, solutions and products but, of course, these are never going to be a full solution. A full solution is to handle this climate issue by, you know, supersized government action and coordinated globally and, obviously, this is not one country’s job.

So that is still not to my taste. I think G-20 is failing big time on this. But I’m hopeful and I’m a positive person and I’m hoping that the governments and G-20 and the global governors are going to come through, which then is going to, you know, speed up the development of financial markets for green transition, insurance market for green transition, and that’s when, you know, those residents in places like California, hopefully, is going to have peace of mind. I cannot tell you when this is going to happen. But—

VELSHI: So, Jason, this is interesting because this comes at a company from three directions. It comes at them from government and regulation. As Şebnem says, we’re going very, very slowly but generally speaking with some exceptions, and there are some Supreme Court cases in the United States that are the exceptions that are rolling back some regulation.

But there’s going to be regulation. They’ve got labor issues and it is one of the demands of employees that their companies are going to be on the right side of this issue, and then the stuff that Michaela studies—there’s consumer demand for companies to do the right thing.

So this is—I don’t know if it falls into the same category of uncertainty because we shouldn’t be all that uncertain about the climate at this point. But where does this fit into the rubric?

SCHLOETZER: I mean, the thing that I find companies are uncertain about is what do investors want from them—what do consumers really want from them. I mean, we have carbon disclosure projects, SASB, TCFD, GRI. Everybody wants something to be reported to investors.

Everybody wants something to be communicated from the firm, and I think from the firm’s perspective, you know, on average, in general, they just don’t know what to provide. Just tell us what to provide. You know, that goes to the regulatory dimension.

I mean, you know, Europe is driving a lot of this but what do you want us to provide because once you tell us what we need to report—

VELSHI: Well, I’ve heard utility—electrical utility companies say this to me for years. We can make this square or we can make it round. Tell us what the rule is going to be and we—

SCHLOETZER: Tell us what the rule is going to be.

VELSHI: —because if we’re going to build a power plant we can build it to any specs you want but we can’t change those specs every five minutes.

SCHLOETZER: And the net-zero pledges. You know, if you talk to some executives or board level directors about why aren’t you making a net-zero pledge. It seems like a great obvious thing to do if I’m, you know, a manager here.

I can make a pledge that I don’t have to actually fulfill. It will come to fruition in 2050. My typical, you know, job is about five years in the CEO role. Why wouldn’t I make this pledge? It’s on somebody else’s dime to actually implement it. I get the benefit of actually saying it.

But, you know, there’s—it’s not that they don’t care about net zero. It’s not that they don’t care about carbon disclosure. They just don’t know what to provide, and there’s the sticking point as to should Larry Fink decide what needs to be provided or should it be regulators, you know, and the net zero people are kind of, like, well, investors are asking us to provide this so we’re going to provide it. The non-net zero people are a little bit more like this isn’t the investors’ responsibility—this is government policy responsibility and we’re going to wait until the government tells us what to do.

VELSHI: What’s the role, Michaela, of people in this thing? Because they can make choices and they are and companies are now starting to tell you. I mean, United keeps talking about these zero-emission planes that they’re going to have. Companies in general like to take positions on these things if they are equipped to and consumers now, unlike forty or fifty years ago, have the ability to make choices.

So it’s not just the worker. It’s not just the protests and the positions that people vote on. But it is, in fact, their consumer choices. Are consumers powerful on this front?

PAGEL: So, yeah, I think this is—climate is a very important question, especially I think the AQI today and yesterday in New York City was above a hundred.


PAGEL: So I got, like, bad air quality warning on my computer and I think it is that some—like, people really care about. At the same time it’s a public goods problem, right. So everybody’s sort of relying on somebody else making the decision for him. My family just bought a Tribeca apartment, even though we know that in twenty years by our own measures unless the New York government builds a wall around downtown Manhattan that apartment will be under water.

So it’s just insane. We just rely, I guess, you know, on the, you know, government to take care of us. I think it’s just a public goods problem and that’s why it’s so important to have regulations.

VELSHI: Thank you.

Right here in the front. Thank you.

Q: Nancy Kuenstner. I’m a consultant to a fintech payment company.

I have a question for Michaela. Was there any—as you looked through the data, and you had massive amounts of it during the uncertain times of COVID, were there any patterns or expenditures or incidents that you couldn’t explain that people were doing, things that were counterintuitive, in that mass of data that you saw?

PAGEL: Mmm hmm.

So I think a lot of what we saw in bank accounts was sort of predictable that people, like, stocked up on, you know, certain goods from superstores, for example, like toilet paper. At the same time we saw this massive shift away from in-store spending to online spending.

I think one of the observations that people were a little bit unprepared for is the fact that so much of the fiscal stimulus money, not for the very low income population but maybe for the somewhat higher income population, ended up in savings accounts as opposed to spend.

Now, ultimately, right, I think part of the inflation that we see now is because of that spending translating into higher prices and I do think that probably by now most of the savings have been depleted. But I think initially the U.S. government was hoping for a more immediate spending response by the average fiscal stimulus recipient.

VELSHI: From your studies does it matter in the long term for the economy whether some of that money went into spending and went into saving?

PAGEL: Yeah. So for the immediate sort of, like, economic stimulus—

VELSHI: Sure. For those immediate stimulus events, yes.

PAGEL: Yeah. Exactly. For the long term, ultimately, the—I think it doesn’t matter, you know, to the extent that that money—like, to the extent that the money circulation, right—

VELSHI: It’ll work its way through, yeah.

PAGEL: Exactly, sort of like ultimately going back to the steady state.

VELSHI: Yeah. Got it. OK.

We have one question that I’d like to go to from a member who is joining us electronically.

OPERATOR: We’ll take our next question from Tara Hariharan.

Q: Thank you so much. My name is Tara Hariharan. I work for a hedge fund called NWI.

My question is specifically for Şebnem. Would it be fair to say that central bank communication is also adding to economic uncertainty? And here I specifically mention the fact that are not just economists but, of course, the Fed as well in general has kind of got growth and inflation forecasts wrong. You can’t blame them, given the kinds of uncertainties we have seen.

But in that context are things like the dot plot or forward guidance are really helpful when there is so much uncertainty even from, I would say, a month to month basis on the direction of the economy and of growth and inflation. Is it just worsening uncertainty for decision makers like businesses and the financial markets or is it still helpful?

Thank you.

KALEMLI-ÖZCAN: OK. So this is a very important issue, what I have been calling fed financial market disconnect pretty much now over a year. And what caused the issue? I would not call it actually bad communication because they were pretty clear in their communication. But, unfortunately, they stopped the forward guidance.

So, two issues. The financial markets are super used to forward guidance. The last decade is—you know, everything is given them in, like, this golden plate by Fed with the forward guidance policy. Not only Fed was very clear on the terminal rate but the path—entire path given, right.

So this is what financial markets are not used to. They are talking about, you know, more than a decade of doing this, and that stopped, number one. Number two, the data being volatile made Fed to communicate something different in each meeting, right.

That is exactly why when they first said this inflationary process started, of course, you know, markets said, OK, that means they are done with raising the rates and they are going to now cut.

But that wasn’t—you know, I mean, they explained it clearly. It is the goods side this inflation started, but the services inflation becoming sticky driving the added inflation sticky. So that was the issue. And I guess we can all go back and, you know, criticize, but I don’t think really criticizing the Fed is going to do us any good here.

It is really this—they tried very hard saying, like, look, there are these different dimensions of this inflation and then, you know, we succeed, you know, curbing the goods one but the services one now becoming sticky. And if you look at the data, this is very clear. I mean, this is exactly what is missed in 2020 and the sectoral nature of this crisis.

We plot in our work the goods market inflation and then goods inflation and then services inflation. And in 2021, goods inflation was up to ten where services, like, not even four. And in 2022, goods started coming down and the services now going to eight, right, and really staying there because of this labor shortage issue—which, actually, I want to answer something Michaela said. We do actually know how much comes from fiscal stimulus, how much comes from labor shortage. I mean, now, there are several papers quantifying that in economics, including my own work, papers from Fed, papers from other academics.

Originally, actually, you know, the—two-third come from the aggregate demand and one-third come from the supply—this is 2021—and that two-third aggregate demand, 70 percent of that is the fiscal stimulus. Because the fiscal stimulus was too much; that’s for sure. Then in 2022 this become how far the supply shock intensified, obviously, with the war. So now you have, you know, half will be coming from the supply—still labor shortage being a big part of it, around 80 percent—and the other half coming from the aggregate demand.

So we do actually have numbers on this. We have quantified this. And in that sense, that didn’t help this communication issue, Tara, you are asking, because each time they said we are doing a data-dependent policy and not forward guidance, they are awaiting the data. Data, of course, comes with a lag. And because of these estimates between sectors—one sector inflation going up, the other down, and vice versa—added inflation through by different components. And that’s something very hard to communicate, if you think about it.

And why then financial markets say, oh, you know, this is a bad forecast, they are doing a bad job? Unfortunately, all the existing models of central banks is one sector model. They are about the aggregate economy, which gives us the Phillips curve, which is why also created a lot of confusion.

But this shock, unfortunately, you cannot understand this shock with a one sector aggregate economy. There is this multi-sector nature to it. There is global nature with where all sectors are connected to the global supply chains and different timing, right? That is—that is the problem. Of course, you know, came like as if a communication problem, but it is really—it is not a communication. It is a data issue, data being volatile and Fed watching the data, and shock being super, super different than what we are used to.

That’s why all these numbers—oh, OK. In the previous cases, you know, after this much tightening, recession came. Well, now there are like, none of this is useable. None of this is usable with this shock and with the models we have. We have to now think with the network models where we work with—(inaudible)—affect the economy. I mean, we are working with 3,000 by 3,000 matrices because we work with all the sectors of the global economy. This is, like, immense amount of data we are working. And when you look at that, everything becomes actually very, very clear.

One final thing I want to say, I want to go back to the saving issue. This whole thing is, like, you know, we expect consumers to save but the—consume but they save. They consume—I mean, you know, lower income consume, the higher incomes. This is very important, exactly as Michaela said, because our models are going to tell you the effect of the fiscal stimulus is going to depend on who consumes and who saves.

But let’s, again, go back to the global—(inaudible)—because those savers, right, when we say that, oh, the rich guys they didn’t spend, they saved; the poor guys—well, those savings are going to other countries. I mean, so this is the importance of thinking in an open economy and not a closed economy.

This is not, like, savings is going to be invested in the United States. The United States an open economy, right? So the things that are not being spent in United States doesn’t mean they are not being spent. They might be spent in Mexico, right? This is what we call—how we capture with current account. So, in fact, when you look at the current account imbalances, they change tremendously.

So I think this is also, again, a point that tells us we (can’t think ?) this shock and the policy response in a single country, right? If we want to understand the effects in that country, for sure we have to have global. Yeah.

VELSHI: That’s perfect. Thank you very much for that.

Let’s go right to the back of the room on the left there. I’m keeping everybody in sight.

Q: Thank you very much. My name is Amina Tirana.

I lead policy research and measurement at Visa on our social impact issues and I’d love to ask all of our panelists and the moderator, please, if anyone has been thinking about micro and small businesses, right.

Fascinating conversation, talking at the individual level, the large firm level, policy level. What are you—are you seeing anything if you have been looking at them in terms of how small businesses are thinking about all the uncertainties that you’ve laid out, right, the different kinds and factors, knowing that micro and small businesses are often livelihood strategies as well as entrepreneurial, and in particular what are you seeing in terms of failure rates and startup rates and also sectors? Are you seeing a shift in what kind of sectors people are opening their new businesses in as a resilience or livelihood strategy or growth strategy?

VELSHI: What an excellent—I, certainly, have more questions about that than I have answers. So I’ll leave that to my panelists. But it’s a remarkably important question. Let me start with you, Jason.

SCHLOETZER: I’m a big company kind of guy but, you know, I live in Georgetown and if you go up and down N Street, the main street for shopping, there’s an awful lot of empty storefronts, and so my sense would be the smaller businesses are not doing so well, particularly in retail and food services.

VELSHI: Michaela, what are you seeing?

PAGEL: So, yeah, there’s actually some new research that is also using bank account data but business checking accounts. Now, it’s already, like, very difficult to draw the line between just because I have a nanny and I pay her and I have a business checking account, like, you know, at what point you do you consider me sort of like a small business or an entrepreneur. And also in terms of the entrepreneur, as you said, right, there is this sort of—the classic growth sectors that we think of as opposed to sort of like I’m opening daily store type of sectors.

So, overall, what I learned from that research is sort of that similar to the research on household finances and their financial health that looked pretty similar to the small business accounts, and one thing that is also documented in this literature, which I thought was very interesting, is that the business and small businesses and households are basically one unit in the sense that if I have a shock to small business lending or to personal lending one translates into the other. Or if, like, my business is not doing well then that is reflected in my consumption.

So in some way there’s a lot of, like, linkage between the household and the small businesses.

VELSHI: I, during COVID, spent a lot of time traveling around the country, just meet with small businesses to determine what their problems were and it is interesting that during COVID and post COVID their needs as articulated by those people who would otherwise say that they are pro-business didn’t get down to a lot of these folks.

And it’s the same thing happening now and we’re arguing about effective tax rates for corporations and people say, well, there’s an effective tax rate of such and it’s only a handful of companies in America that don’t pay that. But it’s a hundred percent of small businesses who pay their full taxation and there are a lot of people who are very frustrated with that.

So on a policy front there’s a disconnect between policymakers who say they’re pro-business. It’s difficult in this country to be pro the biggest businesses and pro the smallest businesses and as a job creator we need—you know, I think everybody who’s in this city walks by every shop where they see a sign out there saying, we need—we need help. We need workers, and they’re struggling with these high labor rates.

So it’s a fascinating conversation and may be worth its own symposium here. There was a question at that second table over there.

KALEMLI-ÖZCAN: Ali, can I say something on small businesses?

VELSHI: Yeah. Sure.

KALEMLI-ÖZCAN: Yeah. Because I did a lot of work on this and right now I’m writing a University of Chicago Press book on small business financing.

This is a very important question. In fact, we actually calculated what the bankruptcy rate would be if we didn’t have programs like PPP. Remember, PPP is a program that is only designed for SMEs—small medium enterprises. The definition of an SME in United States is firms less than 500 employee(s) and in Europe firms less than 250 employees, and both European countries and the United States did a lot of policy action to help these firms because these firms are the engines of growth and innovation in any country. And the PPP program was an $800 billion program, which is the GDP of, you know, a midsize country like Switzerland.

So it was a very expensive program to save these firms. Now, the question here is why federal government has to spend so much money, also European governments, to save these firms? Why banks didn’t do this? And we work, actually, with (firm bank match-level ?) data, first time available from Federal Reserve, because normally we look at household finance and we look at very large firms, right? We don’t know anything (to do with ?) small-business financing because these datasets are very, very split because small business and private firms don’t have to report their financing to anybody. But right now, thanks to Dodd-Frank Act, Federal Reserve collects this data.

And what we see, actually, you know, banks were rolling over their loans and helping them originally. But, unfortunately, they borrow based on their earnings, they put their earnings and account receivable as collateral, and because COVID hits that exactly—that’s a shock to earnings—banks didn’t want to do this. And that’s when governments come into the picture with programs like PPP in the United States and help these small businesses—small/medium enterprises, which was a very, very important action. Our work calculates that if we didn’t have those programs we would have huge bankruptcy rates of small businesses both in the United States and European countries. So that is actually in that sense very important.

Now, in terms of new business formation, there is also work by Census that documented right now there were a lot of new business formation during COVID, especially during the recovery, not into—you know, original but during the recovery in the services sector. So it is exactly true as Jason said, you know, the restaurants and all those guys got hit. But then during the recovery there were more—faster than normal period business formation happening in the United States. I don’t know what happened in other countries but in the United States now Census documents that.

VELSHI: Thank you for that.

Was I right that there was a question over here somewhere? There you go. Right in the front, the first table.

Q: Sorry. Hi. Dan Motulsky, Cloudpoint Capital.

We started this with the framework of the—where we are today and the uncertainties that got us here today and the special set of circumstances, and Şebnem summarized it in the outset.

I’d be curious the view of sort of where we stand today, what do you view in terms of risk, going forward, are greatest in the category of known unknowns, whether they be geopolitical, whether they be national political going to election cycle, whether they be supply demand dynamics or other—labor, other economics—where they, you know, however best to be answered the greatest risks in that category of known unknowns.

VELSHI: Got it. Who wants to start with that one?

Şebnem, let’s start with you.

KALEMLI-ÖZCAN: Well, for me, it is geopolitical. I mean, it is a known unknown. I mean, we don’t know which way it’s going to go and it can take a very, very bad turn. So that is a very large downside and it just completely depends on governments. It is going to depend on elections, of course. But I think geopolitical is the big one involving the United States, involving China, and other important countries that—because that is going to be linked to everything, you know, from solving problems like climate, world inequality, all those things.

I will—I would put my number one geopolitical.

SCHLOETZER: Yeah, I’ll echo that because, you know, I look at it from the supply chain dimension. If you look at semiconductors, for example, very international type of business. You have problems with both capacity and the willingness to invest in expanding capacity. Organizations that need semiconductors are over ordering because they just want to get something.

So then if I’m a semiconductor producer I’m waiting to see what actual demand forecast is before I decide to make a very large capital investment to meet what could be different demand forecasts in the future. So I’m waiting. OK.

And then on top of that, you know, the party comes in and tells Micron, OK, you don’t get to have any China-based business anymore. So you lay geopolitical risk on top of some type of complicated supply chain situation and you just end up mixing together I don’t know what my demand forecast is, I’m unwilling to make a very expensive long-term capital investment, and now revenue might be at risk because of the geopolitical dimension. I’ll just stay put.

VELSHI: Excellent. That’s a great question. Thank you.

You want to add to that?

PAGEL: Just very briefly. I agree with—(inaudible). And I think that’s also what we see in household behavior, that people are not quitting their jobs necessarily unless they already have something in hand. They don’t—they don’t move anymore. So it’s exactly what you say.

VELSHI: Very good. Thank you.

Do I have time for one more? OK. Probably can’t make it a three-person answer but let’s start. The gentleman over there.

Q: Andy Alper. I’m a private investor and corporate director.

This is probably another symposium topic but anybody want to weigh in on the impact of AI in terms of supply and demand in labor?

VELSHI: Nice light ending. (Laughter.)

SCHLOETZER: Yeah, I’ll jump in on that one real quick.

So if I’m the firm who has raised prices in order to offset increases in input costs I would like to make a longer-term investment to change the cost structure of my organization. Automating tasks would be one way to do that because then I can control the cost of this rising input wage.

So I don’t see why automation or artificial intelligence types of technologies wouldn’t continue to proliferate particularly to control input costs that are increasing.

VELSHI: That was a pretty good answer. Anybody else want in on that one because now I’ve got myself thirty extra seconds that I didn’t think I had. (Laughter.)

All right. Şebnem?

KALEMLI-ÖZCAN: So let me—yeah. I fully agree what Jason said. And this is, again, the—we had a prior example, right? We missed this entire automation in manufacturing and how that lag led that—led to inequality and, you know, lost jobs to low-skilled people, and how that led to all sorts of backlash for globalization, you know, very populist policies and all that. This—what AI-led thing is going to be worse than that. The major displacements for labor is going to add to all those problems we already saw with automation and manufacturing in the last, you know, two decades. So this is very, very important. You do need a couple more symposiums to talk about this.

VELSHI: A couple more, yes. I was going to say there’s a lot of topics there but thank you for introducing that because we should be discussing that.

That brings us to a close for just this part of the evening. I just—well, I want to thank you all for an amazing—not just amazing questions but amazing range of questions, and the same thing with my panelists. You brought such remarkable breadth to this conversation.

I do want to thank those of you who have joined us here and online for attending. Please note that the video of today’s entire symposium is going to be posted on CFR’s website, which is good for me because I’m going to want to go back over these things and this is all going to become individual segments on my show.

For those who are here in person in New York we’ve got a brief break. There’s a keynote session, as you know, with the former Treasury Secretary Bob Rubin. It begins in fifteen minutes at 5:30 p.m.

Thank you to all the members who have joined us and thank you to our fantastic panelists. (Applause.)


Keynote Session With Robert E. Rubin

GOLODRYGA: Welcome to the keynote session of today’s Council on Foreign Relations Robert R. Menschel Economic Symposium session. This symposium is made possible through the generous support of Robert Menschel and, since his passing in 2022, the symposium continues in his honor and memory.

I am Bianna Golodryga, senior global affairs analyst and anchor at CNN, and I’m delighted to be presiding over this session with you in this discussion with Bob Rubin. He needs no introduction. Former U.S. Treasury secretary, chairman emeritus of CFR, and author of a fantastic new book, The Yellow Pad. Welcome, all of you. Welcome, Bob. Good to see you.

RUBIN: Thank you, Bianna.

GOLODRYGA: So Bob told me graciously that we didn’t need to spend much time talking about the book, we can talk about news of day. And I said, no, no, no, we are going to weave in the book because it is relevant with a lot of the topics that we’ll be discussing today. We’ll have about a thirty-minute conversation just the two of us, and then we’ll open it up to questions from the audience. And we have people calling in as well via Zoom. So with that, let us begin.

RUBIN: Your nickel.

GOLODRYGA: (Laughs.) OK. So, Bob, we have averted a debt crisis, in an eleventh-hour deal that looks pretty good for the administration. And Speaker McCarthy was, thankfully, able to convince enough of his base go to along with it. And it proved to be a rare example of compromise in negotiating with the other side of the aisle in a hyper-partisan time. Given the concerns and divisions—

RUBIN: I don’t actually think it’s an example of that. I think it’s an example of crisis response.

GOLODRYGA: OK. Well, give us your thoughts. OK. So for you—

RUBIN: If the only time we can legislate is when there’s a crisis, we got a lot of problems in this country.

GOLODRYGA: So can you go more in depth on that? You’re not encouraged by the way this deal came about?

RUBIN: No, I’m discouraged. There’s a very good article in the Atlantic online Tuesday—no, yesterday—that came out yesterday. It’s worth reading. In full disclosure, I wrote it. (Laughter.) So that’s not unrelated to my evaluation. But it really is a good piece. (Laughs.) You can judge for yourself, I guess, if you want. No, I think it was very discouraging. The notion that we could be debating in this country whether to default on our debt or pay our debt, I think is deeply discouraging. And there were, I gather, from what I’m told, a substantial number of people, mostly in the Republican Party but some in the Democratic Party, who would have preferred to default than agree to this deal. And there shouldn’t have been any deal at all. Look, this thing should have been framed as a debate about the budget going forward, not a debate about whether we should pay the debt, the expenses we’ve already made. So I think it’s terribly discouraging.

GOLODRYGA: So, given the circumstances leading up to the final deal Friday, and then signed Saturday, were you concerned? And what was your level of concern in terms of this actually not coming together?

RUBIN: Well, I’ll tell you, I was deeply concerned. And I spoke to some of my fellow former secretaries, and they shared the view. I think the politics—I thought the politics were extremely difficult. And I thought there was a pretty—I thought they’d probably get it solved, just because it’s so unthinkable that they wouldn’t. But I thought there was at least a moderately decent chance, Bianna, that this wouldn’t get solved. And this one is worse—1995 was the first time we faced this. I was secretary then. 2011 was the second time. 2013 is milder. And 2011 was handled by Jack Lew, although Jack was at OMB then. In 2013, there was sort of a mild version of that, and then this one. I think all of us agreed, because we used to talk quite a bit about this, that the politics this time were worse than any other time. And if you look forward, Bianna, if we keep doing this every time we come against—every time we’ve run through our budget, the cumulative probability of a default, it seems to me, gets to be rather troubling.

GOLODRYGA: We’ve talked about this before. You know, the next time could be as soon as 2025 that we do go over the cliff. And we do know that there were quite a few, mostly Republicans, who from reporting suggested wanted to just blow things up, that they weren’t onboard for any serious negotiation. Given that, do you think that we should just do away with the debt ceiling altogether? And is that feasible in this environment?

RUBIN: Oh, yeah. It’s an anachronism. The debt ceiling was enacted to control spending, or deficits, I guess, more accurately. And then the Congress enacted the budget process. Once they enacted the budget process, then you could do what you in fact should do is debate the budget going forward, and the debt limit should have been repealed. But there’s not a political prayer—you’d need sixty votes in the Senate and you’d need a majority in the House, because you can’t do it under reconciliation. So I think there’s almost no chance it could get repealed, but I think that’s exactly what you—and the article in the Atlantic, which I’ll recommend to you again—(laughter)—just in case—

GOLODRYGA: Who wrote that article, again?

RUBIN: Yeah. Independently of who wrote it. No, but seriously, what the article concludes is this thing should be repealed. But I think there’s no political prospect of that, Bianna.

GOLODRYGA: What do you make of the Fourteenth Amendment argument? Should the president have pursued it?

RUBIN: I think—no. I think the—I actually know something about this. I really and truly do. Unlike some other things that I have opinions about. But I think the Fourteenth Amendment was not viable, because look at what would have happened. If he’d used the Fourteenth Amendment, then the Treasury would be trying to issue bonds in a procedure that could very well have been declared illegal—or, invalid, let us say—invalid by the Supreme Court. And so people who bought the bonds would have been buying bonds that were invalidly issued. What do you think those bonds would be traded at? So I don’t think that was a viable option.

GOLODRYGA: OK. So I am going to talk more about your book now. And you have a chapter that talks about the need to preserve functioning government. And you use the 1997 budget agreement as an example. You describe yourself and President Clinton at the time opposed to cutting the capital gains tax, right? And then the president subsequently gets on the phone with Senate Majority Leader Trent Lott, and after some back and forth says, quote, “Yes, Trent, we’re going to cut it.” You go on to write, “What I saw in the Oval Office shouldn’t discourage anyone from having faith in our political process. Just the opposite. I believe what I saw is an example of what it takes for our democracy to work.” Can you elaborate more on that? And—

RUBIN: Sure can. We sat with President Clinton. And we said, OK, here are the things that you should not do. Here are the things you should get and here are the things you should absolutely not do. And top of the list was the thing you should not do, which is to lower the capital gains tax rate, because we felt that that does nothing to contribute to the economy and reduces revenue. So he got on the phone with Trent Lott, and he and Trent were back and forth. And then at some point he said: Yes, Trent, I understand. I understand. I was just looking at him wondering what it was. He said, “We’ll lower the rate.” No, no, no. I shook my head. (Laughter.)

But that is the way the system should work. When people talk about compromise, they talk about finding common ground. It is not—and I say this in the book—compromise is not finding a common ground. If you both believe in it, then it’s not a compromise. Compromise is give and take, and each side gives up something in order to get something. And that’s what that was, man. And that’s the way the system should work. And Trent Lott was as—I thought well of Trent in general as person, but he was highly ideological. And obviously President Clinton had very strong views.

But they each would only give something up to get to where they thought was both substantively and politically a better place than the status quo. And that’s the way our system should work. But, boy, I’ll tell you, in today’s environment—(laughs)—that is extremely, extremely difficult.

GOLODRYGA: That seems to be how President Biden approaches these conflicts, though. And many would view him as outdated, too pollyannaish. Are you encouraged by what you’ve seen from him as opposed—

RUBIN: I think his approach—I think you’re absolutely right. I think—I know a lot of people in this administration. So do you. I mean, I think that’s right that’s his approach. And he pulled it off in the infrastructure bill. And he pulled it off—you know, the IRA was done—I don’t know if IRA was done—he had three major pieces of legislation. He pulled it off in the infrastructure bill. I think the others may have just been done under reconciliation in some form. I’m not sure about that. But I think that—unfortunately, Bianna—I think there is very, very little appetite.

There’s a senator, a sitting senator currently, who said once in some speech she was giving on the floor—I already said “she” so it makes it easier to guess who it is. OK. I didn’t mean to say that. They said—

GOLODRYGA: They. (Laughter.)

RUBIN: Yeah, I retract the “she” and I say “they.” They said that they weren’t elected to compromise. And I thought to myself, that’s exactly wrong. You were elected to compromise. That’s exactly what you were elected to do. Not to violate your values, your fundamental values, but to compromise so that we can move forward as a country.

GOLODRYGA: So Republicans have voiced their great concern. And, interesting that this typically happens when there’s a Democratic in office. But they voiced their concern over the deficit, and that long-term that this is a problem that the country cannot sustain. The last time there was a surplus in this country was when you were Treasury secretary.

RUBIN: I remember. (Laughter.) And I remember how well it was handled.

GOLODRYGA: How do you view this issue, some thirty years later? I mean, how much do budget deficits really matter?

RUBIN: I think it’s an enormous threat to our future. You know, there are a whole panoply of—or, a whole range of risks that are associated with the fiscal situation. Not just interest rates, but business confidence, the ability to undertake vitally needed public investment, the possibility of a fiscal crisis. The CBO in their last estimates, and you all know this, estimated that the debt-to-GDP ratio would go from roughly 100 today to roughly 118 percent ten years from now. But the people I know—and obviously there’s probably some of you too that know, a lot of people know about this thing—all think that 118 percent is probably substantially below what it will actually be.

I was at a Zoom call late last week with a group in London that I’m consulting with. And there were some people on that who were enormously sophisticated about the budget. And they thought a more likely number than 118 would be 130 to 135 percent. I think—I think, Bianna, at some point this is really going to bite us in the way that we’re spending. And you can say, well, it hasn’t hurt us yet. Although, actually, I do think it hurt inflation now and I do think it absolutely has limited what you can do with public investment. But the fact that something hasn’t happened for a while doesn’t mean it won’t. (Laughs.) And very often in markets—and I’ve been around this stuff for a long time—in markets you can conditions that continue for year, after year, after year, and all of a sudden, they blow up.

And a good example, remember the Greek bonds versus the bund—the German bunds. For a long time, they were almost at parity and it didn’t make any sense to anybody that they were, and people traded on it, and all the rest. And then all of a sudden, it blew up. And I think we’re waiting—I think if we don’t do something—not something. If we don’t get onto a better track, I think sooner or later these risks will materialize to a far greater degree than they have so far. And ultimately, you could have a fiscal crisis. But we don’t have the political will to deal with it. And one problem you have is you cannot deal with it on the spending side alone. You have to deal with revenues. And most Republicans have signed this pledge—I guess it’s Club for Growth Pledge, I think it was—this pledge not to vote for an increase in taxes. You cannot do it without increased revenues.

GOLODRYGA: You talk to a lot of global thought leaders, whether on the business, private sector side, or in politics. How concerned are they about this specific issue here in the U.S.?

RUBIN: You know, it’s a funny thing. If you sit—and I do talk a lot—well, a lot—I mean, I talk a fair bit to such people. I think that—you know, if you sit down with somebody—I’m still involved with investment banking firms, so I see some of these people. If you sit down with people and you say, well, what do you think? They’ll say, well, the fiscal thing, we can’t continue to have these kind of deficits. But they’re not willing to—you know, recognizing it is one thing. And internalizing it to the point where you actually put pressure on your congressional members to do things is quite another. And I think there’s very little internalization of the risks. And I think they’re very serious risks, by the way, in our fiscal situation.

GOLODRYGA: Yeah, well, there’s an impetus usually for people to act when there’s a fire. And we didn’t see the fire this time around, which leads us to the state of the U.S. economy in your view, because it is perplexing, to say the least. I mean, the last jobs report, once again, defied expectations—339,000 jobs added despite the Fed raising rates, I believe, ten consecutive times since last March. Inflation remains stubbornly high, though it does appear to be cooling. How would you describe the state of the current U.S. economy?

RUBIN: Massively uncertain and massively complex. Seriously, Bianna. I mean, the forecast for the economy’s always uncertain and complex, but I was thinking about this the other day. I’ve been around this stuff for a long, long time. And I think on average—I mean, obviously if you look back, 1968 and the Cuban Missile Crisis, a tremendous threat. But if you look on average, what we’re facing now—on an average from what we’ve faced in the past—I think times are probably as uncertain and complex as any that I can recollect. And I think the Fed has seriously mismanaged the inflation problem.

And I think now where we are, Bianna, is if they—I guess it’s digressing a touch from your question—but if they now decide to have a pause, inflation’s roughly 5 ¼ percent year over year right now, you know, give or take. And it looks like it’s going to trend down some, but there’s still going to be higher levels—considerably higher levels than the Fed wants. And I think if they declare a pause, it’s just going to exacerbate that. So I think that—

GOLODRYGA: You think they should continue to raise next week?

RUBIN: I really do. I absolutely do. It’s not as if we have a serious unemployment problem right now with 3.7 percent unemployment. Now, they’re obviously worried about will we have a recession. I think it’s pretty likely—I think, one person—it’s probably likely we are going to have a recession. But I think it’s also likely we’re not going to get out of this inflation situation until we have higher unemployment. And you may say, well, that’s not a good thing, higher unemployment. No, it’s not a good thing. But, you know, life is tradeoffs. And higher inflation is certainly not a good thing. And if they—and this is where I thought from the beginning they were handling this thing, inflation, has been most unfortunate—because the longer you let it go on, the harder it is deal with it.

GOLODRYGA: They waited too long, in your view?

RUBIN: They waited way too long. And I think if they declare a pause now, I think they’re probably going to exacerbate the situation. And then when they have to act, it’s going to be even worse.

GOLODRYGA: Your former place of work, Goldman Sachs—you know it well, spent quite a few—a couple decades there—today revised down their prediction of a recession to just 25 percent as opposed to 35 percent over the next twelve months. And they cite two bright spots in the economy, brighter than they had initially seen. And that’s the debt ceiling having been lifted. I mean, the bar’s so low to even lift the debt ceiling for them changes their outlook, and the banking crisis has eased. Do you disagree with this—

RUBIN: I don’t disagree that we solved the debt ceiling for the moment, but—

GOLODRYGA: But on recession chances?

RUBIN: Yeah, no, I don’t agree, actually. No, I don’t agree. I didn’t see their prognostication, but if that’s what it was, it don’t agree with it. Look, you still have wage—even though it’s abated some, you still have wage pressure. Just go speak to people who have big companies, you’ll know this. You still have wage pressure. And as long as you have wage pressure, you’re going to most likely, highly likely I would say, to have inflation. And as long as you have inflation, there’s going to be pressure on the Fed to raise rates. And the Fed funds rate is already at roughly 5 percent. So I think the probability is that we will continue to have a lot of pressure. The Fed may decide to have a pause. If they do, I think they’re going to regret it. (Laughs.)

And maybe I’m wrong, by the way. I’m not saying I’m right. I’m just saying what I think. And I think that the continued pressure, even if there’s a little period of time here in which you have this pause, which I think will make matters worse, by the way, I think the fed funds are going to be going up. I’d be surprised—this is my view, take it for what it’s worth—I would be surprised if fed funds at their peak wound up below 6 percent. Just think about it, Bianna. We have inflation now about 5 ¼ (percent), or something like that—year over year, that is. And so, say by the end of the year we get to the—if we don’t have a recession. With no recession, say it's 4 percent year over year. So maybe in the last quarter it’s 3 ½ percent month over month, or something—I don’t know, something like that.

That’s still not where the Fed wants to be. And as Paul Volcker once said to me, and I’ve never forgotten it—Paul said that even if you have a low level of inflation, the problem is that it can take on a life of its own. And I think that’s where we are. We have inflationary expectations. They’re high. And I think we’ve got to break that. And there’s no way to break that that’s costless.

GOLODRYGA: So I mentioned—

RUBIN: And you have the bank—and you have the banking problem.

GOLODRYGA: Well, that’s what I was going to ask you about, the regional banking crisis. Is it over? And how would you assess how the Fed and the administration handled it?

RUBIN: Well, I think—(laughs)—I know a touch about this, actually. I think that—

GOLODRYGA: (Laughs.) I love how you preface all of your questions—I love that you preface all of your answers with knowing that. That’s why we’re asking you the questions. Of course, you know. (Laughter.)

RUBIN: In the first place, I don’t know. And, secondly, I can tell you what I think, OK?


RUBIN: And I don’t think anybody knows in any very certain sense about anything. (Laughter.) On the regional banks, here’s the problem. Janet said—Yellen—said she would guarantee deposits at one point, remember that? She cannot guarantee deposits. You can only guarantee—you can only pay deposits over and above the—if a thing goes bad, if a bank goes bad, if you first put it in resolution, OK? And then you have to have two-thirds of the board of governors, and two-thirds of the members of the FDIC vote that this is a systemic risk. Once it’s—then, once it’s a systemic risk, then you can pay it.

Now, that’s an ex-ante process, not an ex-post process. I’m sorry. That’s an ex-post process, not an ex-ante process. So you can’t do this in advance. And the question—and I’ve asked people who are very involved in our system what they think the answer to this question is—how many of these could we do at the same time if it really got to be a bank run? Could we do ten? I mean, it’s very cumbersome. It’s a lot of work. Could we do eight? Could we do fifteen? And I think the answer is, we don’t know. And nobody knows. But there are, roughly speaking, four thousand, give or take, small to medium-sized banks around. (Laughs.) So, you know, if we really had a bank run, we’d have a hell of a problem.

I don’t think we’re going to get a bank run. I think we’re probably OK-ish. I mean, it is true that a lot of small and medium-sized banks, Bianna, have unsound balance sheets. But it’s also true that they have insured deposits, and those are sticky. And then a lot of their loans are against housing. And housing loans, right now at least, have a relatively low LTV. That is to say, the loan is low relative to value. So I think probably—and, forget what I think, I mean, I’ve talked to people who really know a ton about this stuff. I think the probability of a bank run is very small, but not zero.

And so because it’s not zero, what my book says is that everything is a matter of probabilities. And the probability of this is not zero. And I think we need to—we need to change our system. And Gene Ludwig, who used to be comptroller of the currency, has some interesting ideas on how to do that. I’m sure other people have other ideas. But the system we have now, as I said a moment ago, is—does pose the risk of if we really had a bank run, could we deal with it? I think the probability of a bank run is very low, but I also think we’ve got to change our system. The problem is, changing our system requires congressional action. And congressional action is almost impossible to get on this.

GOLODRYGA: Were you satisfied with at least the short-term solution, and that is having a behemoth like Jamie Dimon come in and save the day?

RUBIN: (Laughs.) Well, firstly, that was a solution with respect to First Republic, just that one. I think—was I satisfied with that? Well, you can’t—(laughs)—the question is, do you want to have one big bank in America? And I think we’re approaching from that—probably have gone over that line already. So I don’t—and also, I don’t know how many more of these is JPM going to be willing to do? And how much does the government have to give them in some form, really, to get them to do it? So, no, I don’t think that’s a viable approach, uh-uh. I think it worked for what it did, but I don’t think it’s a viable approach.

GOLODRYGA: You also talk in your book about trade and concerns over protectionism. Your administration, under President Clinton, sought to lower trade barriers. And now we’ve seen numerous administrations, whether Republican or Democrat, at least under pressure to do more, to raise them. You note in your book that trade policy is difficult to manage effectively because it, quote, “tends to result in small gains for a large number of people, while resulting in high, very visible costs for smaller groups.” In 2023, what’s the most effective way to mitigate those costs, in your view?

RUBIN: I think it’s the same thing that President Clinton used to talk about, and actually did a certain amount of when he was in office until we lost—and we had a whole plan to go forward, and then we lost the Congress in ’94. I think we have to have, Bianna—what he used to say, and he was right, that with technology, which is even more important than trade, and trade, he said: I can’t guarantee you’ll be in the same job forever. What I can do is provide you with training, and education, and whatever it might be that will enable you to move from what you do now into something else in the mainstream economy. And we started on that track, and then we lost the Congress.

And then you also have to have a social safety net. That is to say, support for the time that people are dislocated. So what we need is a whole raft of legislation. But in this Congress, you’re never going to get it. And, secondly, we already have big deficits. So if you’re going to do what you need to do in public investment, not only do you need increased revenues to deal with our fiscal situation, you need it to fund public investment that we really very powerfully need.

GOLODRYGA: Let me talk to you about China.

RUBIN: China.

GOLODRYGA: Is decoupling at this point inevitable, in your view?

RUBIN: Well, I have a minority view on China, Bianna. And maybe I’m the only person left who has this view, or close to the only person left. (Laughs.) I think there is enormous—I was with the ambassador, the Chinese ambassador to the United States, last night. I was at some dinner thing, and he was there. We chatted for quite a while. He claims to think the same thing that I just said, but God knows whether he does or not. I think that we have an enormous mutual self-interest in having a constructive relationship. No one country can deal with climate change by itself. And climate change, in my opinion, is an existential threat to life on Earth as we know it.

I’m convinced that nuclear weaponry is very dangerous. And I don’t think—again, I think China and the United States together, two large economies, can deal with that far better than anybody else—anybody can alone. Pandemics, and trading norms, and so forth. So I think we have a tremendous mutual self-interest in having a constructive relationship. But now, right now, there’s enormous antagonism in our country toward China, and distrust. And I’m told by people who know China, which I don’t, but I think people need to know it well, that there’s tremendous distrust in China toward us. So I think we’re in a terrible place. And I think that’s most unfortunate.

What I think the administration should do, but I think there’s not much chance they’re going to do it, is I think they should go to President Xi and, ideally in company with the EU, which is, you know, roughly the same size economy we have—and without in any way diminishing protecting our self-interest, because it’s a real possibility that Xi wouldn’t, at this point, relate to such efforts. But I would go to them and say: Look, this is in our mutual self-interest. Sure, we have differences. We have big differences. Taiwan, human rights, the export controls we put in place.

So let’s take the things we can work together on and put them here, and then let’s recognize the differences we have, and let’s try and deal—let’s try to engage with those in the context of a constructive relationship, rather than an antagonistic and mutually distrustful relationship. But, Bianna, I don’t—I think there’s very little support for that point of view.

GOLODRYGA: I think the mercurial person in this conversation and context is not even—you know, listen, on the one hand it’s frightening that it’s the one issue—one of the few issues where you have Republicans and Democrats in agreement. We know where President Biden stands on this. He talks about competition without conflict. I think the one unknown is where Xi is. And from your conversations with Chinese diplomats, do they give a sense that he too is open to a stable relationship with the United States? And what does that look like?

RUBIN: In the first place, competition without—what did you say? Competition without—

GOLODRYGA: Conflict.

RUBIN: Without conflict. If you could do what I just said, I think that would give you a chance of getting there. I think where we are right now—I don’t think even our actions are getting us to competition without conflict. I think that’s what we should have. Look, I know some—I don’t have any idea. I think it’s the right question, Bianna. And I don’t want to mention names, but there are people that I know, I’m sure you’ve engaged with, who are probably the leading people in America about China. And I don’t think they really have any idea. And I’ve talked to—I was talking to these people. And I don’t think anybody has a notion really of what Xi has in—does he want to be a hegemon in Asia? Does he want to be a global hegemon? Alternatively, would he be receptive to something of the kind we’ve been talking about? I don’t think anybody knows.

But the only way to find out, it seems to me, is to go to him in the way that I just described and see what his reaction is. Now, we should have done this a hell of a lot earlier. And so, you know, we’re now getting in late in the game. But I think we should try it. As long as we don’t—as long as we don’t let up on any of the ways we’re trying to protect ourselves, I don’t think we have anything to lose. And even if the odds are low, as I say in my book everything’s a question of probability. So even if the odds are low, if there’s some change of it working, I think we should do it. But I don’t think there’s any chance. My impression would be, there’s no chance that it’s going to happen.

GOLODRYGA: Let me ask you about the war in Ukraine, and then we can open it up for questions from the audience. We have seen some of the most innovative and aggressive sanctions collectively by allies unleashed against Russia in the past year. And while, yes, it has slowed the economy some, it hasn’t changed the trajectory of the war. It hasn’t crippled Russia’s economy or convinced Putin to stop fighting. Is that worrisome to you, the limitations of sanctions?

RUBIN: Well, it’s not worrisome, because I always thought there were limitations. It’s not newly worrisome. I think we should have recognized it a long time ago, both the possibilities but also the limitations on sanctions. And I didn’t think—I don’t know much about these sanctions, and I don’t know much about Ukraine. I know where Ukraine is, sort of. And I don’t know a hell of a lot about Russia. But I kind of had an opinion on this, because I talked to people who knew a lot about these things. And I thought from early on it was very unlikely that the sanctions were going to have much effect beyond the—and you’ve seen it, as you say. The Russian economy has been affected, but not in enough of a matter to force Putin to do anything. The ruble, I think, is higher now than it was when the damn war started. So it hasn’t affected the ruble.

So and I think the more we do this, Bianna, and I’ve always thought this. I thought this when I was in office. We need to be massively selective about when you use sanctions, or the world will start to design around the dollar. Now, it hasn’t happened yet, because what are the alternatives? You know, Chinese currency and their rule of law, and Europe is sort of a—I don’t know, a strange kind of place that doesn’t seem to do much. But that’s, by the way, not the Council on Foreign Relations official position. That’s my view. (Laughter.)

But I think we really are being careless about the position of the dollar, even though, as I say, I find it difficult to see how—because already I saw the other day somebody in China, I’ve forgotten who it was, it might have been Brazil or somebody, or Indonesia, entered into an agreement that they used, I think, the Chinese currency to denominate trade. So I think you could see more of that. I think there’ll be the temptation to—or, let’s say, the incentives for designing around the dollar become greater when we use sanctions so readily. I’ve always worried about that.

GOLODRYGA: Yeah. And it’s worrisome that the Global South has sort of sat this war out.

RUBIN: Well, it’s worse than that. Firstly, I totally agree with you. And secondly, the Global South, don’t they buy oil from Russia? (Laughs.) And the Global South is basically for the most part not supporting us, and acting in ways that are against our interests as they buy oil from Russia.

GOLODRYGA: OK. I lied. I do have one more question, and it’s book related. So you cover a lot of ground in this book. And it’s not like a typical book that you’ve written in the past. You cover everything from, as you mentioned, probability, risk, free speech, and criminal justice reform, and a letter from your granddaughter, just a few of the chapters. What made you write this book now?

RUBIN: Well, I’ll tell you what it was, and maybe that is manifested in what you just said. It goes to about five years ago, and I thought to myself: You know, I’ve been fortunate in my life, I really have. I mean, I say in the book I think luck is an important part of anybody’s history, if they had been successful by external metrics. And I’ve been very lucky in my life. And so I’ve seen a lot of—I really have, Brianna. You know, Goldman Sachs, which Steve and I became the CEOs of, and the White House, Treasury, Citi, I’m with Centerview now, I was chairman of the board of this place for, I think, twelve years or something, the Council. So I’ve seen a lot of the world.

And I thought to myself, I really would like to reflect on that, not to look backwards but to look forward. That is to say, draw on the reflections to then discuss policy, discuss investing, which I do in the book, discuss management, discuss how do you deal with adversity, which, you know, all of us face in life from time to time. And then, underlying all that, what I wanted to do was greatly expand on the issue that I raise in my first book, which is how does one approach decisions, or decision making?

And what I said in this book, what I said in the first book too but I’ve greatly expanded on it here, I took a course—the most important course I ever took anywhere to get me ready for what I—the rest of the life that I subsequently led was not in finance. I never took a finance course, actually. I did major in economics. But it wasn’t any of that. It was philosophy one at Harvard my sophomore year. And the professor led us through the great thinkers of the ages. Much of what we read and he said I didn’t understand. Well, I got an A in the course anyway. But anyway, much of it I didn’t understand. But what I did draw from it was that he was trying to get something across to us, I think. And that is, that there are no certainties. There are no provable certainties.

And then I thought to myself, if there are no provable certainties, then everything is about probabilities. And it was that mindset that I took every decision I’ve ever made. And that was, as I thought about writing the book, would obviously be the underlying theme that would run through all the chapters. So that was it.

GOLODRYGA: That mindset has served you very well, I can say objectively speaking.

RUBIN: Well, sometimes yea, sometimes less well. But OK. (Laughter.)

GOLODRYGA: OK. I’m going to open it up for questions. The first one is going to be from the audience, then I’ll go back and forth, virtual and then an in-person. Right here in the front.

Q: Thank you. Thank you, Secretary Rubin, for your insights. Gaurav Patankar, Bloomberg.

Just one quick question. I mean, every crisis has a poster child in the market, I mean, with rates expected to higher, which I agree with you on. You know, I mean, we had a bit of a bank tantrum, but could the real risks in this particular iteration of the crisis, whatever that comes next, reside in the private markets, private credit, and private equity in particular, where some of the markets are still—

RUBIN: You know, it’s a good question. And I know there are people who think that could be the next great risk. And I certainly don’t profess any expertise in this. But I’m not inclined to think so, because—and private equity I do know a bit about since that’s—all of my personal investment is in private equity, except where I have cash. I don’t think so. I mean, sure, could a firm go bad? Absolutely. But I don’t think, if you look at these firms, that there’s a systemic problem. I think there is a systemic problem in commercial real estate.

What that interesting—the interesting thing about commercial real estate, you will probably know this, the commercial real estate risk is in with the big banks, because they lend to commercial or operations building in the big cities. And that’s where the remote work problem is. In the medium and small banks, they don’t really—yeah, they lend for commercial building, but those cities don’t have the remote work issue. So basically, that probably, which I think is a real problem, fortunately is not tied to the most vulnerable banks, which is the small and medium-sized ones, but the big ones.

GOLODRYGA: OK, we’ll go back into the room. In the back there.

Q: Hi. Kate Hardin with Deloitte.

And I just—we’ve talked about a lot, and wanted you to ask you to weigh in a bit on a scenario that adds to everything we just discussed. The scenario which may have a lot of spending that needs to happen from a government perspective due to climate. Whether that’s extreme weather, or avoidance, adaptation. But would love to hear your thoughts on that.

RUBIN: No, I think—I think when people say that—when the CBO says that our debt-GDP reaches 118 percent, I think the two caveats to me, at least, would be national security, defense, I think it’s going to be a lot larger than they’re projecting because of all the issues that we know we face. And the other is climate change adaptation. I think climate change is an existential risk. We had a terrific, terrific dinner about, oh, two weeks ago maybe here at the Council with Michael Greenstone, who runs a—used to be a professor at MIT. Now Michael runs the—then he went into government, now he runs a center in Chicago on climate change.

I think the probability of our political systems around the world dealing with this well enough to control emissions so we don’t face the kinds of projections that we are currently—or, the current trajectory that we’re on, I think is close to zero. And I understand nothing in life is zero and every question is probabilities, but I think this is pretty close to zero. (Laughs.) Look, China is building coal-driven—coal-fired plants every week. India makes the argument, and I think they’re right, actually, that they have a lot of poor people. The developed countries created this problem and they should subsidize—and I agree with India about this—they should subsidize what India should do. But can you imagine going to Congress and asking for X numbers of tens of billions of dollars to subsidize India? So I don’t think politically we can do it.

The point that Michael made was, technology possibly could do it. And one possibility is removal. But with scale and cost, that’s very uncertain. But the other one he pointed to was the delta between receivables and fossil fuels. And he said, that’s getting closer and closer. And at some point in the not-too-distant future, if renewables became more efficient, more cost-effective than fossil fuels, then just market forces would take you where you need to go. But I think we have a terrible threat. And I think you’re right. I think climate change adaptation is going to—my guess, just a hell of a lot more expensive than people expect.

GOLODRYGA: Are you encouraged at all by the, what, 350 billion (dollars) or so in the IRA towards green energy that the president got through?

RUBIN: Well, yes and no. I mean, people who know a lot about that say that that will be helpful here, but that it’s far from what we need to do. And that’s us, India, China, South Africa, Africa, South America. Seventy percent of the emissions now are coming from emerging market countries, including China which is not really an emerging market country, but let’s put it. And China, as I said, building coal-fired plants now. And a lot of these other countries, India, for example, say—and I think rightly—that we created the problem. They have a ton of poor people. The poor people shouldn’t be paying for this. We should be paying for it. And they’re right.

GOLODRYGA: Let’s take a question virtually.

OPERATOR: We’ll take the next question from Joan Spero.

RUBIN: Oh, hi, Joan.

OPERATOR: Ms. Spero, please accept the unmute now prompt.

Moving on—(laughter)—we’ll take the next question from Fred Hochberg.

RUBIN: Hello, Fred.

Q: Hi, Bob. Hi, Bianna. This was a great conversation and makes me more anxious to read the book soon—right away.


RUBIN: You can buy it, and there’s no limit on the number you can buy. (Laughter.)

Q: Exactly! You should buy as many books as the length of time you know the author.

RUBIN: As what, Fred?

Q: As many years as you know the author, that’s how many books you should buy.

GOLODRYGA: Oh, I like that.

RUBIN: I know you’re going to have to buy a lot of books on that basis.

Q: Exactly. (Laughter.) So my question is, you know, at the turn of the twentieth century, when we had more antitrust fervor and the imposition of the income tax, and both of those have lost favor, I think because of many factors, but I think conservatives, Republicans, have sort of built a case why taxes are bad and regulation is bad. But we’re at a point now where capitalism is in crisis. People want a more liberal view of the economy. And yet, frankly, wealthy people don’t think they should pay their fair share, and we’ve become very anti-regulatory. But those seem like the only ways I can think of it kind of right the ship, give us enough money, and also make sure there’s a fair balance between private interests and public interests. How do we get there, or am I wrong?

RUBIN: No, I don’t think you’re wrong, Fred. And I think we desperately need somebody who can make the case to the American people in a way that resonates with them that we need more revenues and higher taxes. And, yes, they should be predominantly on the most wealthy. But I don’t think the $400,000 exclusion that Biden has not only proposed, but lived by, I don’t think that’s going to work. So I think we need somebody who can make the case to the American people in a way that resonates that we need more taxes, and we also need regulation.

But on the—I’ll tell you, though, I would say this, though Fred, I think on regulation President Clinton tried to do this and President Obama tried to do it, but not with much success. I think we need—I think all regulation, past and present, should be seen in the context of a cost-benefit analysis. And that could be done through—you know, through OMB. But you’d need to have a lot of staffing, and you’d need a real commitment, and the politics of that are very difficult.

GOLODRYGA: Right here, the gentleman with the glasses.

Q: Thank you. Andy Alper. I’m a private investor, corporate director, and part-time fly fisherman. (Laughter.)

RUBIN: Yeah. No, you’re a pretty good fly fisherman, actually. You’re not as good as I am, but. (Laughter.)

Q: I’m sure.

RUBIN: No, I’m teasing. You’re better.

Q: So, Bob, I want to come back to designing around the dollar. So around the world we see increasing political interference with central banks. And wherever we see that, we see a correlation with volatility and weak currencies. Are you concerned about U.S. political pressure on the Fed, and anything we can do about it?

RUBIN: You know, Andy, I think—look, I think it’s a real problem. And I think, I hope I’m right about this, that this administration at least is not going to try to pressure the Fed. But I don’t have a lot of basis for saying that. Just sort of I know the people, a lot of them, and I just don’t think they will. I think congressional pressure is much more of a problem, both from Democrats and Republicans. And I think maintaining the independence of the Fed is really, well, to your point, is critically important. I worry about it, but I—maybe this is—maybe this is hope over something or other, but I hope, at least, that it is sufficiently grounded and anchored that that isn’t going to be challenged in a serious way.

But I think—on the other hand, if unemployment goes up to, you know, 4 ½ percent, or 5 percent, or something like that, which it could—I think could do, if you’re going to get inflation to where we need it to be, could easily do. I don’t know, Andy. I think it’s a legitimate concern.

GOLODRYGA: Well, it’s not a hypothetical. We saw President Biden’s predecessor publicly pressure and criticize the Fed. And he’s the frontrunner of the Republican Party right now. One could imagine he could do the same if he wins.

RUBIN: One could imagine he could do the same. Luckily for us, the chairman when he was there, and doing all of his breast-beating about it, was Janet. And she was a good chair. She really was.

GOLODRYGA: He went after Jay Powell too, though.

RUBIN: He went after Jay—well, he would go after anybody. (Laughter.) But, look, I agree with that, but the Fed stood up to it. But I think you’ve raised what is, to me at least, maybe the single greatest risk we face in our economy, the 2024 elections. And this is not a partisan comment. I believe our system works well when you have a conservative—you know, party is conservative to right of center, Democratic Party, liberal, left of center, there are enough people in both parties willing to work together, and so it works. But I think having an ideologically Trump-ish Republican Party is, I think, really a great danger. And as you and I were discussing before this thing started, who knows what’s going to happen in the 2024 elections, both on the presidential level and on the congressional level?

GOLODRYGA: Well, I don’t want to take up too much of the audience’s—right here in the front.

Q: Jeff Foster. I’m an investor and had the opportunity to work at the U.S. Treasury Department during the first term of the Obama administration. And so it was around—

RUBIN: You worked with Tim?

Q: I did.

RUBIN: What’d you do?

Q: I was on the financial crisis response team.

RUBIN: That’s the place to be.

Q: Yeah. (Laughter.) A lot of—a lot of—

RUBIN: Well, if you were on the financial crisis response, the right hated you and the left hated you.

Q: Well—

RUBIN: Not a good feeling.

GOLODRYGA: That means you’re doing a good job. (Laughter.)

Q: Just wanted to circle back to the beginning of the conversation around the debt limit, and kind of almost the inevitability that you kind of spoke to that eliminating the debt ceiling as a concept feels like that’s probably unlikely to happen. And also kind of reflecting on the trajectory of debt-to-GDP becoming kind of, in some ways, unsustainable at some point. Is there an opportunity to effectively take the debt limit—when you think about, budgets tend to add to the deficit. And the debt ceiling has tended to be something that has sought to reduce it. Should Democrats, that have historically said, hey, you know what, we’re not going to negotiate over the debt limit, only to turn around and negotiate over the debt limit as a way to reduce debt, actually take a different tack and be more accepting of that as a policy tool—an inevitable policy tool that’s not going to go away, towards dealing with long-term fiscal sustainability?

RUBIN: No, I get it. It’s a legitimate question, I guess, but the idea of the United States government having a debate within itself about whether to default on our debt, just seems to me to be unthinkable.

Q: But we’re having that debate right now anyways. And it doesn’t seem likely to stop.

RUBIN: I think it’s unthinkable, and I think it’s very dangerous, for the reason I said. I think even if the odds each time are low, which hopefully they are, the cumulative probability, obviously, goes up. But I think your point is still well-taken. If you had a Republican administration and you had a Democratic House or Senate, would they use that? And I don’t think they should. In fact, I would be massively against them doing it, but they’re not going to care what I think. And is there a real possibility they would? Yeah. I think that’s—you’ve identified a really big problem, the cumulative effect.

GOLODRYGA: Right here.

Q: Robyn Meredith from BNY Mellon.

RUBIN: Hello, Robyn.

Q: Great to see you again. I did not expect you to start this book with a visit to prison. (Laughter.) Very colorful.

RUBIN: There are people in both parties who think I should have been kept there involuntarily. (Laughter.) But that’s another question, Robyn.

Q: And anyone who hasn’t yet read that knows that the books are on sale in the back. So they can, you know, find out what you were doing at San Quintin.

RUBIN: Thank you, Robyn.

Q: You’re welcome. No, but what I wanted to ask you about is the—what everyone’s political views, the level of political polarity in the country now is just extreme. And both sides aren’t anywhere close to getting along. So if you’re laying odds, as you do, and thinking about the probability that our nation can continue without a crisis for democracy in the next few years, you know, how dangerous is the spot that we’re now in?

RUBIN: Well, I have two reactions to that. You said the next two years?

Q: Few years. You can pick a number.

RUBIN: Few years? Yeah, some period of time, OK. I have two reactions to that, Robyn. Almost everybody I know who’s deeply involved with the political system as a journalist or elected official or whatever—you know, political operatives—are deeply concerned. And I think to look at the facts on the ground and not be deeply concerned is just to be blind. On the other hand, my personal view? I have a feeling—a more affirmative view. We’re a dynamic society. We’ve been politically resilient in the past. Politics can change very, very quickly in America. I remember in 1980—no, I’m sorry—in the 1992 election, George Bush—George H.W. Bush going into that election, at one point had 90 percent approval ratings. And Clinton ultimately won. So things can change, and it can change quickly.

But, having said that, I think it’s a real—a very serious threat. Maybe I have a more affirmative view because it’s just my psyche is built that way. I don’t know. But I’m not generally thought of as being unduly ebullient. So I kind of—(laughter)—I kind of think—you know, I think we’ll make it. But we may not.

GOLODRYGA: OK. Here on the left.

Q: Hi, Secretary Rubin. Dan Katz, also a former Treasury Department official.

RUBIN: Who did you serve under?

Q: Most recently under Secretary Mnuchin, doing COVID response.


Q: So one follow up on independence of the Fed. I think we all agree that having an independent Fed is in everyone’s best interest and, you know, crucial for our economics, and growth, and stability over time. But you did mention your view that the Fed badly erred in the context of the current inflationary pressures we’ve seen. And it’s interesting that we’ve actually seen basically a wholesale turnover of the Fed board in the last two years, where there was almost no focus on candidates who got the inflation call right. So do you have any thoughts around how we can ensure that the Fed preserves its independence, while also that it’s accountable and effective in pursuing its mandate?

RUBIN: No, I think you’re raising a totally legitimate question. I think I’m right in saying—somebody will correct me if I’m wrong—I don’t think there’s a single distinguished macroeconomist on the Fed board now. I think I’m right about that. Somebody can check me and see, but I think I’m right. Look, I think the answer is that the appointments to the Fed should be substantive and not political. And I’m not casting aspersions on anybody who’s been appointed, but I must say, if you look at the credentials of—I want to be careful. I just think that they should be substantive and not political, and I’m sure we’ve always lived by that.

And I think you’re absolutely right. I think the greatest danger to the Fed probably is that we make political appointments and not substantive appointments, and that that weakens the Fed, and that ultimately sacrifices its independence. I think your point’s well-taken.

GOLODRYGA: Let’s get a virtual question.

OPERATOR: We’ll take the next question from James Mann.

Q: Mr. Rubin, I’m James Mann. I’m an author based in Johns Hopkins SAIS.

I wanted to pursue the question on China, whether you have any reflections back twenty years—after twenty years of the deal that brought China into the WTO. Did you and the administration underestimate the impact on American workers or, for that matter, the Democratic Party? And did you overestimate China’s willingness to abide by the terms of the deal?

RUBIN: Yeah, it’s a good question. Zhu Rongji, the premier of China, came to this country to finalize the accession to WTO. And Zhu Rongji was an amazing—he really was—an amazing political leader. I went to him once. I said—and we got to—Larry and I got to know him pretty well. I said, you know, you ought to leave China, come to the United States, and run for president. (Laughter.) But he didn’t seem to want to do that. (Laughter.)

No, I think we—I think we did the right thing. I think that—I’m pretty convinced we did the right thing. You weren’t going to keep China out of the world trading community. And the question was, do you bring them into the—into the world order that we’ve tried to create, or not? And I think we were better off bringing them in than not bringing them in. I don’t think that they behaved the way they should have after they were in, but I think if we left them out they simply would have been this very large economy that wasn’t in any way part of the world order.

I think the biggest problem, though, with respect to American workers is a function of technology, not trade. But they’re both—they’re both dislocating issues. But I think the answer to that is not to either try to deter technological development—leaving aside the current debate about whether AI could threaten human existence. I mean, that’s a different question. But not to deter technological development, and not to abandon trade liberalization. But I think the answer is what President Clinton said when he was there, which is to have the programs that will enable people who are adversely affected to get relocated in the mainstream economy effectively, and then have a social safety net. But that, unfortunately, all takes Congress. And at least this Congress is not going to do that.

GOLODRYGA: Let’s come back to the audience here. Gentleman in the corner.

 Q: Ron Tiersky from Amherst College.

I admired what you said about the most important course that you took being in philosophy. You might have said on Shakespeare, but, you know.

RUBIN: On Shakespeare? I never took a course on Shakespeare. I took an English course, and it was my lowest grade in all four years. And the reason was not because I didn’t understand the authors, but I couldn’t remember the names of the damn books and the characters. (Laughter.)

Q: So you probably have read the interview in the Economist magazine with Henry Kissinger. It’s a long interview. And towards the end he gets to the question of the self-confidence of the people in a society. He says that it’s fundamental—it’s of fundamental importance whether people, the people, the nation, the American people, still believe that this country is worth it. Now, you said several times you’ve been around a long time and you’ve done a lot of things. So what’s your view of that?

RUBIN: Oh, Kissinger has another way of saying the same thing. Which he says, for a democracy to succeed the people have to believe in themselves. It’s the same thing you just said. And I think it’s a really good question you raised. I think the question of whether we still have in our country a sense of national identity, look, we had enormous tragedies—you know, slavery and everything thereafter that followed from it. But at least the people believed in the principles that our founders set out in the Declaration of Independence, in the Constitution, the Bill of Rights, and so forth.

I think we—obviously, there are people who know a ton more about this than I do. But Kissinger—I got to be careful about this—we have a Zoom call once a month with a few people who sort of are pretty thoughtful, I think, on this subject. And I think they all agree that there’s a real danger that we’ve lost that in our country. So I think you’re absolutely right. The question is, what do we do to restore it? I think Biden has done a very good job. That’s my opinion. I’m sure some of you disagree. But what I think he’s not provided is inspiring leadership. And I think that’s what we need.

GOLODRYGA: It’s important that you note that today too, obviously today being the seventy-ninth anniversary of D-Day.

RUBIN: Is that right?


RUBIN: Well, it makes a point.

GOLODRYGA: Yes, exactly. We’ll have a virtual question.

OPERATOR: We’ll take the next question from Mike Froman.

RUBIN: Mike Froman? Why don’t you go to the next person? (Laughter.)

Q: Thank you, Bob. (Laughter.) I hope that you can hear me. It’s great to see you on a CFR stage.

You know, repeatedly you’ve said—you’ve cited some big problem, climate change, debt limit, trade, and then said but there’s really no chance of Congress or our political system doing the right thing. As you said, no one’s ever accused you of being ebullient or putting hope over reason. Are there any hopeful lights that you see out there, where you think the political system can deal with one of these major issues? And/or are you suggesting some significant change to our political system that would change the dynamic?

RUBIN: Yeah. I’d like to have a monarchy and I’d like to be the monarch. That’s not going to happen. (Laughter.) So I think I slightly misstated my goal. I don’t think there’s any chance with the political system where it is today. But we have elections in 2024. We will have subsequent—hopefully we will have subsequent elections. And, yes, the reason why I have a more affirmative view than a lot of people is I think at some point we’ll get a change in those who are in office, and they’ll recalibrate the politics. It’s not going to be that they’re not going to be political. Politicians are going to be political. Fine. But I think they’ll recalibrate—I, at least, believe there are various conditions that you can think of that would cause people in office to recalibrate their politics, and then be willing to work together on these things.

Now, whether they’ll ever be willing enough, Michael—well, ever is a long time—whether they’ll be willing enough within some reasonable period of time to work on the really big issues we face? I don’t know. But what I would—what I really meant was to say was I think right now, you know, 2023-2024, which is what we’re in right now, I don’t think there’s any chance. My hope would be, there comes a point when our system gets back to the point we can do those things. I believe that’s likely, but who the hell knows?

GOLODRYGA: I tend to support you. I think if you look at the younger generation now, whether it’s issues like guns, the environment, women’s reproductive rights—I mean, I think you are hearing a lot more voices among the younger population, and perhaps future generation of elected officials.

RUBIN: Yeah, I agree with that, Bianna. But I’ll tell you what they’re not good on? Free speech.

GOLODRYGA: Also something you discuss in your book. OK, we have one more—time for one more question. Back here.

Q: Thanks. I’m Paula DiPerna from the Carbon Disclosure Project. We knew each other when I worked with Richard Sandor on the Chicago Climate Exchange.

RUBIN: That was a while ago.

Q: It was.

But carbon pricing, back to a lot of concern versus action, I don’t want to belabor the climate change question tonight, but back to your point about competition and conflict. EU, China, the United States, why wouldn’t we go to them with a proposition that says: Let’s try an integrated carbon price among the three markets and try to set it up like a currency structure? Why wouldn’t we try that? Because people don’t—they have a lot of worry, but they have very shortage of ways to act. And that’s partly because people don’t have an imagination around how to act on the problem. So this would be, like, a demo.

RUBIN: May I ask you a question?

Q: Sure.

RUBIN: You say around a currency, what do you mean?

Q: Like currency trades. Currency trades, you know, you have—

RUBIN: Oh, you mean, have a carbon market, like we have a currency market?

Q: But integrated with a cap, so that there’s a real value proposition. And you have a Chinese market that’s going to be the largest commodities market in the history of the world. You have in the United States California and RGGI. We have the beginnings of it; we just don’t have an integrated system. So I don’t know if that’s a technological shortage, a platform shortage, but it’s certainly a political shortage. And you could take it on.

RUBIN: No, I understand the question now. I would guess, without really—you know, it’s not something I have any expertise in—but I would guess that technically, technologically, we could figure that out. I don’t mean “we” meaning me, obviously, but that you could figure out. But could you figure out the politics of it in this country, in China, in the EU, India? And I would guess—I would guess we are far, far away from being able to deal with the politics of it, at least in this country. And I would imagine it’s even more unlikely within these other countries.

Q: California—(off mic)—China.

RUBIN: Well, California—I’m not sure what the legality—the constitutionality would be of—I’m not saying it isn’t, by the way. I honestly don’t know. You know, can California enter into a trade agreement with another country? That’s an interesting question. I don’t know the answer to that. They’re a big enough market, so they’re affecting what automobile companies are doing, for example. But I have a feeling that California acting as if it were a country, I guess, I’m not going to opine on that other than to say it seems to me probably that isn’t going to work.

GOLODRYGA: Well, Paula has some interesting thoughts, because I believe you’re joining my friends at PBS tonight.

Q: I was. I thought so too.

GOLODRYGA: Yes. No, it’ll be on, because I anchored it. It’ll be on tonight. Yes, I saw the interview—(laughter)—on Amanpour and Company.

Well, this concludes our conversation. I don’t want to take up anybody’s time. There is going to be a thirty minute reception where you can mingle and hopefully maybe ask Bob some more questions, if he’s—

RUBIN: And you can buy books.

GOLODRYGA: Yes, you can buy books. (Laughter.) Yes. Thank you so much, everyone. This has been great. Thank you, Bob. (Applause.)

RUBIN: Thank you.


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