WEBVTT - The World Bank Former President David Malpass Talks US Economy

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<v Speaker 1>I'm joined by David Malpass, the former World Bank head

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<v Speaker 1>and also Under Secretary of Treasury under the Trump administration.

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<v Speaker 1>Thank you so much for your time. John outlined some

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<v Speaker 1>of these thoughts that you have going into next year,

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<v Speaker 1>this perfect storm, the debt ceiling, the perennial spending fights

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<v Speaker 1>that happened in Washington, and also this expiration, the Trump

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<v Speaker 1>error tax cuts, whether it's Biden or Trump. How should

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<v Speaker 1>the next president be thinking about all of this morning?

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<v Speaker 2>And Marie and John, so that you have to recognize

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<v Speaker 2>what's been going on politically in DC, which is not

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<v Speaker 2>making decisions, not really sorting out what to do about spending,

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<v Speaker 2>about debt, about taxes, and so that's all pushed into

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<v Speaker 2>twenty five and that has an impact on businesses. They

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<v Speaker 2>wait to see. So the uncertainty, I think is what's

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<v Speaker 2>prevailing within the economy. I don't want to invest if

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<v Speaker 2>there's going to be a big tax increase, but I

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<v Speaker 2>can't see what they're going to do to avoid it,

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<v Speaker 2>and so that's the time clock that's going on. Now.

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<v Speaker 1>I'd like to talk about taxes because Ed Mills was

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<v Speaker 1>on from Raymond James earlier this morning, and he made

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<v Speaker 1>a great point, which is the fat that yesterday we

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<v Speaker 1>heard from the House Ways and Means Committee Chair Jason

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<v Speaker 1>Smith coming out and saying it's actually some Republicans who

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<v Speaker 1>want to see a higher corporate tax rate. Trump brought

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<v Speaker 1>it down to twenty one percent from thirty five. Biden

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<v Speaker 1>has pitched twenty eight. Senator Joe Manchin has said maybe

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<v Speaker 1>twenty five is something we can all agree on. Where

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<v Speaker 1>do you see Republicans and Democrats potentially having this equilibrium

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<v Speaker 1>when it comes to the corporate tax rate.

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<v Speaker 2>It's a bit of a fight in the election itself.

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<v Speaker 2>You've got a choice of do you want the economy

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<v Speaker 2>to grow stronger and do you think tax rates matter?

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<v Speaker 2>I think they really do in terms of the growth rate.

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<v Speaker 2>If you raise the taxes, there's less investment going on

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<v Speaker 2>in the corporate sector. We're already seeing it in the

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<v Speaker 2>small business sector, just very hard for them to make

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<v Speaker 2>the new investments needed to pull down or to improve

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<v Speaker 2>the supply chain. So we're seeing this persistent inflation and stagflation.

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<v Speaker 1>So what do you make of Republicans though, coming out

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<v Speaker 1>and saying that it should be higher.

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<v Speaker 2>You know, all through the party unity is not as

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<v Speaker 2>much in the Republican Party, So they've got to sort

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<v Speaker 2>out what is the message of Republicans that you want

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<v Speaker 2>Washington to be bigger. You know, it'd be fun for

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<v Speaker 2>a lot of politicians in Washington to have a big

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<v Speaker 2>debate over which taxes to raise. That pulls in a

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<v Speaker 2>lot of political contributions. But what we should be looking

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<v Speaker 2>at is which taxes affect growth the most, and you

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<v Speaker 2>want to hold those down so that you can have

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<v Speaker 2>more jobs, more people back to work. After COVID, a

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<v Speaker 2>lot of people are just staying out of the economy

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<v Speaker 2>because it's not strong enough to bring them into the

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<v Speaker 2>labor force. Well.

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<v Speaker 1>Labor participation rate though is pretty high, and unemployment is

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<v Speaker 1>below four percent. Most people would argue and would say

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<v Speaker 1>this is a very healthy labor market under four percent

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<v Speaker 1>for more than two years.

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<v Speaker 2>The labor force, though, doesn't include the people that have

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<v Speaker 2>opted out, and those are people that we need in

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<v Speaker 2>the economy in order to really be catching up. In

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<v Speaker 2>the meantime, China's numbers yesterday, they show their their trade numbers.

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<v Speaker 2>They're cleaning up by having a factories running at full speed.

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<v Speaker 2>I'm from Michigan. What you see is the manufacturing inventories

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<v Speaker 2>not building the whole US economy is waiting to see

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<v Speaker 2>what's going to happen in terms of policy in twenty

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<v Speaker 2>twenty five. That's this fiscal train wreck, and they want

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<v Speaker 2>to see how is that going to be resolved by Washington?

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<v Speaker 2>To get Washington out of the way. What we're seeing

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<v Speaker 2>right now is this regulatory push that's going on. Day

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<v Speaker 2>by day. You're seeing these massive new regulations come out

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<v Speaker 2>of Washington as an endpoint to the current administration. Also,

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<v Speaker 2>the proposals for big tax increases that you're talking about that, yes,

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<v Speaker 2>there's going to be some Republicans who say we need it,

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<v Speaker 2>but I think the public recognizes if you give more

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<v Speaker 2>money to Washington, it's just going to be spent. So

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<v Speaker 2>it's not really going to help on the national debt front.

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<v Speaker 1>When it comes to the national debt and taxes, the

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<v Speaker 1>CBO came out yesterday and said, if we were to

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<v Speaker 1>see an extension the Trump era tax cuts four point

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<v Speaker 1>six trillion dollars, so fiscally, this would be incredibly challenging.

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<v Speaker 1>How do you think about that? Would the bond market

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<v Speaker 1>even allow that to happen?

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<v Speaker 2>This gets into what are the taxes and how do

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<v Speaker 2>they affect growth. There's this tendency of people to do

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<v Speaker 2>what's called static modeling, meaning they say if nobody changes

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<v Speaker 2>their behavior, then tax cut will will just be added

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<v Speaker 2>to the national debt. But the whole point of taxation

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<v Speaker 2>is to raise revenue without stopping people from doing what

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<v Speaker 2>they need to do, small businesses, reinvesting. I think we're

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<v Speaker 2>over the laugh or curve right now in terms of

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<v Speaker 2>small business taxation. I don't know if you saw the statistics.

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<v Speaker 2>As President Biden has proposed these big tax increases on

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<v Speaker 2>capital gains also on basis step up. It causes small

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<v Speaker 2>businesses to just stop investing in their business. They look

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<v Speaker 2>to sell to somebody big because they can't afford the taxes.

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<v Speaker 2>So I challenge that for trillion statistic and say, look,

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<v Speaker 2>you would get more growth out of the economy if

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<v Speaker 2>you had better tax policies. You don't need to raise

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<v Speaker 2>the corporate rate.

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<v Speaker 1>Okay, well that's going to be definitely day one something,

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<v Speaker 1>and we already see committees being formed now in Congress

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<v Speaker 1>to try to map out what this tax policy will

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<v Speaker 1>look like. I want to also ask you about what

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<v Speaker 1>potentially we could see under Trump two point zero. You

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<v Speaker 1>were an economic advisor for him when he was campaigning

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<v Speaker 1>in twenty sixteen, you joined the administration, you ran the

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<v Speaker 1>World Bank. When the Wall Street Journal comes out with

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<v Speaker 1>a report and says that Trump potentially wants to put

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<v Speaker 1>his thumb on the scale when it comes to the

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<v Speaker 1>FED and questions FED independence, do you think that actually

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<v Speaker 1>would be happening.

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<v Speaker 2>I saw that story. There weren't any sources. I don't

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<v Speaker 2>think that is the policy that would create growth. You know,

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<v Speaker 2>the FED has I've criticized the FED for being too big,

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<v Speaker 2>for inserting itself into too many markets. The inner bank

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<v Speaker 2>market has gone. Now, trading of FED funds that were

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<v Speaker 2>so vital to the dynamism of the US economy that's gone.

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<v Speaker 2>The repoll market has been almost nationalized as you look

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<v Speaker 2>at the amount that the FED is controlling within that market.

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<v Speaker 2>So I think we could have a smaller FED, a

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<v Speaker 2>smaller balance sheet for the FED, and that would actually

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<v Speaker 2>be very positive for growth. The commercial banks would love

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<v Speaker 2>to be lending right now to small businesses, but the

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<v Speaker 2>way the regulatory policy works, they can't do it. It's

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<v Speaker 2>biased against small businesses. And that's true also of the

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<v Speaker 2>borrowing that's done by Treasury and by the FED, they're

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<v Speaker 2>borrowing in the short end of the curve, and that's

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<v Speaker 2>just crowding out small businesses. So I think that's the

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<v Speaker 2>key dynamic going on.

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<v Speaker 1>But they're borrowing the short end of the curve because

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<v Speaker 1>everyone thinks, why lock in rates this high at the

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<v Speaker 1>long end, We'll do that maybe in two years when

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<v Speaker 1>they come down, right, I mean, isn't that prudent?

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<v Speaker 2>No, that's not prudent. The yield curve is deeply inverted.

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<v Speaker 2>So if you if you borrow at the short end,

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<v Speaker 2>you're you're paying this five point four percent by the Fed,

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<v Speaker 2>they're borrowing every day at five point four percent to

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<v Speaker 2>own bonds that yield substantially less. That's not prudent. What

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<v Speaker 2>it does do is helps prop up the stock market

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<v Speaker 2>for now. I think there's there's some end game going

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<v Speaker 2>on within the economy where it's part of the kick

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<v Speaker 2>the can is to say, well, let's just borrow short term,

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<v Speaker 2>hoping for better in the future. But foreign, the global

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<v Speaker 2>markets look at that and they're not voting for the

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<v Speaker 2>United States on that. We're week at home. In terms

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<v Speaker 2>of the economy just one point six percent growth and

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<v Speaker 2>CBO's forecasts are for weak growth into the future. And

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<v Speaker 2>then abroad, we've also got that the weakness that's leading

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<v Speaker 2>to wars in multiple parts of the world, and they

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<v Speaker 2>look at the fiscal situation in the US, the inverted

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<v Speaker 2>yield curve, and say, why would I invest into that

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<v Speaker 2>highest short term interest rate?

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<v Speaker 1>Two final quick ones, So one you think under Trump

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<v Speaker 1>there would be an autonomous FED and two would you

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<v Speaker 1>go back into a Trump administrature?

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<v Speaker 2>You know right now that's way premature. The issue is

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<v Speaker 2>for people to sort out the policy differential. You've got

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<v Speaker 2>a choice of weak versus strong, of growth versus stagflation.

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<v Speaker 2>That's the decision for people to make. And Trump would

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<v Speaker 2>have a whole array of people that could really implement

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<v Speaker 2>a growth policy. I think that's quite possible, but it's

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<v Speaker 2>the election cycle, so let's focus on that.

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<v Speaker 1>David Malpass, thank you so much for your time this morning.