Speaker 1: I'm joined by David Malpass, the former World Bank head
Speaker 1: and also Under Secretary of Treasury under the Trump administration.
Speaker 1: Thank you so much for your time. John outlined some
Speaker 1: of these thoughts that you have going into next year,
Speaker 1: this perfect storm, the debt ceiling, the perennial spending fights
Speaker 1: that happened in Washington, and also this expiration, the Trump
Speaker 1: error tax cuts, whether it's Biden or Trump. How should
Speaker 1: the next president be thinking about all of this morning?
Speaker 2: And Marie and John, so that you have to recognize
Speaker 2: what's been going on politically in DC, which is not
Speaker 2: making decisions, not really sorting out what to do about spending,
Speaker 2: about debt, about taxes, and so that's all pushed into
Speaker 2: twenty five and that has an impact on businesses. They
Speaker 2: wait to see. So the uncertainty, I think is what's
Speaker 2: prevailing within the economy. I don't want to invest if
Speaker 2: there's going to be a big tax increase, but I
Speaker 2: can't see what they're going to do to avoid it,
Speaker 2: and so that's the time clock that's going on. Now.
Speaker 1: I'd like to talk about taxes because Ed Mills was
Speaker 1: on from Raymond James earlier this morning, and he made
Speaker 1: a great point, which is the fat that yesterday we
Speaker 1: heard from the House Ways and Means Committee Chair Jason
Speaker 1: Smith coming out and saying it's actually some Republicans who
Speaker 1: want to see a higher corporate tax rate. Trump brought
Speaker 1: it down to twenty one percent from thirty five. Biden
Speaker 1: has pitched twenty eight. Senator Joe Manchin has said maybe
Speaker 1: twenty five is something we can all agree on. Where
Speaker 1: do you see Republicans and Democrats potentially having this equilibrium
Speaker 1: when it comes to the corporate tax rate.
Speaker 2: It's a bit of a fight in the election itself.
Speaker 2: You've got a choice of do you want the economy
Speaker 2: to grow stronger and do you think tax rates matter?
Speaker 2: I think they really do in terms of the growth rate.
Speaker 2: If you raise the taxes, there's less investment going on
Speaker 2: in the corporate sector. We're already seeing it in the
Speaker 2: small business sector, just very hard for them to make
Speaker 2: the new investments needed to pull down or to improve
Speaker 2: the supply chain. So we're seeing this persistent inflation and stagflation.
Speaker 1: So what do you make of Republicans though, coming out
Speaker 1: and saying that it should be higher.
Speaker 2: You know, all through the party unity is not as
Speaker 2: much in the Republican Party, So they've got to sort
Speaker 2: out what is the message of Republicans that you want
Speaker 2: Washington to be bigger. You know, it'd be fun for
Speaker 2: a lot of politicians in Washington to have a big
Speaker 2: debate over which taxes to raise. That pulls in a
Speaker 2: lot of political contributions. But what we should be looking
Speaker 2: at is which taxes affect growth the most, and you
Speaker 2: want to hold those down so that you can have
Speaker 2: more jobs, more people back to work. After COVID, a
Speaker 2: lot of people are just staying out of the economy
Speaker 2: because it's not strong enough to bring them into the
Speaker 2: labor force. Well.
Speaker 1: Labor participation rate though is pretty high, and unemployment is
Speaker 1: below four percent. Most people would argue and would say
Speaker 1: this is a very healthy labor market under four percent
Speaker 1: for more than two years.
Speaker 2: The labor force, though, doesn't include the people that have
Speaker 2: opted out, and those are people that we need in
Speaker 2: the economy in order to really be catching up. In
Speaker 2: the meantime, China's numbers yesterday, they show their their trade numbers.
Speaker 2: They're cleaning up by having a factories running at full speed.
Speaker 2: I'm from Michigan. What you see is the manufacturing inventories
Speaker 2: not building the whole US economy is waiting to see
Speaker 2: what's going to happen in terms of policy in twenty
Speaker 2: twenty five. That's this fiscal train wreck, and they want
Speaker 2: to see how is that going to be resolved by Washington?
Speaker 2: To get Washington out of the way. What we're seeing
Speaker 2: right now is this regulatory push that's going on. Day
Speaker 2: by day. You're seeing these massive new regulations come out
Speaker 2: of Washington as an endpoint to the current administration. Also,
Speaker 2: the proposals for big tax increases that you're talking about that, yes,
Speaker 2: there's going to be some Republicans who say we need it,
Speaker 2: but I think the public recognizes if you give more
Speaker 2: money to Washington, it's just going to be spent. So
Speaker 2: it's not really going to help on the national debt front.
Speaker 1: When it comes to the national debt and taxes, the
Speaker 1: CBO came out yesterday and said, if we were to
Speaker 1: see an extension the Trump era tax cuts four point
Speaker 1: six trillion dollars, so fiscally, this would be incredibly challenging.
Speaker 1: How do you think about that? Would the bond market
Speaker 1: even allow that to happen?
Speaker 2: This gets into what are the taxes and how do
Speaker 2: they affect growth. There's this tendency of people to do
Speaker 2: what's called static modeling, meaning they say if nobody changes
Speaker 2: their behavior, then tax cut will will just be added
Speaker 2: to the national debt. But the whole point of taxation
Speaker 2: is to raise revenue without stopping people from doing what
Speaker 2: they need to do, small businesses, reinvesting. I think we're
Speaker 2: over the laugh or curve right now in terms of
Speaker 2: small business taxation. I don't know if you saw the statistics.
Speaker 2: As President Biden has proposed these big tax increases on
Speaker 2: capital gains also on basis step up. It causes small
Speaker 2: businesses to just stop investing in their business. They look
Speaker 2: to sell to somebody big because they can't afford the taxes.
Speaker 2: So I challenge that for trillion statistic and say, look,
Speaker 2: you would get more growth out of the economy if
Speaker 2: you had better tax policies. You don't need to raise
Speaker 2: the corporate rate.
Speaker 1: Okay, well that's going to be definitely day one something,
Speaker 1: and we already see committees being formed now in Congress
Speaker 1: to try to map out what this tax policy will
Speaker 1: look like. I want to also ask you about what
Speaker 1: potentially we could see under Trump two point zero. You
Speaker 1: were an economic advisor for him when he was campaigning
Speaker 1: in twenty sixteen, you joined the administration, you ran the
Speaker 1: World Bank. When the Wall Street Journal comes out with
Speaker 1: a report and says that Trump potentially wants to put
Speaker 1: his thumb on the scale when it comes to the
Speaker 1: FED and questions FED independence, do you think that actually
Speaker 1: would be happening.
Speaker 2: I saw that story. There weren't any sources. I don't
Speaker 2: think that is the policy that would create growth. You know,
Speaker 2: the FED has I've criticized the FED for being too big,
Speaker 2: for inserting itself into too many markets. The inner bank
Speaker 2: market has gone. Now, trading of FED funds that were
Speaker 2: so vital to the dynamism of the US economy that's gone.
Speaker 2: The repoll market has been almost nationalized as you look
Speaker 2: at the amount that the FED is controlling within that market.
Speaker 2: So I think we could have a smaller FED, a
Speaker 2: smaller balance sheet for the FED, and that would actually
Speaker 2: be very positive for growth. The commercial banks would love
Speaker 2: to be lending right now to small businesses, but the
Speaker 2: way the regulatory policy works, they can't do it. It's
Speaker 2: biased against small businesses. And that's true also of the
Speaker 2: borrowing that's done by Treasury and by the FED, they're
Speaker 2: borrowing in the short end of the curve, and that's
Speaker 2: just crowding out small businesses. So I think that's the
Speaker 2: key dynamic going on.
Speaker 1: But they're borrowing the short end of the curve because
Speaker 1: everyone thinks, why lock in rates this high at the
Speaker 1: long end, We'll do that maybe in two years when
Speaker 1: they come down, right, I mean, isn't that prudent?
Speaker 2: No, that's not prudent. The yield curve is deeply inverted.
Speaker 2: So if you if you borrow at the short end,
Speaker 2: you're you're paying this five point four percent by the Fed,
Speaker 2: they're borrowing every day at five point four percent to
Speaker 2: own bonds that yield substantially less. That's not prudent. What
Speaker 2: it does do is helps prop up the stock market
Speaker 2: for now. I think there's there's some end game going
Speaker 2: on within the economy where it's part of the kick
Speaker 2: the can is to say, well, let's just borrow short term,
Speaker 2: hoping for better in the future. But foreign, the global
Speaker 2: markets look at that and they're not voting for the
Speaker 2: United States on that. We're week at home. In terms
Speaker 2: of the economy just one point six percent growth and
Speaker 2: CBO's forecasts are for weak growth into the future. And
Speaker 2: then abroad, we've also got that the weakness that's leading
Speaker 2: to wars in multiple parts of the world, and they
Speaker 2: look at the fiscal situation in the US, the inverted
Speaker 2: yield curve, and say, why would I invest into that
Speaker 2: highest short term interest rate?
Speaker 1: Two final quick ones, So one you think under Trump
Speaker 1: there would be an autonomous FED and two would you
Speaker 1: go back into a Trump administrature?
Speaker 2: You know right now that's way premature. The issue is
Speaker 2: for people to sort out the policy differential. You've got
Speaker 2: a choice of weak versus strong, of growth versus stagflation.
Speaker 2: That's the decision for people to make. And Trump would
Speaker 2: have a whole array of people that could really implement
Speaker 2: a growth policy. I think that's quite possible, but it's
Speaker 2: the election cycle, so let's focus on that.
Speaker 1: David Malpass, thank you so much for your time this morning.