WEBVTT - Surveillance: Richard Clarida Is Ideal for Fed, Crescenzi Says 0:00:06.320 --> 0:00:13.040 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:32.360 Bloomberg dot Com, and of course, on the Bloomberg Well. 0:00:32.640 --> 0:00:35.840 Tony Crosenzi joins us here in our studio, and Tony, 0:00:35.960 --> 0:00:38.760 great to have you with us. Happy holidays and all 0:00:38.840 --> 0:00:40.519 those great things. You know. One of the things I 0:00:40.560 --> 0:00:42.920 like about your notes, as you say, barring a zombie 0:00:42.960 --> 0:00:49.280 apocalypse or a spontaneous collapse and asset prices, uh, that's 0:00:49.280 --> 0:00:51.720 a lot of you know, if this doesn't happen, this 0:00:51.800 --> 0:00:55.200 won't happen. But I'm wondering what would a zombie apocalypse 0:00:55.480 --> 0:00:58.960 look like to Tony Crosenzi. Well, list note was the 0:00:59.000 --> 0:01:02.760 product of pimco's quarterly cyclical form where we look at 0:01:03.200 --> 0:01:05.920 the global economy a year forward and try to devise 0:01:05.959 --> 0:01:09.080 an investment strategy, and Yolakum Fells was the lead author 0:01:09.840 --> 0:01:13.200 to that um. So the zombie apocalypse, of course, would 0:01:13.240 --> 0:01:15.360 be probably a lot of a few things. One would 0:01:15.360 --> 0:01:18.160 be an inflation breakout, which would cause a federal reserve 0:01:18.240 --> 0:01:22.120 to increase its interest rates substantially and change the climate 0:01:22.160 --> 0:01:25.720 for investors substantially. Think about the stock market, it probably 0:01:25.720 --> 0:01:27.720 would be upset by it, and so would the corporate 0:01:27.760 --> 0:01:30.280 bond market. Another asset class. Can that happen? Is is 0:01:30.319 --> 0:01:34.880 it possible for inflation to accelerate, not gradually, but in 0:01:34.920 --> 0:01:37.200 a kind of alerch higher? Is that? You know? Can 0:01:37.200 --> 0:01:39.800 you wake up one day on a Thursday and find out, 0:01:40.080 --> 0:01:43.520 oh my goodness, oil's gone to seventy five dollars a borrow, 0:01:43.560 --> 0:01:46.080 like the Saudist said, But it's not three, It's still 0:01:46.080 --> 0:01:49.920 only twenty. Let's say eighteen. Well, uh. Jacket Yelling a 0:01:49.960 --> 0:01:52.320 couple of years ago wrote a note on inflation and 0:01:52.560 --> 0:01:58.040 called Inflation Dynamics September, and she did a thorough examination 0:01:58.200 --> 0:02:01.880 of what causes inflation, and what she concluded was that 0:02:02.080 --> 0:02:04.360 the most important driver of inflation is not the month, 0:02:04.360 --> 0:02:06.560 the amount of money that exists and this factor of 0:02:06.640 --> 0:02:10.920 that factor, it's inflation expectations, what people believe. So it 0:02:11.040 --> 0:02:13.880 is a very much a behavioral thing. And since most 0:02:13.919 --> 0:02:16.639 people have the view that inflation will stay low people 0:02:16.720 --> 0:02:21.320 meaning investors, consumers, businesses, it's highly improbable that would break 0:02:21.360 --> 0:02:25.600 out quickly. It would take a major change in the 0:02:25.639 --> 0:02:31.360 central bank sphere for UH investors, consumers, businesses to think 0:02:31.400 --> 0:02:35.280 differently about inflation in the future. So, for example, in eighteen, 0:02:35.600 --> 0:02:37.760 what if inflation picked up as a result of the 0:02:37.800 --> 0:02:40.160 US job was rate falling below four percent, which is 0:02:40.200 --> 0:02:42.640 likely next year since it's currently four point one. What 0:02:42.720 --> 0:02:45.880 if the Fed decided we don't care, we're gonna let 0:02:45.960 --> 0:02:49.440 pick up because it's been so low, then inflation expectations 0:02:49.520 --> 0:02:52.840 would build up, and then who knows, it could go higher. 0:02:52.880 --> 0:02:56.639 But that's improbable. The Federal Reserves learned over multiple decades 0:02:57.480 --> 0:03:00.080 to be cautious about letting inflation pick up, and so 0:03:00.120 --> 0:03:03.960 it's not likely inflation will pick up meaningfully for very long. 0:03:04.520 --> 0:03:07.240 But having said that, in your note, you say there 0:03:07.320 --> 0:03:10.040 is the potential for four rate increases by the Fed 0:03:10.120 --> 0:03:13.400 next year. A little bit more aggressive for sure. So 0:03:13.440 --> 0:03:16.919 we saw the Federal Reserve deliver three interest rate hikes 0:03:16.919 --> 0:03:20.760 in t seventeen. Three seems probable next year, and that's 0:03:20.760 --> 0:03:23.959 what the Federal Reserve itself expects. There were inconsistency, so 0:03:24.080 --> 0:03:26.840 and we were discussing this at PIMCO with or an advisor, 0:03:27.240 --> 0:03:31.160 Van Berninki not mean to name drop here, but he 0:03:31.240 --> 0:03:34.360 noted these inconsistencies as well. And the last Federal Reserve 0:03:34.800 --> 0:03:37.800 Summary of Economic Projections is a quarterly report the FED 0:03:37.840 --> 0:03:41.800 produces that shows projections on economic growth, on employment, and inflation. 0:03:41.840 --> 0:03:44.840 There was a big inconsistent here. It is FED projected 0:03:44.880 --> 0:03:47.600 economic growth like we do have two and a half percent, 0:03:48.920 --> 0:03:51.960 but it did not project a meaningful drop in the 0:03:52.080 --> 0:03:55.400 unemployment rate, nor an increase in inflation, nor an increase 0:03:55.400 --> 0:03:58.880 in interest rate hikes. And so something has to give, 0:03:58.960 --> 0:04:03.520 and that give may mean a fourth rate hike, because 0:04:03.560 --> 0:04:06.760 it probably will mean a lower jobs are real quick 0:04:06.760 --> 0:04:08.520 on this, and the job is the simple math. It's 0:04:08.560 --> 0:04:11.320 called the Oakland's laws. Member Nankee pointed out if job 0:04:11.440 --> 0:04:15.000 if economic growth of two exceeds growth potential, which is 0:04:15.040 --> 0:04:17.760 considered one point eight by seven tenths, the job is right, 0:04:17.839 --> 0:04:20.400 by Oaklan's law, should fall half of that FED in 0:04:20.440 --> 0:04:23.240 his summi economic rejections had only a two tenths drop 0:04:23.279 --> 0:04:25.880 instead of roughly four that Okan's law would say that 0:04:25.920 --> 0:04:29.240 it will drop next year. Hey listen, so might Rich 0:04:29.440 --> 0:04:33.400 Clarida beyond that FED next year maybe thinking about doing 0:04:33.440 --> 0:04:35.680 four rate increases. Of course, there's a report out there 0:04:35.760 --> 0:04:38.520 in the Wall Street Journal, according to those in the 0:04:38.640 --> 0:04:42.600 know that the White House has interviewed Mr Clarida, who's 0:04:42.640 --> 0:04:45.760 of course imagining director at PIMCO, and also some others. 0:04:46.360 --> 0:04:48.240 We talked about this on Bloomberg TV with our Marty 0:04:48.279 --> 0:04:52.240 schenk or Um and any insight you can just give 0:04:52.279 --> 0:04:53.840 pim and me, it's just the three of us. Well, 0:04:53.839 --> 0:04:58.559 they would There would only be one announcement, of course, 0:04:58.600 --> 0:05:01.960 of whether or not Rich Claire his name to the 0:05:02.000 --> 0:05:04.280 Federal Reserve, and that would of course come from the 0:05:04.279 --> 0:05:07.760 White House. But I would say about rich and Uh 0:05:07.760 --> 0:05:12.800 that he's expert, he's exemplary, he's exceptional, and these qualities 0:05:12.800 --> 0:05:16.920 are important. Also he's he's very affable and works well 0:05:16.960 --> 0:05:20.719 with people. This is important collegial. Here's his story I 0:05:20.760 --> 0:05:23.560 have from Alan Greenspan. He visited us when he was 0:05:23.600 --> 0:05:26.360 an advisor to Pempico with Newport Beach, and he said 0:05:26.360 --> 0:05:29.280 that when he joined the FED in seven as FED chair, 0:05:29.839 --> 0:05:32.320 that he learned that it it was the most collegial organization 0:05:32.320 --> 0:05:36.120 he ever worked for. For example, he expected staffers PhD 0:05:36.160 --> 0:05:39.480 staffords to walk into his room with competing views on 0:05:40.240 --> 0:05:44.279 the policy, and instead they were working together. This collegiality 0:05:44.400 --> 0:05:48.359 is something that someone like Rich Clarata would contribute well to. 0:05:48.440 --> 0:05:51.560 It's very important to the institution of the FED and uh, 0:05:51.920 --> 0:05:55.440 Rich of course would be ideally suited if chosen. Can 0:05:55.480 --> 0:05:57.120 I just push back on that, I mean, why do 0:05:57.160 --> 0:05:59.920 you want everybody to agree with each other for the collegiality? 0:06:00.040 --> 0:06:02.720 But this is not agreeing with each other. It's not 0:06:03.200 --> 0:06:09.120 it's providing inputs, right, And somebody says don't raise interestsgiality 0:06:09.600 --> 0:06:13.560 in the Federal Reserve sense means healthy discussion. They're all 0:06:13.600 --> 0:06:16.120 working together with their varied points of view. This is 0:06:16.120 --> 0:06:19.039 something that PIMCO knows well. We hold in our quarterly 0:06:19.080 --> 0:06:21.600 forums and Rich Clarence as head of them. Uh. Two 0:06:22.040 --> 0:06:26.680 people attending U in Newport Beach contributing views. It's a 0:06:26.680 --> 0:06:29.880 flat structure where everyone has a voice. One could have 0:06:29.920 --> 0:06:33.320 no rank at all in terms of official rankings. Of course, 0:06:33.440 --> 0:06:36.000 they have high rankings as human beings. Uh. They could 0:06:36.000 --> 0:06:39.320 be vice president of senior vice president, executive managing director. 0:06:39.760 --> 0:06:41.560 Who who knows? The main thing is that it's a 0:06:41.640 --> 0:06:43.719 voice and it's a it's an input. And this is 0:06:43.760 --> 0:06:48.080 something that which absolutely understands quite well. Exceptionally well. What 0:06:48.160 --> 0:06:50.640 about though? Also we know that Rich served as an 0:06:50.640 --> 0:06:54.719 Economic Policy Assistant Secretary for Economic Policy the Treasury Department 0:06:55.120 --> 0:06:58.560 from O two to oh three, So he comes at 0:06:58.600 --> 0:07:04.600 things with an ponomous background, with a financial background, if 0:07:04.640 --> 0:07:06.400 you will, Will comes at it from a couple of 0:07:06.400 --> 0:07:09.320 different angles, Tony, How might that help the FED, particularly 0:07:09.800 --> 0:07:13.000 in what might come in It's also important to have 0:07:13.080 --> 0:07:15.960 a great Anyone who's appointed to the FED should have 0:07:15.960 --> 0:07:19.320 a great understanding about communications. Remember a great line from 0:07:19.320 --> 0:07:22.280 Bamburnanking his most recent book, The Courage to Act. He 0:07:22.360 --> 0:07:24.880 said that he's repeated this to us at PIMCO, that 0:07:24.960 --> 0:07:31.320 that monetary policies on two percent action communication. In other words, 0:07:31.760 --> 0:07:35.240 what the FED says can affect markets and people's expectations, 0:07:35.280 --> 0:07:38.440 and it's important to have an understanding of that, and 0:07:38.480 --> 0:07:43.720 the understanding of economics and monetary policy historically matters too. 0:07:43.880 --> 0:07:46.600 We spoke about this on television a little while ago, 0:07:46.640 --> 0:07:50.480 Carol about how Ben Bernanke understood the dilemma of the 0:07:50.480 --> 0:07:53.920 Great Depression and how the FED failed in the nineteen 0:07:53.960 --> 0:07:57.440 thirties to produce enough money to prevent a collapse in 0:07:57.480 --> 0:07:59.920 the money supply. The amount of money that existed if 0:08:00.000 --> 0:08:02.440 failed by a third according to Milton Friedman, and it 0:08:02.560 --> 0:08:06.440 was a great contributor to the Great Depression lack of money. Uh. 0:08:06.560 --> 0:08:08.880 Bam Bernanke understood that it was that it was importantly 0:08:08.920 --> 0:08:11.520 printed lots of money, just as corroded did in Japan 0:08:11.960 --> 0:08:15.560 and dragging in Europe. Uh. These are very important things 0:08:15.600 --> 0:08:18.480 to understand. Um, that's a big example, but there are 0:08:18.480 --> 0:08:22.120 a lot of little examples about how knowledge about monetary 0:08:22.160 --> 0:08:25.840 policy can conserve a member of the Federal reserved Quite well, 0:08:26.520 --> 0:08:29.320 do you think it's more it's easier to manipulate people's 0:08:29.360 --> 0:08:34.400 opinions now than it was, let's say, in the nineteen thirties. Yes, Um, so, 0:08:34.440 --> 0:08:37.800 then that apocalypse that you describe, where that sudden change 0:08:37.920 --> 0:08:42.400 in people's expectations is perhaps more likely to happen now 0:08:42.400 --> 0:08:47.319 than it was before we had Twitter, smartphones and sevens. Probably, 0:08:47.840 --> 0:08:52.160 perhaps it's not the that the Fed can convince or 0:08:52.240 --> 0:08:56.160 communicate more. Uh. The temple the speed at which things happen, 0:08:56.200 --> 0:08:59.000 of course as faster, but of course the public could 0:08:59.400 --> 0:09:03.400 could have a fear permier quickly. Think of the movie 0:09:03.400 --> 0:09:06.600 It's Wonderful Life with Jimmy Stewart. Uh, there's a scene 0:09:06.760 --> 0:09:09.880 I recall with a bank run. How do people know 0:09:09.960 --> 0:09:12.640 that there's a bank run occurring in that day and age? 0:09:12.640 --> 0:09:15.320 It's simply where it eventually gets around. Today was simply 0:09:15.360 --> 0:09:17.199 the speed at which it gets around is faster. Now 0:09:17.200 --> 0:09:22.440 you just pound the uh, you know, online button, tweet. 0:09:22.559 --> 0:09:24.760 But I mean if you go to a website and 0:09:24.800 --> 0:09:28.040 it stops working and it's your bank, all of a sudden, 0:09:28.120 --> 0:09:31.280 everybody in the world knows that everything's changed, or a 0:09:31.280 --> 0:09:36.359 tweet or something posted on a social website. Absolutely, communication 0:09:36.440 --> 0:09:38.840 is important to central bankers, and that's one of the 0:09:39.040 --> 0:09:42.440 key things that's keeping interest rates low and make causing 0:09:42.440 --> 0:09:45.160 the yield curve to be flat, as they say, meaning 0:09:45.360 --> 0:09:48.000 short term rates are close to long term rates. Is 0:09:48.040 --> 0:09:51.520 the idea that this communication is calmed investors. They don't 0:09:51.559 --> 0:09:54.520 worry and ask what compensate compensation against the risk of 0:09:54.559 --> 0:09:59.400 higher inflation and higher policy rates anymore. Alright, we're going 0:09:59.440 --> 0:10:01.959 to continue the conversation. We've got more with Tony Krissense, 0:10:02.080 --> 0:10:06.560 Pimco market strategist and portfolio manager. I'm pim Fox along 0:10:06.600 --> 0:10:27.600 with Carol Masser, and this is Bloomberg Surveillance. I'm Carol 0:10:27.640 --> 0:10:30.040 Masser along with Pim Fox. We are in for Tom 0:10:30.080 --> 0:10:32.520 Keene and Jonathan Farrell on this Wednesday. We want to 0:10:32.520 --> 0:10:35.000 talk a little bit about the tax legislation. We mentioned 0:10:35.000 --> 0:10:37.679 earlier about Barkley's taking a one time hit from the 0:10:37.760 --> 0:10:40.400 U S tax bill, but expecting to make it back 0:10:40.480 --> 0:10:43.720 to some extent on future earnings. David Burton is with 0:10:43.760 --> 0:10:46.880 the Heritage Foundation, Senior fellow at the Heritage Foundation. We 0:10:46.960 --> 0:10:49.720 find him on the phone from the nation's capital on 0:10:49.880 --> 0:10:52.800 this Wednesday. David, nice to have you here on Bloomberg Radio. 0:10:53.559 --> 0:10:56.760 This tax proposal, we talked about it earlier, not proposal, 0:10:56.840 --> 0:10:59.920 this new tax legislation overhaul, if you will, we talk 0:11:00.080 --> 0:11:07.080 about it earlier. Greatest benefit really is for corporations. Yes, 0:11:07.240 --> 0:11:12.640 in terms of the positive economic effects, the biggest benefit 0:11:13.280 --> 0:11:19.680 is the reduction and corporate tax rate from which was 0:11:19.720 --> 0:11:23.160 a while it sounds like a lot. Um actually puts 0:11:23.200 --> 0:11:26.080 this in the middle of the pack among industrialized countries. 0:11:27.040 --> 0:11:31.640 Will be at about one state corporate taxes are taken 0:11:31.640 --> 0:11:37.080 into account, but until next week, we're literally the worst 0:11:37.800 --> 0:11:41.880 highest corporate tax rate in the industrialized world. So we've 0:11:41.880 --> 0:11:45.720 made progress. Uh. It also contains a number of other 0:11:45.840 --> 0:11:52.040 provisions that are constructive. Probably the most notable is expensing 0:11:52.200 --> 0:11:57.000 for machinery and equipment for five years, so businesses can 0:11:57.040 --> 0:12:00.800 deduct the cost of buying machinery and witment rather than 0:12:00.840 --> 0:12:05.559 having to deducted over many years, five, seven, ten years um. 0:12:06.120 --> 0:12:08.240 There are a number of other positive things in the 0:12:08.280 --> 0:12:14.480 international tax area that will help US headquartered companies, But 0:12:14.600 --> 0:12:17.920 on the individual side, it's not all that much to 0:12:18.160 --> 0:12:22.240 brag about. It reduces individual tax rates a couple of points, 0:12:22.240 --> 0:12:25.080 but for a lot of people that's taken back immediately 0:12:25.200 --> 0:12:28.760 by the repeal of the state and local tax deduction. David, 0:12:28.760 --> 0:12:30.839 do you believe that the economy is doing fairly well 0:12:30.960 --> 0:12:37.720 right now? Yes? I mean it is just doing reasonably well. 0:12:38.360 --> 0:12:42.400 There's plenty of room for improvement, both in terms of 0:12:42.640 --> 0:12:47.440 investments and productivity gains. But also there's a lot of 0:12:47.440 --> 0:12:51.880 people who aren't encountered as unemployed, who normally would be 0:12:51.960 --> 0:12:56.200 in the workforce. Well, do we know exactly how many 0:12:56.240 --> 0:12:59.000 of those people are there and whether that is what 0:12:59.120 --> 0:13:01.679 is tipping the political scales to force this overhaul of 0:13:01.720 --> 0:13:05.240 the tax code. You can get a cent of how 0:13:05.240 --> 0:13:08.600 many people are there by looking at the broader definitions 0:13:08.600 --> 0:13:13.000 of unemployment that the Beer of Labor Statistics put out. Um, 0:13:13.360 --> 0:13:18.360 they put out lots of different measures. The you know 0:13:18.400 --> 0:13:22.000 that what you usually hear on the radio, uh is 0:13:22.240 --> 0:13:26.760 one measure, but there are broader measures, uh that would 0:13:26.760 --> 0:13:31.040 have unemployment up there. I forget the exact number right now, 0:13:31.120 --> 0:13:34.440 it's but it's about ten. Uh. Those are people who 0:13:34.440 --> 0:13:39.520 have not reported in the conventional unemployment rates. But use 0:13:39.600 --> 0:13:43.040 six is what this is called is is uh. It 0:13:43.200 --> 0:13:46.480 reflects people who have gonna affect given up looking for 0:13:46.520 --> 0:13:49.040 work for the time being. Okay, so I'm just trying 0:13:49.040 --> 0:13:51.520 to understand why would you put together a tax overhaul 0:13:51.559 --> 0:13:54.080 plan at a time that the economy, by your own admission, 0:13:54.160 --> 0:13:57.120 is doing pretty well. And you're pointing to all these 0:13:57.120 --> 0:14:00.440 people that are outside the workforce that perhaps aren't counted. 0:14:00.600 --> 0:14:04.080 And yet Uh, if you've got to pass through corporation, 0:14:04.080 --> 0:14:07.760 you're gonna end up paying what tax? But if you're 0:14:07.800 --> 0:14:10.960 actually working for a pay check, as chances are that 0:14:11.000 --> 0:14:13.319 your tax rate is going to be a lot higher. 0:14:13.760 --> 0:14:18.120 How does that make sense? Well, for one, our labor 0:14:18.160 --> 0:14:22.600 force produci patient rate is that historic loads are near 0:14:22.880 --> 0:14:26.480 those loads. This tremendous number of people not working. It 0:14:26.560 --> 0:14:30.400 could be working, and presumably you would prefer that they 0:14:30.560 --> 0:14:35.200 be working and self sufficient rather than uh collecting the 0:14:35.240 --> 0:14:39.040 disability or unemployment insurance. I don't think anybody argues that, 0:14:39.080 --> 0:14:42.040 but I think the question is how do you make 0:14:42.160 --> 0:14:45.880 how do you maintain this sort of idea that this 0:14:46.000 --> 0:14:51.080 tax overhaul plan that reduces You said it's good for corporations, right, 0:14:51.120 --> 0:14:53.360 I mean it will reduce their tax rate, although most 0:14:53.400 --> 0:14:58.600 companies don't necessarily overseas pay that tax rate. Of how 0:14:58.720 --> 0:15:01.880 is the relevant thing you would think is you would 0:15:01.880 --> 0:15:06.400 want people to invest in producing things here in the 0:15:06.480 --> 0:15:09.080 United States, So why not make the tax cut contingent 0:15:09.280 --> 0:15:11.760 on their actual hiring. I mean you can do that. 0:15:11.840 --> 0:15:14.400 You can put all the details you want into the 0:15:14.400 --> 0:15:17.080 tax code. Why just assume that they're going to do 0:15:17.120 --> 0:15:20.480 it or encourage it? When chief executives have already raised 0:15:20.480 --> 0:15:22.400 their hands and said we're going to buy back stock 0:15:22.440 --> 0:15:26.160 and we're going to increase dividends. Well, we'll do some 0:15:26.320 --> 0:15:27.960 of that, and that's fine. The money that when they 0:15:28.040 --> 0:15:30.440 buy back the stock, that money doesn't disappear. It gets 0:15:30.440 --> 0:15:33.720 reinvested somewhere else, and the market determines where it goes. 0:15:33.840 --> 0:15:36.920 It goes to the generally what people believe will be 0:15:36.960 --> 0:15:41.840 the highest return investments. UH. As you probably are aware, 0:15:41.920 --> 0:15:45.600 a tremendous number of US companies have been leaving, for example, 0:15:45.640 --> 0:15:49.000 Onizer Bushes now Belsenburger King Is now Canadian and selling 0:15:49.080 --> 0:15:52.480 down the line. By reducing our core for tax rate 0:15:52.600 --> 0:15:57.880 and improving the international treatment of US businesses, we're going 0:15:57.920 --> 0:16:00.280 to see less of that. We're going to see more 0:16:00.440 --> 0:16:03.320 factories being built in the United States. We're gonna see 0:16:03.320 --> 0:16:06.560 a higher rates of productivity growth. We're going to see 0:16:06.640 --> 0:16:09.680 a lot of positive things as a result of this legislation. 0:16:10.240 --> 0:16:12.920 But I don't want to oversell this legislation. It is 0:16:12.920 --> 0:16:16.440 a shadow of what it should have been. UH. It's 0:16:16.520 --> 0:16:19.960 probably going to result in two and a half uh 0:16:20.120 --> 0:16:23.680 increase in the GDP or the overall size of the 0:16:23.680 --> 0:16:27.600 economy over the next ten years. It should have been 0:16:27.600 --> 0:16:30.560 more up around the neighborhood of ten percent. This is 0:16:30.600 --> 0:16:36.120 going to be a relatively small positive effect on the 0:16:36.120 --> 0:16:40.800 economy as opposed to the transformational, huge kick in the 0:16:40.840 --> 0:16:43.560 pants that it could have been if they've done it right. 0:16:43.720 --> 0:16:45.480 And let me just point out the Joint Committee on 0:16:45.600 --> 0:16:49.160 Taxation UM, the group within the Congress that really kind 0:16:49.160 --> 0:16:52.000 of figures out, you know, what kind of kick this 0:16:52.120 --> 0:16:54.120 legislation will have. They actually say that it's going to 0:16:54.160 --> 0:16:57.760 be maybe eight tenths of a percent increase to the 0:16:57.800 --> 0:17:01.560 accounty over ten years, so it's a lot less substantial. 0:17:02.160 --> 0:17:06.800 The Joint Committee on Taxation staff basically has a long 0:17:07.000 --> 0:17:12.280 history of underestimating the economic growth effects of any tax legislation. 0:17:12.840 --> 0:17:17.080 That said, you know, I don't want to overseell this legislation. 0:17:17.200 --> 0:17:20.159 It's not going to have magical effects. But David, let 0:17:20.160 --> 0:17:22.320 me ask you. You say that there was a missed opportunity. 0:17:22.359 --> 0:17:24.560 They could have done a lot more. What should they 0:17:24.560 --> 0:17:26.679 have done in your view? Should it have been more 0:17:26.680 --> 0:17:30.880 of an individual tax cut? What? Wow? The biggest thing 0:17:30.920 --> 0:17:34.520 that they failed to do is improve permanently the tax 0:17:34.560 --> 0:17:40.280 treatment of investment in things like factories or technologlogical developments 0:17:40.400 --> 0:17:43.879 on the line. In other words, they did not expense 0:17:44.119 --> 0:17:48.679 capital investment. Uh, they didn't expense structures, they didn't expense 0:17:48.720 --> 0:17:53.560 equipment uh permanently. Uh. They made a lot of other mistakes. 0:17:53.600 --> 0:17:56.320 They kept the capital gains rate where it is. They 0:17:56.400 --> 0:18:01.800 kept the rate on pass through businesses or or individuals 0:18:01.920 --> 0:18:05.320 uh very high and for a lot of people who 0:18:05.359 --> 0:18:11.240 actually see marginal tax rate increases. Uh. So there's then 0:18:11.320 --> 0:18:13.320 I can get into a lot more details, but there's 0:18:13.800 --> 0:18:16.000 a long list of things they did not do to 0:18:16.119 --> 0:18:22.399 improve the tax system, David, If the consequences of the 0:18:22.520 --> 0:18:27.520 overhaul lead to muted growth, in other words, this pop 0:18:27.680 --> 0:18:30.880 that you're describing, or indeed even the stronger economy that's 0:18:30.880 --> 0:18:34.000 being described by the Republicans who passed it, if that 0:18:34.040 --> 0:18:37.639 does not appear, is there a way to put to 0:18:37.760 --> 0:18:43.280 rest the notion that tax cuts fuel economic growth. I 0:18:43.320 --> 0:18:48.920 think it's vertually certain that tax reductions and marginal tax 0:18:49.040 --> 0:18:51.960 rates and reductions in the cost of capital will fuel 0:18:52.000 --> 0:18:56.520 economic growth. That's pretty basic pricetery, pretty basic public finance. 0:18:57.160 --> 0:19:00.320 It's not the tax cuts per se has and do 0:19:00.359 --> 0:19:03.520 its sort of kensy and multipliers and things like that. 0:19:03.840 --> 0:19:06.159 It's the fact that people are economically rational and if 0:19:06.160 --> 0:19:07.880 they can get a higher rate of return, they're more 0:19:07.920 --> 0:19:10.720 likely to invest, they're more likely to work, they're more 0:19:10.760 --> 0:19:16.480 likely to say uh. And so I don't think we'll 0:19:16.480 --> 0:19:19.760 get over that because I think it's almost incontrovertibly true. 0:19:20.800 --> 0:19:23.640 But then the question is how do you do that? 0:19:24.480 --> 0:19:27.440 And reducing marginal tax race is part of it. Reducing 0:19:27.480 --> 0:19:30.160 the cost of capital as part of it. This bill 0:19:31.000 --> 0:19:34.879 or or legislation does improve those things, but it's not 0:19:35.040 --> 0:19:38.359 nearly as dramatic as it could have been, should have 0:19:38.400 --> 0:19:41.320 been as not as as dramatic as it started out. 0:19:41.800 --> 0:19:45.240 They ended up having to keep a long laundry list 0:19:45.280 --> 0:19:49.919 of special tax provisions uh and and various things on 0:19:49.960 --> 0:19:53.119 the individual side. It don't affect by people off because 0:19:53.160 --> 0:19:57.359 there they needed virtually every Republican vote to get it done. 0:19:57.840 --> 0:19:59.960 All right, well, we're gonna leave it there, but thanks 0:20:00.080 --> 0:20:02.560 very much at David Burton. Looking forward to having you 0:20:02.600 --> 0:20:04.840 in the new year and to go over the effects 0:20:04.840 --> 0:20:08.400 of the attacks overhaul plan. David Burton is the Heritage 0:20:08.400 --> 0:20:13.040 Foundation's Senior Fellow in Economic policy on the tax plan. 0:20:13.080 --> 0:20:15.639 You're listening to Bloomberg Surveillance. I'm Pim Fox along with 0:20:15.760 --> 0:20:31.320 Carol Masser. I'm Carol Masser along with the wonderful Pim 0:20:31.359 --> 0:20:34.080 Fox right here on Bloomberg Radio. We are in for 0:20:34.280 --> 0:20:37.040 Jonathan Farroll and Tom Keene. We do want to talk 0:20:37.080 --> 0:20:39.040 a bit about the economic outlook what it might mean 0:20:39.080 --> 0:20:41.720 for FED policy. Joining us right now is Kevin Cummins. 0:20:42.000 --> 0:20:46.120 He's senior US economist at NatWest Market, joining us on 0:20:46.320 --> 0:20:49.920 the phone from I Believe, Connecticut. Kevin, good to have 0:20:49.960 --> 0:20:52.160 you here on Bloomberg Radio. You look at the outlook, 0:20:52.200 --> 0:20:54.119 you look at the economic outlook. There are folks that 0:20:54.160 --> 0:20:57.240 come on and they are optimistic about what's to come. 0:20:57.600 --> 0:21:01.480 They continue to see growth into one eighteen summer. Tempering 0:21:01.480 --> 0:21:04.080 it back, Where are you, hi, Good morning, Well, thanks 0:21:04.080 --> 0:21:07.159 for having me Carol. Um. Yeah, we're pretty optimistic on 0:21:07.200 --> 0:21:11.040 the overall outlook. We think the expansion is going to continue. Um, 0:21:11.240 --> 0:21:14.199 we're looking for growth this year right around two and 0:21:14.200 --> 0:21:17.480 a half percent and to gradually accelerate into next year 0:21:17.520 --> 0:21:21.439 closer to I want to know about automobile sales and 0:21:21.640 --> 0:21:24.960 what what weight you give those to your outlook, because 0:21:25.000 --> 0:21:27.560 it looks as though we are set for the first 0:21:27.600 --> 0:21:31.600 decline full year sales decline since the Great Recession. And 0:21:31.640 --> 0:21:33.600 I know that there are a lot of statistics that 0:21:33.680 --> 0:21:38.119 you know, exclude automobiles, They exclude energy, whether that's inflation. 0:21:38.400 --> 0:21:40.880 But I'm wondering if you could talk about automobile sales 0:21:40.920 --> 0:21:44.320 and how you figured that that flows into the economy. Yeah, 0:21:44.400 --> 0:21:48.400 I mean, obviously, the manufacturing more broadly is an important 0:21:48.480 --> 0:21:51.680 sector of the economy. In particular, autos drives a lot 0:21:51.680 --> 0:21:56.280 of manufacturing UM and as you mentioned, those are set 0:21:56.359 --> 0:22:01.520 to moderate, although more recent months you've seen very strong 0:22:01.640 --> 0:22:04.919 demand in the wake of the hurricanes, which impacted a 0:22:04.960 --> 0:22:08.399 lot of UH. You know, replacement automobiles have picked up 0:22:08.880 --> 0:22:11.600 in the in the wake of that. UH. In fact, 0:22:11.760 --> 0:22:15.440 we're looking for a nice rebound that will get at 0:22:15.440 --> 0:22:18.240 the start of the year a pretty healthy reading close 0:22:18.280 --> 0:22:21.200 to eighteen million units at an annualized rate. So that's 0:22:21.240 --> 0:22:26.399 a very strong, probably unsustainable pace. More broadly, UM, but 0:22:26.680 --> 0:22:29.240 this year we're looking for a closer to about a 0:22:29.280 --> 0:22:31.920 seventeen million unit rate when it's all said and done 0:22:31.960 --> 0:22:35.160 for the twelve months of the year UM, and we're 0:22:35.200 --> 0:22:38.200 looking for that to be pretty much sustained into two 0:22:38.240 --> 0:22:41.639 thousand and eighteen. As the consumers and still pretty healthy shape. 0:22:42.000 --> 0:22:44.719 Do you think that consumer is in healthy enough shape 0:22:44.720 --> 0:22:47.439 to actually buy one of these new cars, because the 0:22:47.520 --> 0:22:51.200 Kelly Blue Book says that the average sticker price paid 0:22:51.280 --> 0:22:56.040 for a new vehicle is nearly thirty six thousand dollars. 0:22:56.080 --> 0:22:58.280 That's up two percent from a year earlier. Those are 0:22:58.280 --> 0:23:01.919 November figures. Yeah, those are big numbers. But uh, you know, 0:23:02.000 --> 0:23:05.200 with the sort of labor market that we've gotten, Um, 0:23:05.320 --> 0:23:08.080 you know, it's the consumers seems to be kind of 0:23:08.119 --> 0:23:10.680 firing on all cylinders as we headed into the start 0:23:10.720 --> 0:23:13.040 of the year. Do you think that they'll be able 0:23:13.080 --> 0:23:15.160 to continue to afford it whether they put cash down 0:23:15.160 --> 0:23:18.320 which is unlikely, but more likely to borrow or lease. Yeah, 0:23:18.359 --> 0:23:20.760 that's kind of the American way. I mean, you know, 0:23:20.800 --> 0:23:23.640 the labor market has remained very solid. If you look 0:23:23.680 --> 0:23:26.920 at payroll growth, we've averaged about a hundred and seventy 0:23:26.960 --> 0:23:29.560 five or so thousand jobs over the last twelve months 0:23:29.600 --> 0:23:33.679 or so. UM. The employment report that we'll get at 0:23:33.720 --> 0:23:35.879 the start of the year suggests that the consumer is 0:23:35.920 --> 0:23:41.159 likely to have have a pretty good uh wherewithal to 0:23:41.359 --> 0:23:44.440 spend h to start two thousand and eighteen. And now 0:23:44.480 --> 0:23:46.560 that you've gotten a little bit of momentum in the 0:23:46.680 --> 0:23:50.199 overall economy as we head into the year, uh, you know, 0:23:50.240 --> 0:23:54.199 when people are reminded U that confidence is high. We'll 0:23:54.240 --> 0:23:56.679 get a reading in that in a little bit with 0:23:56.760 --> 0:23:59.800 the Conference Board measure. But but by all indications, there's 0:23:59.800 --> 0:24:02.120 no reason to suggest that there's going to be any 0:24:02.160 --> 0:24:05.520 sort of pull back from the consumer sector as two 0:24:05.400 --> 0:24:08.399 thousand eighteen starts. All Right, Kevin Cummins, I'm a half 0:24:08.600 --> 0:24:11.399 glassful kind of girl. I'm just going to say that 0:24:11.440 --> 0:24:15.720 I'm pretty optimistic. UM. Having said that, we have seen 0:24:15.720 --> 0:24:18.959