By Nick Timiraos
Economist David Malpass offers his thoughts on trade, debt management and monetary policy.
November 21, 2016 "Information Clearing House" - "WSJ" - David Malpass, an economic adviser to President-elect Donald Trump, has been tasked with overseeing the transition for the Treasury Department and economic policy.
Mr. Malpass, a former chief economist at Bear Stearns who served in the Ronald Reagan and George H.W. Bush administrations, in October addressed a group of economists and reporters in Washington.
Here are excerpts, lightly edited and condensed for clarity, of his remarks on a range of economic policy subjects facing the incoming Trump administration.
On renegotiating the North American Free Trade Agreement:
I was there at the beginning of Nafta. The idea of Nafta was, it was supposed to be…a very clear, free-market orientation that would allow both sides of the border to do what they do best in the classical sense of more commerce.
But as it was negotiated, year after year, special interests descended upon it. And it got thicker and thicker and thicker. This was 1989, 1990 and into 1991. It’s up to 1,200 pages and then [President George H.W.] Bush left, [President Bill] Clinton came in and added the environmental chapter and the labor chapter.
It became this monstrously large, managed trade process that doesn’t work at all for small businesses in the U.S….
There are too many parts of it that are not working. There is supposed to be regular annual review between the parties of Nafta to see where it’s not working well and to have kind of a constant process of renewal. That’s been dropped away. And so that’s something that needs to be looked at.
On the federal debt limit:
Think how odd it is to the public that here, Washington, D.C., keeps suspending the debt limit. We have a $20 trillion debt and Washington’s response to that is to suspend [the debt limit] because they can’t meet it, because it keeps going up. So it will, remember, be reinstated in March.
There will be a temptation in Washington to simply suspend it again, which is a nonworkable solution for the American public, because in the end, they’re going to have to pay that national debt.
Instead, what I would like to see everyone agree [is] that the current debt-limit law is simply a failure. It doesn’t limit debt. It doesn’t even limit spending, because the spending occurs and then the debt has been accumulated. And then members of Congress are asked whether they approve debt that has already been spent.
So we have to recognize that this has been a complete failure of a law. We ought to have a way to rewrite the law so that it at least attempts to control spending before it becomes debt, rather than after it becomes debt.
On the Federal Reserve:
Trump has talked about the politicization of the Fed. A way for people to think about this is the Fed is an independent agency within the U.S. government. That we want.
But the results of the Fed’s policies have been highly disappointing. For years, in 2010, 2011, 2012, the Fed would start the year with an optimistic forecast that, due to the stimulus it was providing, the economy was going to grow 4%. Then as the year went on, they’d be lowering their forecast to 3%, and then to 2%….We’re now at 1.4% despite the Fed thinking that it has pedal to the metal in terms of stimulus.
That’s a grievance that needs to be brought from the American people to Washington to say, ‘This system that you’re running simply does not work.’
And so that was the context of wondering about the political inclination of the Fed….Governors are approved by the Senate. They have political leanings. So there’s a problem in thinking about, Are we getting the best policy?
We need monetary integrity. We need to have a situation where the U.S. dollar is a trustworthy currency. I would like to see the world’s most trustworthy currency. We don’t have that in the current system.
On infrastructure spending:
We all agree we need more infrastructure. We have to find a system where the private sector wants to finance a lot more infrastructure.
There was an article in The Wall Street Journal showing around the world $50 trillion in cash. Most of the cash is now either negative—I don’t know the numbers anymore because they keep going up—but $12 trillion in negative-interest-rate yielding bonds.
All I have to do is show you an infrastructure project that returns zero, meaning—so for 30 years, you’re going to have a bridge. And it’s going to break even. And that’s good enough to beat the hurdle rate that the market is choosing right now.
So it seems clear to me that what’s broken in the system is not the sources of financing for infrastructure, but the obstacles to actually getting it built. So that means property rights. That means permits. That means the choice of project. That means the interstate cooperation.
In New York state, we have this giant problem where the infrastructure is jointly owned between the state, New Jersey and the city of New York. So imagine trying to get those three actors to agree on a tunnel under the Hudson River or whatever project you want to do.
On debt management by the U.S. Treasury:
Right now, the U.S. issues a certain amount of longer-maturity debt. So every treasurer in the country in the corporate sector is trying to lengthen the maturity of their debt given the low yields that are available. So we just saw Saudi Arabia do a gigantic bond deal at a 3.5% interest rate for a 10-year security. And it was presented, rightly, that that will help stabilize their finances.
So a lot of developed countries are issuing huge amounts of long-term debt right now because the market wants the debt and because that will benefit the taxpayer for the long run. Remember the trade-off. That means in the very short run your interest costs go up a little bit because you’re lengthening the maturity. Now every corporate treasurer makes that trade-off and says, ‘I’d rather have the stability of the long-term debt.’
So here’s the problem: The Fed has been buying up a large percentage of the long-duration debt. So every time a bond comes due at the Fed, they roll it into a long-maturity purchase-back. So they’re buying back the debt that should be in the private sector.
So one thing Treasury should be doing, to Trump’s point, we should be refinancing the debt into longer maturity. That means as debt comes due, issue longer maturity. And that would protect the taxpayer and be the logical thing to do.…
So shouldn’t the U.S. government be doing that and why aren’t we? Well, because it makes our budget deficit look good for one year, but the cost of that is for 30 years you’re missing the opportunity to lock in these low rates.
On the Dodd-Frank financial-regulatory law:
So Dodd-Frank hasn’t worked. Lots of luminaries including Alan Greenspan have pointed out that it’s just an unworkable concept of a law, and so how do you begin to get back to a system that works for average Americans….[House Financial Services Committee Chairman] Jeb Hensarling has a comprehensive bill on various segments of that problem and those are well-received in the campaign.
On carbon pricing to address climate change:
That is not a market-based way to have more energy benefits for the nation from the huge resources that are here.
On a housing-finance overhaul:
The current housing-finance system is very government-centered. Fannie and Freddie are doing a giant percentage of the conventional mortgages. There hasn’t been much ability to regrow private-label mortgages, and so that’s a system that’s much too Washington-centric.
Now whether that gives you a path in Washington—there’s how many plans on what to do with Fannie and Freddie, probably two dozen, right? I think the direction of the administration would be to change housing finance and improve it so that it works better for average Americans.
If you look at the skewing of the average mortgages that are being given now, rich people are doing a lot better on their mortgages than average people within the current regulatory structure.
Donald Trump's economic policies could go badly wrong – but not soon enough
November 21, 2016 "Information Clearing House" - "The Guardian" - November 2020: the results of the US presidential election are in. The Democrat candidate, Elizabeth Warren, fought bravely but the outcome was never really in doubt. With the economy booming, Donald Trump is returned to the White House in a landslide. His pitch to voters has been simple: I kept my promise. America is great again.
For Trump’s opponents, this is the nightmare scenario. Still stunned by Hillary Clinton’s defeat, they have taken comfort from their belief that the billionaire property tycoon will prove to be a one-term president – exposed as a dangerous charlatan as soon as he takes office. This may, indeed, prove to be the case. Trumponomics is by no means a fully thought-through programme. The inconsistencies are obvious, as are the dangers. It could all go horribly wrong. But Trump may well have won a second term by the time it does.
Paul Krugman, the Nobel prize-winning economist and one of Trump’s most vociferous critics, suggested in the immediate aftermath of “that horrible election night” that a global recession was imminent.
Now the dust has had time to settle, Krugman admits that his disappointment got the better of him. “Trumpism will have dire effects, but they will take time to become manifest. In fact, don’t be surprised if economic growth actually accelerates for a couple of years.”
Steve Keen, economics professor at Kingston University, thinks Trump’s first term will see a sharp acceleration in US growth – to perhaps 4% a year. By the time any of the nasty side-effects become apparent, he says, Trump will have been safely re-elected.
The president-elect’s economic plan is an eclectic mix of ideas culled from previous occupants of the White House. Half a trillion dollars to improve America’s creaking public infrastructure is a throwback to the 1950s, when Dwight Eisenhower was responsible for the creation of the interstate highway network. A 10% increase in troop numbers looks like the military Keynesianism favoured by Ronald Reagan. The cuts in taxes for corporations and those on the highest incomes conjure up more recent memories, of George W Bush.
Put simply, Trumponomics is a gamble on deficit spending. Tax cuts and spending increases will lead to bigger budget deficits – a doubling from 3% to 6% of GDP, according to independent estimates – and an increase in the national debt, which is already above 100% of national output.
But Trump’s belief is that the tax cuts and additional public spending will lead to faster growth, and eventually an improvement rather than a deterioration in the US public finances. The new president’s credo is that if he looks after the economy, the deficit and the debt will look after themselves.
Trump’s approach is not dismissed out of hand by economists such as Krugman and former US Treasury secretary Larry Summers, who have long argued that a fiscal stimulus – tax cuts and higher infrastructure spending – is needed to lift the economy out of its post-financial crisis torpor. They have criticised the over-reliance on ultra-low interest rates and quantitative easing deployed by the US Federal Reserve, America’s central bank.
Summers says he has long advocated debt-financed public investment and is glad the idea has the backing of the president-elect. But, like Krugman, the former Treasury secretary considers Trump’s package to be badly designed and poorly targeted. It is, in other words, the wrong sort of stimulus.
This criticism has merit. Tax cuts targeting the poor have a bigger impact on growth than those aimed at the rich, because those on limited incomes spend rather than save any extra money they receive. Yet Trump’s personal tax cuts will be of far more benefit to millionaires than to the working-class voters who swung the election his way. Research by the US Tax Policy Center showed that the top 0.1% of earners in America, those making more than $3.7m a year, would get a tax cut of nearly $1.1m (14% of their after-tax income on average). The poorest fifth of Americans would get a tax break of just $110 a year, or 0.8% of their income.
Similar misgivings apply to the infrastructure side of the fiscal plan. America’s pressing need is to repair the freeways, bridges and tunnels built in the 1950s, to modernise schools and to improve the air traffic network. Yet, says Summers, this sort of infrastructure spending will be excluded from Trump’s plans, because such projects don’t generate a big enough commercial return.
The other big element of Trump’s plan involves wooing American companies back home. Corporation tax is to be cut from 35% to 15%, and there will probably be a 10% tax on repatriated profits to encourage US companies to bring back some of the estimated $2.4 trillion currently held offshore to avoid what they regard as punitive tax rates. The hope is that this will create jobs and encourage investment.
If all goes well, the next four years will see lower unemployment, higher real wages, higher profits and investment-driven productivity improvements. But there are plenty of things that could go wrong.
Any boost from looser fiscal policy could be offset by tighter monetary policy. Inflation has been creeping up in the US, and there is a risk that the economy will run into capacity constraints once the tax cuts and spending increases kick in. Federal Reserve chair Janet Yellen was giving nothing away when she gave evidence to Congress last week, but the central bank could accelerate the pace of interest rate increases. Even if the Fed takes a relaxed view of Trump’s policies, the financial markets may not.
“If a dollar that is borrowed and spent by the government – or even forecast to be borrowed and spent by the government – pushes up the bond yield, it makes it more expensive for the private sector to borrow and spend,” says Dhaval Joshi of BCA Research. “If, as a result, the private sector scales back its borrowing by a dollar, the dollar of government spending would have no impact on GDP.”
Then there’s the exchange rate. If Trumponomics follows the pattern of Reaganomics, higher growth and upward pressure on interest rates will mean a stronger currency and a bigger trade deficit. Reagan’s answer to a 50% appreciation of the dollar was an international accord, reached at New York’s Plaza hotel, to reduce its value. Judging by his campaign rhetoric, Trump’s answer may be protectionism and a potentially bruising trade war with China. That would make him less of a shoo-in for 2020.
