Transcripts For CSPAN3 Discussion On Economic Policy 20240713

Welcome to the second day of the policy conference. My name is ilan kolet. Im the head of inflation and Commodities Research at Fidelity Investments in boston. Today, we have the pleasure of hearing the latest views from World Bank President David Malpass. President malpass is the 13th president of the world bank group. A term he began last year. Prior to joining the world bank, he served as undersecretary of the treasury for international affairs, founded a Macroeconomics Research firm, and served as the chief economist at bear stearns. While many of us know him now as a policymaker, there is a very long history in private sector macroeconomic analysis. Yesterday, when i was chatting with a retired friend of mine, he mentioned that the best moderators are funny, fluid, and forgettable. With that, president malpass, the floor is yours. That was funny and fluid and everybody will remember it. So you failed. Well, ilan, im very pleased to be here. Ive got some notes, and then ive got some ideas of things to tell people about. And then looking forward to the conversation. Im especially pleased to be here with the National Association of business economists. The meetings were one of my favorites in the 1980s when i was at the senate, when i worked at the Senate Budget committee, treasury, and Congress Joint Economic committee. Its fun to be back and see some old friends. The 1980s was an important time for u. S. Growth, but like today, the years presented stiff challenges for global growth, and especially for developing countries. There are quite a few hotter topics today, like coronavirus. But the one i would like to tackle is the need for faster growth in developing countries, the challenges that theyre facing, and i want to focus on the importance of europes growth rate within the developing country growth rate matrix. But also the importance of Digital Financial services, which i want to speak a little about, and also, transparency of debt and investment policies, which is something that the world bank is working on hard. I can list the various parts, not everyone knows what the world bank is. But the short take is there are five different parts of it. Ibrd, the ifc, the International Finance corporation, which works on private sector growth. Theres migo, which insures against different types of crossborder risk, and theres also exit, which helps settle investment disputes between governments and investors. So its a big group with a very clear mission. The mission of lowering the poverty rate, but also increasing shared prosperity. That shared prosperity means to me and can be done from a mathematical standpoint, higher medium income, Better Living standards, better social circumstances within countries, so its a goal probably we all share, to have better prospects for people around the world and especially in the poor countries. The world bank does forecast. We have to use forecasts sometimes. In january, we put out forecasts for 2020 of 2. 5 real growth for the world. The good news is that was slightly higher than what the growth rate was in 2019. But the bad news is for one, the first half is probably going to be slower than that, given coronavirus. But also, even at 2. 5 real growth for the world, that simply is not enough growth to really lift developing countries. Many of the poorer countries need a faster growth rate by the World Economy in order to lift them up. Theres also the concern that growth is unequal, so inequality takes various forms, which are all concerning for developing country growth. One is that capital is tending to go more toward developed countries than developing countries. Meaning theres not an equalization of capital flows going on. Even within developing countries, capital is going more towards Big Companies rather than small companies. And so that, too, contributes to the inequality of both income and also of wealth. And theres an added problem with inequality. As we look at the investment rates for developing countries, they have been sluggish. Our report, the World Bank Report in june of 2019 had a subtitle which is sluggish investment in developing countries. So if you start from a platform thats unequal, and then you have an inequality of new investment, that gives you prospects for continued inequality or slow growth in the developing world. Theres simply not enough new investment taking place. So i would like to focus for a little bit on europe. And then talk also about transparency and Digital Financial services. So as we look at the growth rate around the world, one of the notable weaknesses has been in europe. It just reported numbers, the weakest growth in seven years, which is of particular concern to africa, where a lot of the worlds poor live, because their growth rate is their ability to grow is closely associated with europes growth rate. As we look at 1 or even lower growth rate for europe, we can look to various factors. One is structural. The structural system, labor imobility, but one important one, the slow growth is coming at a time when the Central Banks are trying to be as stimulative as possible. And so i want to talk a bit about that. Europes slow growth comes at a time when mainstream economics considers the ecbs policies to be massively stimulative. Thats the size of the balance sheet, the expansion of the balance sheet. One interpretation of the slow growth now is that there simply hasnt been enough qe, that the constraints on growth in europe are so great that the central bank should increase its bond purchases or even buy Corporate Bonds or increase its holdings of low rated sovereign bonds. The other interpretation which i prefer is that europes combined monetary and financial regulatory policy has not actually been stimulative. While textbooks teach m monetaryism, which means theyre multiplied through the Private Banking system by the way of Bank Reserves and reserve requirements, the reality is that we have moved to a postmonitorest world. Were in post monitarism. They have expanded many fold in these recent years, but theres no longer a direct connection to private sector bank credit growth. So we have the oddity under a monitarist system, there should have been some leveraging into private sector growth, but it hasnt happen. Adding to the inequality, Central Banks are buying Long Duration government assets using shortterm liabilities. Thats a major distortion of markets because the central Bank Purchases subsidize the least productive assets in the economy. To be productive, a market economy needs working capital. Thats shortterm floating rates capital, more than longterm capital. At least in the growth phase for an economy. That requires shortterm financing, but much of the supply of shortterm capital in europe is soaked up by the central bank in order to purchase and hold longterm government bonds. The result is the Central Bank Policy that doesnt provide monetary stimulus. Its notable the slowness of private sector credit growth in europe, especially for Small Businesses. Despite all the targeted Small Business credit programs out there, its not working. I think its important that economists recognize the new environment, postmonitarism. The key levels are financial regulatory policy, which itself is biased toward large existing borrowers. Thats a recipe for slow growth, especially for new entrants, for Small Businesses, for people without much capital, for developing countries. All of those are the system is biased to provide slow growth for the people trying to get into the system. Its a recipe for inequality. I think its important that the economic profession reexamine qe as a Monetary Policy tool. What its leaving is slow, unequal growth, because specifically because it sets out to channel capital into longterm government bonds. Its just not a workable system. I want to turn to africa for a minute, and make some general points. One is that Structural Reforms are as critical in developing countries as they are in developed countries. That means systems that work for labor mobility, for fiscal policy, for Monetary Policy, for providing sound money. Some means for people to have access to money and credit. And all of those are struggling in many of the developing country world. The world bank has a Major Program to try to push forward with transparency of debt and investment. What this means or the basis of that is the idea that if you have a more transparent system, youre going to be able to attract more capital. Its actually a recipe for more dent, more investment, and more growth. If you can have more transparency in your own system. The challenge is that it becomes very detailed in order to improve the transparency of credit markets in developing countries. And i want to list some of the challenges that were facing. I may be able to find a list of those here, and then ill say them. And this is all particularly important with the yield curve flat, because as i described, the slowness of investment into developing countries is in part as capital gets sucked up in Long Duration assets in developed countries, that doesnt leave enough for the investment thats needed in developing countries. Okay. Sorry. Let me take a moment because i really want to give you a bit of a list. At times, so im talking about how do credits get established in developing countries. And the environment has changed dramatically over recent years. We did a report, the world bank did a report about two months ago called four waves of debt, which went through and described the evolution of the debt available to developing countries. So what we find now, today in our analysis, and it was discussed at the g20 and the g7 that occurred just this weekend in riyadh. Some creditors are using contracts with excessive confidentiality clauses. So this is new. A creditor comes into a sovereign and says you have to sign a confidentiality agreement. Where these exist, were encouraging borrowers to request relief from the clause in order to proceed with transparent data reporting. Number two, at times, creditors may be violating legal requirements of other creditors such as negative pledge clauses. Again, these are important because they become obstacles to new investment within the developing country. And ibrd, one part of the world bank, has contracts with countries around the world that have negative pledge clauses inside. So thats a protection for the people of the country, as their governments think about new types of loans. We think it would be helpful if official lenders would publish templates of their loan contracts and invite we have invited the g20 to endorse this suggestion and push it forward in developing countries. I want to mention stateowned enterprise debt. One of the things going on in developing countries is you push the debt down to a subsidiary of the government, a stateowned enterprise, and that then doesnt show up in the governments debt statistics. So it ends up being an obstacle to new investors coming into the country. Another challenge is the growth of sovereign borrowing that provides collateral for the lender. It used to be that sovereign lenders didnt provide collateral, but more and more, they have been providing collateral, and that ties up the assets of the country from other types of growth or borrowing that might have been achieved on that. So were working with countries around the world to try to shift away from collateralized borrowing in order to have more transparency and get more investment in. The bank has a policy, the world bank has a policy of discouraging nonconcessional borrowing when theres concessional borrowing going on. For poorer countries, we make very concessional loans and grants to the countries. Thats undercut, and the donors interest in doing that is undercut if the country then turns around and takes on highinterestrate borrowing from other creditors. So theres a policy that discourages that, and that will be pushing forward as we go into new years of encouragement of policy. So the Transparency Initiative is to show countries that they can have faster growth and more investment if they have more transparency within their system. It sounds straightforward. It sounds it sounds like it should be the normal policy, but i have to say that the world system right now is set up to work against that approach, so were pushing back on that and really trying to deepen it. And i wanted to take a short moment and mention the importance of a new step in development, which is Digital Financial services. Throughout history, for poor people, its been a giant struggle to actually have money rather than barter. You know, a barter system is inherently inefficient because youre comparing apples and oranges. Youre comparing different kinds of goods and trying to make trades. And it was a big innovation to monetize the worlds financial system. But the problem has been really throughout time, that its hard to have money in the weakest parts of the Global Economy. Its hard for Small Businesses to get ahold of credit. Its hard for women to physically hold on to money because someone takes it away. And so thats those obstacles, i think, are we can see an avenue to improving this through Digital Financial services. You can think of it as debit cards, but its a debit card with a fingerprint, creates a great deal of security for a woman or a Small Business or some new entrant into the market to actually have, it starts at small amounts of money and then it can grow. That becomes one of the most important avenues toward dynamic new growth. So were pushing hard for Digital Financial services to grow. That means you have to have a its not easy. You have to have a regulatory policy that encourages that kind of diversity, and you also have to have a Banking System or a telecommunication system thats up to the task of keeping track of individual money for even the smallest, the poorest person within an economy. So its critical to get financial transaction costs down as low as possible so you need to be thinking about the smallest fraction of a cent per transaction cost. That enables hundreds of millions of transactions, even for poor people in countries. So kenya has been a good example of a country thats managed to set up a system that works on even the most basic cell phone and even for the poorest person, and thats opening new transaction volume, which people in this room, Financial Market people, know how critical it is to have a high volume of lowcost transactions in order to liquefy a market. So in summary, i wanted to give you some sense. Im concerned about the slowness of growth. Especially the slowness of growth in europe, and its going to be challenged by current events. And as we think about developing countries, theres an inequality because of the way the system is set up thats exacerbating the challenges. A lot of it is their own Structural Reforms, and we can hope for better systems. I work every day on countries themselves and how they can get a better growth system going in their own country. But we need more transparency in the debt and investment policies, and i think Digital Financial services provides one avenue to achieve that. Thanks very much. Wonderful. Thank you, president malpass. That was an insightful and wide range of comments. One of the benefits of being the moderator is you have the monopoly on the first question or two. I have a few questions related to, and i advise everyone to submit questions. I dont think there will be any shortage of questions. I have been coming to this conference a long time, and you mentioned, you have been as well. And we spent a considerable amount of time discussing frustratingly weak potential growth and investment. And i know this is something you spent a lot of time thinking about. In your mind, what are the Building Blocks of strong and Sustainable Growth . And how does the world bank think about this . Whats the framework . Ill tell you my view and then bring in the world bank. So i think economics is pretty clear that you need to have sound money as a starting point. You need to have a system of taxation thats not too distortive. I think thats done by having taxes at a low rate on a broad base. Thats the revenue creation goal of a tax system. Governments that provide restraint on their own spending, but almost more importantly, provide a Regulatory Framework for people to operate in a free environment. That means a rule of law. That means some clarity in terms of how the rules and regulations change over time. And so those are those are critical in order to getting growth. Because we know the growth comes from people. And often, people at the bottom having an opportunity. So this idea, you know, and it was featured at the g20 this weekend. An Opportunity Society is, i think, really important that people have to feel like they can try something and see if it works. Either thats a new kind of job skill or changing colleges or other things that, you know, are getting to go to high school even. For a lot of developing countries, the first step toward growth is being allowed to go to seventh grade or eighth grade, which a lot of countries still are not allowing. As far as how does the world bank then interact with that system, the bank is active in governance processes and rule of law. One of the things in the Transparency Initiative that i didnt go thru for you is the importance of knowing within a country who has the right to sign a contract on behalf of the government. Many countries dont have clarity in that. So youre the lender. You come in, you get joe to sign or janet to sign on a contract. And it hasnt really been scrutinized by other parts of the government. So we want to see a governance process that can make some sensible choices. We can provide Technical Assistance to build the capacity, because a lot of countries just dont have the people that can think about the contracting environment. You need, of course, to have an environment that invites new investment, both private sector investment, infrastructure investment, some of which comes from the governments themselves, so we do a lot of work in that area. And vitally important is human capital, which is the peoples skills and Education System that we have an indicator called the learning poverty index, which is a simple measurement. Its done globally for really, for a lot of countries meeting, i dont know, over 150 countries, which is can children at age 10, what percentage can read a basic story . So its a simple indicator. And it allows you then to tie back to countries whats the obstacle . And really focus on more learning. Health is critical, and theres a lot of time on that. Climate and environment and ability to withstand changes in climate and extreme weather conditions is important for a huge portion of the worlds poor. They tend to live closer to sea level, that was a broad statement, but many of them, millions and even hundreds of millions, live close to sea level, without very much protection and other aspects of that are important. So the bank works in all of those areas, but the starting point, i think, is the structure of economy thats basically marketbased rather than monopolies. One of the hardest things that we fight against is capture by Stateowned Enterprises or by the military. Many countries still have systems where theres a bias in favor of businesses owned by the military or by Stateowned Enterprises. That really undercuts the innovation of the economy. Very interesting. So staying on the growth theme for just a moment, one of the things you mentioned was, you know, better educational attainment. One of the things that was brought up yesterday by cleveland fed president Loretta Mester was really the very significant increase in female Participation Rate here in the u. S. And when i was researching ideas to pose to you, i was quite struck by the sort of decline globally in the female Participation Rate from some of the data on the world bank. How do you think about female engagement in the labor force and the dividends for growth that could bring . This is one of the strongest points of economic you know, economists can argue about 2. 5 growth or 3. 5 growth, but one that people can agree on is the vital portion that women can provide into an economy. And we see it every day in terms of women being just additive from a straight gdp standpoint, but then also very importantly, creating different kinds of innovation that a man might think of. And oftentimes, better at negotiating a favorable outcome than a man might be. So getting that participation is vital everywhere around the world. Some countries are going up, and we have been encouraged, the world bank does a lot of reporting on this. I was just in dubai a week ago for a summit, a womens summit, which one of the things the world bank tries to do and does very effectively is lean on governments, often maleheaded government, to change the laws of their countries so that women can own businesses or can have a passport or can take a job in different sectors of the economy, can have pay that goes up rather than going sideways. And its been actually, i think, one of the bigger successes of World Development over the last lets say 10 or 20 years, or lets say ten years because its relatively recent that countries are changing their laws to allow fuller participation by women in the economy. And then they get better results out of it. We do an important report called the Women Business and the law, wbl, which documents the rules changes, you know, one part of development is just keeping track. Which countries actually changed their laws in a positive way that empower women . So it just came out two weeks ago. Its a thick report. And it gives blow by blow, which countries were making progress. So im cautiously optimistic, but your point, i was in pakistan in october. And ill single them out. The Participation Rate for women in their economy is still really low. Like 25 even. And so what that means is a whole group of important economic contributors is screened out at the getgo. They have an additional problem, which is girls go to school for a while, but then they stop. Theres not schools, secondary schools, and much less Higher Education thats readily available for girls. And so that leaves with lower skills. I would love we could spend the whole hour on this topic because its one thats clearly economically beneficial. There is some progress being made, and its identifiable enough of what needs to be done in which countries in order to get more progress. Interesting. So staying with the theme of the Building Blocks. Another topic that came up yesterday in a really great session, and get the slides if you havent seen them, was the Climate Change was the Climate Change session. You know, Research Suggests that the effects of Climate Change will disproportionately affect the countries that are already struggling to develop, as you mentioned. Is the solution well targeted public and private investment, and how is the world bank thinking about the drivers of growth and Climate Change . A fairly broad question, but. Let me address that by im not sure i got the full question, but the answer is, what the world bank is doing. So theres a big program in order to invest or make loans in ways that address climate issues. And countries have different programs in what theyre trying to do within their climate commitments. And the bank can support those. Over the next five years, theres a target. Theres a commitment by the bank of doing 200 billion in climate cold benefits. To put it in perspective, you know, there are lots and lots of international organizations, from the United Nations to the European Bank for reconstruction and development, youre familiar with the imf and on down, of all of those, you put all of the rest together, the world bank does half of the total. In terms of climate and Environment Investments in countries. So the types of things that are done are adaptations so people are prepared for Climate Changes and for extreme weather conditions. And our lives are preserved. Theres disaster relief. I was in mozambique in april, after the cyclone hit. And the world bank can provide immediate funding and has windows or tools that are fast disbursing. A lot of times, the biggest thing that can be done is responding quickly. And then theres preparedness, so we strongly encourage and work with countries on ways that they can be prepared for change. And theres also mitigation. We think about low carbon. Theres around the world still glaring anomalies within the carbon environment. You know, germany continuing to burn a lot of coal. Its pakistan still signing contracts for new coal. And in other parts of the world, still an expansion of that. Then very sluggish, you know, there are a lot of developing countries that are still so have such difficulty in their electricity sectors that theyre using bunker fuel and diesel fuel to make electricity, which is one of the most costly, costly parts of the higher carbon environment that were in. So those are all different aspects of change that can go on. I think focusing country by country and region by region in things that will really improve the improve the outlook is really where people can be focused. Thank you. You know, i left out, and theres a whole range, so water usage is a critical part of the whole ecosystem, and that gets into the crop cycle, so the bank is very involved in trying to help countries use better fertilizer, lower, much lower quantities of fertilizer, that will allow more productivity for crops that arent you know, one anomaly or one harmful thing in the world is countries choose to grow crops not based on whether its environmentally sustainable but whether theres a special interest that wants that crop. Whether its cotton or rice or wheat in parts of the world that dont need those. And on down the list in the u. S. , were aware of the sugar anomaly, and it uses up, it drains a lot of environmental resources. And so i wanted to mention also, one of our bigger new programs is in chinas Marine Plastic problem. Chinas fallen into the habit of putting plastic into rivers. And then it goes into oceans. And so were many are aware of that as a major problem within environmental processes. So were working. We have a loan going through right now that addresses how farmers use plastic to try to discourage that plastic from finding its way into rivers, which is an important new aspect. So were doing Marine Plastic undertakings in indonesia, in the caribbean, and other places to try to reduce that overhang. Interesting. I realized when i asked that question, its ironic were both drinking from plastic bottles. And i would rather not be. Let me go to some of the questions we have in the few minutes we have left. Its always interesting the questions you can submit when theyre anonymous. So is the world Bank Operating differently versus the Previous Administration . If so, how . Thanks. So i began at the world bank in april of 2019. To an extent, theres a lot of inertia in organizations, but i think were making very positive changes. One of the things i wanted the bank to do is focus on Good Development outcomes. And that means country by country and region by region. For example, for the sahel or the horn of africa. And thats that focus is this big very talented staff on thinking about how do we get a good outcome in nigeria . How do we get a good outcome in ethiopia and around the world . In china, in india, and other places around the world . So i think its a good Healthy Focus for the bank. And people have been energized by that. Were doing what we call a realignment or a global footprint to put more resources near the client. So the bank has a huge number of offices around the world. And we will be were putting more practice managers into regional offices rather than d. C. , which allows them to connect well with clients and do the job well within that. So and its putting the resources and the Decision Making in a shorter process. Those are all inside baseball. There are ways to make the bank function well. Were in the process of recruiting a new chief economist. And the economic role is very important in the bank. We also have two new very senior women in the bank. Maury pingetsu will start. Shes in d. C. This week and will start at the bank on march 1st. And shirley cant became our chief Financial Officer in, i dont know when she started, maybe in september. So these are very strong luminary women at the top of the bank. And chula cant was just at the g20 in riyadh this weekend with the finance ministers from around the world. So shes speaking on behalf of the bank, and showing the strength of the leadership of the world bank in terms of addressing some of these challenges. Because people all want to talk about what the challenges are, but what im trying to do is have us focus very much on individual solutions. Lets break it down for this country, what change can we actually hope for and encourage and push forward. That actually speaks to the next question. Maybe our last question. Ill try to sneak in two. You highlight the ways of the current policy mix in europe may not be working. What are the specific policies you would advocate to change this . People have written for 20 years about this. One is labor mobility, which i mentioned. Meaning that the ability of people to change jobs and to get new skills. That just hasnt been working well. Small Business Credit is a second major problem for europe, and i think we have to examine, you patently got a Central Bank Policy where they buy longterm government instruments. So thats a heavy bias in the system away from where youre trying to go, which is to get Small Business dynamism started up. Of course, the efficiency of Government Spending is important. But some European Countries have better systems than others in that, so i would say better uniformity around europe of the quality of Government Spending would be important. I think the regulatory policies have to be looked at as far as why is it that a lot of the Innovative Capital is and innovative investing is maybe done from europe but into places where the businesses start somewhere outside Continental Europe . That should be a focus. Interesting. One last question before we wrap up. What is the world banks ref sponse to the coronavirus outbreak . Hello to the cameras out there. So, because coronavirus is topic number one. So we are looking at ways to respond or to make available resources for developing countries as it goes. And were also very closely coordinated with w. H. O. , the world health organization, which is one of the frontline providers on that. So we have a range of tools that the bank can use as the pandemic spreads. Please join me in thanking president David Malpass for spending some time with us. Thank you very much. Thank you. [ applause ] that was a great session. I get the privilege, for some reason, they think i should be on this Political Panel moderatoring at all time. It is a true joy when i get to do it because i get to see charlie and this year mark, both of whom i have known for a really long time. To give you some background on the framing of this panel, and charlie refers to it as your dessert, because you have to go through all the other stuff, and this is fun. Im not sure how fun politics is anymore, but charlie will make it entertaining for us. This is economics. Well, i know. But first of all, just so you know, charlie cook is a legend, and in terms of applying data to economic elections and at one point in time in his bio, it says he was referred to as a picasso of political science, which i thought, im not sure, you know, now that picasso is considered a little misogynist, we should take it away and say youre a rembrandt, but truly an artist and amazing. And also we have mark zandi. I have known mark since i was a regional economist. I remember those meetings from chicago. A long time ago. About 30 years ago, i think. Anyway, and mark has a model for moodys. Hes chief economist at moodys analytics. He had economy. Com before that, and he employed one of my sons best friends, who happens to be brilliant. Who is that . Colby lewis. Is that right . Yeah. He worked with your brother. That explains it. But both of them have an interesting perspective, and the title of this session is its the economy, stupid. James carville said that back in 1992. What a colorful person he was, is still. Its the economy stupid, because back in 1992, we had our first jobless recovery, and they were ushering in the end of world war ii, so the silent generation of george h. W. Bush, and our first baby boomer, bill clinton, was elected. And we had our first jobless recovery back in 1992. So there was a lot of tension between the fed and president bush back then, too. So some of these things that come around come and haunt us again. What mark is going to do is start us off. He has a great model on modeling the Economic Impact and how modeling can impact the economic vote, and charlie is going to give a counterpoint on whether its the comeconomy stupid or n. Thank you for inviting me here and for the opportunity. How long did you want me to go on for . Five, six minutes. Okay, it is the economy stupid. But its the economy stupid in three states. Rank order that includes pennsylvania, michigan, and wisconsin. Thats the conclusion based on our election model. And thats an open book. If you go up on google, zandi president ial election model, youll get right to a white paper that describes the model in detail, gory detail. Everything is laid out for you. Lefthand side of the model is the share of vote that goes to the incumbent party. Obviously, this year, its republican trump. Righthand side is explanatory variables. Two sets of variables, one set political, the other economic. Political include the share of the vote that went to the incumbent party in the previous election. That controls for voting patterns. So anyone from wyoming . I didnt think so. Theres only 600,000 of you. But youre going to vote republican. Everyone in wyoming knows dick cheney and family, and youre going to be republican. If youre in maryland, anyone from maryland . Youre probably a democrat, and youre going to vote democratic. Thats always going to go democratic. Maybe except in this room. Im not sure. So we control for that. The change in the president s Approval Rating leading up to the election, its not the level of the Approval Rating. Its the change in that matters, which obviously is very trumpfriendly, because President Trumps Approval Rating, we use the gallup poll because we have data the gallup. We have information going back to 1980. His Approval Rating is lower than any other president since modern surveys, but the standard deviation is also the lowest. So, very likely his Approval Rating on election day will not have changed from what it is today. We also include and this is an innovation. Weve been doing this since the 1992 election. Thats when we first did this. But we now have the share of the the key thing here is turn out. So, what percent of voters from the nonincoming party go out and vote so, turnout is a key variable. By the way, this model, weve been using it since 1992. Its been right every single time except clinton. We got clinton wrong. And the reason is after some econometrics, we did not include turnout in the model. We were assuming turnout would be typical on average. It was anything but typical. In 2016, turnout for clinton was very low particularly in the swing states. Economic variables, pocketbook variables, gasoline prices, stock prices, labor market variables. This is all at a state Electoral College level. So, were modeling economics at a state level. Unemployment, real incomes. You can take a look. One quick side bar, what economic variables matter has changed over time. So, when you go back to when carhill said those words, the change in gasoline prices was very, very important. That was obviously a period of inflation. Gasoline prices were peoples benchmark for understanding whether inflation was a problem or not. We were driving lie a lot. The variable that matters more today is stock prices. Stock prices are central to the results, very, very sensitive to the results. And i think in large part broadly speaking, i think the stock market is more central to the economy. The intuition behind that, the baby boomers me, diane, youre too young to be a baby boomer. Were both baby boomers. We werent prepared for retirement. Theres nowhere to get a yield. People cant get return anywhere. Were piling on the equity market. So, we are very tied in to the equity market. Moreover, one other point, the equity market effects are asymmetric meaning when prices rise, it has an impact positive, but its relatively small compared to if prices decline. Thats because, again, think about the baby boomer. They thats their nest egg, right . So, if their nest egg is building, they feel pretty good. It feels okay. But theyre not going to go out and spend the nest egg. They need retirement. But if prices fall, that means the nest egg is being diminished. They go into pull back, Savings Rates fall. Thats a quick side bar. All right. Under the assumption that the economy on election day is roughly the same as it is today, across states, that the president s Approval Rating is basically where it is today both those assumptions feel reasonably okay although the virus is kind of mucking things up here and turnout is typical, meaning the average turnout for the party since 1989 on the condition of that model, this is the result. Ready . There you go. Okay. Absorb that. Now, President Trump saw this, and he tweeted it. Yep. And i would say it was a very whats the word . I hate to say this, but it was a charming tweet. Yeah. Here it is. Looks good to me. Looks good to me. All right. So, for the ds in the room, youre starting to choke a little bit. By the way, i got a lot of hate mail. Apparently im a republican hack. I didnt know that. But there you go. And actually i got a lot of good emails from economists who were taking umbrage with my econometrics which i found useful. They were all wrong, but still very useful. So, under the assumption that the economy is performing roughly as well on election day as it is today, that the president s Approval Rating is roughly unchanged from where it is today, but turnout is high for the ds, 2008 turnout, obama mccain turnout, heres the result. You can see who flips. And this is where the economy matters. Its all on the margin. Were economists. The economy matters, but it matters on the margin. It matters in those states that are on the edge. And its pennsylvania, michigan, and wisconsin. Heres the interesting thing, fascinating thing. Its about five counties in pennsylvania. Five counties. Two counties surrounding pittsburgh. Those are purple counties, right . Thats kind of half trump, half d. Two counties in northeast pennsylvania. Thats trump country. Thats grant, that area. But its about the turnout for the ds because its pretty big counties and you can get big d turnout there. And theres one county in southeast pennsylvania, chester county, pennsylvania. I live in chester county, pennsylvania. This election will be determined by my wife. Shes a d. She is a d. But its about how engaged a d she is she becomes. If shes all in, shes raising money. Shes at the polls. Shes canvassing. Shes doing everything to get that d elected. If shes not engaged, then forget about it. Its not happening. Im not going to tell you who shes going to vote for or who she wants to be the d candidate. But the point is the d candidate matters an awful lot, an awful lot. But it is still the economy, stupid. Just in a more nuanced different way than it was in 1992. So, thanks. Good to know that your wifes going to determine the next election. Im glad women have such a high role in this election. I think we need to. Im going to turn to charlie now who i know has some more nuanced views as well. I sort of feel like theres no nuance about it. I just disagree. I was going to say counterpoint. I dont know if anyone remembers because im a baby boomer, saturday night live, thats what im thinking about. Let me preface what im going to say, ive always had an enormous amount of respect for mark and his work so i dont want to denigrate what hes said and done and how right it used to be at all. But its i think if i had to put a title in mind, it used to be the economy, stupid. Because right now the economy is not driving american politics. You dont have this kind of economy. You dont have unemployment at a 50year low while at the same time youve got a president who is never ever had a 50 job Approval Rating in any Credible National poll. In 402 out of 403 Major National polls taken since he took office that measured his job Approval Rating, his numbers have been underwater. That is higher disapproval than approval. If youre curious about the 1 out of 403, it was the very first fox news poll taken about ten days into his administration that had him at 48 approval and 47 disapprove. That was the one that wasnt underwater, upsidedown. The economy just doesnt have the relationship that it used to. And what was really interesting to me is if anybodys interested in reading a book about the 2016 election and, you know, i dont recommend any books. But theres one written by call called identity crisis. Its written in english. And basically it is about grievance politics, identity politics, how hyperpartisanship and tribalism has taken over. But youre all economists. Im not. But i thought what was really interesting and they just barely touched on this was there was a very strong relationship between the between Consumer Confidence and president ial Approval Rating from john kennedy all the way through george w. Bush. Very, very strong relationship. Now and specifically the index of the michigan index with job Approval Rating. And i should say that job approval has always been the best predictor of how an incumbent president s going to do. Strong relationship. That relationship all but ended up obama and did not restart under President Trump, that we have something that supersedes all you know, the whole people vote with their pocketbooks, they vote its the economy its totally different now. And that what we have is people who some people are voting against their own economic selfinterest. You know, the farmer that i talk to in north florida, beef cattleman, and i asked him about i asked him about tariffs. Are you worried about tariffs . He said, oh, yeah, im really worried about tariffs. And the next thing out of the mans mouth was, but you know, i think everything the president is doing is what he believes is in the National Interest and i support him 100 . And i come home at night, the economys been very good to us, weve benefitted from the tax cuts, and she will never vote for President Trump in a million he could come up with a cure for cancer and the common cold and shes never the question now is she wouldnt vote for any republican in any sort of circumstances. Thats not data driven. But whats happened is that people are college of heducate suburban voters are trending towards democrats, particularly women. Very, very, very strong. Working class, small town rural whites with less than a Fouryear College degree, whites that go to church at least once a week, trending very strongly the other way. This has nothing to do with economics. It has to do with values, culture, with identity. And whether you really like donald trump or whether you hate his guts has nothing to do with economics. It depends on its how you do there. But you dont see these kinds of numbers with a president with i mean, his job Approval Rating ought to be what . Ten points higher than it is right now given the economy . I mean, really. I mean, typically he runs his Approval Rating runs 10 to 15 points below the popularity of his own positions on many issues. I dont think its the economy at all. And the thing is theres only been one data point, one incumbent president up since weve gone into this new era. So, i just dont i think models were absolutely right for a previous era. I dont think were there anymore. And whether President Trump gets reelected or not, i dont i frankly look, if we went into a recession, okay, that would tank him. But to be honest, if the economy got a little better, i dont think it would help him much. If it got a little worse, i dont think it would help him you much. It certainly hasnt been reactive to the economy for the last three years. I mean not at all. Well, just tiny, tiny bit on the margin. So, i just you know, i dont think this dynamic exists anymore. But well see. But, you know, whether democrats win or lose rather than this first of all, i think were probably going to have the highest either the highest turnout in American History which would be beating 1940 and 1960, or it would be close. And it will have two components. Everyone who loves President Trump will turn out. The second part is everyone who loathes President Trump will turn out. And in 2018 we had the highest Midterm Election since 1914. In the previous Midterm Election, we had the lowest Midterm Election since 1942. Something happened after the 2016 election, and it depends on whether you love him or not. So i frankly think its the old joke about the woman was asked by a friend, how your husband. She replied compared to what . I think whether President Trump gets reelected or not has a lot to do with compared to what. On that note, i have a question or two for you, mark. But im going to go back to charlie. Theres a lot of questions about sanders, about trump. Whos going to win the democratic nomination here, because it does matter who it is. And it clearly matters to marks wife. Im going to keep this succinct because i know mark wants to jump in here. The Democratic Party is unified in one sense and badly divided in the other. Its unified in the sense that they all want to evict President Trump. Theyre all against trump. But there is a division in the party. And about 60 of them basically want to beat him and thats it. They may have preferences for the democratic nomination, but the end of the day they are for any democrat who can beat him. I mean, they dont have its not going they just they want to hit the reset button. They want to restore. They want to take things back to where they were before President Trump. The other 40 though, theyre looking for big stuff. You know, when you listen tie Bernie Sanders, Elizabeth Warren, go to one of their events in florida i mean, iowa, New Hampshire, wherever you will hear the word corruption said but not in the sense i learned it growing up in louisiana. But its in the sense of political corruption. Weve had liberal democrats run for president all may life, but theyve never been antiestablishment like to this degree to want to go for fundamental change of systems. Thats not what George Mcgovern or dukakis or ted kennedy, any of these other Democratic Candidates for president were pushing. So, this is its really quite different. Now, the thing is my thinking has been had been that if youve got 60 that just want to throw him out, dont give a rip who it is just so they can win, and 40 that wants something thats pretty extreme this direction that the 60 would probably prevail. But heres the problem. On the bernie side, if you were going to ask him a year ago what would be the best Case Scenario for you, and he would probably say Elizabeth Warren collapses or all but collapses and theres, like, 345way contested on the center left lane. Well, guess what . Thats where we are. And quite frankly, last saturday, next saturday, i think theyre of little importance other than to shoot the wounded from iowa and New Hampshire maybe the couple of candidacies. The thing is what happens on super tuesday, he could get sanders could get maybe 25 , 30 of the vote and end up with 40 , 45 of the delegates just simply because of the weird delegate Selection Process democrats have and the fact that the other side of the party is just so badly divided. So, i dont know ive always ive been skeptical whether bernie could win the nomination, but these are the circumstances in which he could. I still kind of dont think that he will get it. But even in my own firm im in a minority view. Its a close call. But he may coming out of super tuesday, he may have an insurmountable lead in terms of delegates coming out of that. If hes the democratic nominee, i would never say that he cannot possibly win. But i think he would be facing gail force head winds and that just about any other democrat other than maybe warren, if its a referendum of up or down on donald trump, i think he loses. If its a choice referendum on socialism, he could win that. Referendum on impeachment, he could win that. If its a choice between him and somebody else whos equally polarizing controversial, that one can go either way. If its just about donald trump, i dont think he wins that. So, mark, you can counter but also have a couple of questions for you. One is you mentioned the issue on baby boomers. Im really fascinated by this because i know youve done a lot of work and friends in the credit card industry that have done a lot of work. We had the december soon when the market collapsed, it was baby boomers pulling in during the height of the christmas season. It was a reaction asymmetrically to the stock market through baby boomers. Its interesting and fascinating to understand the demographics. What are so, that would obviously if the market is flat this year, if the market, you know how would that play into it . And i also have another question for you. In addition to that, for you and your models, have you considered looking at social media variables . Good questions. So, nice thing about a model is it obviously is based in data and econometric analysis. But it also allows you to examine questions of what if. You asked a what if question. What if stock prices were to decline, would that change the dynamic here . Would we get a different result . Would the map look different . And the answer is yes. So, if stock prices and this was i did a quick calculation. So, its back in the envelope. So, its not exactly right but roughly right. If you go back a week ago for the swoon in the equity market, stock prices had fallen from that alltime peak by 15 . To give context, the s p 50,000 was sitting at 3,300. So, that would be a decline of about 500 points. We get back 2,800 and stayed there, not that you go down and go back up which is kind of typical for this market. Lets say we go down and its more fundamental. Maybe the buyer is actually slowing growth, global recession is more likely. Do we go down, stay down . That would flip the election. Even with typical turnout. And again its on the margin. Its not the economy doesnt matter in north dakota or kansas or wyoming where the farmer is. That is set. And that actually has been set for a long time. Thats not its more set under trump, but its been set for time for the last two generations, three generations. What matters is the economy in pennsylvania, michigan, and wisconsin. By the way, that goes to who the democrat should have for their nominee. If they really want to win, theyve got to think about who is going to do well in pennsylvania, michigan, and wisconsin. And thats the crux of the matter. So, the stock market matters quite significantly and could turn the election. By the way, i would say the president , because he has shown a like on the equity market i dont know if you noticed. But, you know, every chance he gets when the market rises, he says take a look at the stock market, right . And by the way, every time the market was crossing 28,000 on the dow, goes up and goes down, every time it crosses 28,000, he goes oh, look, it went over 28,000. So, its like this is a big deal. Anyway, this is just reinforcing in the minds of the electorate, in people, the importance of the equity market is a real time report card of whats going on. In my view, i think this is a critical thing. One other thing i wanted to say about the economy and the election, this is deeper than just whos going to win this election. I would by the way, ill preface this by saying im an economist. So, i have a bias. Everything looks like the economy to me. You know, so lets just take that as a given. So, i may be overstating the case here. But trump and the democratic reaction lets call that bernie is in my view a direct result of the financial crisis ten years ago. That was devastating to millions and millions of people. It disenfranchised people. This is globally. Its across the entire planet. Its taken us ten years just to get back to where we started and were still not back to where we started. The tenyear treasury yield is 1. 63 . That is not a symptom of a healthy economy so, were not there. So, people know this. They feel it. So, were not back. The fed did a great survey a year ago i think everyone knows it but just to repeat. 40 of american households dont have 400 bucks they could use for an emergency. If im one of those 40 , im pissed off. I dont care what the guys are saying. All i know is i want something different. I want to blow this up. Thats the economy stupid, and the economy stupid has given us trump and bernie, two sides of no, theyre not the same. Theres lots of differences between the two, obviously. But they are symptomatic of what the economy has done to our politics. It is the economy stupid. Ill let charlie counter that. I do want to interject this is really important is the d20. 58 Peterson Institute did a great study on 55 new and existing parties within the g20. And the overwhelming majority had moved to right nationalism populous which included limits on immigration, closed borders, tariffs, and subsidies to favored industries depending on whether theyre developed or developing, and much more to the right than the left. But thats something we should be aware of is this is a global for whatever reasons, there is a surge in populism, particularly nationalism that is global in scope right now. So, with that, why dont you weigh in . If the economy still matters, then President Trump would be having a job Approval Rating ten points higher than it is. Just simple as that. Or ten points lower, right . If the economy wasnt what it was, maybe he would be at 30 , not 40. Has the economy been good the last three years . Depends on where you are. Okay. Well, let me ask you this pennsylvania, michigan im going to back out. It wasnt that great. Look at pennsylvania, michigan, and wisconsin. Look at the statistics. If we were here four years ago today, would you be pointing to wisconsin . I dont think so. Wisconsin had gone democratic seven times in a row. The last democrat to lose wisconsin was mondale. The other two, six times in a row. Dukakis. These were not michigan wisconsin were not states people were pointing to. After we have the results, we know hillary didnt even step foot in the state of wisconsin between labor day and election day. They didnt think the state sometimes that you anticipate being the Tipping Point states arent. And people in states that are were not the ones you were looking for. And thats sort of what happened in michigan wisconsin. I mean, i had michigan wisconsin were not targeted states. You know, overall, in that election. But they. 2 in michigan,. 7 in wisconsin and pennsylvania. And what happened in pennsylvania was the rural vote, rural small town in the center across the top, it came out in unprecedented numbers. It basically broke the models. The clinton campaign, they got the numbers they thought they needed out of montgomery, buks, delaware counties, they got the numbers they thought they needed. But you had voters coming out of the woodwork in numbers we had never seen before. So, whats that about . The reason that michigan, wisconsin, pennsylvania i think, they have a disproportionate number of whites with less than a Fouryear College degree, whites that are in the manufacturing sector, and that is where trump did well in the primaries, and thats where he did well in the general. But i think it has a lot more to do with culture. You know me a working class white particular a working class white male and i dont care what his checkbook shows. Its very, very likely to be for donald trump regardless of his personal finances because its about culture. Its about identity. Its about a feeling that weve been left behind, that the coasts look down on us. They either make fun of us or ignore us. That is about culture and identify more than anything else. You know, i wanted to follow up with you on that, charlie. Ive been talking to a lot of the moderates that have won and flipped in 2018 all trump areas very marginally, very moderate democrats. And they flipped these red areas and they said the Biggest Issue for them was showing up. And you mentioned that Hillary Clinton but they werent trump areas, they were republican areas. Yeah, okay. You look at where the democrats get the majority in 2018 . It was in the suburbs of atlanta, dallas, houston, kansas city, oklahoma city, richmond. And that just talked about the south. These were districts that had been republican since mow by dick was a guppy. But theyre fastgrowing. The economys doing well. And a lot and youve got lots of people from other parts of the country moving in and making just look next door in virginia. Virginia used to be a red republican state. Youve had this influx of new people coming in and its now a blue state. Its gone from purple to blue. North carolina coming into the research triangle, charlotte going into atlanta in the suburbs, going into texas. The places with the big influx of people coming in changing their southernness, making them less southern, those are the states that are moving away and where democrats score big gains. The states that dont have a lot of new people coming, my home state of louisiana, my parents home state of louisiana, mississippi where my wife was born, South Carolina, alabama, those states arent changing a bit. Theyre just as red republican. But the thing is its how you view trump. There are a lot of opeople who by the traditional definitions would be called republicans who loathe the guy and are moving away from him. And ill finish on my friend tom davis who was a moderate republican, represented fairfax county, virginia next door. Hes good night great line. He said the Republican Party has gone from country club to just country. And this isnt about economics. Its about culture. So, ill let you counter on that. But the question you mentioned texas. How do you look at texas in your models because texas is coming up as one of the states that maybe could shift colors. From economic standpoint charlie mentioned that its shift being the number coming in. I didnt say its going to go its getting closer. I dont think democrats are going to win this year. Texas one of the interesting things the other its fascinating what you can do with the data and the models. We can rank order the states based on the percent of the vote thats going to go to the incumbent party. We have precise estimate. So, those states that are sitting around 50, those are the swing states. Thats why i keep going back to pennsylvania, michigan, and wisconsin. And wisconsin, charlie brought up a very good point. Historically that has generally gone d, but that has always been very, very close. Go look at the data. Its on the margin. Its almost a random event that its gone more d than r seven times in a row is a random event. Yeah, actually. Go take a look. Its very, very close. I know its close, but seven times in a row is not random. I dont mean to call you my father, but youre im having exact same fight with my father. My father is a hes actually written a book. This is about this is the book hes written. Ill plug it right now because he would love me to plug the book. Dad, im plugging your book. Its coming out. This is exactly the fight that im having with my dad. Hes the culture guy and im the economist. Were going back and forth like. This its a pretty good book. Well send it to you, charlie. But anyway, thats all a long way of prefacing. You can see where texas lands. And in my minds eye because i dont remember perfectly heres charlies address. Thank you. Ive got a card too. I have you both on email. So, texas is not close. Its not close. So, you know, you would have to the economy would have to go to hell and thats not happening in texas. Texas is a very solid economy. Its amazing whats going on in dallas. You dont have a copy . I do, i do. Hold on. Youve got other peoples cards. Here you go. Here we go. Theres my son when he was like three. He was a cute kid actually. All right. Keep going, keep going. Anyway, i dont think texas is in play. At least not in my mind. We had agreement. Can i Say Something . Its not like i dont think culture matters. Im not saying that, right . Obviously im not. Im controlling for that. Im saying after you control for things as best we can in terms of and culture, by the way, the way i control for it is brute force. I say okay, how did these guys vote last time . If im from wyoming, im going wyoming. If im north dakota, im going to go north dakota regardless of what the economy is doing. Its not like im saying culture doesnt matter. It matters. And its not like it matters less than 1992. It does. After you control for culture, economy matters and its on the margin. Its flipping. 2 in michigan,. 7 in pennsylvania, and its there where the economy matters, flipping a few basis points. And thats why the election is its crazy. We elect the most powerful person on the planet in five counties in pennsylvania. Go figure. Thats any way to run a railroad. Its makes no sense. Charlie, theres a lot of questions on people assessing different candidates. Bloomberg comes up, sanders seem to be mostly bloomberg and sanders. So, if you dont think its going to be sander action youre in the minority in your office. Who could it be . I think that bloomberg is the only candidate thats got the money first of all, tom steyer. This guy might as well be running his money through a shredder. He spent 160 million and has virtually no he would do a little bit better than expected in South Carolina because hes focused a lot of money in South Carolina. But hes not these other people, they do not have the money to compete. No. Hes already spent 500 million. With sanders on super tuesday. Super tuesday, to do a decent job in those 14 states including california and texas, you need about 100 million. You know, some of these candidates barely have bus fare to go from nevada to South Carolina. Theyre not going to be able to run effective campaigns. So, its either going to be trump or its going to be excuse me. Its either going to be Bernie Sanders or bloomberg. I had been thinking very strongly it would be bloomberg. I still kind of lean that way. But he needs to step up his debate skills. Well, the thing is, it you know, you would normally you would expect some of these democrats that have not done well to get out of the race because thats what normally happens. Theyre not getting out. But theyre all staying in which means that none of them may get the nomination and the nomination may go to somebody that reflects something totally different from where 60 of the party is. Is it similar to what we saw with 2016 . We had a lot of republicans. Its similar but not. The thing is in the Republican Party you had a visceral anger at the establishment that was really, really, really quite something. And they they wanted to do something wild and crazy. And they dismissed jeb bush in the blink of an eye, marco rubio, people that normally republicans would go for. That was i think sort of what had been the Tea Party Movement has evolved into the trump movement. I think their people have said how barack obama in the in th minds barack obama wasnt even an american and mccain lost to him. And romney couldnt knock him out again. What good is the establishment . So, lets just do something totally different. And, you know, like wow. Now, there is a 40 change to the system in the Democratic Party. But its 40, not 60. But, you know, if its 40 with only 1 1 3 candidates versus 60 divided by 4. So, i wanted to i know youve done some work on the coronavirus, mark. Ive seen your work. Its great. Weve talked about this. This is becoming what could be a black swan event. It certainly is an issue for xi in china. What do you think Something Like the black swan event like the coronavirus and ill ask you as well, charlie could mean for this election . Well, when you say black swan, i assume youre saying this becomes a pandemic. Or an economic pandemic. I think its already rolling around the world. I think if this remains largely contained to china lets abstract italy and korea and assume thats contained and what were seeing now is what were going to get, its a hit to the Global Economy. Q1 is going to be very weak but we get the growth back by election day. Ironically it may feel like things are very strong because all the deferred activity, it wont start getting it back in q2 but q3 will be the quarter when you get a 3 growth rate, something very strong because everythings coming back to life. And also youre benefitting from the very low rate environment because youve got fixed Mortgage Rates that are going to be pretty close to record low which means a lot of refi nancing activity, housing is just surging. So, it could ironically if what were getting right now is what were going to get, it could be trump friendly on election day. If the virus jumps and becomes a pandemic the odds of what happened yesterday in the equity market is investors said oh, my god, theres now a higher there is a reasonably high probability this is a pandemic meaning its going everywhere. Milan is like the center of europe. I mean, its, you know, transportation hub everywhere. People are going everywhere in milan, by plane or rail. Doesnt look like its very contained. Yeah, but if it jumps then i think recession is very likely. Certainly globally it is. European economy was very teetering on the edge anyway. Germany was arguably in recession. The italians we were debating now theyre definitely in recession. The uk was growing 1 at best because of the brexit transition. This is going to push them. Whats the policy response in europe . There is literal none. Youve got negative Interest Rates at gcb. The only country that has fiscal space but wont use is the germans so its not happening. Now you have asia struggling. With the declining prices, latin america and africa are struggling. We are the island. We might be able to navigate through depending on the scenario. But with the entire Global Economy in recession, that likely means were going pretty close. If not in recession, slow enough that unemployment is going to start to rise, particularly in pennsylvania, michigan, and wisconsin. And that will be significant. And heres the most significant thing. What really is going to seal this is the equity market, the stock market. The stock market is going to anticipate all this. And you will get 15 down. The typical decline in s p500 if youre going into recession is 20 , down 20 . Remember what i said. According to the modeling, take it for what its worth, we go down 15 from the peak which was a week ago and stay there, thats enough to flip those states. So, this virus could really scramble the election depending on just what path it takes here over the next few days, few weeks. So, you charlie. And im going to give you all the last word. This is out of my lane, but heck, i think it gives the president excuse for why the economy you know, i dont think the economy going down anything short of a recession, i dont think it will hurt him much at all. And it actually gives him excuse for the economy slowing down. We can blame it on this. I dont think it the thing is i think yes, michigan, wisconsin, pennsylvania are going to be important. But i would not take my eyes off of north carolina, georgia, arizona. These states are going to be just as important this election. And their economies are going opposite of michigan, wisconsin, and pennsylvania. But theyre going to be on the bubble too. And its not about the economy. One last thing just about the virus. It may actually what may matter in terms of the election is actually the policy response to the virus. Right. If this is katrina, remember bush katrina, that was disastrous for president bush because everyone said its katrina, act of god, but it wasnt an act of god the way we treated those people in new orleans which you know. So, if and this goes this is a referendum on the way government has been operating in the last three years. I mean, weve seen government hollowed out. And weve been waiting for what is the implication of that. And this may be the implication, that we are not prepared for this, and we are bungling. And if were bungling, that will definitely have an impact on the election. Let me throw one data point. 3 1 2 weeks ago or 4 weeks ago im flying to hong kong for a speech. Get off the plane, united from san francisco, health people, Chinese Health people everywhere, fevered guns, the whole drill. Six days later, lunar new years eve day, flying back, hong kongsan francisco, get off the plane. Not a trace of any healthrelated person of any kind greeting our plane coming in. And i thought wow. I hope gods looking after this country. Ive been spending a lot of time with epidemiologists lately so im in a rabbit hole on this. Thank you. Theyre always exciting, thank you both. And thank you for not hurting me in the middle of all this. [ applause ] hi. Im diane lim. This is the morning of moderators all named i ddiane. This is our theme today. And i am pleased to welcome you to hear this discussion with jason furman and doug holtzeakin. Im with the penn budget model these days in case you havent heard. And jason is professor in practice at Harvard University kennedy school. He was director he was the chair of the council of economic advisers during the obama administration. Hes had other prominent roles throughout his here. And doug holtzeakin is president of American Action forum which he started i guess over ten years ago now. Yes. And of course you know doug mostly probably as his from his stint as cbo director. And he was also working for the council of economic advisers during the george w. Bush administration. So, in other words welcome to the fiscal policy establishment. So, today maybe we can practice a little bit of you know, i tried to get people from more extreme points of view but all of them are too busy right now. So, i would like to i thought he was supposed to represent trump and i was supposed to be represent sanders. Did i get the wrong memo . So, the title of this session is fiscal policy responses to economic inequality. And i thought i would start by mentioning that nabe just put out the results of the membership policy survey. One of the questions was what should be the primary objective of fiscal policy . And 44 of you said growth, increasing Economic Growth. 36 of you said reducing the deficit. And 13 of you said to address income inequality. And its interesting because id like to think we could do it all, but im an optimist. But i think that part of our discussion today will be you dont take Budget Constraints very seriously. I dont . No, no, thats your job. Right, right. So, i think that no, i think its i think part of our discussion today, isnt it possible to die little bit of all of that . Theyre not mutually exclusive goals i would argue. At least we should try. I think. Okay. So, im going to launch right into an opening question which is, you know, were not going to dispute that theres been Rising Economic inequality over the past few decades. I think thats indisputable. But id like to know what you think are the explanations for that trend in terms of the economy itself rather than dont get into policy yet, but economic factors. Jason, you want to lead . Sure. Were not going to dispute it. I think the reason were not going to dispute it is you see rising inequality in wage data, house hold income data, wealth data, in the mortality data, you see nit a wide range of data. And wherever possible, as we talk about numbers, im going to try to use the cbo numbers to make it as hard as possible for doug to object. The in terms of explanations, i think theres two broad classes and they both have some merit. The first broad class is grounded in Competitive Labor markets. Im talking about the rise of market inequality by the way right now, not what the fiscal system has done. Its grounded in Competitive Labor markets, supply and demand for labor and market clearing wage. This is the golden race between education and technology model. We have the change that rewards skills. At the same time that College Attainment is increasing, but its increasing at a slower rate starting with people born around 1960. And so youre producing fewer skilled people. You have more need for skilled people. The wages of skilled people going up. I think that explains probably a little bit more than half the increase in inequality. The other bit less than half is institutional factors which lie outside of this competitive model, things like reduction in unions, reduction in the minimum wage, and other things that have changed the Bargaining Power of labor and the way the pie is divided, increased industrial concentration and the like. That second set of factors have associated with them that theyre not necessarily an efficient response. In fact, curbing them may help in so far as you believe the competitive model, really all you can do is education or taxes. So, im going to agree with jason on the first one. I think its really important because it also explains the rise in inequality in market outcomes across the globe. We really did the see in the labor day at that in the 80s you just started to see in real terms the bottom start to drop, the top start to rise. You get into the 90s, the bottom stabilizes, but the top has continued to rise since. Thats at the core of this. Whats interesting to me is that this now starts to feel like an episode early in my career when the United States had a big productivity slowdown and spent an enormous amount of time trying to explain the productivity slow down in the 70s and early 80s. Was it oil shocks . List after list came out. After a while, they had massively overexplained the productivi productivity slowdown. Weve got megacities versus rural places, high paying firms versus low paying firms, institutional factors. I think the issue k bbecomes hoo you think about ordering those as things that are a, quantitatively important, and b amenable to policy responses in thinking about where you go next. So, the top has kept rising, and thats been a big source of the increase inequality. What do you think the role of government should be in combatting or not exacerbating inequality . Right. So, let me start out by saying that its really important to understand the government does reduce inequality. The tax system is mildly progressive. The benefit system is massively progressive. And so taken together, the fiscal system does a lot to reduce inequality. If you look at the change in market inequality from 1979 to 2016, the top 1 share went up by 12 Percentage Points over that period. The aftertax and transfer top 1 share went up by about 7 Percentage Points over that period. So, a little bit more than 1 3 of the increase in equality was off set by the fact that the system itself is progressive and it became more progressive over that period as we increased tax credits for low income house holds, as we increased Health Benefits especially and to some degree taxes. So, there is a bit of a partial Success Story to our fiscal system right now. I dont think its enough of a Success Story, and i think we undermined some of that success with the legislation in 2017 which resulted in a larger reduction in taxes for house holds at the top than for house holds in the middle or bottom and exacerbated aftertax inequality which i think is the exact opposite of the direction that we should be trying to go. I mean, if we put our tax system on autopilot, right, and if we didnt change, legislate tax cuts and increases along the way, as the economy grows theres a natural growth of revenue in the share of gdp because we get more income in the higher brackes, right . So, as the economy grows, it would support a larger and more progressive government system. You know, do you feel like every time we creep into that area though, theres a legislative desire to kind of beat it back down. Has that been happening . How would you characterize our history of, you know, the Natural Evolution of revenues, and you know, as we grow, our revenues as a shared gdp havent grown in our economy. Thats a very hard question. So, for a while, you would have this sort of as you described it natural increase in revenues. And on the spinning side, sort of comparable ease with which you could adjust things because in the 80s, 90s, the spending side was largely discretionary, not mandatory, relatively easy to adjust. The revenues up until the big move by reagan, the index income tax, it was all inflation. So, you could offer a tax cut periodically and not really change the real tax burden that much. And they got used to that. They got used to the idea that it was relatively benign and successful on a regular basis do this. And they continued to do it after we indexed the income tax for inflation. And thats that i think has become a real problem because now you have the desire to lower rates to, give tax cuts. You also increasingly took people off the rolls and we saw the thinning out of the income tax. Its no longer a broad based revenue raiser. Its a surtax on the revenue. Thats left us in a difficult place because theres no great appetite. Were left fighting over the income tax which isnt really what it used to be, isnt enough to solve the problems. Yeah. So, i kind of want to go to the antiestablishment policies first approaches. Im wondering what if we could talk a little bit about what you think of some of the proposals that really are trying to explicitly address inequality by taxing the very rich and by paying for benefit programs that will benefit all americans broadly, namely medicare for all. So, if you could talk about whats wrong with those ideas, like what do you see as the challenges of how much time do we have . Well, lets limit to, you know lets talk about the trade off between lets talk about the leaky bucket, like how big the holes are in the bucket or how promising is the rising tide kind of theory, you know, metaphor. So, lets just talk about that. Should i start again . Yes, yes. Okay. My position is simple. The tide will not rise and there is no bucket. Oh. Go. I think we quantitatively just hugely overstate, you know some people, some people hugely overstate the growth and efficiency side as compared to the distribution side. Let me give you two examples. The 2017 tax law. Cbo said after a decade it would increase the level of gdp by 0. 5 percentage point. That means on an an eventual basis it would increase the growth rate of gdp by onehalf of. 1. I did a paper and we found a tiny bit smaller, basically the same ball park. Thats not an increase of how much it increases peoples well being because its funded from international funding. That went up by. 1 after a decade which is to say the growth rate went up by. 01 per year of gnp. That is not welfare because that came from people working longer, less leisure, and increased amount of that was depreciation from larger capital stock. When you do the net welfare measure, it was 0 or negative. Compare that to the distribution. If one group gets a tax change that is plus or minus 2 Percentage Points, that is huge. That is way bigger direct effect on their income. Their income goes up by 2 or down 2 because of the tax change than anything that happens to their welfare as a result of Economic Growth. My second example to pick a policy that i like about as much as i like the 2017 tax cut which is to say that certain elements of it that are motivated by good things but poorly executed would be the sanders proposal for 8 wealth tax. The penn worten budget model not to pick on diane finds that would lower the gdp by 1 . Ken is about as good an estimator of these things as i know and he has it lowering the annual growth rate which is to say if you thought the economy was going to grow at 2. 7 absent the sanders tax, according to the penn worten budget model its going to grow at 2 because you wont see the. 03 in rounding. I think the distributional effects of all of these proposals are just much larger. You could add or subtract 10 , 15 to peoples income for better or worse by redistribution. In term of growth you can do for better or worse by the redistributionbut theredistribution in terms of growth and a lot less on actual welfare so focusing on the distributional impact is a reasonable way to evaluate. Its because of the distributional implications. We used essentially the equivalent to explicitly look at the implications of the wealth tax on the proposals by Elizabeth Warren. What happens is the economic incidentals increasingly overtime on workers in the form of lower labor income. We know where those people are. It isnt is in the way that i want to go. These are deliberately destructive policies. The goal is to destroy wealth accumulation and as a result, extraordinarily high tax rates on the return to capital. I understand people wanting to collect more money and i have no particular animus towards the. How you collect it matters this is a terrible proposal something we shouldnt even consider in my view. Its comparably well intentioned intentioned. The United States is about 30 Million People who are insured. 15 million of those are eligible for medicaid, check out the exchanges that come along with it. Another 5 million are here illegally and another 5 million have declined. So 5 million americans who are a target to get everyone into this coverage. 2. 5 million of them are relatively low in the states they didntstatesthey didnt do the medicaid expansion. Thisthat is a target for the coverage. Pretty affluent americans who are Walking Around selfinsured i dont really care if i want to do that, thats michael. But really you do this too for 2. 5 Million People, that is an extraordinarily inefficient policy that makes no sense at all. What you put onto thewhen you put onto the government have, the cost for all you can fight about whether National Health spending changes but if you have to put it all and finance it somehow, the scale of that is enormous. If you did it with a traditional approach to the payroll tax for the program, thats not the way to go. Its a disruptive policy with poorly targeted results and we just have to avoid that. There is a big tradeoff. So, are you saying that policies like the wealth tax and medicare for all to raise taxes to pay for it they will be counterproductive . Economic growth for sure and there are ways to target and equality. Its the same on the universal income. We have the array of programs that they have good reason. Lets figure out how to get 15 million are eligible actually on medicaid or the aca. To go back to the supplyside response, how do you feel about the magnitude of this versus the benefit of getting revenue and using it for lower income households . First of all, i havent seen the paper on the wealth tax so i will take a look at that. I think that it is lowering income by 1 after 30 years. So i think they got a pretty Different Number so i would be interested in seeing the different assumptions and i agree with almost everything you said on medicare for all right now. My first choice would be to make the tax system more efficient and raise more revenue. Theres a lot of ways to do that. I put out a paper recently that suggested basically that douglas holtzeakin tax plan with a 28 tax rate and i think that he originally had a 25 . When you look at the economic efficiency of the corporate taxes, the tax base matters a lot more. You can make different arguments oneon way they may or may not matter but if you have expensing and to disallow the cash flow tax that gives you a lot more room to raise the tax revenues so we can get more and increase Economic Growth in dividends 0. 2 Percentage Points to the growth rate relative to everything in the existing program so there are some steps like that. There isnt going to be enough revenue for things that are efficient improving so there has to be a tradeoff to minimize things like getting rid of the Capital Gains as a way of producing and it also enables you to raise the Capital Gains because it becomes less responsive to the taxes than they are now and eventually you have to pay them some way as opposed to avoid them entirely. A greater degree between corporate and individual level taxes if they were able to switch to something more like market to market taxation and Capital Gains to raise revenue and give it in a more progressive manner, by the way, mark would have paid more taxes underunder the plan then he would pay under the wealth tax. They paid a low rate for someone like him is an enormously high rate of return. The wealth tax is a low rate of return so this would actually get the economics are so theres a lot of things we can do on the efficiency improvement and i think in almost all of those cases the come of the revenue is going to swamp any of these different efficiencies so if we can do a testing freeze that is the only thing we could do, i would take that as money spent in a decent way. Are there other ways they would raise taxes to address inequality . Wolf is the secret of the income, some of them are consumption so if you tax the income more progressively you will have a distribution and more progressive income tax distribution so i dont find the reframing. You can just go back and forth between the two. You end up with this strange thing where 80 of tax might sound reasonable to but then when you transform that into the income space they are getting 1. 3 and that is over a 100 tax rate on the income they are generating and i think income as that is associated with incentives and theres a reason we look at these things and i think once you start getting to the wealth of space, you can miss that and also the people they get a 100 rate of return and on the income generated uri under taxing them relative to what you would tax them even in the consumption tax system that was properly designed for the normal rate of return. So i think the wild thing has been political and takes us away from sensible economics on the distribution issues. Ive always been mystified by the billion dollar slipped to one offspring as well as those generates very different intergenerational inequalities and we ought to configure the system to tax people on the basis of what they receive and there is a that was properly blind to exempt a normal rate of return. So, i think the wealth thing has been political and takes us away from sensible economics, not just in efficiency, but actually on the issues that can get them wrong as well. I think what is important intergenerational, and we always have gotten that wrong. I have always been mystified by whether we want to tax the billionaire and that leaves 1 Million Dollars to one offspring, same as a billionaire that gives a dollar to a billion people. Those generate very different intergenerational any qualities, and i think we ought to can figure this system to tack people on the basis of what they receive. If you get the billion dollars, there is a very progressive inheritance tax. If you get a dollar, you are good. That i think is the place where you worry about the Wealth Distribution again, Everything Else is right. So, going turning, now to the political debates and discussions among the Democratic Candidates, im not going to ask you who you support, but i dont have to decide. Same here. I have until 8 pm to keep thinking about this. Ill be right there with you. So, do you think, and im trying to wrap my head around how, what is going to emerge as the democratic platform in terms of tax and spending policy. So that obviously depends on a large extent on who is the nominee, but do you think that part of this process of going through this very lively primary process, very different perspectives on how tax and spending policies should be used to address inequality, do you think that it will, in any case poll the Democratic Party a little bit leftward because of the fact that we have these candidates, even if one of the candidates that is advocating for these extreme ideas its not the nominee, it seems like it will have lasting effects, no matter who ends up, even if sanders or warren does not end up the nominee. What do you think about that . I think congress has been entirely unscathed by the discussions that we are talking about. Doug and i testified to the committee a few weeks ago, there wasnt a member of congress, i love a wealth tax, can you tell us why a wealth tax is great. Thats generally the format of the question. The democrats, id say are more passionate about restoring the salt deduction then they are on raising the rate. Theyre more passionate for tax cut than a tax increase for high income households. I think a lot of them are more terrified than they should be of raising the corporate tax, so i think no matter who is elected the constraint will be congress, will be quite a big constraint and just as an open question that i dont know the answer to, what would make a financial transaction more likely to happen in this country, Bernie Sanders getting elected has argued ford for a long time now or Mike Bloomberg who came out in favor of a week or two ago. Im not sure i know the answer to that. I can tell a story where Mike Bloomberg would be more effective at legislating that and arguing against the objections that it would destroy the Financial Markets so if youre betting on an ftc you are, that ftc is not going to happen you should start to get nervous that it will happen so you should not have to read outcomes against what peoples going in position is, because book london shot for quite a Big Health Care plan and got nothing as a result. You can certainly see that happening with some of the more ambitious candidates. Also the question was about the platform. Thats already happened. Its already shifted the Democratic Party left. So, i think it is a fair question with any of the likely president s what they will actually do and how they will deal with. Thats a hard question to answer. They campaigned on tax cuts and then once he was president , he raised taxes, and ended up raising taxes instead. Obviously, things can change from the time you campaigned the time reacts to governing. Were not going to have a government thats larger than france. Thats it and his proposals, to make the u. S. Government larger than the government of denmark or france. The u. S. Congress is not going to go anywhere near that that brings me to another question, which is a handful have tried a wealth tax and later rescinded it. Still, what are they doing instead . Why are we not like those countries . What they are doing is broad based taxes that are less progressive than u. S. Taxes combined with people who are rich and mostly people that are super rich. Youre just adjoining the conversation we had in the thirties, the 1960s when we had medicare, which is that everyone will get anything back, and it will be a really good. Deal that is the direction i wish we would have. How do we compare, i think the key is to go back to the competitive aspect of the rising inequality and the skills issue, and it recognize that in the United States, we test every year the National Assessment of economic progress a fourth and eighth graders and every year we have 25 to 33 who are seriously deficient in reading and math, they cant even come close to doing great level reading or math, and we are leaving 23 of publishing behind and creating inequality. They will not be successful in the labor market future, thats a guarantee. Then we will have a huge fight at how you fix it after the fact. The europeans have done a better job of avoiding it, its a crime in the u. S. , and the single biggest thing we should be talking about, and nobody is talking about doing that. Were under investing in human capital. We have to teach kids to read thats under investing. We have 7000 rooms in the United States filled with people, who talk about really standing american workers, skill them the first time. For do you think economists have failed to speak up enough about the other kind of capital in the economy . Human capital . Human versus vehicle its ridiculous. How we are forgetting Student Loans . None. Zero. These are terrible proposals, and they are expensive. We dont have as a budget restraint. We have to get serious about this. I think if you want to boost human capital, the two lowest denominator is education. The United States has involvement that is 22nd in the world, and three and four year old in the world, to do that costs money. They cannot be in a program with a teacher that does not have a college degree, that does not have any training in educating them. It needs to be high quality programs, the returns on that are a mess. We can do euphemisms that no one talks about that, in that particular case, there have been a lot of democratic proposals, including ones out of the administration i worked for him to do things like that, and you have a economists on the republican side that supported but no elected members of the Republican Party want to. You talk about equalizing opportunity, one way is to tax the billionaire or attacks the billionaires air. The other way to do it is to make sure that people arent incredibly disadvantage, from the moment of birth through the rest of their lives. That is going to take more money. Not a lot more money, in fact, a whole lot less than 150 billion dollars a year, but thats going to take more money. K through 12 its less clear to me if that is more money or a reforming the way we do the education. Im more confused and uncertain and agnostic on that, and then at the other end of it is college. And expanding the number of people that go, as i said before, we saw the slow down, and i think that is the other margin we have. There, we dont need more money, we dont need very much more money, what you need is more things like income based repayment, like they have in australia, everyone automatically enrolled in it, you do well, you may back your fullblown, you do badly, your loan in suffocating forgiven. With some system like, that at almost no cost we can deal with all the problems that prevent people from going to college. I think the k12 thing is important. If you want to find somebody who is going to end up in trouble under Student Loans, find somebody that needs remedial education. Thats the single best predictor of problems. Theyre way less likely to finish, if they finish, to takes them way longer and more likely to get a great job as a result and have problems. That is a legacy issue. I think we have to get on to that and remember that about 30 of americans go to college. Theres a whole lot of the labor force that will be determining the nature of inequality of the future, that are going to have to be addressed, not through the Traditional College experience, and that has been under appreciated in this whole discussion. I think the audience is throwing out a couple other policies that they would like thoughts on. One is the value added tax, and the other is universal basic impact. So your thoughts, and you the eye as a way to address inequality . Cant afford any of the proposals anyone has put out, i think a lot of them have bad efficiency and unemployment, you have to be applying for a job. I think thats a good. Think we can argue about how its implemented but the idea that there is conditionality is something that strikes us that strikes us as fair, and efficient. The last thing is wrong, i think we should be more focused on what we can do to enable people to work and succeed in the workplace, rather than effectively thanking the robots will take all the jobs, something theres no evidence of in the next couple of decades for. So i think its in the wrong direction. Of that, theres lots of memo that pam motion did for job bush, maybe doug was involved or saw it, and it was this great analysis of five different models for tax reform, and it leaked. The beginning of the section on a value added tax said every government has only instituted and lost the next election. That was followed by some analysis that found a decent, and i can picture president bush skipping onto this. So its consistent with what i said. And raising more money, i think its very hard the way to get to it might be something through a bit of a back door, and Something Like the type of Business Tax Reform that i was talking about has an awful lot, and looks like a tax on big bag businesses so maybe we should do with that one. We have overwhelming agreement on that, the proposals are completely misplaced, i agree with that, and i think the Political Capital youd have to spend to get it back is too high for the outcome. Im a big fan on using the business collections system to end up with a progressive consumption tax that could look like its economics, but its not on paper. One of the reasons that was a big fan of the House Task Force better rate proposal 2016 and 17 was that it really was a that in the skies. That is a good way to go. So, yesterday youre not supposed to tell people. Right, i forgot that. Forget that. Yesterday, stephanie was speaking about modern monetary theater, and i thought it would be nice to ask, do deficits still matter, and how much should the federal budget be constrained on any of the approaches that you would advocate for addressing economic inequality . Do you want to go first . Ill say it at the outset, ive been on a couple of panels with stephanie, and weve had some discussions, and ive seen the movie being. There i dont understand either of them. So, i think we have to take seriously the trajectory of the federal budget. Theres no question that it is unsustainable, its an ever larger divergence. The structure of it is all wrong because youre crowding out the discretionary spending, which is where you do be research, all the things that our founders soil as a role of the government, all the places you can invest in the future, so its all wrong and has to be taken seriously. The only debate is where you stabilize the gdp ratio, and thats a hard question. Do you want to wait for a while and do nothing for ten years, and then maybe get serious about it . I think, given the fundamental problems is that we have to raise more revenue, take on mandatory spending, you should start now, because its not going to be easier. It happens fast. I think that oneway my view on deficits as changes that i used to have this attitude that everybody in congress is irresponsible, laughter their own devices, wants to cut taxes too much, race spending too much, so its best to lean against that with lots of price speeches about the problems with deficits, even if the speeches overstate the problem. Then i went through the experience of congress being incredibly concerned about the deficit, while the Unemployment Rate was 10 . That was completely insane. And you look around other countries and you see the same thing in places like germany today. So now the political system has as likely to be over concerned about deficits as it is to be underlay concerned about deficits. That symmetry in the political era, errors has not made by his incantations that shade the truth in one direction to just tell you the truth. So i will do that now. Modern monetary, the problem is that it claims its discovered a timeless truth. It has a bunch of identities and it turns those identities into some grandiose statement about everything, everywhere. That is completely wrong. You have to think situational. The modern monetary theory, they hold in argentina, just as well as a hold here. The modern monetary they would work out disastrously, in fact, it has. So we know that theres something more to economics than just the application of identities. What i do think though has changed is in the straits. The ten year, the negative real rate means that we should be thinking about that differently. Olivier said that is sustainable primary deficit is a lot larger now than what we thought it was a decade ago. Who knows which way it will go but we remember people saying that it will go up, the question is how much and have just gone down since then. So i think, to me, that says we can wait a bit of time, i would pay for things, but we can also make sure that we are eventually dealing with Social Security and medicare in the sense we have that deficit reduction built into the system now, i do that mostly on the revenue side, by the way and if the destabilizes at 100 percent or above i have no conviction anymore that that is obviously the wrong point. Okay, i think im going to, i dont know if i can ask a quick question here. Prediction about who is going to take the democratic nomination . I think a new yorker will be the next president. Im voting for john mccain, i always vote for john mccain. Okay, well thank you. Thank you for your great questions. We are going to a