What Will Donald Trump Do on Economic Policy? Here’s a Top Adviser’s View
http://blogs.wsj.com/economics/2016/11/20/what-will-donald-trump-do-on-economic-policy-heres-a-top-advisers-view/
Economist David Malpass offers his thoughts on trade, debt management and monetary policy
ENLARGE
David Malpass, an economic adviser to President-elect Donald Trump, has been tasked with overseeing the transition for the Treasury Department and economic policy.
Mr. Malpass, a former chief economist at Bear Stearns who served in the Ronald Reaganand George H.W. Bush administrations, in October addressed a group of economists and reporters in Washington.
Here are excerpts, lightly edited and condensed for clarity, of his remarks on a range of economic policy subjects facing the incoming Trump administration.
On renegotiating the North American Free Trade Agreement:
I was there at the beginning of Nafta. The idea of Nafta was, it was supposed to be…a very clear, free-market orientation that would allow both sides of the border to do what they do best in the classical sense of more commerce.
But as it was negotiated, year after year, special interests descended upon it. And it got thicker and thicker and thicker. This was 1989, 1990 and into 1991. It’s up to 1,200 pages and then [President George H.W.] Bush left, [President Bill] Clinton came in and added the environmental chapter and the labor chapter.
It became this monstrously large, managed trade process that doesn’t work at all for small businesses in the U.S….
There are too many parts of it that are not working. There is supposed to be regular annual review between the parties of Nafta to see where it’s not working well and to have kind of a constant process of renewal. That’s been dropped away. And so that’s something that needs to be looked at.
On the federal debt limit:
Think how odd it is to the public that here, Washington, D.C., keeps suspending the debt limit. We have a $20 trillion debt and Washington’s response to that is to suspend [the debt limit] because they can’t meet it, because it keeps going up. So it will, remember, be reinstated in March.
There will be a temptation in Washington to simply suspend it again, which is a nonworkable solution for the American public, because in the end, they’re going to have to pay that national debt.
Instead, what I would like to see everyone agree [is] that the current debt-limit law is simply a failure. It doesn’t limit debt. It doesn’t even limit spending, because the spending occurs and then the debt has been accumulated. And then members of Congress are asked whether they approve debt that has already been spent.
So we have to recognize that this has been a complete failure of a law. We ought to have a way to rewrite the law so that it at least attempts to control spending before it becomes debt, rather than after it becomes debt.
On the Federal Reserve:
Trump has talked about the politicization of the Fed. A way for people to think about this is the Fed is an independent agency within the U.S. government. That we want.
But the results of the Fed’s policies have been highly disappointing. For years, in 2010, 2011, 2012, the Fed would start the year with an optimistic forecast that, due to the stimulus it was providing, the economy was going to grow 4%. Then as the year went on, they’d be lowering their forecast to 3%, and then to 2%….We’re now at 1.4% despite the Fed thinking that it has pedal to the metal in terms of stimulus.
That’s a grievance that needs to be brought from the American people to Washington to say, ‘This system that you’re running simply does not work.’
And so that was the context of wondering about the political inclination of the Fed….Governors are approved by the Senate. They have political leanings. So there’s a problem in thinking about, Are we getting the best policy?
We need monetary integrity. We need to have a situation where the U.S. dollar is a trustworthy currency. I would like to see the world’s most trustworthy currency. We don’t have that in the current system.
On infrastructure spending:
We all agree we need more infrastructure. We have to find a system where the private sector wants to finance a lot more infrastructure.
There was an article in The Wall Street Journal showing around the world $50 trillion in cash. Most of the cash is now either negative—I don’t know the numbers anymore because they keep going up—but $12 trillion in negative-interest-rate yielding bonds.
All I have to do is show you an infrastructure project that returns zero, meaning—so for 30 years, you’re going to have a bridge. And it’s going to break even. And that’s good enough to beat the hurdle rate that the market is choosing right now.
So it seems clear to me that what’s broken in the system is not the sources of financing for infrastructure, but the obstacles to actually getting it built. So that means property rights. That means permits. That means the choice of project. That means the interstate cooperation.
In New York state, we have this giant problem where the infrastructure is jointly owned between the state, New Jersey and the city of New York. So imagine trying to get those three actors to agree on a tunnel under the Hudson River or whatever project you want to do.
On debt management by the U.S. Treasury:
Right now, the U.S. issues a certain amount of longer-maturity debt. So every treasurer in the country in the corporate sector is trying to lengthen the maturity of their debt given the low yields that are available. So we just saw Saudi Arabia do a gigantic bond deal at a 3.5% interest rate for a 10-year security. And it was presented, rightly, that that will help stabilize their finances.
So a lot of developed countries are issuing huge amounts of long-term debt right now because the market wants the debt and because that will benefit the taxpayer for the long run. Remember the trade-off. That means in the very short run your interest costs go up a little bit because you’re lengthening the maturity. Now every corporate treasurer makes that trade-off and says, ‘I’d rather have the stability of the long-term debt.’
So here’s the problem: The Fed has been buying up a large percentage of the long-duration debt. So every time a bond comes due at the Fed, they roll it into a long-maturity purchase-back. So they’re buying back the debt that should be in the private sector.
So one thing Treasury should be doing, to Trump’s point, we should be refinancing the debt into longer maturity. That means as debt comes due, issue longer maturity. And that would protect the taxpayer and be the logical thing to do.…
So shouldn’t the U.S. government be doing that and why aren’t we? Well, because it makes our budget deficit look good for one year, but the cost of that is for 30 years you’re missing the opportunity to lock in these low rates.
On the Dodd-Frank financial-regulatory law:
So Dodd-Frank hasn’t worked. Lots of luminaries including Alan Greenspan have pointed out that it’s just an unworkable concept of a law, and so how do you begin to get back to a system that works for average Americans….[House Financial Services Committee Chairman] Jeb Hensarling has a comprehensive bill on various segments of that problem and those are well-received in the campaign.
On carbon pricing to address climate change:
That is not a market-based way to have more energy benefits for the nation from the huge resources that are here.
On a housing-finance overhaul:
The current housing-finance system is very government-centered. Fannie and Freddie are doing a giant percentage of the conventional mortgages. There hasn’t been much ability to regrow private-label mortgages, and so that’s a system that’s much too Washington-centric.
Now whether that gives you a path in Washington—there’s how many plans on what to do with Fannie and Freddie, probably two dozen, right? I think the direction of the administration would be to change housing finance and improve it so that it works better for average Americans.
If you look at the skewing of the average mortgages that are being given now, rich people are doing a lot better on their mortgages than average people within the current regulatory structure.
