World Economic Update

Experts discuss trends in the global economy.

The World Economic Update highlights the quarter's most important and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

MALLABY: Good morning, everyone. I think we can get started. I’m Sebastian Mallaby. I work here at the Council on Foreign Relations. This is the “World Economic Update.”

We’ve got a great panel. Over on the far my right, your left, Vincent Reinhart, chief economist at Standish Mellon Asset Management and also at the AEI. In the middle there, Caroline Atkinson, head of policy—global policy at Google. And next to me Douglas Rediker, who is both at Brookings and the chairman of International Capital Strategies.

The “World Economic Update” is sometimes about whether China’s about to have a financial crisis. It’s sometimes about oil and energy, and what’s that doing to the world. It’s often been about massive uncertainty in the eurozone. I think it’s pretty easy to assert that the biggest variable right now is the U.S., right here—in fact, not just the U.S., it’s this city. And so we’re going to start a bit with the U.S.

But before we talk about what’s going on right now, I wanted to ask Vincent to kind of set the stage a bit. Donald Trump got elected on the slogan “Make America Great Again.” But before November, America was looking pretty great anyway. Maybe you can just talk about how you see the economy positioned.

REINHART: I mean, the cyclical position of the U.S. was pretty great toward the end of last year, the unemployment rate at 4 ¾ percent. That means we basically worked off all labor market slack. Aggregate demand is growing in the neighborhood of 2 to 2 ½ percent. That seems slow by historical standards, but it’s a half to 1 percentage point above our rate of growth of potential output. And we are talking about a Federal Reserve that is in a tightening mode. And so, among other things, that tells you there’s limited upside to growth because markets will try to pare some of that back in the form of dollar appreciation and Fed tightening.

So the real issue isn’t cyclical. We have that momentum going in. Households are confident. We’ve created a lot of wealth. We’re sharing some of our strength with our trading partners in the form of dollar appreciation, which is a contribution to world activity. The real issue is about the rate of growth of potential output. We’re an aging population. We’re not growing that fast. And for some reason or another, we’re not adding much to output per hour. In that environment, all future possibilities are constrained by a slowly growing path of output.

MALLABY: Well, just stick with that—stick with Vincent for one second. So are you saying that if you—if there are reasonable arguments to the effect that growth potential is falling because of demographics and so forth, yet we have an administration that’s talking rather optimistically about sustaining growth of I think—I had the number—4 percent at one point. What do you think is—you know, if you—if you stipulated deregulation and whatever the supply side playbook that you might wish for coming out of this administration, how much could they push the sustainable growth rate up?

REINHART: So here’s a conundrum, and that is that economists’ forecasts for growth this year and next are actually pretty tightly clustered, even though no one knows what’s going to happen with regulatory policy and tax policy and fiscal stimulus generally. Why? Because we mostly have confidence that market mechanisms pull growth toward the greater growth of potential output.

And here is the most unfortunate news: economists really don’t know—(laughter)—about potential output growth. We would have told you that productivity growth slowed in 1973 in about 1980. For some reason, it isn’t just that we’re not investing much and adding much to the capital stock; technological progress is at a virtual standstill. Now, I know Caroline will object—(laughter)—and she may be part of the problem instead of the solution, who knows, in terms of the biased nature of technological progress. But it’s not happening.

And it’s hard to provide recommendations on what to do about it. Taxing consumption helps. Encouraging savings and investment helps. Scaling back on regulatory excesses help. But when you—the reliability of policy changes to change productivity growth is uncertain at best, and even if it works it tilts up the future path. You don’t get big off-the-shelf improvements in productivity by government policy. If they were there, we would have taken them.

MALLABY: You had your hand, yeah.

ATKINSON: Yeah, perhaps I would like to object. And my colleague, Hal Varian, who’s the chief economist at Google, has done a lot of work suggesting that we are seriously underestimating productivity growth. And, as Vince said, it can take a long time to understand how technological change is feeding into the measurement of productivity.

And I think that we will—what I sometimes hear about technology and the internet growth are two conflicting concerns. One is, well, why hasn’t productivity gone up? And then the other is, oh my gosh, machines are going to be able to do all these things and there will be no jobs. Now, obviously, those are in contradiction. I think that the adoption of more and more technology is increasing productivity, maybe in ways that we’re not very good at measuring, and that that will be an important contributor, given the aging society and other issues, to future growth.

What we need to be careful about—and I think what we’ve all learned—is it’s very important for society and politics to make sure that everybody is included in some way in the—in growth that does happen. That’s certainly something that my company wants to do.

On a more traditional macro point, I think that if—we have had worldwide rather constrained fiscal policy for a number of years. In the U.S., that’s been because of Congress cutting back on proposed spending plans and so on, and in Europe we know there’s the euro crisis and so on and so on. So this recovery, monetary policy authorities have been trying to push, but fiscal authorities have often been trying to hold it back. When you have a faster-growing economy, I think it’s clear that you tend to pull more people into the labor force, spread the benefits more, and over time get more productivity because things are being used more intensively. So I think that a faster-growing economy can by itself produce some productivity growth.

REINHART: Still three quick issues about that.

MALLABY: OK. We’ll come to you in a minute.

REINHART: One is I think you should let the Federal Reserve know about unmeasured productivity, because that means that, in fact, we’re pretty good at measuring—

ATKINSON: They don’t need to tighten.

REINHART: —nominal activity. Real activity is increasing. Prices are actually going down.

Second, I think part of your comment suggests our issue isn’t as much with globalization, it’s with technological progress and the biased nature of it. And we may be talking about the long—

MALLABY: When you say biased nature, you mean the distribution of the—of the rewards from technology?

REINHART: Both in terms of we’re really good at doing stuff that creates extra output but doesn’t employ many extra people, and we don’t necessarily charge very much for it—i.e., think of the people in their parents’ basement creating apps. And that has consequences. Technological progress doesn’t necessarily mean a lot more capital spending in a way that in the 1950s, if you figured out how to build a better steel mill, you would therefore be creating a lot of extra demand as well as extra output.

And then, you know—you know, the third issue is fiscal policy has a role internationally for supporting growth. We may have to—have impetus in the wrong places, though, in the—this year and next.

ATKINSON: Mmm hmm.

MALLABY: Let me switch up a bit. So, you know, Doug, a central part of your business is essentially to understand political uncertainty or political trends and relate that to markets and the economy. We’ve had a couple of interesting experiences recently where a big political shift was predicted to produce uncertainty, and therefore chill economic activity. But both here after the election and before that in the U.K. after the Brexit vote, the markets didn’t fall apart. In your experience, are there some kinds of political shock that do lead to market consequences and others that actually, oddly, don’t?

REDIKER: So I think—let’s go back to Project Fear, or those who believed that Trump’s election would cause both market calamity and global disaster. In the era of technology, social media, Twitter, where everything is instantaneous, in a sense, the fact that the sun actually did come up the next morning, both in Brexit and with Trump’s election, was perceived as, oh, it’s not so bad. Now, that does not mean that a year from now—and I’m not using a year as a magical time frame, but let’s just say a period that we can see but we don’t really know exactly what it’s going to look like—that much of whether it was Project Fear, so described, or those who believed the Trump election would be calamitous to, you know, whether global stability, economic fortunes, markets, et cetera, it is not clear to me that that is not going to play out, as badly as, or somewhat as badly as, or at least a little bit as badly as those who predicted disaster might have seen it coming. It’s just the time mismatch was such that markets said, oh my God, it didn’t happen overnight—the election happened overnight, right? There was an instantaneous, you know, binary outcome; you win, you lose. And suddenly, the consequences have yet to be seen.

So I’m not sure I would argue that there’s a great level of comfort we should all take in the fact that the immediate aftermath was a market holding their breath, and then exhaling and deciding everything’s better, not worse. I think, you know, as is the case with anything that is this complicated, it’s going to take time. But I do think that the real economic consequences of both of these events—the Brexit decision and the election of Donald Trump—are going to be monumental in terms of their impact on markets, on global stability, on political outcomes. It just hasn’t really fed through the system yet. And as it—as it will, let’s see whether the markets overcorrect or whether they actually absorb it in a more, you know, digestible, manageable fashion. That’s, I think, the outcome that we aren’t sure about yet.

MALLABY: And if you related that specifically to the U.S.—and you could say, well, with the Brexit vote, Brexit won’t actually happen for a couple of years, whereas if the uncertainty around the election of Donald Trump was to do with his style, a radical policy agenda, or something like that, that could hit a lot faster and maybe is already hitting. Do you think, therefore, that the switch in sentiment in a case like the U.K. can take a long time, the switch in sentiment might already be happening in the U.S.? How soon, do you think, in the U.S. is this going to show up?

REDIKER: I think—let’s face it. I mean, the Trump presidency is less than two weeks old. And if we just take a step back and think, first of all, two weeks is not a long time, although it certainly seems like it has been in this particular instance. What is right now—I mean, you started using the word “uncertainty.” I would start and conclude by using the word “uncertainty.” I don’t think anyone knows how this is going to play out. I think for those of us who are here in Washington who have been in positions of policymaking or government, you know that process matters, right? It’s inside baseball minutiae most people don’t want to hear about. It’s just boring. But actually, this stuff really matters. And what we’re seeing is a very chaotic, very leaky, very imperfect process coming out of this administration, which means we don’t know what policy’s really going to be. The president says something. I was joking the room before that Orrin Hatch, the chairman of the Senate Finance Committee, yesterday was quoted as saying that a—that half of the senators wanted a different tax plan than that which is proposed by Speaker Ryan and Chairman Brady. And then, this morning, that quote was revised to a “handful” of senators.

MALLABY: From half to a handful?

REDIKER: From half to a handful. Now, you know, I wasn’t in the room, but I’ve got to assume that somewhere between when he said it and it was written down and reported, and then today, something happened. I don’t know what it was. But, boy, when a chairman of a material committee is quoted as saying one thing at one point and then eight hours later that quote is changed, I think that’s the definition of uncertainty—(laughter)—when it comes to tax reform, which is pretty significant in terms of the premise of your question.

Why are markets ebullient in the U.S.? Because there’s been a sense that the Ryan-style tax reform/deregulatory agenda will prevail, and all of the global uncertainties that emanate from the foreign policy side of the Trump administration will somehow get, you know, tamped down. So it’s all the upside with none of the downside. And all of the confusion—how are you going to pay for it, how are you going to reconcile otherwise highly conflicting positions within the GOP, much less within the Congress as a whole and the Congress and the White House—that’s just been sort of pushed aside. So the uncertainties have all been resolved in favor of upside, and the ones that are simply downside risks are being pushed off as, well, that’s too uncertain for us to really swallow so we’ll just push it out and not calculate it in the market expectations.

MALLABY: Vincent, is there a behavioral thing going on here, that somehow, confronted with complex politics, you know, these political elites yakking at each other, it’s too complicated to figure out what’s going to happen; if I’m a consumer, I’ll just zone that out and just carry on my life and hope for the best? Is there some of that?

REINHART: Part of it is you also are looking at the back pages of the newspaper that says equity markets were continuing to post gains up until the last couple days. That would provide some financial market validation of a sense that change is good. Can’t help but feel like Doug, that investors, particularly equity investors, were getting way ahead of themselves in terms of not appreciating that change takes time, that the central tenet makes sense: campaigning is different than governing, and governing you have to move toward the center. Thus far, we’ve seen less movement toward the center. And the suggestion that actually executing, particularly on the legislative side, is going to be extremely difficult, which would suggest there’s some disappointment in store.

But there’s another feature of it, and that is a touching faith in central banks, expressed in—

MALLABY: Spoken like a former central banker. (Laughter.)

REINHART: —expressed after the Brexit referendum, expressed after the election. It’s not just that volatilities coming out of financial markets are very low; they’re quickly mean-reverting to those very low levels. You had the surprising British referendum, and within a day and a half volatilities were back to below where they were before the referendum. It took about six hours on the morning of November 9^th for it to get back to low levels. And I think that is a sense that central banks will—in the U.S. case, the Fed will just tighten a little quicker if there’s more fiscal stimulus than currently expected. The dollar will just appreciate a little bit more and will deliver good economic progress.

In the U.K. case, you know, Mark Carney in the Bank of England was there to provide the basically—the citizens of the U.K. inflicted an aggregate demand shock on themselves by lowering their future income prospects by withdrawing from trade. The Bank of England shared that aggregate demand shock with the rest of the world by pursuing policies that depreciated the currency.

ATKINSON: Can I just jump in on Vince’s talk about globalization or mention of globalization and Doug’s point about uncertainty? I think that it’s clear that there is a mood abroad about—or mood here and also in other parts of the world—in Europe most obviously, but also elsewhere—that somehow globalization hasn’t delivered or isn’t delivering the good things that many people predicted, or even that some people may measure. And from my point of view, I think that there is a danger in moving a lot away from that in some ways that are not so obvious.

We’re very much discussing trade in a world of manufacturing goods and so on, but what underpins much economic growth and is a huge part of the U.S. economy—tech sector is 10 percent of the U.S. economy, it’s a big part of the global economy—depends on the free flow of data, as does the financial sector as do many services, which make up increasingly the jobs for people and growth. And if we—there are—there are sort of elements of foreign policy that can inflict damage on some of those issues, which—as Doug said, they may seem boring or technical—the privacy shield, which protects data flows between Europe and the U.S., for example. If that doesn’t—if that is not there, that’s a major cost for the U.S. economy. Similarly, in Asia, if you have a real push for data localization on the grounds—somebody was telling me the other day that one country in Asia believes that when data goes out to other large countries to be analyzed, it’s a kind of national loss, and want to insist on having it kept in their country, which of course will raise the costs and reduce the ability of countries and citizens around the world to access information and data analytics.

So I think that those trends are something that can—you know, that we ought to watch out for how they may impact the overall economy here and around the world.

MALLABY: Let’s just stick on this point for a second because I think it’s very, very interesting. I mean, McKinsey has done some very good work sort of evaluating the state of globalization. So what you see is that in the last 10 years—or take since the crisis—you know, cross-border capital flows have come down a huge amount because cross-border bank lending has been discouraged by post-crisis regulation. That’s probably a healthy thing. Trade growing less quickly relative to GDP, but there’s no real major setback there. Cross-border flows of people I think slightly picking up in the last few years. So that’s—that aspect of globalization has been progressing a bit. But the big thing that really has been transformative is cross-border flows of data, and that’s what you’re saying is under threat slightly because of backlashes, data localization pushes, and so forth. So, in some sense, to safeguard globalization, we’re at a moment where you actually needed to do new policy to underpin the bit that is more dynamic, and you’re—and yet we have a kind of political moment where the instinct is, rather, to pull back on cross-border movement of people, pull back on the trade side, and in a way replicate what we’ve already done on finance.

ATKINSON: Yeah, and I think that you’re right that a pullback from finance—the expansion of finance led to a crisis that hurt a lot of people. A pullback of finance and stronger regulation was a good thing.

Understanding citizens’ concerns about what’s happening with data and so on is also an important issue, but underestimating how much people’s jobs and well-being and access to information, education, and so on does depend on this open internet I think would be a big mistake. For the United States, you know, we’re global leaders there. That can annoy countries in—some other countries, but I would encourage them to think of the ways to deepen their own internet economies because that is future growth.

MALLABY: And what’s your—quickly, what’s your evaluation of the kind of political and policy community right now in Washington? How much does it understand this agenda of safeguarding this aspect of American greatness?

ATKINSON: I think there was—I think there’s a lot of understanding and depth in the existing, you know, political environment. As Doug said, there’s uncertainty about which way the new administration and the new Congress will go. We know that there are important tech advisers inside the administration, and they will be—we know also there are a lot of financial people coming from Goldman Sachs who certainly understand about data flows. So I think that’s something to be—to be developed and, you know, I’m sure that everybody will be discussing how to deepen it. But there’s just—

MALLABY: Yeah. So, Doug, talk a bit about the Middle East and the kind of broader geopolitical picture. I think you’ve looked at the issue of U.S. engagement in the G-20 and global institutions. Beyond the obvious, that we have a travel ban and so forth, where do you see the next layer of arguments coming with regards to the U.S. posture in the world?

REDIKER: Well, thankfully you said arguments, plural, as opposed to a singular, because I think in every day there’s a multiple stream of these things.

Let me—let me take your question—there was a lot in there—and just sort of bring it up 30,000 feet, which is there are a lot of geopolitical consequences, let’s just call them international consequences, that have yet to be factored in because we don’t know what’s going to happen, back to that uncertainty point again. But what we do know is this is an administration that shuns multilateralism. So whether it is the TPP or, you know, the G-20—I can’t wait to see how Donald Trump acts in his first G-20—I mean, this will be must-watch TV because—actually, not even TV—

ATKINSON: Not on TV. (Laughter.)

REDIKER: —just watch your Twitter. (Laughter.) Watch Twitter, because he’s very likely to tweet from the middle of a G-20 summit something provocative.

So I do think that the basic premises of post-World War II Bretton Woods institutions and the geopolitical fabric are in question now. What does that mean? Well, it does mean that a lot of investors—just to bring it back to an economic/financial market perspective—are effectively immune from believing that some of the premises of their day-to-day professional existence are called into question. I think you’re going to have to call them into question. I have often said that under the Obama administration, for the conspiracy theorists out there, they were all wrong. President Obama was a very straight-shooting, you know, legally oriented, prudent president. But in this administration, you know, all bets are off, and conspiracy theorists should let their imaginations run wild, because the basic premises of international diplomacy, of international relations, of rule of law are all subject to being rethought under this administration.

So you started by asking about the Middle East. I think the Middle East is a big question because, first of all, you’ve seen in the last 24 hours the national security advisor make some very aggressive statements against Iran. You know, whether you agreed with the Iran deal or not under the Obama administration, it did provide a certain level of stability in moving forward. Now, the Saudis weren’t happy with it, but you could sort of understand the balance the Obama administration was seeking. That balance has now been thrown up in the air.

What does that mean as it relates to oil price? What does it mean as it relates to JASTA? Remember JASTA, which was several weeks ago a very major international hot point between the U.S. and Saudis? That seems to have been ignored. Interestingly, in the president’s call with the king of Saudi over the weekend, JASTA apparently didn’t come up, which is kind of interesting for those of us who care about these things. But what I mean by that is oil prices—oil priced in U.S. dollars, Saudi-Iran, Shia-Sunni stability, all of this stuff is extremely important to the global economy, and we’re sort of in a new era that we don’t know how it’s going to play out because, as I said, it’s less than two weeks in. And all of these things have been thrown into that basket of uncertainty.

So, you know, I think markets underestimate the basic risks of very fundamental, unsettling shifts. But it is impossible to predict. So I think what both markets and governments are doing in both the financial and political spheres are hoping, but hedging.

MALLABY: Vincent, do you want to be more optimistic than that, or you share the worries?

REINHART: The world’s an uncertain place. (Laughter.) It is more uncertain now than it was a month ago. I think markets have mostly brushed off a lot of those concerns, again, in part perhaps a misplaced confidence in central banks.

I would say that I appreciated Caroline’s answer as the glass being half-full, but I’d like to emphasize the half-empty part of it, as I would bet that our—I would think that our trading partners who don’t have the comparative advantage in big data and storage of big data and manipulating it have a better understanding of what’s at stake than the current administration. And so I would worry about what happens going forward because—

MALLABY: In terms of the global rules around data transfer?

REINHART: Global rules of law. The tech sector is not automatically a source of great sympathy right now, and I think that’s going to be a challenge for you going forward.

And that is going to be a challenge with regard to global trade generally. Finance is off. That’s probably a good thing. But so is trade finance, and that’s part of the reason global trade growth has slowed. We have an anchor in an important trading partner for emerging markets—i.e., China—but it is an economy that is overlevered, that is putting off reforms in order to deliver 6 ½ percent growth because that’s what officials want delivered. Would a shock to the global trading system perturb that? Well, we saw that locally a shock to the North American trading system could provide—cause rather considerable dislocations in the Mexican economy. I’m not sure I want to, you know, test what could happen on a bigger scale.

MALLABY: So we’ll just stick on that for a second, because China has at times—if you think about mid-2015, early 2016, China has at times been the thing that has most shaken up world markets. It seems like a sleeper issue right now, but you’re saying that under the surface there’s a lot of pressure, people trying to get money out, capital controls, the growth is artificial. Do you see this coming back soon?

REINHART: I think it’s instructive that thus far—and it is only two weeks into the administration—we haven’t heard much about the economy with the biggest bilateral imbalance with the U.S, with the—you know, the largest stock of reserves, the one with the most-managed exchange rate. I kind of think that just reveals that one thing a schoolyard bully understands is you don’t pick on the other bully in the schoolyard. But that’s—(laughter)—you know, that time is limited, and at some point changes in the trading system, particularly if there were across-the-board tariffs, would be an external shock.

Remember where we were a year ago. The Fed had just tightened a quarter point and concerns about China had escalated. I actually published yesterday something that reported the Google search interest in China slowdown, and it was at a local peak in February of last year. That was a small shock in the scheme of things. This administration could produce a larger shock, for sure.

MALLABY: Can I just—yeah, go ahead.

REDIKER: So I’m pleased that you mentioned China. I was going to look at the clock and say we’re halfway through and we haven’t mentioned China.

ATKINSON: Haven’t mentioned China. It’s a new world.

REDIKER: So I’m glad you did. And I take a little bit less comfort in the fact that this administration has taken your bully analogy to heart. We haven’t seen that yet. What we have seen, that you’re right, is they have not been overtly antagonistic to China in any specific move since they’ve been in, in 12 days, 13 days. But what we have seen is that the major promises this administration said it was going to undertake in the, quote, first day of the administration—let’s assume that means the first short period—they have been pretty good to their word, for better or for worse.

The fact that China has not yet been designated a currency manipulator, regardless of the facts that they are not actually a currency manipulator at this point—different issue—does not give me a lot of comfort that they believe that there is another bully they’re going to be differential to. I think it’s only a matter of time. And I share your concern. I’d say it’s even elevated from what you portrayed it as, that a trade-based conflict between the U.S. and China is wildly destabilizing and wildly damaging to economic prospects, you know, around the world. But markets don’t seem to be accepting that as a basic premise so, you know, party on.

MALLABY: I want to ask one question of Caroline about Europe, and then we’re going to come to the floor for questions. So Europe, on the one hand, has had a positive tailwind from a strong dollar, loose monetary policy in Europe. It benefitted, I guess, from low oil prices, but that seems to be changing. Do you see—I mean, President Trump rather provocatively talked about Brexit being just the first step in a wider crackup of Europe. So he doesn’t seem to be a Euro-optimist. Do you think that Europe reemerges as a crisis point in the next 12 months?

ATKINSON: Well, I think that it’s easy in America to underestimate the political gloom in Europe. And that’s why—that’s what held the euro together, as well as Europe together, during, you know, a period of great difficulty and stain. I think that—I mean, I’m not a forecaster in that sense. We see political fissures and difficulties in Europe, but we also, I think, in the basic core, see a lot of support for staying together and in the basic institutions. My hope would be that governments in Europe, and the Commission, and all the rest of it, understand the importance of allowing and supporting economic growth, allowing and supporting, you know, in the case of technology a thriving digital economy. I think there is interest in that. And I think that we will see a lot—we will know a lot more as we see how the elections play out during this year.

Governments—I mean, one thing we all need to remember is that Donald Trump did speak to a lot of people, including in America, about how they felt about stagnate real incomes, exclusion, lack of opportunity. And that is something that politicians need to address. I also think that if Doug is right or Vince is right about the potential shock of uncertainty or of some measures, it’s incumbent on—and I think people in the administration will also be searching to connect back to the campaign appeal that was about people wanting to find opportunity and connectedness and jobs and growth all over America. And that will turn out to be a really important—I would hope, that would turn out to be a really important guiding post for the administration here and in Europe.

MALLABY: OK. So let’s go to Q&A. And so if members have a question, please put your hand up. Remember, this is on the record. And wait for the microphone, please. Yeah, there’s a question right here. The Microphone coming. Please say who you—state your name and affiliation.

Q: My name is Alexander Slater and I work at the World Bank Group.

I just wanted to pick up what Caroline said at the end, and sort of a theme that had been running throughout the conversation. The policy underpinnings that can support globalization. It seems to me that one of the policy underpinnings that can support globalization are, ironically, domestic efforts to share the benefits of globalization among national populations. We didn’t hear much talk about that from the panel. So I’d love to hear your views on what is it that you would advise a President Trump to do to promote the—sort of the larger pie that comes from globalization, while ensuring that those gains from globalization are more widely shared among a national population?

MALLABY: Who wants to take a crack at that? Caroline?

ATKINSON: Well, I think that—I’d be interested to hear what the others say—but certainly supporting growth with fiscal policy that also is aimed to spread support across the spectrum.

MALLABY: So it sounds like a corporate tax cut would not be top of your list, then. (Laughter.)

ATKINSON: I think corporate—that’s a whole different question. A corporate tax cut that led to corporate taxes being in line with international practice in the United States I think would be a positive, including for growth and employment. But, you know, one of my pet things having to do with being at Google is around a payroll tax cut. You want somehow to make it more possible for people to be employed. I also think that infrastructure spending, which has been proposed before and being proposed again, or we haven’t seen any details, can be really important. Of course, I think that should include internet infrastructure and broadband as well. It should be modern infrastructure spending. But that is a very—can be a very powerful accelerant and also a powerful connector.

REINHART: So I would say it feels really swimming against a strong current that—in terms of answering your question. But, you know, the truism is right, the best contribution the U.S. can make to the world economy is a strongly growing U.S. economy. So the extent that we don’t do anything to derail economic expansion would be a good thing. I worry greatly that impediments to trade reflect an administration willing to accept asymmetric incidents. One extra job created in the U.S. is worth two or three or four extra jobs destroyed in the emerging market economy.

To the extent that we can get past that, to the extent that the president can fulfill his commitments to the people who voted for him by individual interventions, firm by firm, industry by industry, that is something that gets mediated through equity markets and the macro economy can absorb across the board sanctions or tariffs or mechanisms that require the exchange rate to change. And once that happens, then the macroeconomic consequences is pretty significant. So growth, keep trade open, and support the—support some international financial institutions.

MALLABY: Let’s get another question. Yes, Bruce.

Q: Bruce Stokes with the Pew Research Center.

I’m curious to get you to speculate a bit on the potential impact on market expectations, and particularly on what Caroline was talking about in terms of data flow regulatory practices, of the image of the United States and the image of the new U.S. president. We know that the image of the United States began to fall soon after George W. Bush was elected, even before the Iraq War invasion, and then plummeted after that. We don’t know what’s going to happen to the image of the United States now. We can speculate, certainly. But the question, it seems to me, is we also know that some studies that were done in the early part of the last decade show that the decline in the imagine didn’t seem to affect the sales, at least in Europe, of certain major American companies—like Nike and Coca-Cola and McDonalds. So maybe this has no market impact or economic impact at all that reverberates against the U.S.

But I’d be curious to get you to speculate about this, especially in terms of this data issue, because the data issue is about whether other people align their regulatory practices with us. So that’s a decision that governments have to make. And to get in bed with a U.S. government who they may not trust as much as they once did, and on issues that they never trusted the United States on. So I think—

MALLABY: So, Bruce, if I understand your question right, part of what you’re asking about is whether the brand of a company like Google is tied to the brand of the United States, or are they actually separated in European consumers’ minds.

Q: And the willingness to cooperate on economic issues and regulatory issues will be affected by the image—the general population image of the United States and Trump going forward, at least in key countries.

ATKINSON: Can I just jump in there? I think that what matters for companies—and you mentioned Nike, Starbucks, and so on, Google also—what matters most for is how consumers—how useful consumers find them, or how attractive or how tasty, in the case of a cup of coffee. And I think that that’s something that American companies will—you know, as they embed in other societies—will certainly depend on. Certainly I know Google will depend on our products being those that consumers love and want to use.

As far as regulators go, it will also depend on some understanding between governments. And I think the privacy, we have a system. There is—in the form of a privacy shield. And what will be important is just to preserve that, and preserve the understandings around that, which, by the way, also are relevant for the U.K. and Brexit because of how they will look at those issues. So that would be my answer.

MALLABY: Another question? Yeah, over there.

Q: Hi. Arbra Johnson (sp) with ITOCHU.

I’d like to push a little more on the North American integration issue, and what the economic consequences would be if/when NAFTA’s renegotiated, particularly vis-à-vis our competitiveness with Asia.

MALLABY: So you were wondering whether barriers within NAFTA, just instead of shifting jobs from Mexico to the U.S., shifts the whole lot to Asia? That’s sort of the—

Q: I wouldn’t put it that way, but I’m wondering what will happen.

MALLABY: Vince, you want to take a crack at that?

REINHART: Oh, I was hoping you’d point to Doug first. But so I think what we have to remember is that the Mexican government showed itself to be an excellent trade negotiator to get NAFTA to begin with. That is an economy that has alternatives. It can look south for its agricultural products, as well as north. And that there are alternatives to Boeing, one called Airbus. So I think the high stakes game of impeding trade between the United States and Mexico, the United States and Canada, is forgetting that both economies can look to the left and right of them for alternatives to U.S. production. That’s a real risk. I think it is a risk that trade negotiators will take into account. And it can work. It can work with specific industry agreements. It can work with two bilateral trade agreements. But it’s a risk.

MALLABY: Yeah.

REDIKER: So let me give you the benign, optimistic, hopeful scenario under NAFTA, which is that this administration prizes a political victory on NAFTA early, and that the specific provisions are less important than the political optics of a, see, I told you I’d renegotiate NAFTA and in 180 days I did—something along those lines. And if you take TPP, there were hard-fought negotiations between Canada, the U.S., and Mexico in particular, on a lot of the key chapters in TPP. So if you’re somewhat pragmatic and politically opportunistic, and let’s assume that some of these people are, then you could extract some of the major chapters of TPP that apply to Mexico, U.S. and Canada, slap the word NAFTA 2.0 Trump Edition on top of it, and declare victory. That’s a very pragmatic way to see NAFTA, in a benign light.

The problem is, there are other forces at work here. And so, as we saw as recently as this past week, the president seems to also have a different set of agenda points which is, you know, the political victory of not being seen as losing even the smallest battle. So will that opportunistic, pragmatic, politically resonant path that I just described be the way they go? Or will they get hung up on some you can’t cancel the meeting on me, I’m going to cancel the meeting on you. And by the way, I’m going to slap unilateral tariffs on you, whether I can or not. That is a risk. But if you want to come off in the NAFTA context, vis-à-vis Mexico in particular, with a positive spin, you know, the pragmatic outcome of 180 days from now, seeing the president signing NAFTA 2.0, you know, that has a lot of political upside for the president, if he wants to go that way.

MALLABY: So there’s a deal to be done if they know how to get there.

REDIKER: Yeah.

MALLABY: This guy here—right here.

Q: So, you know—

MALLABY: Can you identify yourself?

Q: Jeff Bialos. I’m a partner at Eversheds Sutherland law firm.

So one of the issues when you hear, “America first,” is we want more manufacturing at home, which of course may not be the best value solution, but let’s put that aside. How do you play that out in these trade agreements? I have trouble imagining you’re going to negotiate trade agreements that are going to enhance—you know, increase U.S. manufacturing when the issues involved go to the core of a lot of these countries—the degree of subsidization, labor rates, lack of, you know, various regulatory frameworks in these countries. I mean, how is it plausible that countries are going to be willing to negotiate away things that are really very challenging to them, because otherwise it’s hard to see how more manufacturing comes home. You know, market access does it in some places, but it’s hard to see.

MALLABY: Just to clarify, are you saying that you’re—that you don’t believe that the U.S. can get more manufacturing, or are you saying that other countries—

Q: The premise of the trade approach—or, the Trump approach is he wants more manufacturing in the U.S.

MALLABY: In the U.S.

Q: And he’s going to negotiate trade agreements that are going to enhance our ability to do that. And it just strikes me that while, yes, maybe if you allow more U.S. market access we’ll have more exports, maybe that creates a few more jobs. What he’s cutting at, the core to it, gets to the practices in other countries that are going to be very challenging for any government to agree to eliminate.

ATKINSON: I just want to pick up on what Doug said. There are—it is clear that NAFTA 2.0 needs to include more protections around labor regulations and so on. And I don’t believe that that is impossible. Now, whether that—how much that drives manufacturing back to the United States remains to be seen, but I think that—I would not regard it as impossible. I think it part of, actually, Mexico’s development, and part of what the United States negotiators have been insisting on for a while is to level the playing field in terms of subsidies and in terms of labor market regulations.

What I would say is that—what I would also say is that it’s not—global growth is not a zero-sum game. And putting America first, as Vince laid out, could be something that also pulls along the rest of the world. I think that that helps to underpin Doug’s benign version. It does depend an awful lot on how one plays that. This is not a negotiation where the more one side benefits the less the other side does. A lot of what goes on, as you know, in the global economy is that what is good for America can be good for the rest of the world, depending on how that is developed. And what’s good for the rest of the world can likewise be good here.

I think what we have to think about is how to work to bring those benefits more broadly into our society and other societies that are showing strength.

REINHART: Yeah, I think the optimistic—you know, there is a path to success. And if the administration accepts that campaigning isn’t governing and that you have cooperate within the White House and with Congress and with our trading partners. Thirteen days in, it’s a little hard to be convinced that we’ll follow that path for success. But even if we do, we’re not going back to the ’60s manufacturing presence in the United States. That’s not about globalization. That’s about technological progress.

And that there’s no scope for, say, to pick an example, the Mexican authorities to realign their wage structure so much to eliminate—to basically bargain away their comparative advantage. And as long as they have a comparative advantage, if there’s some openness to trade, there will be manufacturing done there. We got to accept that. We got to find out—find ways to share the benefits of trade better than we have with our society, and count on a growing global economy to pull everyone along.

REDIKER: One quick interjection. Caroline, you talked about how trade is not a zero-sum game, and of course it’s not, unless this administration believes it is. And that’s a risk. Is, you know, this administration so far within the campaign and its governing philosophy that we’ve seen in the last 13 days has been very much win-lose, that it is not the what are we doing that works for America, but also works for everybody else. It has been, what works for us. And by the way, it may even be better if it’s worse for the other guy, because that actually makes us win and you lose and that feels good.

MALLABY: And if you think it’s zero sum it ends up being negative sum.

REDIKER: Well, that’s right.

REINHART: That’s what I meant by the asymmetry of incidents, a job in the U.S. means more than two jobs lost elsewhere.

REDIKER: Right. That’s right.

MALLABY: Vincent, the elephant in the background here is the dollar, right? So, you know, adding fiscal fuel to an economy that was already poised at pretty much full potential in November is driving the dollar up. The peso is weak. The notion that you’re going to move manufacturing jobs into the U.S. when the dollar is strengthening seems implausible. The notion that you’re going to stem migration from Mexico when for a Mexican worker the attraction of a U.S. dollar salary or wage has gone up—does this end up in a fight between the administration and the Fed?

REINHART: So I think it’s a fight within the administration of exactly what they want to deliver. Doing macroeconomic policies associated with an appreciated foreign exchange value of your currency is inconsistent with export-led growth. At some point, something has to give. One possibility, as you suggest, is monetary policy. The Fed could engineer a weaker dollar, but it wouldn’t be this cast of characters at the Fed. But remember, there are already two open seats on the Board of Governors, that Janet Yellen’s term as chair comes up basically one year less one day from today. It is one way internally consistent to reconcile those conflicting ambitions is to do policies that increase fiscal impetus in the U.S., strengthen growth here, but have a monetary policy that lets inflation overshoot and weakens the dollar.

In some sense, the key issue is you kind of sense that the combination of deregulation and fiscal impetus, at least in an expected value sense has gone up—whether it actually will be delivered is a different question—has already appreciated the exchange value of the currency. The question is, is the bulk of the rally already behind us, or is there more to come if we actually see a Chairman Brady plan going forward, if we see infrastructure legislation sometime soon. And I think that that’s—economists just can’t forecast that.

MALLABY: I think we can take one more question. That’s all the way in the back. Yeah, that’s it.

Q: Hi. Brett Fortnam from Inside U.S. Trade.

Just even in the first 13 days of this administration we’ve seen a structure put in place that is chaotic, to be kind. With the formation of a national trade council and with the different personalities—Wilbur Ross, Bob Lighthizer—and all these different people who seem to have a hand in the formation of our international trade policy, how do you think that formation is going to impact how policy is made? We’ve seen with the National Trade Council the two positions—the two deputy positions, buy America, hire American, and one of the industrial defense space. Is that an indication that the U.S. policy is going to become inward looking? And how do you expect all of these different voices to lead policy forward?

MALLABY: Let’s give the last word to Doug.

REDIKER: I was hoping you’d go to Caroline. (Laughter.)

I mean, I can be sarcastic and say, don’t worry, it’s going to work perfectly, but we all know that’s not the case. So even in a seamlessly run, very experienced White House there are internal conflicts and fissures and problems. And this is far from an experienced, well-organized White House. So you’re pointing to the National Trade Council, which I think is a perfect example of we have no idea how this is going to work, because it’s a new entity within the White House, you already had the National Security Council, the National Economic Council, and the U.S. trade representative, and the Council of Economic Advisors, and all of these other various, you know, influential but jockeying entities and individuals. Now you’ve overlaid—(laughs)—this National Trade Council. We don’t really know how it’s going to work.

It is wholly uncertain. I think what is certain is that process chaos leads to policy chaos. And, you know, certainly on trade, process chaos seems to be the starting point. Whether they can streamline that, learn from mistakes, and ratchet it up or not remains to be seen. A lot of them are smart, capable people. I’d say, on trade, Ironically, there’s probably more of a consensus view within this administration, like it or not, than there are on other foreign policy and domestic policy issues. So, on trade, you’ve got a fairly consistent, anti-China, you know, pro-buy America, hire America kind of rhetoric. Whether they can formulate that into a coherent, cohesive policy structure that does not cause counterproductive consequences, I don’t know.

But as I say, I would be—if you look at what they’ve said and believe that they’re going to follow through, or try to, on what they’ve said, there’s more consistency on trade than there is on a lot of other issues. And, you know, so maybe if you believe that their agenda is a correct one, then you should be heartened by it. If you don’t, maybe you take heart in the fact that it’s probably going to be a pretty messy process and might not get there.

MALLABY: So this is a moment when the World Economic Update begins to sound a little bit like the Washington political update. (Laughter.) But that’s the world we’re in. Thank you to Vincent, Caroline, Doug. And thank you for coming. (Applause.)

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