Debt, inequality and the coronavirus: A conversation with former Fed Chair Janet Yellen and the World Bank’s David Malpass
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The U.S. is on a “completely unsustainable” debt path. That’s the assessment of former Federal Reserve Chair Janet Yellen, speaking at an event today at George Washington University. Yellen joined World Bank President David Malpass for a wide-ranging discussion about, among other things, slowing global growth, trade tensions and the economic impact of the coronavirus.
The panel discussion, sponsored by the Bipartisan Policy Center and moderated by “Marketplace” host Kai Ryssdal, also touched on labor productivity and income inequality.
Yellen served as Fed Chair from 2014 to 2018, when President Donald Trump tapped Jerome Powell to replace her. She currently serves as a distinguished fellow in residence at the Brookings Institution and is the president of the American Economic Association. The last time “Marketplace” interviewed Yellen she told us that Trump didn’t understand macroeconomic policy. Malpass, a former Trump administration official in the Treasury Department, took over the World Bank last year.
Below are edited highlights from the conversation.
Does growth in income inequality in advanced economies pose a risk to the global economy?
Malpass: If you say, “why do we have so many super rich and is that a negative?”… I’ll defend that little part of the question and say they are pretty good about reinvesting in their own businesses and growing businesses, creating businesses that have been helpful to the whole world. If we use [inequality] as being poverty and also median income outside the U.S., [it] simply hasn’t been growing … And that means we need small businesses, we need skills, we need women in the workforce … we need health and education that allow people to earn income.
Yellen: In the United States … maybe median income is rising in recent years, but long-term trend in the United States, let’s go back to 1979. Since 1979, the median male worker in the United States has seen no gain in real wages. And if you look at white men with high school education or less, since 1979 real wages have dropped by 13%. And, yes, a very strong economy as we have now, were we also saw this in the second half of the 1990s, it begins to arrest that trend toward deterioration, a widening skill gap, pressures at the bottom end due to a disappearance of jobs. The structural forces that have caused rising inequality in the United States, and other developed countries, they’re alive and well. And I don’t think we’re on a path to improvement where if we just keep the economy where it is, operating with a tight labor market, this problem is going to disappear. It’s very serious and to my mind it’s driving a lot of the populace and we see in the United States and we’re seeing emerging in other developed economies, and it’s fueling discontent with trade, protectionism.
Do you think the American public understands the debt that we all owe?
Yellen: I think the answer is no. I doubt that most people for example would know that the ratio of debt to GDP in the U.S. has doubled since the financial crisis. And I sometimes recommend to people who asked me about this topic, pick up the Congressional Budget Office’s long-term budget projections and take a look. And the details change from year to year but for more or less the last 20 years at least, what you see is the U.S. debt path is completely unsustainable under current tax and spending plans and the exact way in which it takes off moves around from year to year depending on what happens but that fundamental problem of the U.S. debt path is not sustainable, I think is something that most people don’t understand and I see very little evidence of concern about it in recent years.
Malpass: I’ve supported over time the idea of having a debt limit that if you go above the debt limit, a debt to GDP ratio which at the time I was writing about it, I did it first in 1990, with Sen. Bill Roth and it was 50% debt to GDP, if we went over that we changed the rules a little bit on spending to try to hold it down, then in more recent years at 80%, and now we’d have to go to 100%.
Yellen: We’re at 80%, 79% federal debt to GDP.
Malpass: So, but there’s a bit of a hole in the constitution in that there’s no constraint on that so as as bond yields are lower, you can make the case that we ought to just borrow more and you know worry about it later, which I don’t think is is very fulsome. We need a better answer to that, which would be if our debt to GDP ratio which is, which we can sustain now but if it goes higher, we should have some way to say we should spend less.
Does the coronavirus distress you at all in terms of global economic shock?
Yellen: Of course. It is a potential influence on the global economy. It seems certain to have a significant effect, at least for a quarter or two on Chinese growth, and China’s such a significant piece of the global economy that’s bound to have spillovers … It clearly is a significant concern.
Economists have looked at what’s happened with past episodes like the SARS virus or the MERS virus, and typically, what’s happened in the past is there may be a short-term impact of an epidemic or a pandemic, but longer term it seems to have relatively little influence, and I think many observers are hoping that will be true this time. But we don’t know where this is going. And to my mind, it is clearly a source of uncertainty and risk to the global outlook.
Malpass: There’ll be a lowering of forecasts for at least the first part of 2020, in part due to China, but in part due to the supply chains. To give you an example, a lot of Chinese goods come out to the rest of the world in the belly of aircraft that are carrying passengers. So as you cut down on passenger flights, you need to adjust the supply chains in order to get the goods out to make the products that the whole world economy is operating on. And vice versa. They go back in to China that same way. It’s the world’s biggest economy.
A positive side that I bring out is the different science that’s available this time than [during] SARS. SARS stars was 2002/2003. China hadn’t released the virus to allow scientists to look at it. This time they quickly released the virus, so that people can decode the genome of the virus … and technology has come a long way in finding things that can affect viruses. So we have some hope that science response will shorten the full life cycle of this crisis.
Do you think the period of trade unpleasantness the past 18 months has been worth it?
Malpass: Our clear objectives with China, that people are working on, one is the rules that involve intellectual property and so on. If progress can be made in that area that’s going to be good. I think it’s good to get a first phase agreement, just so you can move on in and move into new issues.
Yellen: Well, with respect to tariffs, I think President Trump and some of his advisers are very focused about the magnitude of bilateral trade deficits — and of course, we have a huge bilateral trade deficit with China — and take that as a symptom of relationships being unfair and seek to really try to modify that.
… I regarded that as not the proper focus. But let me be clear, I do think the United States has real issues in terms of its trade relations with China, and many valid concerns that are certainly on the table for discussion.
… Now, I think it’s healthy and a good thing for business confidence that there’s been a truce in terms of escalation of tariffs between China in the United States. To be clear, even though we have a phase one agreement … U.S. tariffs on Chinese goods are a great deal higher than they were before the trade war began, and China’s tariffs on U.S. goods are also.
Currently we have something like two thirds of all U.S. imports are covered by tariffs. The average U.S. tariff level on Chinese imports pre-tariff war was around 2% or 3%, and now it’s close to 20%, and similarly in China, on the U.S. So they’re not going up, there were small rollbacks. But still lots of tariffs are in place and importantly they affect intermediate goods.
When you look at businesses in the United States, if a motive for putting in place tariffs was to make U.S. manufacturers more competitive and to increase job prospects in manufacturing in the United States, I would say we haven’t seen that. On the one hand, the tariffs afford some protection for U.S. manufacturers, but on the other hand, they serve as tariffs on intermediate inputs that are important to these same businesses. And overall it seems to me that it’s been wash from the perspective of U.S. jobs, especially in manufacturing.
Let’s talk about interest rates. Dr. Yellen, you have said you’re a little worried about interest rates being so low for so long — explain.
Yellen: Well, there’s several pieces to that. Mainly low interest rates, which you can lay at the feet of central banks … but central banks are trying to keep their economies operating near potential, and at this point actually trying to boost inflation rather than lower it. And the reason they have set interest rates as low as they are, is because they’re operating in an environment where that seems absolutely necessary to keep inflation running at moderate levels … so I worry about low interest rates because it is a symptom of a deeper problem in the global economy, and it is ultimately putting central banks in a position where they don’t have a lot of ammunition. If we have a serious recession, you know, we’re probably not going to be able to count on central banks to offer up a significant response. And then the last point I’d make is that in a chronically low interest rate world — which is what it looks like we can expect going forward — we do have to worry about risk-taking and the possibility of financial imbalances building.
Ryssdal: David [Malpass], … negative interest rates. It’s happening in Europe, it’s happening in Japan — discuss.
Malpass: In a way it’s frozen capital, so someone in Germany is saying I’d rather put my money into something and 10 years from now get less money out, then invest in the opportunities that I see around. And complicating that is the central banks are saying, if there were a slowdown or a global recession or a recession in country … the central banks have said the policy then is to buy more long-term government bonds. And so the the policy prescription in the event of a slowdown is to do more of the same. So, I’m skeptical of that.
Describe for me this macroeconomic moment. Where are we in terms of growth?
Malpass: As far as growth for developing countries, it’s really problematic as global growth slows down. We recently did our global economic prospects report… and it’s, looking at 2020, only 2.5% real growth. And that’s a compendium of some of the developing countries, especially China and a little bit India, running above that average, but then the U.S. in our forecasts was consensus at 1.8% for 2020. … Europe is down at 1% only, and Japan at 0.7%, so they dragged down the average. So that gives you a sense of what’s going on in the world, that developed countries are not growing fast enough to provide the engine. And the big countries matter in both the developed and developing world. You’ve got to get some of the big countries going in order to … get people toward prosperity.
Where are the drivers of growth? Is it troubling that the potential of the American economy is 2%?
Yellen: For the U.S. … the main driver is the consumer. Consumers are in reasonably good shape in the United States. We’ve had solid job gains and income growth that’s driving consumer spending. The service sector is strong in spite of the fact that manufacturing has been going through a really weak stint [in the] U.S. and globally. Trade has really been very depressed, especially since the tariff increases. But the U.S. consumer is strong enough to, I think, propel, in the United States, growth at a trend-like pace which is not inappropriate given it means we’ll continue to have a very tight labor market, and maybe it’ll even tighten further.
… It is troubling that it’s 2%. It’s something that has been long anticipated, so it’s not an enormous surprise.
Part of it reflects a slowdown in labor force growth. We have an aging population, less immigration, so labor force growth is really contributing very little to potential output growth going forward.
The second piece of it is productivity growth, and it is depressing, or of concern, that not only in the United States but in most developed countries, we’re simply seeing slower productivity growth than has been the average, at least in the United States over the last 50 years, and way below what we’ve seen in some periods like the second half of the ’90s… that’s a huge concern.
Partly, I think it reflects sluggish investment spending … Part of it reflects a slow-down in the pace of educational attainment in the United States. The average with level of education is going up, but less quickly than in earlier years.
But most important, just the pace of technological change seems like it’s declined. And there really is no agreement on the reason. … The American economy also seems less dynamic. We have a slower pace of startup of new businesses, less reallocation of people and capital from declining firms and industries into dynamic firms and industries. Why that is exactly is also uncertain.
But the diagnosis of why slow productivity growth, no clear diagnosis there, but of course it’s of tremendous concern.
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