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Speeches & Transcripts February 4, 2020

Transcript: A conversation with David Malpass and Janet Yellen at event hosted by Bipartisan Policy Center

MR. GRUMET:  Well, good morning, everyone, and welcome.  I'm Jason Grumet, the President of the Bipartisan Policy Center.  It is a privilege to be able to offer some opening remarks and set the context a little bit for the program ahead.

So, when we reached out several months ago to President Malpass and Dr. Yellen, talk of recession was in the air.  The yield curve was inverted, which I came to understand that that means that the long-term investments were essentially doing less well than the short-term investments, which in econ terms is like, "There be dragons," right?

So, we came into this with the imagination that that would be the focus of discussion.  And the good news is that the U.S. economy is on much more stable footing.  And so, while I look forward to what I'm sure will be a significant discussion of our macroeconomic structural issues, there are two other misshapen curves that I think are worth acknowledging.

The first is that we have an inverted democracy curve.  Just an average day in Washington, D.C., we have the chaos of the caucuses, which suggests some misfortune for long-term election legitimacy.  The President is giving a State of the Union speech this evening which, by all measures, will be more combustible than the usual speech.  It's not going to be just a litany of 73 policy recommendations.

And of course, tomorrow, it is certain that the President will be acquitted of an impeachment which was one of the most divisive moments in our recent political history.

So, we have to ask ourselves, not only do we have the tools to manage the economy, but do we have the capacity to use those tools?  There is an amount of political risk in our society right now which I think features significantly into this discussion.

Second, we have an inverted opportunity curve.  Half of the 30-year-olds in the U.S. today are likely to do worse economically than their parents.  Kids born in poverty stay in poverty.  Children born in the bottom 20 percent of the economic scale have a 1-in-13 chance of becoming part of the top 20 percent, fundamentally disassociated from the imagination of this country, and I think it stokes a lot of the anger that is coursing through our public debates.

So, we're focused on this a lot at the Bipartisan Policy Center.  We're thinking about what we imagine as kind of an opportunity agenda, focusing on improving access, affordability, and quality of higher education, dealing with retirement system that was designed in kind of a pre-post-pension economy, affordable housing, childcare, paid family leave, workforce skills that actually prepare people for real jobs.

Regardless of who the president is, we believe that this is the agenda that can and actually must move through the divided Congress.

So, here we are.  We're going to talk about structural, political, and distributional challenges in our economy, no small task.  The good news is we could not have better speakers to take this on.

Really honored to have President of the World Bank, David Malpass, with us.  Prior to his appointment to this position in April, he served as the Undersecretary of Treasury for International Affairs in the current administration.  He was also Deputy Assistant Secretary of State in the Bush administration and Deputy Assistant in Treasury in the Reagan administration.

President Malpass also spent several years in Wall Street, where he was consistently ranked and noted as one of the most effective analysts in the country.  So, it is terrific that he can bring this wealth of perspective both to his leadership of the Bank and also to our forum today.

Next, it is my pleasure to introduce Dr. Janet Yellen.  While I am introducing Dr. Yellen second, she is absolutely number one.  She is the only woman in her graduating class with Ph.D. from Yale.  She is the first female President of the Federal Reserve Bank of San Francisco, as most of you know, the first woman to Chair the Federal Reserve, which she did from 2014 to 2018.

However, Dr. Yellen's career has not been defined by gender but by real achievement and service at the highest levels of government and academia.  Among many acknowledgements, she was recently--became the President of the American Economic Association.

So, we have a lot to cover.  No one better than Kai Ryssdal to help us make sense of this.  Like many of you, I think of Kai as a friend.  I met him for the first time today, but he's been part of my commute for the last 15 or 20 years.  And I will just tell you that from my perspective, he has a really unique combination of rigor, curiosity, and optimism, which actually makes economic policy entertaining, which is no small feat.  I'm sure he will bring those skills to bear this morning.

And so, with that, I thank you again for coming, and turn it over to you, Kai.


MR. RYSSDAL: So, thank you all for coming this morning.  We do appreciate it.

The morning is going to run like this:  We've got about 45 minutes, the three of us, to chat.  During that time, I believe you have notecards that you got on the way in.  There will be staff--Katie, where are you?

Katie and some other folks will be circulating to pick them up and we'll go to a Q&A from the cards after about 45 minutes.  And then, we'll get you out of here at 11:00, just in time for lunch, okay?

And I'm going to start with an admitted softball, and David, I'll start with you, describe for me this macroeconomic moment.  Where are we?

MR. MALPASS:  Thanks.  Softball, slow growth, but that leads to all sorts of conversation.

But before we go into that, I need to add to my bio.  My real claim to fame in this group is having been hired by Bill Hoagland, who's here, which I appreciate,long, long ago .  And my wife was separately hired by Bill Hoagland and then we found each other and got married.  So--

MR. RYSSDAL: Oh, there you go.

MR. MALPASS:  So, my real claim to fame is in that corner over there.

MR. RYSSDAL: There you go.  Fair enough.

MR. 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.  So, the Bank does twice a year a thick report on growth.  And it's looking at 2020, only 2.5 percent 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 forecast was consensus at 1.8 percent for 2020.  Some numbers show that maybe being higher.  But Europe is down at 1 percent only, and Japan at 0.7 percent.  So, they drag 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, let's say, pull up the averages, but to get people towards prosperity.

MR. RYSSDAL: Janet, let me ask you this question, then:  Where are the drivers of growth?  I mean if, as the World Bank says, the United States is going to grow at 1.8 percent this year.  Are we helping?

DR. YELLEN:  So, growth in the United States this year is likely to be slower than it was last year and the year before.  But likely the U.S. economy is still going to grow in its potential or maybe even a little bit higher, which, in a sense, is all that can be expected, especially given how tight the labor market is, with the lowest unemployment rate in 50 years.

So, it shouldn't be surprising to see growth in the United States around 2 percent.  We've had globally--weak global growth is a drag on the U.S. and the U.S. growing slower, of course, is a drag on the global economy.  But the driver of growth in the U.S. and in many more developed countries this is true--that 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, 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 will even tighten further.

MR. RYSSDAL: But don't--sorry, wait, let me just follow-up really quickly.  Don't you worry about consumers getting tired, because it's been years now that everybody, from you on down, has been saying, "Consumers, they're the thing"?  How much longer can that happen?

DR. YELLEN:  Well, consumer spending is in line with income growth.  If you contrast the current situation with what we saw before the crisis, in the run-up to the crisis, consumer spending was also the driver, but it was debt-fueled.  We had a lot of people using their homes like piggy banks, taking out home equity loans, and the saving rate had been declining to exceptionally low levels.  We've been through a very tough period in the United States in which consumers have worked off debt.  Interest rates, of course, are also low.  So, debt burdens are quite manageable for the household--not for every household, but for the U.S. household sector as a whole.

And the labor market has been performing exceptionally well.  We still have about 180,000 jobs a month.  And wage gains are moderate but have picked up some.  And the saving rate is a lot higher than it used to be.  And so, I don't see the consumer spending that's carrying this economy as based on very weak foundations.  It's based on solid growth of income.  I see it as sustainable.

MR. RYSSDAL: David, I cut you off.  I apologize.  What were you going to say?

MR. MALPASS:  That's fine.  Just picking up on some of those points.  The misery index is way down, and so that gives--if you look at what drives people going forward in businesses to create a new business, it's as people have confidence in the economy.

So, remember the old misery index: the sum of the unemployment rate and the inflation rate.  And one implication from that, as the unemployment rate has gone down, the participation rate has gone up.  And economics isn't very good at putting a value on all those skills being created from the participation rate.

You've got people from all parts of society, minorities, lower-end income, getting maybe the first job or the second job and building skills that will last a lifetime.  So, that is the best investment.

If we look in developing countries, the best thing that could happen is to have more people working because they learned how to run the equipment, the transportation, all of the things that are needed within the economy.

One other point that follows is, you know, real median income has been going up sharply in the U.S., which helps then with the consumption or gives sustainability.  That's the combination of the nominal wages going up at all levels and then the inflation rate being low.

So, one of the most important things, I think, that should--that we need to see a change in the global environment is better structural reforms in particularly Europe and Japan which are growing at half the rate of the U.S. and still with the high unemployment rate.  So, that skills divide that's going on is very apparent with Europe, of the U.S. creating more and more people that have a job or know how to get a job and a system that does that, and that's just not there in Europe right now.

MR. RYSSDAL: So, I get all that, and that's all good and I appreciate the indicators, but let me pick up on something you said, Janet, which was that the U.S. economy is growing about at its potential, 1.8, maybe 2 percent. 

Is it troubling to no one that the potential of the American economy is 2 percent?

DR. YELLEN:  It is troubling that it is 2 percent.


DR. YELLEN:  It is 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 have seen in some periods like the second half of the '90s.  So, second half of the '90s, or in the post-war period up to around 1973, productivity growth averaged about 2.8 percent.  Now, and projected going forward, we're looking at half that, 1.4 percent.  And that is a concern, that's a huge concern.

Partly, I think it reflects sluggish investment spending.  Ever since the financial crisis and we continue to see--we've had three quarters now of actual negative investment spending.  Part of it reflects a slowdown in the pace of educational attainment in the United States.  The average 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.

Some people think that the inventions that we've had just aren't as exciting in terms of their potential for productivity in a wide swathe of the American economy.  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 you know, the diagnosis of why slow productivity growth--no clear diagnosis, there, but of course it's of tremendous concern.

MR. RYSSDAL: I say this mostly just to--I guess there's probably thought bubbles out there, but it's not at all encouraging when a former Fed Chair says, "I don't know," right?


MR. RYSSDAL: You know?  Anyway, sorry.

DR. YELLEN:  It's the truth.

MR. RYSSDAL: And we'll get back to that in a minute.

Globally, is the global economy at 2.5 percent or whatever, is that growing at its potential?  I mean, we're looking at--we're doing about as good as we can do everywhere?

MR. MALPASS:  No.  Certainly, and I'm not such a fan of potential growth as being a limiting factor.  I think it depends on what structural reforms you do.  So, could the U.S. have a sustained growth rate higher than that number?  Absolutely, and it involves policies that can be changed.  So, I want to come back to that, but looking at the global growth numbers, the 2.5 percent is a World Bank number.  And so, as an aside for the GDP nerds in the audience, the IMF puts out a higher number.  Theirs is running some 3.5 percent, or 3.3.

The way they do that is they overweight China and India and other emerging marketsbecause they use a purchasing power parity model, which I don't think is the best one to use for this purpose.  And then, they underweight the U.S. and other--and some of the countries that are really producing a lot of GDP.  So, it literally puts a heavy weight on China, which is recording a 6 percent kind of real GDP growth.

So, I think we should start from 2.5 and just recognize that that's too slow to get other countries moving, and then focus in on what that is, and there is no one answer.

With regard to productivity, I really think it's important that small businesses innovate.  They're the ones that hire--typically have hired workers that have been left out.  You know, the first job that people have used to always be with a small business.  And then, if you did well, a big business would pick you up.  In Europe, that's not happening.  There's no engine.

So, we have this really important disconnect that the central banks say they're doing stimulus, but credit growth is not fast and small business credit growth is zero--is in many countries zero, whether in Europe or in Egypt, some of the developing countries.  You just don't have the credit growth at the small business level that would allow the new skills to be picked up.  That is productivity, if you think about it.  Innovation and productivity come from--often from smaller companies and we've kind of lost that model.

So, then if we say, "Why is that?"  I, as you know, I'm not a fan of the central banks buying long-term government bonds.  That biases the whole world economy toward relying on governments to figure out what to invest in.  If you've got your central banks in Japan, in Europe, and even continuing in the U.S. buying long-duration government bonds, that's a major distortion in the world.

The World Bank and IMF have an Annual Meeting, we had in October, and that was the first topic of conversation at the Group:  Why is there so much inequality in the world?  And then, Mark Carney laid out a very persuasive argument that you had--that as central banks are buying, as their balance sheets are expanding, you end up this low-for-long in terms of the interest rates being kept low for a long time, and that is distorting the investments that people are making toward long-term, government-oriented investments, when what we need is working capital right at the frontend so that small businesses can finance their accounts receivable.

MR. RYSSDAL: So, let's talk about interest rates for a second, Dr. Yellen.  You have said you are little worried about interest rates being so low for so long.  Explain.

DR. YELLEN:  Well, there are several pieces to that.  Mainly, low interest rates, which you can lay at the feet of central banks.  They do set short rates and by buying longer-term assets influence longer rates, as well.  You might say it's due to 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.

The fundamental driver of low interest rates in the developed world at least is a surfeit of saving, lots of saving, and very weak investment demand.  And ultimately, interest rates reflect the strength of saving or supply of funds and the demand for those funds for investment purposes and partly because of low productivity growth; in most developed countries, partly because of slowing labor force growth,we have very weak investment demand and a lot of saving.  And even before the financial crisis these forces and possibly the demand for safe assets, as well, has been pushing down interest rates both at the long and short end of the spectrum.  And central banks have to go with that and essentially validate what these underlying factors dictate.  If they refuse to do so, essentially, we would have much higher unemployment, lower inflation than we do, and inflation is already too low.

So, I worry about low interest rates because it is a symptom of a problem, a deeper problem, in the global economy.  And it is ultimately going--and it has put 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 lower 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, and that's a potential concern, as well.

MR. RYSSDAL: David, two words to you--maybe three, actually, sorry: negative interest rates.  It's happening in Europe; it's happening in Japan.  Discuss.

MR. MALPASS:  Yeah, so, in a way, it's frozen capital.  So, someone in Germany is saying, "I'd rather put my money into something and, ten years from now, get less money out than invest in the opportunities that I see around."

And complicating that is the central banks are saying, If there were a slowdown of--you know, a global recession or a recession in-country--by the way, you know, Europe's numbers were coming in negative in the fourth quarter.  So, the central banks have said the policy, then, is to buy more long-term government bonds.

And so, the policy prescription in the event of a slowdown is to do more of the same.  So, I'm skeptical of that.  The Fed is showing one new face, new image, which is buying T-bills, the short end of the curve, and also lending money through the repo market.  So, that started last September and has become sizable.

I saw a projection yesterday that said that by the summer they may own 20 percent of the T-bill market.  My view is that's better than them owning long-term government bonds, because they get themselves locked in too long.  But people can have a different view on that.

But it simply--I mean, one concern is the magnitude.  The Fed is operating in a big space in the repo market, the reverse repo market, and in the T-bill market, which is--some parts of that are quite new for the Fed to be so heavily involved.

MR. RYSSDAL: With the understanding that this is probably the ideal audience for this, let's not get too far into the reverse repo market.

Did you want to say something?

DR. YELLEN:  Yeah, I guess I'd offer a somewhat different perspective on the long-term asset purchases.

The Fed began to do that, and other central banks did the same after the financial crisis.  By December of 2008, short-term rates had been lowered to zero.  The unemployment rate was hovering around 10 percent.  And there was an urgent need to get the economy growing again and creating jobs. 

And essentially, the Fed's main tool for stimulating the economy is via interest rates.  So, there was no more they could do with the short end but they looked at 10-year Treasuries, and as recently as 2012, the 10-year Treasury yield was around 3.5 percent.  And they thought to themselves, "Well, there's not much more we can do at the short end, but if we can bring down longer-term interest rates"--now, they could only really buy--legally, they can only buy government bonds, Treasury bonds or agency-backed, mortgage-backed securities.  They're not--as some countries, the central bank can buy private assets, corporate bonds or even equity.  But in the United States, the Fed can't do that.

But they thought, "Okay, if we buy government bonds, there will be spillovers to private bonds, as well.  Corporate bond yields will go down and that will stimulate spending."  And they started to do that.  And a lot of papers have been written, hundreds of papers, now, on whether or not that did succeed in stimulating the economy.  And the way I read that literature is that it was successful in pushing down, that plus forward guidance about the path of short rates pushed longer-term rates down considerably.  And it wasn't confined just to government bonds.  There were also spillovers to corporate bonds.  Mortgage rates fell.

Now, how much did that actually stimulate investment spending?  You know, we could argue about that, but that is the standard tool.  And there were probably also spillovers to equity markets, as well, and wealth that stimulated consumer spending.

And you know, it is an important debate because, when you look at how low short-term rates are, I mean, they're at negative levels in the Euro area, in Japan--okay, higher in the United States, but not terribly high at about 1.6 percent.  If we get another recession, rates in the U.S. will be quickly cut to zero.  That will be true in the developed world.  And these so-called "unconventional policies" of buying long-term bonds, that's going to become conventional.

So, this is an important discussion to have.  I think the Fed has decided this is a tool that worked.  They should probably use it again.  And I guess I'm on that side of the debate, but there is a very legitimate area for disagreement.

MR. RYSSDAL: This is really interesting, because the last six or seven minutes has been--the theme has been you two saying, "Central banks, I don't know, they can only do so much."  And there's--and you know, out there amongst the news reading public, there's the, "Oh, my God, the Fed said this.  It must be true."  You know, I just think that's really interesting.

Go ahead.

MR. MALPASS:  And I think it's really important that economists have modesty in terms of what we know.  In other word--you know, there have been ups and downs in the world.  And so, that's true of the Fed, as well.

And I take very well Janet's point of, this was a very difficult situation in 2010-2011, that the Fed did things that were within its power.  It sure seems to have helped at that time.

So, what I--you know, I think we're in an environment that economists should analyze as being post-monetarism.

You know, there used to be an idea that the supplying of reserves by central banks was the control mechanism within the economy, because then money would be multiplied and that would create private sector credit.  That model isn't what is operating now.  We have--it's a regulatory structure where there's all these metrics that the banking system operates under, high-quality, liquid assets that's fed by central bank reserves but also by other forms of liquidity within the system.

So, I guess I'll leave one point.  I don't like it so much when people talk about central banks "injecting liquidity."  Because in the U.S., Japan, and ECB, that's not actually the constraint within the system.  They can change regulatory policy to allow more small business loans.  That's a policy tool that people could think about.  How do we get more working capital available to new businesses, that is a valid question, but that is no longer monetarism in the old way.

China, in contrast, still is operating under a monetarist system where they inject reserves and it is the constraint on the banking system.

So, in the face just last week of the virus they "injected" liquidity by supplying more bank reserves, and that causes, the banks then to lend more money.  So, they're hoping they can get a liquidity injection.

But I would rather, in the U.S. and elsewhere, us be talking about structural changes within the economy that encourage people to invest, businesses to invest.

MR. RYSSDAL: Very quick change of topic, since you both have brought it up, the recession and the response.  The crisis next time, because of course there's another recession coming.  This expansion is long in the tooth, although it does not, as we all know, die of old age.  Coronavirus, does that distress you at all in terms of a global economic shock?

I mean, you were just in Hong Kong.  You're feeling fine, we should say.

DR. YELLEN:  So far.

MR. RYSSDAL: But you know--"so far," right.

DR. YELLEN:  So, it's been three weeks.  So, all's good.

MR. RYSSDAL: All right, good.  Are you worried about that?  I mean, honestly.

DR. YELLEN:  Well, of course, it is a potential influence on the global economy.  It seems certain to have a significant effect, you know, at least for a quarter or two on Chinese growth.  And China is such a significant piece of the global economy, that's bound to have spillovers.  There remains an enormous amount of uncertainty about what will happen with the coronavirus, whether it will be contained.  I'm obviously not an expert in this, but it clearly is a significant concern.

I guess economists have looked at what's happened with past episodes like the SARS virus or the MERS virus.  And typically, what has happened in the past is there may be 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 I mean, to my mind, it is clearly a source of uncertainty and risk to the global outlook.

MR. RYSSDAL: David, the World Bank's position?

MR. MALPASS:  Yeah, so, there will be a lowering of forecasts for at least the first part of 2020, in part due to China but in part due to supply chains.

To give you an example, a lot of the 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 the whole world economy is operating on.

And vice versa:  They go back into China that same way.  It's the world's biggest economy, and so there is the economic effect.

A positive side that I bring out is the different science that's available this time than the SARS.  So, SARS 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 that allows them to then study.  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 lifecycle of this crisis.

MR. RYSSDAL: Also true, though, that China's more integrated now into the global economy.  So, that's--you know, the transmission factors are completely different.

MR. MALPASS:  Correct.

MR. RYSSDAL: We're going to go another 20 minutes, the three of us.  If you've got questions, fill out your cards, raise them up, and Katie and the gang will come get them.

Okay, change of gears but still generally China-related.  I want to talk about trade for a minute, current state of play, and whether, David, you think the period of trade unpleasantness, shall we say, the last 18 months, has been worth it.

MR. MALPASS:  Well, there's--they've reached a deal and I gather are still working on it.  I'm not part of the administration so I don't--am not privy to that.

I think there are 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 and move into new issues.

And then, also, with China, part of what's going on--with the World Bank, we're evolving the relationship with China.  People should note, China's the third biggest shareholder in the World Bank.  And in the recent IDA replenishment, the soft loan window of the World Bank, China doubled its contribution.  They're putting real money into parts of the development assistance network around the world.  So, there's lots of bad press about the mistakes that they're making.  We can work with them on ways to have more transparency within their development assistance programs.

So, if I could, I'll take a quick minute on that.  Transparency is so important in both the way people invest and the debt that they use to invest in it.  Economics shows us debt is basically good if it finances good investments.  But to do that, you have to know what are the terms.  So, what interest rate are we talking about and how many years?  What are the clauses?

And so, China was this new player in the international sphere.  Their economy went from zero to 60 in terms of GDP growth and per capita income.  And so, as they did contracting in developing countries, they put in new terms into the contracts that don't work very well in the international system.  I'd like to mention a couple.

One is they put in nondisclosure clauses.  So, when they're working--which is unusual and unnecessary.  So, as the IMF or the World Bank goes into a developing country and says, "What are your debts?"  The country can't tell you because they have a nondisclosure clause that's really tightly written.

So, we're working with China and they're receptive to the idea of, "Don't put that clause in new contracts."  So, that's a starting point.

Their contracts have other techniques that make it harder to--for example, they have been taking collateral for sovereign loans.  That means you lock up some of your nation's resources as the potential to repay just the loan from China.  That violates a negative pledge clause that the World Bank has in contracts in the same country.  So, we're working to untangle the legal challenge.

And again, I say China is working well with this, but it happened very quickly.  The amounts that they're investing in developing countries skyrocketed.

MR. RYSSDAL: To be clear, you're not saying China's a paragon of transparency here, right?

MR. MALPASS:  They're not.


MR. MALPASS:  And so, I mean, as a practical problem, as our teams go into China, they can meet with the PBOC, the People's Bank of China, with the Ministry of Finance, who are looking for ways forward.

But China has two big development agencies, the Ex-Im Bank, and the CDB, the China--

MR. RYSSDAL: China Development Bank.

MR. MALPASS:  --Development Bank, which have been used to having their own lawyers making their own contracts.  So, this is something we can work on as a world.

They're not members of the Paris Club.  They're not part of the OECD anti-bribery policies.  And so, having China join the world in an international system--it would be good to have China join the world more in an international system that operates on--I don't want to say tight rules and regulations.  I just want to say general standards of how these things operate.  That's going to go a long way.

MR. RYSSDAL: Janet, to the question of the President's tariffs and whether we are getting to where the President and his advisors have said we want to be. 

As I'm sure you remember, you and I spoke on Marketplaces a year ago, as the trade war was really getting going.  And I asked you at one point if you thought the President understands macroeconomic policy.  And as I'm equally sure you remember, you said, "No, I don't."

Do you still feel that way?

DR. YELLEN:  Well, with respect to tariffs, I think President Trump and some of his advisors 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.

And I think many economists feel that, for a country as a whole, a country's overall deficit in trade with the rest of the world, when there is a deficit, it means that that country is spending more than the output it can produce itself.  So, it's importing extra goods from the rest of the world to support that consumption need, and it's borrowing from the rest of the world as a consequence.

So, the mirror image of a country's trade or current account deficit is the amount it's borrowing from the rest of the world.  And most economists think that a country's savings and investment are decisions that aren't affected by trade policy, so that if you put a tariff on one country or a group of countries, either the trade will migrate outside to countries that are not immediately affected or, alternatively, if there's no change in savings and investment, that this will tend to lead to an appreciation of the country's currency.  And so, while the tariffs may make goods more competitive, the appreciation of the currency will offset that.  So, I regarded that as not the proper focus.

But let me 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.

And David mentioned intellectual property.  I think that's forced technology transfer, intellectual property, China's subsidization of state-owned enterprises that play a dominant role in developing new technologies and its desire not to open its own markets in areas that are regarded as crucial to foreign technologies.  I think these are really important issues that we're beginning to get to.

Now, I mean, 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 and the United States.  To be clear, even though we have a phase one agreement, tariffs are very much higher.  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 percent, and now it's close to 20 percent.

And similarly, on 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.

You know, 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 a wash from the perspective of U.S. jobs, especially in manufacturing.

MR. RYSSDAL: I bet that's the answer you wish you'd given last year.

DR. YELLEN:  That's right.  You're--

MR. RYSSDAL: Yeah, here you go.

DR. YELLEN:  I guess I should have been prepared for that.

MR. RYSSDAL: When we started, you both talked about the China slowdown and the European slowdown.  David, who are you worried more about, Europe slowing down or China slowing down?

MR. MALPASS:  Well, the coronavirus is a new factor for China, and we'll see how they're dealing with it.  I've offered our, the World Bank's, support in various ways.

So, I think, today, we have to say the China slowdown, but if you'd asked me a month ago, I would have said the Europe--because its economy is bigger than--in combination, the Euro zone countries are bigger than China, and their slowdown is--was much--or their growth rate is simply not adding to the world.

So, let me mention a little bit the World Bank goals.  I'd like to see countries do well, good outcomes for developing countries.  That means poverty alleviation; that means higher median income, because it's very tightly connected to poverty alleviation.

A report just yesterday by Lant Pritchett, which might be a good topic for your--for Marketplace--

MR. RYSSDAL: I'll look it up.

MR. MALPASS:  --makes this, you know, economist correlation between the two that, when median income is going up, we also see that poverty rates are going down in countries.  So, that leads you to, how do we get more growth in developing countries?

For many in Africa, the single most important one is Europe's growth rate, because it's the market source for a lot of the trade going on.

So, the World Bank then works in specific areas in developing countries around the world to try to have better structural policies so that they can make more advances.  That means the rule of law; that means transparency, which we talked about.  It's also electricity and water that can get to a bigger percentage--we have a lot of developing countries that still only have--30 percent of the people have electricity and even fewer have clean water, which leaves big problems for children's health, for the way the society works.

And so, you want to have--and in cities, one of the issues that we are working on more and more is people are moving to cities and they need to have some way of having a livable city, and the rules aren't well established.  Each country is different in terms of how the national government interacts with the city government. 

We try to set up municipal finance, which is critical for helping clean water, for climate, the environment, preparation for extreme weather conditions, and so on.  All those impact cities heavily because there's a population center.

So, getting all of these done--and I'll mention one more point, which is governments have a little bit conflict of the incentives that they have.  They want to get a solution within their term in office.  So, they want something that works in two years.  And the problem is that some of the best changes operate in ten-year horizon.

And so, particularly now with the yield curve flat, there's a conflict between what they should be doing, which is investing for the long term; and what either politicians or even the autocrat, they need near-term gratification.  So, having--I think the solution is very firm transparency of what they're buying so that people--of the investments that they're making and the debts that they're taking on--so that the public can better evaluate what they're getting.

MR. RYSSDAL: Let me riff on that for a second.  Do you think the American public understands the debt we all owe?

Janet, I'll give you--

MR. MALPASS:  I'll say no.

MR. RYSSDAL: Do you think the American public understands its debt?

DR. 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 ask 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.

MR. RYSSDAL: Okay.  So, who's got a handful of cards for me, and I'll take it from there.

And while we're chewing on these--okay, handwriting, people.  God--yes, David go ahead.

MR. MALPASS:  I encourage--on that point, two philosophical debates that economics should have.  One is whether central banks should own long-term assets.  So that, I think, is a core issue to think about because--

MR. RYSSDAL: And you're a no.

MR. MALPASS:  And I'm a no, because how do you divide the line of which long-term assets?  And it gives a natural bias to government, because that's what they're allowed to buy.

Japan buys some degree of equities, but that raises its own challenges.

And then in a kind of related depth of philosophy is what is your constraint on government spending or size of government.  We had Gramm-Rudman-Hollings--remember, a bipartisan effort, discussion of a constitutional amendment to balance the budget.  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--well, I did it first in 1990 with Senator Bill Roth, and it was 50 percent debt-to-GDP, if we went over.  We changed the rules a little bit on spending to try to hold it down.  Then in more recent years at 80 percent, and now we'd have to do it 100 percent.

MR. RYSSDAL: We're like at 105 now, right?

MR. MALPASS:  Yeah.  So, say--

DR. YELLEN:  We're 80, 79, federal debt-to-GDP.

MR. RYSSDAL: Oh, all right.  Fair enough.

MR. MALPASS:  So, but there's a bit of a hole in the Constitution in that there's no constraint on that.  So, as bond yields are low, you can make the case that we ought to just borrow more and worry about it later, which I don't think is very fulsome.  We need a better answer to that, which would be if our debt-to-GDP ratio--which we can sustain now--but if it goes higher, we should have some way to say we should spend less.

MR. RYSSDAL: Common sense doesn’t do that?  You need a constitutional amendment for that?

MR. MALPASS:  And you know, sometimes people say, well, politicians should have backbone.  I hope people--

MR. RYSSDAL: And also, it's not just spending, right?  It's not just spending.  It's taxes as well, but that's a whole different panel.

Okay, so, but to that, though, and I’ll let both of you answer this one.  What are the ramifications for the United States of the long-term fiscal imbalances given spending outpacing revenue and aging population and rising mandatory spending?  That is to say, you've said it's not sustainable.  Then what?  What does that mean?  I mean, 15 years from now, what am I going to tell my kids?

DR. YELLEN:  So, I think the issues of aging population resulting in rising spending on entitlement programs, Social Security, Medicare, Medicaid, without a comparable increase in tax revenues to finance them is a problem, and that's what drives the unsustainable debt path.  And this is not new.  We've known about this for 20 or 30 years and we've failed to address it.

Now I think the fact that interest rates are so low and look like they're going to stay low for the foreseeable future does change the picture in the sense that an 80 percent debt-to-GDP ratio now does seem sustainable.  I don't think it's terrible worrisome in a low-interest rate environment.  And interest payments on that debt as a share of GDP haven't increased at all. 

But we do need a framework.  We do need to deal with the imbalance caused by those entitlement programs and their projected growth over time.  And to the extent that it involves changes in those programs--and we've known this for a long time and haven't done it--you need to have a phase-in period so that people who will be affected by it understand how things have changed and how they need to prepare.  So, I think that this remains an important priority for policymakers.

MR. RYSSDAL: Seems to me you and frankly all of us are banking on low interest rates out as far as the eye can see. And that seems a tad naïve.  You do this again.  Why?

DR. YELLEN:  You know, interest rates have been trending down among all developed countries over many decades, and the forces that are causing this seem like there are ones that are not likely to change in the near term.  And so, I do think that's a reasonable baseline.  Obviously, things can happen.  Interest rates can rise for a whole variety of reasons.  But I think we are looking at a world where low interest rates is a safe assumption.

MR. RYSSDAL: Yeah, David, go ahead.

MR. MALPASS:  One issue on that is investment is less than the savings which is holding down.  And so, do we have enough investment going on in the world to create the growth for the future?  And that depends a little bit on your evaluation of the quality of investment going on.

I mentioned earlier the importance of, by having the participation rate go up in the U.S. and the unemployment rate be down for minorities for lots of people within this society, you get skills that are permanently valuable.  So, let's put a checkmark on positive there.  If you had though infrastructure--Japan famously a few years ago would repave the runway of an airport that had just been repaved.  So, you can imagine the marginal benefit from that new investment is pretty low.

And so, in developing countries, it's the same.  You've got investments that are going in the wrong sectors.  And so if we start from the point of saying the total investment quantity is so low that it's less than the savings--so that's a starting point that is not good--and then you say some of the quality of investment--and you know, people can argue but it's not transparent and sometimes mistaken--a railroad that you don't need or on down the list of--then that leads you in a bad place 20 years from now.

MR. RYSSDAL: David, next question to you about the global economy.  Does growth in income inequality in advanced economies pose a risk to the global economy?  Income inequality, say, here, posing a risk to the global economy?

MR. MALPASS:  Well, the U.S. is showing pretty good data on inequality.  The Gini coefficient is going the right way on that and the median income has been going up.  So then if you refine that and say--

MR. RYSSDAL: Inequality in this economy is still a huge problem, right?

MR. MALPASS:  Yeah, so if you say why do we have so many super-rich and is that a negative, I guess I'll defend that little part of the question and say they are pretty good about reinvesting in their own businesses and creating businesses that have been helpful to the whole world.

But I want to buy into the whole thrust of the question that inequality, if we use that as being poverty and also median income outside of the U.S. simply hasn't been growing, and that we see in our developing countries--it's true in Europe--that the median income--that's the person in the middle of the income scale that's so closely correlated to poverty, per this new research--that is a problem.

So, if we say inequality in the sense that there's a top 1 percent and then there's no growth in the median income, outside the U.S. that's a major problem.  And that means we need small businesses, we need skills, we need women in the workforces.  We have World Bank programs across the board.  We need health and education that allow people to earn income.  They have to get started.

DR. YELLEN:  So, let me just add to that too.

MR. RYSSDAL: Please do, yeah.

DR. YELLEN:  First let me say that I completely agree with David.  He's emphasized the benefits across the board, but especially to low-income people of a very strong labor market fostering increased labor force participation.  The greatest gains are at the bottom end of the spectrum in the United States and the skills development that occurs in a strong labor market when people find jobs--all very important.  I was very glad you emphasized that. 

And 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 percent.

And, yes, a very strong economy as we have now, where we also saw this in the second half of the 1990s, it begins to rest that trend toward deteriorating, a widening skill gap, pressures at the bottom end due to a disappearance of jobs.  The structural forces that 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 populism we see in the United States and we're seeing emerging in other developed economies.  And it's fueling discontent with trade, protectionism.  And when I think about the global economy--and the question is what are the spillovers to the global economy--given that the growth of trade that we have seen over the last 50 years in development of global supply chains has been one of the most important factors boosting growth all around the world, this is a trend in developed countries that is not going to be good globally for reducing poverty.  So, I mean, of course there are things we can do to address it, as you said, and I believe we should be.

MR. MALPASS:  One minor on that is trade facilitation.  So, one of the best value-adds for developing countries is to be able to trade with their neighbors. That means harmonizing the tariffs across the border or having enough physical installation to allow the trucks to go across--let women go across, which is important.  And so that's an area that we're working on that then helps these global supply chains that Janet is mentioning.

MR. RYSSDAL: David, this one's to you, and it goes back to central banks investing in long-term government bonds.  Do you think central banks--the American central bank, frankly--should be allowed to invest in corporate debt?

MR. MALPASS:  I think no.  How would you know which corporate debt to invest in?  Would you have …so clearly no on that.


DR. YELLEN:  I don't think so either.  The Fed has never--and as I mentioned, other central banks have invested in private assets and are allowed to.  The Fed has never asked for this power, and I think it does raise questions about how would the central bank decide what to do when this could politicize decision-making to a great extent.

And there are spillovers.  There's enough similarity between government debt and mortgage-backed securities and corporate debt.  They are substitutes in the portfolios of wealth holders.  So, buying government debt tends to push down not only the yields on the assets the government's bought but on other substitute assets like corporate debt as well.  So, I don't think it's really necessary.

MR. RYSSDAL: I'm going to paraphrase this one for whoever the climate change questioner was.  Setting aside global destruction--right?--well, you know, you've got to frame the question--the spirit of this question is, do you think we're going to get it together enough on climate change to find the economic upside and then make those investments?

And, David, I'll throw this one to you, right?  Because there are economic upsides in climate change, right?  There are investments to be made.

MR. MALPASS:  Right.

MR. RYSSDAL: Do you think we're going to get it together enough to do that?

MR. MALPASS:  So, I'll just speak for what the World Bank is doing on this.  The World Bank is the biggest funder of climate change and environment initiatives globally.  Of all the international organizations the World Bank is nearly half of the total.  We have a $200 billion target over the next five years for investments in climate and in environment.

MR. RYSSDAL: Forgive me, but that doesn't sound like very much money.

MR. MALPASS:  That's actually a lot compared to what anyone else is doing.  You might say not enough.

And then you get a lot of benefits from choosing the right things to invest in.  I mentioned earlier the idea of cities that are close to areas that are prone to have--so one problem the world is facing is there is a huge population growth going on in places that you wouldn't choose if you were thinking ahead about climate, about extreme weather events.  So, Bangladesh, you can think of that has big population growth that some portion of which is even below sea level.  So, I think the world has a huge amount of work that can be done on things that are economically beneficial.

Another is to create a low-carbon environment, you can look--pretty clearly you don't want heavy bunker fuels.  There are countries still burning--bunker fuel is the most unrefined of the oil products.  They're using those to generate electricity and underpricing the electricity, so they have to burn more of it.  There are diesel generators spotted throughout the developing world, which are harmful. 

And so, transitioning towards lower carbon generation--well, and I need to mention Germany and China and India are still burning huge amounts of coal for generation of electricity.  And so, if we set kind of priorities for the world of what things could be done over the next one, two and three years to really move the needle, I have just named quite a bit of it.

MR. RYSSDAL: You want to weigh in, or no?

DR. YELLEN:  Sure.  So, I agree with everything David said, and I think sustainable finance can make a very important contribution on climate change.  But at the end of the day, I think governments have to put in place real policies that really lead to the kind of innovation we need to reduce greenhouse gas emissions and will discourage emissions.

And I think carbon pricing absolutely is central to creating the right incentives for investment.  With carbon pricing, every private firm and household will see an incentive to economize on greenhouse gas.  Emissions will be in their self-interest to do that, and there will be real momentum behind investing in research and development activities that give rise to new technologies that will help with climate change and the kinds of investments that we want to see all over the world.  They will be more profitable and attract more private capital if we've put in place a carbon pricing system that is taxing emissions.

So, I do think policies are central.  This is a tremendously challenging matter that requires global cooperation.  I would really like to see the United States be part of that solution.  And I do believe it's possible to find a bipartisan consensus on ways forward on this.

MR. RYSSDAL: Janet, you mentioned economic inequality driving some of the political things that have been happening here and elsewhere.  Here's the flipside of that question.  Does polarization of our politics have economic consequences, do you think?

DR. YELLEN:  Well, it's certainly making it hard to enact policy changes.  You know, David's been mentioning--and I agree with him--you need structural policies to address slow growth.  I completely agree with that.  I think there are many things that we need to be doing in the United States and other countries need to do to address worker training, education.  You have mentioned investing in making sure that funds are available to smaller businesses, R&D, support for basic research that will drive innovation in the United States and other countries. 

And I think the polarization, we're just not doing anything to address these issues.  We're not working to find common ground to put in place policies that I think for inequality some combination of training, education, and improving the safety net for people who are working in an economy where jobs with the traditional supports are disappearing.  You know, we need to be addressing all of those things, and I think the polarization is making it harder to find good solutions.

MR. RYSSDAL: David, go ahead.

MR. MALPASS:  One thing is to try to identify--and I'm speaking to the audience--the things that are bipartisan, that there's broad agreement on.  But a problem with that is I think people don't define their terms, so we end up with this, let's say socialism versus capitalism.  Well, nobody likes either of the terms.  So, let's define what we think is broadly agreed, both in the U.S. and then in the left side of the European political spectrum.

Janet mentioned earlier China still has state-owned enterprises that have subsidies.  So, economics is pretty clear that you need contestability.  If you have a state-owned enterprise, the temptation is to give it a monopoly and then it distorts the whole pricing structure around it.  So, it's really important for countries to pull back from that.

And whether you want to call that market-based system or not socialism, it doesn't really matter.  It's just a practical way to move forward, that you can't have your government-owned enterprise have a monopoly, because we know that doesn't work.  So, I think trying to persuade most of the political spectrum on that.

That still doesn't get you to your answer on the highly politicized issues of who provides healthcare, or--but what we know is--and the U.S. sees it very much--that those parts of the healthcare system that operate in the private sector work really well, and innovate and so on.  So, finding a way for the world to kind of accept that and then try to think about what they want their rules to be within their political structure.

MR. RYSSDAL: So, in the three minutes and 24 seconds that we've got left--and I'll trust you each to keep an eye on the clock--let's end on an up note, shall we?  And I want to know what you are economically optimistic about in the next short-to-medium term.


DR. YELLEN:  Well, short-term, in many ways I think the United States is doing well.  And we have a strong labor market.  David has pointed out the benefits of that will be permanent in that people brought into the labor market get training, build networks.  If we can keep that going, I think that has really excellent upside for the future, and I think there's every reason to think we can keep it going.

We're in an environment where inflation is extremely low.  Many expansions end because inflation picks up and the Fed ends up trying to bring it down and causing a recession.  This is a very different situation.  What we have going on in the United States, this expansion, it's not fundamentally bubble-driven, and that's also good.

And productivity growth, which really has been a concern, there are periods in which it picks up.  And it's hard to predict that it will pick up, but I do think there is upside to productivity growth.  And when you read about the exciting innovations that are coming down the line in biomedical science, artificial intelligence, machine learning, we could see a pickup in productivity growth.  That's happened before.  It could happen again.

MR. RYSSDAL: David, from where the World Bank sits, what do you like?

MR. MALPASS:  All those--in the developing world, there's a recipe that's available to countries that allows them to do well.  So, it's a rule of law where there's some confidence in how the system works, and then electricity is important and clean water are important.  And people have the techniques to do that now.  You need to implement them.  And then that enables a digital financial services environment to develop.

So, one of the things I'm excited about, if you had low-cost transactions, as Kenya has shown, then poor people can actually hold money, and then they borrow against their today's flows and get more product tomorrow, and they can build businesses out of that.  So, it empowers the poorest people within the economy, women in the economy, to do something more.

And so, if we put that together with some skills or like computer-generated certificate--or I mean computers that can help people get certificates for arithmetic, certificates for literacy, those become the building blocks for skills that are applicable to businesses. 

So, I think there's a path having cities that have rights-of-way are important in that path.  Natural gas lines that allow people to have cooking.  You know, one of the discoveries is people cooking in their homes with wood stoves is really bad for their health.  So, there's all these paths forward.

MR. RYSSDAL: David Malpass of the World Bank; Janet Yellen, formerly of the Fed.

Jason, back to you, wherever you are.


MR. GRUMET:  Thank you so much.  I want to thank you all for coming out on a drizzly morning.  Thank everyone watching online, and just one more round of applause for our really terrific panel.