Surveillance: Feldstein Foresees Capital Inflows if Tax Bill Passes

advisor to President Ronald Reagan. Professor Fauldstein joining us around a table, Professor, Good to catch up with you. It's been a while. Why is deficit spending a good idea when we're going to get payrolls on Friday and unemployment around four Deficit spending is not a good idea, It's never a good idea. But the impact of the corporate tax reform outweighs the adverse effects this time around of the increase in the deficit, So I think as a package,

it's a deal worth having. There's a lot of doubts around this tax bill, Professor, and a lot of people stand one thing that's guaranteed his debt. What isn't guaranteed. Is a return from capital spending to capex and improved M and A Why do you see that happening? I see that happening because if the bill goes through with a US corporate rate, that is going to make investing in the US so much more attractive than investing elsewhere.

So we're gonna see American firms bringing back capital from the rest of the world, making fewer investments outside the US. And we're gonna see foreign companies wanting to expand in the United States to take advantage of a tax rate which is much lower than it is in their own home countries. So, Professor White, is now the right time. I got back to the previous point. Unemployment near four percent, GDP near three percent. We're quite afar along in the

cycle as it is. We don't needed for a fiscal stimulus. Uh. It is certainly true that the economy may turn down sometime in the next few years, and we'll be glad to have that fiscal stimulus in place. But you wouldn't do it now for the fiscal stimulus. You do it now because the politics is right, because now is a time when we can get through with the Republicans controlling both Houses and the White House, we can get a major tax reform done. But let's talk about the politics.

The politics was politics of wealth inequality. That's what got President Trump into the White House. Do you see a tax bill that addresses that. I think in the short run, we're gonna see people's withholding fall. That is to say, their paychecks are gonna go up, so they're gonna be happy about that. And in the long run, we're gonna see this increased capital flow to the United States leading to higher productivity and higher real wages, a real female.

We'll talk about the dollar dynamics. There's well, good morning, I've you won. John Farrell and Tom Keen Coast to Coast Good Morning Radio London, thrilled you with us. I believe John Farrell will join you in the evening hour London time. Is that true? John? Sometimes five to six I'm always that five to six weeks there Um Bloomberg Surveillance. This morning brought you by Investco. Get timely market insight delivered straight to your inbox from Investco Global market strategist

Christina Hooper. Visit investco dot com slash Cooper to subscribe. Professor Feldstein, What do the Trump politics and the Trump economics and the Trump sort of strong dollar, what will it mean for emerging markets? It's a different emerging markets than it was twenty years ago or fourty years ago, isn't it. Well? For emerging markets, it's going to mean, as it does for developed economies, it's going to mean less investment coming from the United States companies keeping more

at home. Now. That's not going to be like a complete reversal emerging markets. There are a lot of reasons to be investing in emerging markets for American companies, including uh access to those markets, to the consumers in those markets, and to the workforce in those markets. But I think the lower tax rates in the US will mean less investing in those markets than would otherwise happen. Do you

see the jobs coming back? You know, we're essentially at full employment, so the impact of all of this on the number of jobs is not going to be significant. What is going to be significant is the increase in in real wages. We're going to see real wages rising more rapidly and incomes rising more rapidly over the next decade because of the impact of this tax bill. Uncapital formation in the United States. Isn't one half of this bill the jobs bill, though, Professor, Isn't that what it's

meant to be. It's sold that way. I think that the reality is it's a it's a better jobs rather than a more jobs bill. What do you make of the crafting of this bill, Professor? When we wake up one morning and realized the alternative minimum tax is still in the Senate's bill, many people didn't expect it to be there, but it was. It feels like this was rushed. Was it rushed? Well, in one sense, it's not rushed

at all. I mean, the House has been working on the structure of this tax reform for years and years. Paul Ryan, when he was the head of the Ways and Means Committee, led the charge, and so this is not something that they came up with over over the weekend. But then you have to deal with all of the minutia, all of the the needs to get this or that senator or congressman on board, and and of course, at the same time, to stay within the overall ten year

budget allowance. Professor. I wanted to get to this on television and couldn't. So I want to be sure we do. No. Stanley Fisher is very big on the percentage change to the mathematics of percentage change work at the lower bound. If we say the two year yield in normal times moved a certain percent, it's a lot different now at these low yields, isn't it. Do you care about percentage change?

I don't think of it in terms of percentage change, because if you're starting at zero, everything looks like a very big percentage change, and we're almost at zero on a lot of these short rates. So I don't think of that. I think of what's happening to absolute levels of rates, and what's happening to real rates and those who are all super low now and they're going to be heading higher uh in the next few years. The

optimism of Martin Feldstine. The other day I showed an offspring a black and white video of a guy out in l A doing twenty meal team borax ads for Death Valley Days. It became religion. No one knew that Ronald Reagan would change American conservative thought. Henry Olson is written a fabulously controversial book on the Conservatives of Them and the Conservatives of Now. George Will Cause of the nuanced portrait. Jd Vance of a Great and Immediate Claim

calls it simply an excellent book. Henry thrilled to have you on. There are eight shades of conservatisms right now. Do any of them have anything to do with President Reagan? They all have. Uh, It's kind of like the people walking around in elephant blind and saying that the tail means that the snake, and the leg means that the tree. They all have some roots in Reaganism, but none of

them represent the beauty of them. The arch fact is in some of us of a certain village to know that he came off the planes of the Midwest a Democrat. He had an internal humility around his fierce, combatitive spirit. Where's the internal humility and the conservative Republican movement today?

It's pretty lacking when you take a look at it, that there's a conceit of ideology, that ideas can change the world in a way that you know, Reagan always thought that ideas served the realities of everyday life and the love of the average person. That really animated Reagan's politics all too often seems absent from modern conservatism. How has this been taken? Have you talking to any of

our modern conservative leaders about working class Republicans. I mean, does Paul Ryan actually I mean we talk about a tax legislation done for a donor class, is any of this done for the working class Republican. I think people like Paul Ryan would say that cutting taxes for the corporations and the well to do is the way to

help the working class person in the long term. But as far as direct um compassion for today's working class person, all too often that seems pretty absent in the leadership. I have talked to a number of senators and representatives who share my views, but they're not in leadership. Let me ask one more question. I'm going to bring in

a distinguished gentleman from London. There there's an idea of conservatism and out of World War Two, and it was McArthur Republicans of the Midwest and there were the East Coast Conservatives in that. Is it now more amorphous? Is it now just one conservative blob versus the nuances of two generations ago. Yeah, there's different strains of conservatism, so it's not quite that way. But you know, there's social

conservatism that puts the questions of religious liberty first. And there's liberty conservatism that's still all the old time small government religion. Um, but they're not divided at at war with each other quite the way the old times warm. If you're joining us now, a really an entertaining read. The working Class Republican Ronald Reagan and the Return of blue collar Conservatism. John Farrell, Thank you, Tom. I'm looking around for that distinguished gentleman from from London where you

sing you're it? I met, I met. What an honor. Thank you, Henry, Hello, Jonathan farrellhead for me. For the working class Republicans. If there's nothing in it in terms of the economic policy to address their woes right now, have they done enough in terms of the cultural issues that they're attached to in the last year, Yes and no. Um. Certainly talking about patriotism, which is an undercurrent of the

President's message a lot. Certainly talking about the immigration. Uh. Those are things that working class voters tend to care about, But they haven't spoken as much to the the broader longing for being part of America. And I think that's something that Trump touched on with Make America great Again, but it's been not quite as Rather obviously part of

the governing policy. Well, Henry asked the question, because as far as populism is concerned and the plant of the working class right now, whether it's in the United States or elsewhere, do you find that is more underpinned by cultural issues, identity issues, political identity, or is it underpinned by economics. I think there are two streams of the same. Uh. Thing is that people who are economically stressed and to

turn to other issues at the same time. But people who are of working class are finding themselves on the margins, both economically and culturally, and I think issues like immigration to kind of combine the two are particularly important to them. Henry Olson with us the working Class Republican. My important page, Henry is page two O nine, where you folding Ronald Reagan with the mainstream of Democrat politics as the grenade

invasion and all that, and you mentioned Scoop Jackson. How do the Democrats respond after the last election to their search for the working class democrat or the disaffected democrat that Ronald Reagan took. What does the Democratic Party need to do after they read your book? Well, I think the Democratic Party needs to come and communion with center.

They need to stop talking about the working class people's occupations as things of the path that are going to be cast aside, like manufacturing, or mining, or or trucking. And I think they need to take cultural respect for people that when there was a place for pro life, pro gun people in the Democratic Party was just a decade ago, and they swept to victory throughout these areas.

They need to stop representing the elites of San Francisco and Manhattan and start trying to represent the people who actually have been the base of the Democratic Party for most of its history, the average person. Henry, how do you characterize the group of individuals that last year when they went into the election, they didn't face a choice between Republican and Democrat. They faced the choice between Bernie Sanders in the primaries and say President Trump. For them,

it was really binary. They didn't look at this as Republican and Democrat. They were looking at right and left and they could swing to either. All. Yeah. I mean, one of the things that's interesting is that when they had a ways and a lot of the primaries in America, you don't have to be a registered Republican, so you really can choose. Uh. They overwhelmingly chose Trump. Is that the white working class person in Michigan who could have voted for Sanders but instead tended to vote in large

numbers for Trump. And I think it's because they don't want the top down social democracy that Sanders was selling. What do they need to do around the president? I mean, you're a beast of Washington, and our last question, that's you can put that on the back of the He's gonna put that on the back of the paperback a beast of Washington. What do they need? What does the Republican Party need to do to advise the president forward to the mid term elections? What would you change directly

with President Trump right now? You know? I think President Trump needs to recover his populist mojo. Is that what he's kind of become as a classical Republican in what he's doing is not very much on the economic side. That wouldn't be coming straight from a Pence or a Cruise or a Bush administration. And his populism has reduced to angry tweets and that's kind of like the worst of both worlds. I would tell President Trump he should not go with what they want next, which is a

re make of entitlement programs. But he should go with the bold infrastructure program. He should start doing more like what he was talking about before he was inaugurated, about bringing American manufacturing back, and he should, uh, you know, be more like what he campaigned on the person who's not gonna help his friends in uh, in the boardroom, but help the person on main Street. We're out of time.

We need to see you in Washington Studios, Henry. At some point, John Farrowe and Tom King Mr Olsen has written a terrific and controversial book with a great cover photo of middle Reagan. It's not the Reagan of the final years. It was the vitality of an actor from California at that time. The book is a working class Republican Henry Olson, Ronald Reagan and the return of blue

collar Conservatism as well. How foreign it was that discussion, John, to me, it's like everybody knows what we're talking about now. I don't think it's far and I think we've experienced it in the United Kingdom as well. And what you saw that in the Brexit vote, I think there was a disillusioned group of individuals outside the metropolitan elite of London and within London they just did not understand what was handing in the rest of the country. Absolutely fabulous

the working class Republican. I put it on in social media here today as well, John Ferrell, why don't you bring an esteemed guest from Mr Gorman's I'm really pleased to say that we've got one of the smartest minds on the street um for a global fixed income it's Matt Hornback of Morecan Stanley and Matt. For me, the headline in the session of the last twenty four hours fives thirties on treasuries south of sixty basis points. There has got to be a message, some signal in south

of sixty basis points on five thirties. Well, I think one of the things that we've seen is investors take a little bit of a more confidence stands towards the path for FED policy. Over the coming quarters, particularly after the announcement of Governor Powell as the next FED chair, we saw investors really grow um in their confidence towards the path for FED policy. So we've got uh the

December rate hike fully priced into the marketplace. People are now pretty pretty sure that we're going to get another rate hike in March beyond that, so uh people are expressing those views by selling bonds in the front end of the ILD curve. If I thought this was going to be sustained, if I thought that the FED could carry on hiking and the economy would continue to improve, I wouldn't expect to see two fives down at thirty

basis points. That doesn't make sense because if you think this can last and the FED won't be cutting it's aggressively in a couple of years time, you're not going to see two fives at thirty basis points, You're gonna see two fives steeper. I don't see that, I see thirty. I see a market that send actually in a couple of years time that's going to have to cut. Well. Well,

that that's the magic of of how markets work. You know, when we're sitting here going through our two thousand and eighteen year ahead outlooks, typically by the time you come to the end of the process, a consensus is developed amongst Wall Street economists and strategists like myself, and typically by the time that consensus develops, it's in the price. And so what that means is that the outlook for two thousand and eighteen, stronger growth, higher inflation that's already

in the price today. What ultimately ends up moving markets in eighteen itself is any surprises to those to those consensus views, and then how the outlook for twenty nineteen develops. And on that front, our economists are are not as optimistic on twenty nineteen as they are. You came out of that acclaimed quantitative house vass right, and indeed I did, How and hell did you get from fixed income um out of Vassar College? That's like almost original to American education.

So interestingly, my my start in finance was in our Tokyo office, Morgan Stanley's Tokyo office. I was an intern there for some time and then moved into the trading business. Think did folks, this is like a huge deal to go come out of the liberal arts bashion of Vassar and to achieve as you have, Matt, I think is just killer. What I'm seeing mathematically is everything's log convex. Everything's got an accelerated force to it. There's way too

many curves within the log rhythmic spaces. John Farrell nicely laid out in the spread market is John mentioned I'm sorry, there's a message there. What's the message of the second derivatives right now? The message is that as we move deeper into the balance sheet normalization cycle, that's another tool

the FED is using to tighten policy. There's going to be a tightening in financial conditions, which is something by the way that New York Fed President Ugly has been looking for, has been wanting to engender tighter financial conditions that will eventually impinge on the growth trajectory of the condom. Does the impitch come with a smooth curve and smooth vectors or are are we up for instability and jump conditions? Well,

things never move in a straight line forever. My guess is that over the course of next year there will be bouts of volatility, unforeseen of course and uh and that will eventually lead to the FED to stop hiking rates in the fourth quarter of the year. Many FED officials are on the record of saying they're worried about the curve flattening, and they'd be worried if it's really started to invert. When is the bike point really start

to kick in? If we've got two tens and around sixty basis points, did they get concerned at forty thirty twenty, I think I think for some participants, UM, the answer will be invariably yes, it depends. I mean, we've already heard from three FMC participants suggesting that they would not

feel comfortable hiking with the yield curve completely flat. We're not there yet, of course, but I expect that we will be there by the or a quarter of next year, and then you'll start to hear a growing chorus of concern being expressed by f FORMC participant. Can we get to my chart of the day, Tom Traceries. It works on radio versus two year buns for anyone on radio. Just picture this a line just two fifty five basis points is the two years spread buns versus Traceries. Is

there any oxygen left up there at this point? Not so much. If you actually look at what markets are pricing in for Fed policy in what you find is that they're pricing in two bases point rate hikes. Now, Morgan Stanley's economist Ellen Zentner thinks the Fed will give us three and that's roughly where street consensus is as well. Um, But in my analysis of the bond markets, you rarely price more than two thirds of what the FED will

end up delivering. So in fact, if the FED does end up delivering three next year, I wouldn't expect the market to price anymore than what it already is. Let's John, this has been great, all this spread in palysis and the mathematics that we're alluding to here, forget about it. I'm at home, I'm out on the back deck. I got a monthly statement from name the shop, price down, yield up, and then there's a second month, and then there's a third month. When does the bond bear market

click in? To be frank, I think we've already seen the bond bear market. We um in the wake of the um instability in the UK last year, uh, in the wake of the presidential election in we saw quite a move higher in interest rates and a move lower in bond prices. I think we've seen that market play out, and now it's time for the next phase. That's the phase where FED policy tightens further, and that's the phase that eventually leads to higher bond prices, lower bond yields.

So you're talking about a bull market in bonds. Higher bond prices will click in apps lutely. I think that the talk that the thirty year bond bull market is dead was was way premature, fascinating. We can we can you come back on this? Can Well, no, we can't keep him. He's gotta go. He's gotta go. Getting a cell phone called James Corman. Tell Mr Gorman they're solving today at Morgan Stanley. This has been fab Matthew Warrenbuck please come back for a more extended conversation. He is

with Morgan Stanley. Let me talk about our next guest, um as I can and set this up correctly. I was someone once said to me the only reason I talked nice about Mackenzie and so Don Barton will let me into their Davos party and full disclosure. I show up, I have a drink and I go home, unlike the surveillance staff who stays until two b two am. The Mackenzie Global Institute is truly one of the jewels of

American intellectual work on India. They have been absolutely path breaking and trying to figure out the mathematics and dynamics of poverty. And they do this across a lot of other themes. Michael Chewy as a privilege of working with Don Barton at the MG I's a partner out of their San Francisco UH combine, and they're thinking about this technology stuff that we're all buried by and what the ramifications are gonna be. So this is like Michael a view from sixty thou feet. But let me cut to

the media. Is my iPhone my friend or my enemy? What do you say after three pages of research? Well, I'll tell you. I mean, I think what we've discovered is that technology is just a lever for being more powerful. So depending on how you use it, it could be your friend or your enemy. But what we really wanted to do is look at the potential impact act of these technologies on jobs. What these these technologies that potentially could automate things that people do already, what those might

mean for jobs. We looked at that in January and that we've published a sequel report which really talks about if, in fact, automation will be adopted increasingly do some of the things that we pay people to do, will there be enough work for people to do? Going for you have a prescription of policy prescription within the McKinsey Global Institute. Do you recommend that all nations. Should WiFi the country, is that available of a valid policy or should that

be left to the private industry. Well, we'd never give policy advice. We do talk about different policy options. We do think that it is necessary in order to have to to derive the benefits of these technologies to in

fact to have more connectivity going forward. But our most recent researcher has really been around UH, trying to understand if there's enough work for people to do, and if there is, what the transitions might be as we go forward, UH, and then what incomes might look like as as we go forward, as well as these technologies such as robotics and automation and artificial intelligence start to be adapted in

the economy. Michael, before joining Mackenzie, you were the first chief information officer of the City of Bloomington, Indiana, and I'm wondering if you could bring that experience to bear on this very topic of jobs and automation. Are their municipalities, states, or indeed even countries that have it have a better understanding of what's going to happen and are implementing the types of programs and policies necessary to deal with it. Before this becomes you know, a riot in the streets

because nobody has a job they want. Well, one of the things that we discovered in our research is even net of automation, UH, there are a lot of scenarios that we can model out which show there's enough work for people to do. Even as the robots and AI

start to do more work. There's enough work for people to do, whether it's UM because we have increasing prosperity around the world, another billion people entering the consuming class, aging actually will cause more demand for a potential labor UH, deploying and developing the technology infrastructure, potentially even paying for

what's currently unpaid work domestically. So that what that means is, if there's enough work, can we transition people into the work that there is to do into the new jobs of the future. Do we have any examples of that actually happening? So you know what, the the in history that the might cause for optimism is that we have been able to um solve similar scale of challenges. So, for instance, moving from the agricultural economy to the manufacturing economy.

At the beginning of that story, there was no universal secondary school. We collectively invested in that in something called the high school movement. It was a true social movement. Truth be told now past the first two decades of life, retraining people at scale in a successful way, It's hard to find a lot of examples of that. We see some of them, whether it's you know, what's happening in some places in Europe, say Apart has a program. At the same time, we do think this is one of

the grand challenges going forward. How can we retrain a lot of people in the mid career. Now, again, I'm an optimist. I live in California. I'd say we've done something similar before. We have a different challenge now and I'm hopeful we can do it, but it will require

dedicated investment and effort to do so. Can you give us any any insight into what has been going on in China in this effort, because you know, if you have a workforce that is the size of many countries, uh, your challenges might be different just on the scale and that speed with which you have to move, particularly when you have a demographic challenge coming out of that one

child policy. I think that's exactly right. I mean number one, I think one thing that we see in China is, you know, they are trying to adapt to adopt these technologies as quickly as possible because they realize they'll need the increased productivity which will allow them to continue to

grow economically. But as you said, you know, as a country of one and a half billion people, it's workforce is or very soon will already be declining in size, and so again that retraining, that retraining UH imperatives is extremely strong for them as well. Quickly, here, what's the big report you have coming out at the beginning of the year wrapped around Dallas and the ene means is the mg idea of the mckensey Global Institute. Do you

have an important report on a given nation coming out? Well, this this report is global and we do think that this report will form some of the discussions that will go into Davie as well. Very good, Michael Cheer, Thank you so much. Michael Chuey with mckensey Global Institute. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane. Before the podcast,

you can always catch us worldwide. I'm Bloomberg Radio,