I'm joined by David Malpass, the former World Bank head and also Under Secretary of Treasury under the Trump administration. Thank you so much for your time. John outlined some of these thoughts that you have going into next year, this perfect storm, the debt ceiling, the perennial spending fights that happened in Washington, and also this expiration, the Trump error tax cuts, whether it's Biden or Trump. How should the next president be thinking about all of this morning?
And Marie and John, so that you have to recognize what's been going on politically in DC, which is not making decisions, not really sorting out what to do about spending, about debt, about taxes, and so that's all pushed into twenty five and that has an impact on businesses. They wait to see. So the uncertainty, I think is what's prevailing within the economy. I don't want to invest if there's going to be a big tax increase, but I can't see what they're going to do to avoid it,
and so that's the time clock that's going on. Now.
I'd like to talk about taxes because Ed Mills was on from Raymond James earlier this morning, and he made a great point, which is the fat that yesterday we heard from the House Ways and Means Committee Chair Jason Smith coming out and saying it's actually some Republicans who want to see a higher corporate tax rate. Trump brought it down to twenty one percent from thirty five. Biden has pitched twenty eight. Senator Joe Manchin has said maybe
twenty five is something we can all agree on. Where do you see Republicans and Democrats potentially having this equilibrium when it comes to the corporate tax rate.
It's a bit of a fight in the election itself. You've got a choice of do you want the economy to grow stronger and do you think tax rates matter? I think they really do in terms of the growth rate. If you raise the taxes, there's less investment going on in the corporate sector. We're already seeing it in the small business sector, just very hard for them to make the new investments needed to pull down or to improve the supply chain. So we're seeing this persistent inflation and stagflation.
So what do you make of Republicans though, coming out and saying that it should be higher.
You know, all through the party unity is not as much in the Republican Party, So they've got to sort out what is the message of Republicans that you want Washington to be bigger. You know, it'd be fun for a lot of politicians in Washington to have a big debate over which taxes to raise. That pulls in a lot of political contributions. But what we should be looking at is which taxes affect growth the most, and you want to hold those down so that you can have
more jobs, more people back to work. After COVID, a lot of people are just staying out of the economy because it's not strong enough to bring them into the labor force. Well.
Labor participation rate though is pretty high, and unemployment is below four percent. Most people would argue and would say this is a very healthy labor market under four percent for more than two years.
The labor force, though, doesn't include the people that have opted out, and those are people that we need in the economy in order to really be catching up. In the meantime, China's numbers yesterday, they show their their trade numbers. They're cleaning up by having a factories running at full speed. I'm from Michigan. What you see is the manufacturing inventories not building the whole US economy is waiting to see what's going to happen in terms of policy in twenty
twenty five. That's this fiscal train wreck, and they want to see how is that going to be resolved by Washington? To get Washington out of the way. What we're seeing right now is this regulatory push that's going on. Day by day. You're seeing these massive new regulations come out
of Washington as an endpoint to the current administration. Also, the proposals for big tax increases that you're talking about that, yes, there's going to be some Republicans who say we need it, but I think the public recognizes if you give more money to Washington, it's just going to be spent. So it's not really going to help on the national debt front.
When it comes to the national debt and taxes, the CBO came out yesterday and said, if we were to see an extension the Trump era tax cuts four point six trillion dollars, so fiscally, this would be incredibly challenging. How do you think about that? Would the bond market even allow that to happen?
This gets into what are the taxes and how do they affect growth. There's this tendency of people to do what's called static modeling, meaning they say if nobody changes their behavior, then tax cut will will just be added to the national debt. But the whole point of taxation is to raise revenue without stopping people from doing what they need to do, small businesses, reinvesting. I think we're over the laugh or curve right now in terms of
small business taxation. I don't know if you saw the statistics. As President Biden has proposed these big tax increases on capital gains also on basis step up. It causes small businesses to just stop investing in their business. They look to sell to somebody big because they can't afford the taxes. So I challenge that for trillion statistic and say, look, you would get more growth out of the economy if you had better tax policies. You don't need to raise the corporate rate.
Okay, well that's going to be definitely day one something, and we already see committees being formed now in Congress to try to map out what this tax policy will look like. I want to also ask you about what potentially we could see under Trump two point zero. You were an economic advisor for him when he was campaigning in twenty sixteen, you joined the administration, you ran the
World Bank. When the Wall Street Journal comes out with a report and says that Trump potentially wants to put his thumb on the scale when it comes to the FED and questions FED independence, do you think that actually would be happening.
I saw that story. There weren't any sources. I don't think that is the policy that would create growth. You know, the FED has I've criticized the FED for being too big, for inserting itself into too many markets. The inner bank market has gone. Now, trading of FED funds that were so vital to the dynamism of the US economy that's gone. The repoll market has been almost nationalized as you look at the amount that the FED is controlling within that market.
So I think we could have a smaller FED, a smaller balance sheet for the FED, and that would actually be very positive for growth. The commercial banks would love to be lending right now to small businesses, but the way the regulatory policy works, they can't do it. It's biased against small businesses. And that's true also of the borrowing that's done by Treasury and by the FED, they're borrowing in the short end of the curve, and that's
just crowding out small businesses. So I think that's the key dynamic going on.
But they're borrowing the short end of the curve because everyone thinks, why lock in rates this high at the long end, We'll do that maybe in two years when they come down, right, I mean, isn't that prudent?
No, that's not prudent. The yield curve is deeply inverted. So if you if you borrow at the short end, you're you're paying this five point four percent by the Fed, they're borrowing every day at five point four percent to own bonds that yield substantially less. That's not prudent. What it does do is helps prop up the stock market for now. I think there's there's some end game going on within the economy where it's part of the kick the can is to say, well, let's just borrow short term,
hoping for better in the future. But foreign, the global markets look at that and they're not voting for the United States on that. We're week at home. In terms of the economy just one point six percent growth and
CBO's forecasts are for weak growth into the future. And then abroad, we've also got that the weakness that's leading to wars in multiple parts of the world, and they look at the fiscal situation in the US, the inverted yield curve, and say, why would I invest into that highest short term interest rate?
Two final quick ones, So one you think under Trump there would be an autonomous FED and two would you go back into a Trump administrature?
You know right now that's way premature. The issue is for people to sort out the policy differential. You've got a choice of weak versus strong, of growth versus stagflation. That's the decision for people to make. And Trump would have a whole array of people that could really implement a growth policy. I think that's quite possible, but it's the election cycle, so let's focus on that.
David Malpass, thank you so much for your time this morning.