Robert Rubin: The US Still Has The ‘World’s Best Long-Run Hand’

“The US still has the best long-run hand. The question is how we play our cards,” Robert Rubin, former US Treasury Secretary told the Financial Times’ Robin Wigglesworth at CB Insights’ Future of Fintech conference.

But while some people are optimistic that “we’ve turned the corner,” Bob Rubin believes this is a short-term view and the US still has work to do. “It’s a good time to have a cautious bias: I have a very firm view on the long-run — with the caveat that we reestablish an effective government.” And Rubin noted, we’ve got to, “and get our fiscal house in order.”

Comparing the economic environment in Europe and Asia, Rubin says he believes the euro zone is going through a cyclical rebound but there are enormous structural issues in troubled countries like France, Italy, and Spain.

In Asia, on the other hand, Rubin estimated that debt is approximately 300% of GDP and was used to fund unsound projects, projects that were designed to support growth in infrastructure. His instinct there is that there is a lot of work to do but that the Chinese officials are very focused on addressing the financial issues.

Returning to the US, Rubin said the excessive policy proposals under the current administration are counterproductive. He noted that one of the greatest areas of inconsistency has been on trade. He also views trade policy as one of the US’ greatest immediate risks. Noting the unpredictability of the current administration, Rubin said there’s a risk that if the president becomes frustrated with trade negotiations, he could block trade altogether, which would have an extremely negative impact on producers and foreign relations.

On tax policy proposals, Rubin sees two possible outcomes, reform or cuts: On tax reform, he noted that there are always winners and losers and seemed to think it would be challenging to reach a  a majority vote in Congress. On cuts, he took a cautious tone when addressing the audience warning “you will all be affected.” Tax cuts would create severe deficits which have geopolitical implications on all industries including the technology sector, Rubin noted.

Automation and job loss has been a major conversation among the tech industry, economists, and the media lately:“It’s a major issue that profoundly affects what you do,” said Rubin, referring to the implications of technology like machine learning (ML), artificial intelligence (AI), and automation on jobs. “Going forward, it will impact productivity and it could cause sluggish wages and job insecurity.”

One of the US’ greatest advantages is a flexible labor market, Rubin said, yet “we are not close to inclusive employment.” Employment he said “is a technology issue but has been blamed on globalization. [Technology] has created job dislocation for the bottom of the income spectrum,” and this is something he believes will widen the skills gap. Rubin cited the need for education reform and workforce readiness programs. He also believes employment is a deeper structural issue. To fix it, “we need to have a growth based agenda and employment based participation.”

Ultimately, Rubin said, on the debt ceiling and other economic issues facing the US, Rubin believes that the administration needs to have a willingness to compromise on policy and political divides. “If we can do it we have a tremendous advantage.” If not, we languish.

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Transcript

Robin: I’d like you to introduce Bob Rubin who I’m sure you all know. He’s had a very long pedigreed career in government service and in finance. And we have a lot of interesting things to talk about. So, I’m gonna open up with something that, you know, frankly I spend a lot of my time thinking about and asking people about. This year, we’ve actually seen a bit of a tentative economic boom in Asia, especially China, Europe, and the US at the same time for the first time, I think, since the media recovery after the crisis. And some people are optimistic that we maybe have turned the proverbial corner. Maybe I’m just as pessimistic journalists, but I’m skeptical, and I’d like to hear what your thoughts are.

Bob: Well, I think the following, Robin. You are talking about the short term now?

Robin: Like short term, yeah.

Bob: Short term, long term?

Robin: In 17, 18.

Bob: Yeah, okay. Let’s go around the world real quick. Europe, the euro-zone clearly is having a cyclical rebound of some magnitude, but my view for whatever it’s worth is that individually the countries, particularly the trouble countries, France, Italy, even Spain, have enormously complex structural issues to deal with, though Spain’s done more than the others, and Italy is the most lagging. And the politics of doing all that, it gonna be very difficult. There are also a lot of fiscal issues. But more broadly, Robin, my view is the following, that is that even if these countries do some reasonable job of dealing with their own specific issues, and I’m pretty skeptical about the politics and their capacity to do that. But leaving that aside, the euro zone itself has enormously complicated structural issues to resolve, if they’re gonna be long-term successful with respect to bank guarantee, deposit Insurance, fiscal coordination, euro bonds, and so forth. And I think those are gonna be enormously daunting, challenges and I myself would have a pretty concerned view about the longer-run outlook as to where all this is gonna go.

China is…so while there is a cyclical rebound, my instinct would be to think of that as cyclical, not like a lot of issues out there. China is sort of more or less just a new normal. The IMF came out with a recent growth projections and we’re letting 6.7% or 6.5%, I’ve forgotten. That is sort of the new normal, but for those you’ve been in China lately, you’ll know that officials in China at least are very focused on financial stability. And there are a lot of other issues that China faces. Demographics, obviously, because the one-child policy, environmental issues, a whole host of other issues. My view would be the…and SOE reform which they’ve actually now reverse position on it, it’s not even their formal objective, at least the fact of at the moment.

Having said that, and I think that a lot to be focused on given that China is now in a different stage than it was when it came back from, when it recovered, rather move forward from being a poor country, but if you look at the success that China’s had since 1978, my instinct is to think the probabilities are, that over time, they’ll do what they need to do but time will tell. And then you get the United States. And we’re projected by the IMF to grow something like 2.1%. They just revised their projections the other day, probably most of you know that, 2.1% this year, 2.1% next year. There obviously are a lot of policy proposals that have been made by the President and by the house of representatives in the area of taxes, and I guess, taxes regulation, two predominant ones, and trade. So, the three areas that could affect the short-term. Regulation, you could do without, restriction and we’ll see what he does. Hopefully, he’ll do this with the context of a cost-benefit framework, but my instinct is having watched it so far that isn’t gonna be constrained in that way.

Robin: No.

Bob: Two is trade, and I think trade is real risk. The administration has concept about trade deficits and the nation’s, our nation’s trade deficits, current account deficits that are inconsistent with, virtually, all mainstream thinking about trade, whether it be conservative economists or liberal economists. And I think there’s a real risk than the trade area that there could be actions that could be significantly counterproductive for our economy, for consumers, and for our capacity, for our producers. Furthermore, if the president continues to be frustrated by legislative inaction or the courts or the media whatever else frustrates him, there is always the possibility, he’ll lash out in some way. And if you do that, not only are you counterproductive in the respect that I’ve already mentioned, but there’s certainly a possibility, Robin, of trade retaliation.

And finally, it gets us to taxes. And very briefly, my view on taxes is the following. There are two dimensions, there two elements of the tax proposal. One is reform, and I think since reform always involves winners and losers, it’s always been extremely difficult to do reform, and I think, at least, that the reform measures are highly likely to go nowheres. And that leaves you with the tax cuts. And that arrange to be seen, the schedule and tax cuts has been deferred consistently and now being deferred again. Well, I shouldn’t say now being deferred again, it looks to me at least, that it’s gonna be pushed back further but all the problems around health care, Russia, and the like. So, if we get it, my guess is you get it toward the last quarter this year, first quarter next year, if you get it.

Robin: If we get it, yeah.

Bob: And in terms of the odds of corporate tax cuts, major talk corporate tax cuts, I think it’ very complicated to judge, but it seems to me it’s kind of a 50/50 proposition. And one of the real issues that stand, that are left to be dealt with is this quite…no matter how this thing is done, there aren’t gonna be anything, like, remotely like the necessary pay-for-us to fund it. So, it’s gonna be funded largely by deficits. And the question is how will the majorities in the House and the Senate respond or react when you have very large deficits being created by very large tax cuts? And remember, they’re doing under this, all this under the reconciliation process to avoid the filibuster rules. So, they have to get, of the 52 Republican senators, they have to get the support of 50 plus the vice president’s tie-breaking vote which means they can only afford to lose three senators. And it’s, and then, of course, is the freedom caucus in the house which may also have concern or may or may not have a dispositive concern about fiscal matters. So, I think there’s a lot of uncertainty about what will happen the tax code area.

Robin: Well, I wanna spend most of our time on only US subsidies because of home, Lewis just a power here on China. I think that’s fascinating. I’m remember reading a couple of years ago a paper by one of your former colleague, Larry Summers, where he talked about, I think the paper was entitled “Asiaphoria Meet Reversion to the Mean,” which I think was failure punching, but he made the point that, you know, we haven’t had a lot of examples of infrastructure and construction led growth spurts financed by credits, especially in Asia, that have ended well. And we seem to be putting a lot of faith in the Chinese authorities which frankly have paid, I think, a blinder so far being economies are very hard things to manage. What beyond, moving beyond the next year or two, how worried should we be? Because, Chinese being with a half of global growth in the post-crisis era, that’s quite alarming if we hired a hard landing there.

Bob: Well, look, the problem and the reason that, as I say, you those who’ve been in China recently have seen it yourself as you’ve met with officials, they’re very focused for the very reason you say, Robin, on financial stability. Total Chinese debt is about 300% of GDP. Well, that’s not that different from the US but the difference is that…you got exactly the right point…the difference is a lot of this have been used to fund unsound projects that were designed to promote growth. And so, you’ve got a lot of this that is now represented, excuse me, represents debt in unsound projects. And the question is how will all this work out? In addition, there’s the, what I think of the shadow banking area, or the gray area, if you will, in the Chinese financial system, including these wealth management products. So, there are a lot of very big issues they’ve got to deal with in the financial area, and I think the answer is who knows? My interaction, folks are somewhat conversant with this, my instinct is to think that given they have a lot of room on the fiscal side, they have a lot of fiscal room. And given they still have substantial reserves or they have spent them down some to maintain their currency, I think they’ll work their way through this over time but there could be some ups and downs, and it certainly is, as you correctly say, a risk.

Robin: But is it a danger, maybe, that I find myself sometimes falling trap of looking at, you know, the old EM crisis of the ’80s and ’90s, many of which you helped clean up. Maybe this will be different time that it’ll be more like Japan than the old Asian crisis, because they have fiscal space, because they have a lot of levels they can pull. But it’s just being, you know, the demographics look fairly similar to Japan. And you’ll see a messy banking sector that will take decades to clean up.

Bob: Yeah. But I think it’s a big, that’s a good point, Robin. I think there’s a big difference. Japan basically is now, has had roughly 25 years a very, very low growth. And you could have all kinds of discussions about why that is and everything else, it’s kind of interesting subject in my opinion, but leave that aside. That’s what they’ve had. And looking forward, it seems to me although, Japan’s a little better at the moment. And Japan is gonna be a low growth economy, very low growth economy. I don’t think China, as a society, I think it’s a very different society culturally than Japan. And I don’t think that China, I think for China, if they can, if the fall into, which I don’t think they will, but if they fall into the kind of trap that China, I mean Japan is in, maybe I shouldn’t call it a trap because Japanese may not need a trap, but if they have conditions analogous to what happened in Japan, I’m not so sure that works politically in China. And so, I think the authorities will simply have to do, I think the authorities will try to do everything they can to avoid that. And think they have the capacity to avoid it, but the risk that you mentioned certainly exist. Can I go back to US for just one second?

Robin: Yes.

Bob: I didn’t wanna leave. If we do get a large tagging, I think that’s a very important point to bear in mind, and by the way, I know all of US and FinTech as I mentioned the beginning, but all of you are gonna be enormously affected despite the fact of what you’re focused on its financial technology and how that affects your industry which I think effects will be enormous. You’re going to be affected by the geopolitical or political and economic conditions of the work, that constant of context in which you’re operating. So, I think it’s really, really important for everybody involved in any of these activities to have their own probabilistic judgments as to where all of this is going in the broader contextual sense because the context will have tremendous effect on you no matter how specifically you’re focused on the technology, on technology and its application to your particular activity.

Go back to United States for one second. If we do an act of corporate tax cut, I said a moment ago, it will generate huge deficits no matter what pay-fors because I don’t think they’ll be much done in the pay, way of pay-fors, and to extent they are it’s not gonna be remotely meet the needs. So, then you might say, what effect that’s gonna have on growth. And I think in the shorter term, 17 and 18. And I think the answer to that is that as the Fed is said and as most labor economists will say, and as I kind of think is probably right, we’re probably very close to true full employment, no matter what you look at, the employment, participation rate, whatever you want to look at. If that’s so, and I believe it is so, I think the odds are extremely high that if so, let us say, then even if you have a very large stimulus, it is unlikely to produce more than moderate increase in growth. So, if the projected growth rate for next year is 2.1%, maybe it goes to 2.3, 2.4, maybe. But I don’ think much, the probabilities get very low and start getting above those numbers.

So then, you’re gonna have all this excess demand and what’s gonna happen. And either it will be inflationary, which I think is unlikely conceivable, but unlikely. Or the Feds will step in and counteract that with their own policies, but that depends on what kind of people the President appoint into what an hour five, likely to be five and maybe even six vacancies, over the course of the next year. Or it goes into asset prices. I think it will not go into, I don’t. Or highly unlikely to go into is raising growth above, I don’ know, pick a number, 2.4%, 2.5%, something like that. And even that will only be temporary because, ultimately, we have to get back to our long-term potential which is another question we should discuss.

Robin: yeah. I mean, that doesn’t look very likely we’ll have this Trump up. Maybe this is me being a very cynical journalist and sort of congenital to my professions. But even tax cuts looks very difficult. I mean, even Trump’s budget director, Mick Mulvaney, has, you know, he was one of the green leaders on debt. We have a debt really coming up. I mean, we’re talking about avoiding the debt ceiling lesser than actually managing a massive unfunded tax cuts.

Bob: There’s a marvelous irony which you just identified. The current head of OMB, when he was in the Congress or rather the house, was a fiscal hawk.

Robin: Ultrahawk.

Bob: Yeah well, absolutely ultrahawk, now, of course, he’s part of the administration and watch through these tax cuts. Look, I don’t know, Robin, if you go back, I’ve been around this political system for a long time including the six and half years I was in our administration. But even way before that, I was pretty involved. This is not a criticism, just a comment I’m about to say, when the fiscal hawks on the Republican side have come up against the potential for doing tax cuts, they almost always revert to the tax cuts despite their philosophical belief in some fiscal conditions. So, I kind of think, but that is that is gonna be a real question.

Another real question which I just raised, so I’ll allude to it just once more though, is the Fed, what is the Fed gonna be like? They’re going to be at least five or, assuming that Janet Yellen and Stan Fischer are not reappointed to the current positions, I have no idea what he’s gonna do, obviously. But if he does, and assuming that if they’re not, they’ve stepped down, and I have no idea what they’re gonna do, you would have anywhere from three, and then there’s one other possibility of say three to five open seats, and actually think maybe there’s a sixth. If he decides to put people in there who really believe in the mission of the Fed to protect price stability as well as for employment, then that obviously then would then act to offset whatever excess demand is created. If he puts an accommodationists whose interest is in accommodating his desire for what, I think, a very unrealistic objectives with respect to growth, then you do run a risk, then they don’t, they don’t try to counteract the excess demand. And you’d run at least the risk of inflation which is something none of us ever think about. There are a lot of reasons why you might not get that inflation, but the excess demand has to go up to some place and may be the asset prices, I don’t know.

Robin: I mean, I all on tech schedules reminds me of St. Augustine, “Lord make me chase, but not now.” Politicians very good at saying, “Well, at some point we’ll tighten the belt,” but it’s tricky to do in practice.

Bob: St. Augustine, obviously, was of course was a very interesting figure. His reference to that, I think was in a different area than taxes.

Robin: I guess not, I think it is very much so. It’s only more amusing one. But on the Fed, actually. So, I remember you wrote a piece not so long ago about the dangers to the feds independence. I mean, we have a track record of most administration, administrations favorite favoring competence and continuity above political decisions. So, Obama reaffirmed Bernanke, and we had Paul Volcker, that was also confirmed by Bush. How big is the danger that the Fed becomes very political? Because Yellen doesn’t look mind fit, he’s a low-interest rate guy. He said so, he’s a king debt. Why would you want to put some Republican hawk in there?

Bob: Well, well, well, the point I was looking, you got to the right issue, and that’s the point I was trying to make. You know, I had an op-ed New York Times about two or three months, I don’t know what it was, a couple of months ago. And the question was exactly the one you just raised. That’s a really important question with respect to our economy, what kind of people is this president gonna appoint to the Fed? And I find this president a little more difficult to predict than, perhaps, other people who have been at that office. So…

Robin: No, really?

Bob: Well, it’s probably more reflection on me than on him. But given that one does find a touch of difficulty in predicting what he’s gonna do, I don’t know. But if based on everything he said, I think there’s at least some risk that he’ll put an accommodationists that won’t then pursue the price stability mandate of the Fed. Look, I think Janet Yellen, senator, I think she’s done a very good job, but whether he will…and she’s not, you know, she has leaned toward keeping rates lower than perhaps some people would have. But I think she’s found the right balance, myself. Whether, I have no idea whether he would consider reappointing her or not.

Robin: She seems to be tending towards the hawkish side again now.

Bob: Who would?

Robin: Yellen. I mean, she seems quite determined to normalize interest rates again, slowly.

Bob: I have no knowledge of this, but just reading the print, same things you do, read the press. She does seem to be…

Robin: The FTO Business is the best place to read about this.

Bob: Well, the FT is amongst those that I read. Not always first, maybe, but nevertheless. But leaving that issue aside for the moment, I subscribe to it actually, so you should be very happy.

Robin: Thank you for your support.

Bob: No, you know, I subscribe.

Robin: Very important to support your dead tree newspapers guys, especially these days.

Bob: But I…yes, I think they are gonna head to a normalization and I think that’s a responsible and reasonable thing to do.

Robin: But only in face, the more the reason why I’ve heard some people in the market have been less enthusiastic about the Fed normalizing rates recently is that inflation has just stayed really low even as employment has dropped. There is a participation rate issue but that seems to be demographic. To what extent, then this actually touches people in this room. I know you thought about productivity, but we seem to have a secular down shift in inflation, possibly brought on by the fact that technology. Off the camera, this stat that a gigabyte of storage in the ’50s cost 10,000, $10 million, and now it costs three cents. That’s a staggering disinflationary force that seems to be affecting so many things. Maybe the Fed can normalize rates but inflation will stay low, whatever the…

Bob: Yeah, but…yes, that’s certainly possible, but if there’s excess demand, it has to reflect someplace. You know, you make an interesting point about technology though, and can I raise a slightly different point? I think there’s another very major issue facing this country, and it’s gonna profoundly affect what all of you do for a long time to come. If you believe, and I do believe, that we’ve under measured productivity. But that’s a big debate, and I think I understand, but at least I have some moderate understanding both sides of it. But I think we’ve under measured productivity. And I think with AI, and machine learning, and pattern recognition and big data, probably printing and all the rest, I think the probabilities are high, though I know this is a big debate too. The probabilities are high, the technology development is gonna powerfully affect us going forward.

That can be very good for productivity, but to state the obvious, it can continue to have substantial adverse effects on wages so you get a stagnant or sluggish wage growth at least with the bottom half of the wage spectrum. And on job insecurity, and what that, I believe that is computed very substantially to, what has now has been actually quite a while, a rising populism on both the left and the right in this country, its turned against trade, as we all know, against trade liberalization or tightened, let me say, the opposition to trade liberalization.

I think that some risk, Robin, that if this continues, and then I’ll tell you what I think the answer is. But what the answer should be but it’s complicated, and I may be wrong also. But I think there’s some risk that could, at some point, change from focusing on trade to focusing on technological development, on market-based economics, and our labor flexibility, and that’s the key to our future. Look, the answer to this is the issue is real, and we need to have, as an inclusive growth agenda, at least in my opinion, that promotes both growth and broad-based participation, the benefits of growth. And I think there’s a whole array of policies that could be highly constructive in achieving those two objectives. And I don’t think you can get growth without broad-based participation for all kinds of reasons. We could discuss if you want to, but we are no…we’re not even remotely close in our political system today to pursuing an inclusive growth agenda focusing on skills gap and infrastructure, which I don’t think, the president probably is going to happen so well, how else would it happen?

Anyway, basic research, overcoming poverty, which is an economic issue as well, a major economic issue, a major detriment to growth in this country, so much else. I don’t think we’re even close to pursuing these issues to say nothing of accomplishing them. So, I think, and this is the single most important thing in my own mind is I think about myself as an investor, which I am, and as consultant of various entities, which I also am. I think the single most important factor for the future of all of us is whether or not we can re-establish effective government. We have not have had an effective government in terms of meeting our challenges for an extended period of time, aside from the immediate problems that I think it made up may have exacerbated that, but even a lot. But leaving that aside, we have not had it for a long time.

So, the question is can we re-establish effective government? In which government, in which there’s a willingness to compromise both within the Congress and also the administration, in which there is a willingness to make difficult decisions, and in which there’s on focus on facts and analysis in making decisions albeit the politics will always be involved. And that, I think, is this fundamental question respect to the future of this country. If we can do it, I think we have tremendous comparative advantages, tremendous long-term strength. I’d rather invest in this country than any other place in the world or I do business here than any other place in the world.

But, realizing that potential depends on re-establishing effective government. I kind of think it’s likely to happen for all kinds of reasons we could discuss, but certainly, the current experience and empirical evidence is deeply troubling.

Robin: Yeah. I mean I read an op-ed you wrote in October 2016 just before the election.

Bob: Yeah, that was a good op-ed.

Robin: Yes, it was, actually.

Bob: Yeah, oh yeah.

Robin: Maybe reading it post-election and recent development, it felt you were very optimistic on America, I love it here, among other things. Obviously, I’m a native as you can tell from the accent. But you said, you know, the US still has the best long-run hand in the world.

Bob: I believe that.

Robin: Do you still? How high is your confidence level on that after what’s been happening recently?

Bob: Well, what’s happened recently I don’t find totally…

Robin: Or maybe totally reassuring…

Bob: Totally reassuring, totally reassuring. But to put it mildly. But, now, I actually have the same view, Robin. I think if you, but there’s a reason for it which you may or may not agree with. I think we have tremendous comparative advantages here. Flexible labor, capital markets, demographics, natural resources, dynamic society, and so much else, rule of law, and so forth. But…and therefore I think we, I do think we have the best hand to play in the global economy, but it does depend on re-establishing the sound fiscal trajectory, it depends on public investment in whole array of areas, it depends on structure reform and some of the areas I’ve already mentioned, well, I didn’t mention them, but k-12 education, any related skills gap, lifelong learning and so forth. I even think we probably should have public employment at least on a temporary basis so the people get soft and hard skills to enter the workforce more effectively.

And so, the question is, and the ultimate issue with respect to whether or not we realize that potential is will we re-establish effective government? And while most people I know in the political world are pretty discouraged about that, I kind of have a more positive view that we will at some point. Though it may be a long and messy process, there’re no guarantees because we do have, when you think about it, we have a long history of political resilience, we have a dynamic society, and politics changes very rapidly in America. So, I think we will get there but there’s certainly no guarantees. And that is, that is the ultimate issue, the ultimate caveat to my, yes, I do have an optimism about America. But that is the caveat of the concern.

Robin: Well, I mean, obviously, I’m in the UK, seems to have committed an act of economic seppuku recently, which I’m not tiny thrilled about, but the US, I’m surprised coming over here because, you know, the European cliche about Americans, you guys have the “can-do” spirit, the “gung-ho” attitude, you know, optimistic on the future, and America being a phenomenal place. The thing that’s been palpable to me, and this predates the election, is how many Americans seem really pessimistic these days. I’m constantly talking to people. I’m the American mouthpiece, the area I cover all the time. I constantly have to tell people that the American capital markets are incredibly vibrant and dynamic, despite all the issues.

Look at the IPOs, everybody here, I’m sure, has talked about how difficult is to go public and the IPO market is dying out. There’s partial reflection that you have this vibrant venture capital market, a private debt market that people in Europe would kill for. But why, so why are people so negative?

Bob: You know, that’s a good question. And I think a part of it, Robin, and as you say this predates the election, I think a good part of it is a reality. I think it was about a year ago, and don’t hold me this exactly, but about a year ago, the Fed put out a study. And it, I think these aren’t exactly right numbers, but I’m in the right ballpark, something over 30%, I think it was 31% or 35% of the American people, self-described themselves as struggling. And it says, in that same study, I think it says something like 40% or there bouts of the American people couldn’t raise $40 in cash in 24 hours. In other words, what’s happened is, and I think it’s largely technology, although it’s blamed on globalization. Then there’s globalization plays a role in this too. These forces that have been so powerful in terms of promoting growth have also created serious, serious wage pressures and job dislocations for, say, the bottom half, if you will, of the American income stream, income spectrum. And so, yes, there’s a lot of concern. And I think with good reason on the part of many Americans, about where all this is heading.

What I think, and this I think is the thing that’s so troubling to me, and I believe it is a terribly troubling problem, a terribly troubling point. And that is I think there is a way to deal with this, I really do, and that, that op-ed that was in the Washington Post. And as I said, was pretty good, you can disagree with the specifics, but I think the basic point was kinda right, which is that there was an inclusive growth agenda which if we put it in place would enable us to deal with this really tectonic changes, the shifting of tectonic plates in our economy. And I think we could do very well. But we haven’t had a political system, arguably in the ’90s, and that’s when I was there in White House and treasuring, all that kinda stuff, there was a lot of partisanships, but we got a fair bit done on a bipartisan basis, although conditions were already worse than they’d been say 20 years before that in terms of by partisanship. But now, in the last, say 10 years or thereabouts, it really, the ability for our political systems to function effectively is pretty much ground to a halt with the exception of a few significant pieces of legislation. But predominantly, we have simply have not dealt with our challenges. And I think that is disheartening to people. But I, let’s I say, I’ve expressed, say the support, I’ll say it again. I think the odds, everything’s about probabilities. I mean, there are no absolute answers or certainties about anything so I’m making my judgment, so you’ll have to make your judgments. I think the odds are we’ll get back on track. But there’re no guarantees and it may be long and messy process, Robin.

Robin: Yeah. But I mean, inclusive growth, I mean, I don’t think anybody is one of those phrases that sounds great, everybody agrees with it. What does that mean in concrete practice? I mean, it’s complex world, complex answers and questions, what does that mean, what do we do?

Bob: Well, I’ll tell you. I’ll get you, I’ll give you my view in one second, but it is. The issues are complex, the solutions have to be complex, and yet for the most part, the public responds much better to bumper-sticker simplicities. I was with president to Clinton’s the Oval Office in 1994 when he was deeply frustrated because he had done a lot that was really significant. And eventually, of course, it worked and it got him reelected but the people weren’t feeling it yet. And he said, you know, the American people want John Wayne to ride up on a white horse with a silver bullet. Now, he, sort of, mixed up his cowboy metaphor. Leaving that aside, it, well, he did.

Robin: He had to be a journalist with a mixed metaphor like that.

Bob: He couldn’t be a journalist, want to be journalist? Anyway…

Robin: He’d. Okay, yeah.

Bob: Well, he didn’t, he didn’t. But the point he was making, which I think is right, is that in the political and public arena, simplistic views that can be contained on bumper stickers tend to resonate. Complex policies that deal with the inherent complexity of the issues we face are very, very difficult communicate effectively politically. And that is a, I think, a very serious problem. What would you do? Here’s what I do, we’ve got to get our fiscal house in order. If you look at the longer, intermediate longer-term trajectory, it is a really a problem. The best way to do it, of course, let’s leave the ACA debate aside, okay? We have enormously inefficient and ineffective health care system. We spent about 18% there about’s of GDP on health care. A lot of the European countries spent 10% and their outcomes are not worse than ours.

Robin: I think France is 8 and they have better outcomes than the US on average.

Bob: Okay. Well, that’s even more than makes the point. So, but they drink a lot of wine, maybe makes them feel better, I don’t know. But anyway…

Robin: Pretty happy when they do…

Bob: Yeah, they’re happy. They do a lot of things different than we do and sometimes maybe aren’t so bad. But even, be that as it may, if we could, if we could…and there are some demographic issues that we have that they don’t have and so forth. But nevertheless, if we could substantially decrease that, that would solve a lot of our Medicare problems, but you got to do that, you’ve got to deal with the skills gap problem, and there are all kinds of possibilities there. We’ve got to deal with basic research, we’ve got to deal with infrastructure. I believe it’s imperative we overcome poverty. Twenty percent of the American children live in poverty. Aside from the question is a moral average, think of what that means for the future of our workforce.

We have vastly over incarcerated people. Criminal justice is not just a criminal justice issue, it’s also economic issue, so we’ve got to deal with that more effectively. And if we do, we will greatly benefit the future economy, a lot we need to do. And the thing that’s just, every time I think about it I get the same kind of reaction. It’s a terrible situation because it’s not that there aren’t good, not that there aren’t very useful things to do, there are. There’s a tremendous amount of you, and we can debate what this thing should, what exactly this policy should be. But if you had reasonable people who are basing their issues, their views on facts analysis, and we’re willing to get together, conservatives and liberals could get together and move forward. The problem is that we don’t have that right now. But I believe, as I said before, I believe the odds are sooner or later, we’ll find our way back.

Robin: Well, I mean that’s a core issue, I have to admit, worries me a lot. When, I think it was an American engineer, was it Denning Williams, that said, “In God we trust, the rest must bring data.” And it’s one my favorite quotes because, you know, that’s how most people should approach things. And it feels that, sort of, age of rationality we had for long period has eroded somewhat. Sometimes, without even, I didn’t really notice it, but the idea that, you know, we now live in this post-fact, post-truth era, you know, it goes on both sides of political aisle, really, sometimes. Doesn’t that make you question that we can move into that? That even if you had all the facts, the martial facts, they just don’t bite because the narrative is different? The bumper sticker says something else?

Bob: I think we are now in a very difficult period, Robin. The idea of alternative facts, for example, is simply not consonant with sound decision-making. And we are in an environment in which respect for facts and analysis is curated substantially. And it’s not just true in our political environment, I think it’s true more broadly in our society. And therefore, I think it makes it ever the more important, that for any of us and many of you who are in this position, to be engaged with institutions that stand for intellectual integrity with respect to facts and analysis. I think is all the more important those institutions try to have whatever effect they can have in our society. But I think we do need to re-establish that respect. And as I say, I think that’s part of…I do think that the probabilities are that that will happen because that’s inherent in my general view that, I believe, we will reestablish an effective political system. But for the moment, and for now, and may be gone for some period, I think you’re absolutely right. There’s been a terrible deterioration in the respect to facts analysis in the public discourse, in the political discourse, and that has to be established if we’re gonna be effective in our political decision-making.

Robin: Mm-hmm. Well, and just to end things. I mean, we’re approaching 10 years from what, I call, the start of the financial crisis, you know, is a small thing happening for some funds managed by a French bank that most people miss, but I remember is a huge thing, might well have been people are bar funds. Ten years on from the crisis, Yellen, Janet Yellen, the Fed chair said yesterday that she believed that we probably wouldn’t have another crisis, I assume, of that scale in our lifetime. And that sounds great, but you think, are you optimistic on that side? Explain a few of those in your grip.

Bob: Yeah, I’ve been through a lot of ups and downs in the system going back a long way. I didn’t see her comment, so I’m not sure what she meant. If she meant that, let’s not speculate what she meant, but here’s what I think. The ’08 crisis was the worst crisis in 80 years. A lot of people before the ’08 crisis saw excesses, but virtually nobody, and you can see this in the Fed minutes because this includes the Fed, and virtually everybody else, there were some exceptions, but virtually everyone else, saw the possibility of a mega crisis, nor did I or my dad. I think, virtually, nobody did. If that’s what she meant, I would guess the probabilities of a mega crisis are really very slight. But, you know, there are some real risks that didn’t used to exist. The geopolitics, for example, there are enormous risks in the geopolitical arena, and a tremendous amount is gonna depend on what happens. But also, a tremendous amount’s gonna depend on the decision-making that our country makes with respect to these issues because of the major role we play in global geopolitics. And that depends on soundness, intellectual integrity, and having a balanced, and disciplined, and well-informed, ultimate decision maker. And we can all have our own views on where we stand in that, but that could spark…events that are serious enough could themselves spark crises of a different type.

We had a senior partner at Coleman Sachs once, John White, a very thoughtful man. And he said, “Each time you were done with a crisis you say, ‘Well, we’re not gonna do that again because we’ll protect against it.'” “The problem is,” John said, “the next crisis will come from a solely unanticipated place.” And that is always a risk in a market-based economic and financial system. Will we have normal, you know, normal can be pretty serious, normal ups and downs and then serious downturns at some point? Yeah, I think it’s inevitably part of our system and I think all of this is…I personally, right now, just in one individual, because of all the risks that I see, and I think the risks are unusually great, and the uncertainties are unusually great, and the collection…I tend to have a rather cautious, but I do have a very positive view about the United States for long term. And I’m not, and I don’t believe in market timing, I don’t think anybody’s, well, maybe some people, I think press people good at it. But I do think, if you look at the risk that we face, and you look at the way our own political system at the moment is functioning, I don’t think it’s a good time to have a, sort of, cautious bias in whatever one does.

Robin: Okay. So, you are not optimistic on that respect then?

Bob: Well, it depends what you mean. I have a very affirmative view about the long-run prospects for the United States, subject to the caveat that requires that we establish effective government. If you take a shorter run view, I do think it is not unwise to have a somewhat cautious bias given the geopolitical risks, the risk that we have, an administration whose policy views, in some respects, strike me as having some possibly counterproductive effects, for example trade as one example, how they react to geopolitical risk would be another. I think it heightens our risk when you see some of the kinds of responses that we’ve seen so far, can project. So, I think that probably the markets have under, now I may be wrong about this, but I’d at least underestimated the probabilities…well, if you have already estimated the probabilities that we’re gonna get, what they think of as constructive tax cuts and regulatory reform or underestimated the risk we want. Now, I know that if you look at the underlying rotations or the market, that looks like it’s going out of it, but I still think there’s an animal spirits that relates somewhat to that. We also have, you know, you made a good, you said something which I should have picked up and didn’t, I apologize.

We have a debt ceiling issue coming up and at the end of September, the government has to be funded. And while these things should go smoothly and easily because none of these should be controversial, there are members of Congress in both parties, and there is at least one cabinet member who has said that he thinks that these events should be used for the leverage potential they provide for accomplishing other purposes. If that happens, there is always a possibility, I don’t think that’ll happen, but there’s a possibility that could be a problem around here the debt ceiling or the continuing resolution or budget resolution, whatever it’s gonna be at the end of September. And that could at least create temporary complexity. Though, I think, ultimately, those things will get resolved.

But even if we have a temporary problem, that could adversely affect the credibility of our political system which is, at the moment, already suffering a not very good period with respect to credibility.

Robin: No. I mean, as a journalist, obviously, it’d be great fun to write about an American sovereign default, but I think as a person, I think that would be a rather scary prospect.

Bob: Yeah, and it’s not good for you if none of the people to subscribe to your newspaper can afford to subscribe to anymore.

Robin: No. Well, you know.

Bob: You might think of it from that point of view and be a little less enthusiastic.

Robin: Yeah, I’m gonna move into side business. These canned goods, I’ll trade canned goods and something like that. Well, Bob, thanks so much, you’ve been really fascinating and I hope you all enjoyed it.

Bob: Robin, thank you. It was fun, thank you.

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