U.S. Economic Policy With Kevin Hassett

Chairman of the Council of Economic Advisers Kevin Hassett discusses economic growth, international trade talks, and the impact of the Trump administration’s policies on the U.S. economy.

HASSETT: Liz, go ahead, given me that.

ELIZABETH ECONOMY: OK. Good luck, dude.

HASSETT: (Laughs.)

RATTNER: What, do you want that? You brought somebody to do a fist bump with?

ECONOMY: I had to.

HASSETT: I have been paying attention to Liz Economy’s wisdom ever since freshman year at Swarthmore.

ECONOMY: So sweet.

RATTNER: Well, she’s—

HASSETT: And Willett’s.

ECONOMY: Well, I did date your—

HASSETT: She did date my roommate at one point, that’s true. (Laughter.)

RATTNER: Dated your roommate?

HASSETT: You said it. I didn’t. I would never—(laughs)—

RATTNER: I think we have our first line of questioning. (Laughter.) Well, on that note, let me welcome you all to the Council on Foreign Relations—(coughs)—excuse me—C. Peter McColough Series on International Economics with Kevin Hassett, the chairman of the Council on Economics. I’m Steve Rattner, the chairman and CEO of Willett Advisors.

And so we are going to start with some questions from me. I’m not going to get into Kevin’s bio, which you all have and which you probably all know anyway. Very distinguished career in economics, especially economic policy, at the AEA—AEI—excuse me—for many, many years. So let me—let’s plunge right in. And then, as I said, in about a half an hour, a little bit less, we’ll turn this over to the audience.

I thought, Kevin, that since we are at the Council on Foreign Relations, and many, many things to talk to you about, obviously. Some of which are outside the bounds of economic policy, but we’re going to stay with economic policy. But since we are at the Council, I thought we really should start with trade, which is obviously much in the news. We have a president who seems to equate the health of our economy with the size of our trade deficit with countries, with the world, with whatever, and views that as the indicator of health or ill health. Obviously there are people who have a different view. Could you just give us a sense of what the administration’s philosophy of trade is? Are deficits just bad, or is it more complicated than that?

HASSETT: Yeah. So thanks for the question. And trade is a natural place to start here at CFR, which is such an essential part of our intellectual life as a nation, especially in the international policy space. And, you know, I think that trade is—when I came into the administration—I came in a year ago June. I was confirmed in September. But when I got there, they had a different chief of staff, Steve Bannon was still in the White House, Breitbart was attacking my confirmation. So my own colleague, is apparently—and my first day at work Gary Cohn said: We want you to make a presentation at the trade meeting in the Roosevelt Room.

And so I’m, like, coming into this extremely strange, foreign situation. And I had to instantly decide, like, you know, what is CEA’s role going to be in the trade debates. And you know, I had gone through a confirmation hearing where I had talked a lot about the role of CEA. I promise I’m not filibustering. (Laughter.) And the role of CEA is to be this place in the White House that’s there forever. It’s established by the ’46 Act. It takes an act of law to get rid of us. And our job is to tell everybody what economists think about what happens if you do this, what happens if you do that. And, you know, that’s what I do.

But one of the things that I’ve done is, first, understanding that trade is such a politically challenging thing, is that I was also thinking back, just as I was starting—making my first presentation, to some incredibly wise advice I got from Austan Goolsbee. So Austan and I were having one of those—you might have noticed, I did all these presidential campaigns, but I never wanted to be in government. And so I just did presidential campaigns. But Austan and I would, like, fight on TV during the ’08 campaign. And then you might—you might recall that President Obama said we should pull out of NAFTA, that he had, like, all these really strong things. And then Austan got in trouble, do you remember, because he told—he said, folks, hey, we’re not really serious about this, and stuff.

And then we had this heart-to-heart. And since he said something so wise, I think it’s OK, even though it was, like, just a personal conversation. He just said, you know, when you and I think of trade deals, because we’re economists, then there are a couple of lines, it’s like, free trade. But if you actually look at the trade deals, then they’re thousands of pages long. And they’re filled with stuff that doesn’t make any sense. And so, I came in both as an economist who knows, like, the great work of so many people who—like, that shows what happens, like, if you put tariffs on things then you get less economic growth. But also, I came in sort of mindful of the fact that that’s not really what trade is all about when you’re talking trade policy. It’s about these agreements that are negotiated with people that are thousands of pages long.

And so what I’ve done in my time there is, you know, be mindful of sort of what works in our models, but also pay closer attention to what’s in the specific agreements. So I can remember one of the first things that I had my people describe to me were the non-tariff barriers in Korea that made it so that U.S. automakers couldn’t sell cars in Korea. And we can talk about that, but it’s getting pretty deep in the weeds, but it turns out that there’s some pretty egregious stuff that we agreed to in the past with Korea that we should fix. And so I think that the trade—President Trump—let me—let me—I’m going to answer your question. I promised I wouldn’t filibuster. But it seems like—

RATTNER: We only got, like, twenty-five minutes left, so.

HASSETT: Yeah. It’s OK. (Laughter.) I can stay long. My train’s not till 3:00. But I think that President Trump said at the G-7 meeting that he’s for zero tariffs, zero non-tariff barriers. And I think a lot of people really didn’t believe him. And—but now we’ve got an USMCA deal. It’s like YMCA with the U.S. in front, if you want to remember it. And it’s a much-improved deal, I think, in many ways. And so I think President Trump is a trade reformer who’s willing to get tough with people that continue to treat us unfairly. I think that that’s the way to think about our trade policy.

RATTNER: I wasn’t—you know, I recognize that you’re not in charge of trade policy. So I didn’t really want to get into the weeds of these agreements. I’m asking more of an economist question, which is: Are trade deficits the way to measure the health or sickness of an economy, the way President Trump seems to think they are?

HASSETT: I think that in an economic model the trade deficit—there are lots of good reasons why you’d want to run a trade deficit. Suppose that we didn’t—like, Japan doesn’t have any oil, really. Like, for instance, so, gosh, if they stopped trading oil it wouldn’t be so good for their—for their economy. But if you do something like, you know, open up a free trade deal with Korea and then, you know, they—you have great success with their very nice cars, selling them like hotcakes in the U.S., and then we seem to have basically zero sales in Korea. And then you look and you say, oh, we agreed to these weird non-tariff barriers about who’s allowed to fix the cars and so on, then that kind of an imbalance, it feels like an injustice to me.

RATTNER: So what you’re saying is—

HASSETT: And that’s the kind of stuff that he’s focused on. And we’ve seen that now with the deals. We’ve had lots of progress with Europe. We’ve got a trade deal with Mexico and Canada. We’ve got a trade deal with Korea that’s repaired a lot of this stuff. And so I think that we’ve demonstrated that the president is a trade reformer.

RATTNER: OK. So what you’re saying is that if all of these non-tariff barriers went away and we still had a $500 billion trade deficit with China, because that’s the world of a level playing field and everybody’s competing, and that’s OK.

HASSETT: Yeah, so my understanding of the president’s view is that the deals need to be fair and reciprocal. So their tariffs on us should be our tariffs on them, or they should all go to zero. And the non-tariff barriers should just be gone. So if you look at the new USMCA deal, you know, the other countries are accepting—like, if a car is safe enough to sell in the U.S., it’s now safe enough to sell in Mexico and Canada. It seems like that ought to be true in other countries too, right? Like, I feel pretty safe—

RATTNER: Well, look, without getting into the weeds of it, there are those who think the USMCA deal was some tweaks, not an overhaul. That, for example, the concessions Mexico made were in TPP, most of them I believe. And if we had only signed TPP we’d have accomplished that without going through everything we went through. And that with Canada, you know, diary—you know, fine, diary—but is that really going to change life for us or the Canadians?

HASSETT: That—so you said you didn’t want to get into the weeds, and—

RATTNER: Well, I don’t. So, I withdraw the question.

HASSETT: No, no, no, no. But let me just say this, that I will—at the CEA Twitter account, I’ll put up some information on this, because that is something that you’ve heard some people say, that it’s the same as TPP. But I’ve got this whole spreadsheet. I asked people—you know, how is this different from TPP? And I got this whole spreadsheet from USTR that had, you know, zillions of things that were radically different between this and TPP. And I think that first there’s the 21^st century stuff about, like, getting the internet right. There’s the harmonization of environmental standards and labor standards, something that is really a bipartisan thing, or maybe it’s a Democratic thing that’s going to be bipartisan now hopefully. But the idea that we are exporting pollution to Mexico, it’s—we fix that. Even things like—that I really care a lot about. Ocean litter. You know, we got a, like, very pathbreaking agreement on ocean litter. So there’s all this stuff in there. But you said you didn’t want to get int the weeds. I could go on and on about this.

RATTNER: OK. But let me ask you about another thing.

HASSETT: I didn’t want to get int the weeds with the White House too, by the way. (Laughter.)

RATTNER: Fair enough. We’re going to get out of the weeds.

HASSETT: (Laughs.)

RATTNER: But I do want to ask you about another comment the president makes many times. And one way he’s said it is this. He said: China is now paying us billions of dollars in tariffs. At least the way I learned economics, that’s not how it works. The tariffs are paid by companies that import things into the U.S. More often than not, they either get passed on—well, they always either get passed onto consumers as higher prices or they make profits lower. How should we think about tariffs?

HASSETT: OK. So—

RATTNER: Are they not taxes?

HASSETT: Yeah. So I think of tariffs as taxes. And I think of taxes as being born by the immobile factor. And so you can remember during the tax debate we talked about how the corporate tax—the literature says, I wrote one of the first papers—that corporate tax is borne by labor, because labor in the U.S. is immobile but capital is mobile. So imagine if you had a country that was exporting a lot of stuff into your country that had immobile capital, because they actually don’t let the capital leave? Then the immobile capital is going to bear the tax. And so I think in this case the president’s correct because, you know, he’s—he went to Wharton, studied economics. He gets this stuff. Really, you can talk about taxes with the president. It sounds like you shouldn’t, but you can. (Laughs.)

RATTNER: Well, we’ll have to take your word for that, because I don’t think he’s going to show up here anytime soon to be interviewed by anybody, let alone me.

Greg Mankiw, who you know and was a predecessor of yours under the Bush administration, I think—and I would commend this to anyone who is not a trade person, because I think he on Sunday, in his column, laid out really very well how to think about the trade deficit and how it interacts with our many other economics factors and indicators. And one of the points he made is that when you run an economic policy like what we’re running—a pro-growth economic policy where you’re going to have more stimulus, higher interest rates, stronger dollar, that is going to exacerbate the trade deficit. And that’s not necessarily a bad thing, but it is a fact. Would you agree with that, or not agree with that?

HASSETT: That correlation is evident in the data. The thing that’s different this time is that while we’re doing that, then we’re hopefully repairing a lot of asymmetries in trade deals, and that’ll have an effect that would be offsetting. But there were no changes in trade policy whatsoever given that the U.S. economy is kind of disconnected from the global economy or growing a lot faster. Then you would expect the trade deficit to go up from that impulse alone. But note that—you know, there are a lot of heads nodding in the audience—that that means, though, that you shouldn’t accept the argument that you see quite a bit, that the U.S. growth experience right now is not special, that there’s nothing—it has nothing to do with Trump policies, because all the other countries on Earth are growing like hotcakes too. In fact, it’s kind of—that was true, maybe—that’s what I thought last December. But it’s not what I think now.

RATTNER: Well, I want to get more into economic growth, but let me start with an IMF forecast that came out, I think, the last couple days, in which they—

HASSETT: Right. Down two-tenths, 3.9 (percent) to 3.7 (percent).

RATTNER: Yeah, they’ve—thank you. You’ve asked my question for me. Now you can answer it.

HASSETT: (Laughs.)

RATTNER: They cut their global growth estimate. And they basically attributed two things. One was trade and one was, you know, disarray in the emerging markets, which may in fact have some—have some relationship to our economic policy. But let’s just focus on the trade piece. So is the IMF wrong? Is trade not inhibit—is the trade war, so to speak, or the trade disagreements, or whatever you want to call it, not inhibiting global economic growth?

HASSETT: No, I think that their estimate is correct. That’s about how much I revised my estimate. I might have even gone a little bit further. And it—in fact, a lot of it goes back to what I said earlier, that I think that the immobile factor is going to bear the cost of the trade war, and—if there is such a thing, of the trade dispute. And so that it’s going to be, you know, harmful to the Chinese if they don’t reform. But as far—they also—that IMF forecast also did not revise their U.S. forecast. And I just want you to know that that’s because that our steps in this trade dispute have been very well-crafted to put pressure on them, but not to be super harmful to us. And the way to think about it is that if there’s some product that we can buy—in fact, honestly, that you could make lists like this.

So tell me things where the U.S. is the only customer for the Chinese firm, but we also buy it from lots of other countries. Give me a list of those, right? And so if you get a list of those, then if you were to put a tariff on those things, then it would be really bad for the Chinese companies, but it wouldn’t really have much effect on us all. And so I think if you go back and you look at the first moves, that they—there’s not only one idea about how the 301 progressed. But the first moves basically had a lot of that flavor, that we’re putting—you know, we’re basically moving U.S. demand to other producers.

RATTNER: But you’re also—

HASSETT: But since it’s bad for China, then—so when I estimated the bad for China part, and then changed my global growth forecast, I think I was down three-tenths, or something, with our internal model. So they were down two-tenths. And so—and so the one thing about it is, that I would say about their forecast, that if you think that there’s an emerging market story, which I think there might be, then they’re probably going to—the next time they do their forecasts at IMF, if that emerging market story that’s negative continues to evolve, then they’ll have to ratchet down their forecast again, because they—because they pretty much have the whole China effect in their revision, it seems to me.

RATTNER: But in terms of this notion of targeted trade—I don’t know, I keep saying trade war—but trade disagreement, obviously we import a lot more from them than we export to them. But there are other ways they can choose to retaliate if they choose to, right? I mean, we could get into a situation. They have $1.2 trillion of U.S. Treasurys, for example. There’s a lot of stuff they can do if it comes to it.

HASSETT: Yeah. And absolutely everybody hopes for an end game where we work everything out. I think that, you know, it’s something that, you know, people of this great institute are going to be studying for a long time, that—you know, like negotiation is not really something that economists are super good at. We don’t have great models for what it means—like, how you get to an end game in bargaining. Like, Laffont and Tirole have this big long book that’s really hard to understand, but it’s just—it’s a very difficult space. And so, you know, I think we all hope that it works out well in the end, but, you know, I think that the economic report of the president this year—we put out estimate, you know, based on a big literature that intellectual property alone, China was stealing about one to three percent of our GDP every year.

And so, you know, if we’re starting out down, say, 1 percent, taking a lower estimate, then, you know, that’s something that there’s a big upside to fixing, right? Like a whole percent of GDP. It’s a big upside. And so I think the president’s right to pursue improvement in the relationship. But that’s ultimately, as you can see with the other things that look like trade wars, and then turned into trade disputes, and then turned into trade reform, that there’s a lot of hope for progress, and a lot of opportunity here.

RATTNER: So it sounds like, if we asked you to predict, your prediction would be that this is going to end peacefully?

HASSETT: Oh, peacefully, yes.

RATTNER: Without—I mean, I don’t mean militarily peacefully. I mean economically peacefully. Without the kind of damage to our growth or global growth or even China’s growth that are in some of these forecasts? Is that a fair assessment?

HASSETT: That’s a fair assessment.

RATTNER: OK. Fair enough. I have—I have one other trade question. And I want to keep this apolitical, but it was an interesting interaction, so I do have to ask about it. But Goldman Sachs recently wrote that tariffs threaten corporate earnings through higher costs and lowers margins. Conservatively assuming no substitution of passthrough of expenses, we estimate a twenty-five percent tariff on all imports from China could lower our 2019 S&P 500 EPS estimate by roughly seven percent, resulting in no EPS growth next year. And you responded by saying, quote, “The Goldman Sachs economic team almost at times look like they are the Democratic opposition.” And in fact, two of your colleagues—current and former, Secretary Mnuchin and Gary Cohn, are Goldman Sachs alumni. So—

HASSETT: Yeah. So, yeah, thanks for bringing that up. (Laughter.) That the—

RATTNER: He asked me to—no he didn’t. (Laughs.)

HASSETT: But the way you connected the question, I just wanted to clarify that as soon as they stated that that report had come out, then I said, oh, I haven’t read that report. I have not read that report. And but they put out a lot of pretty flawed analysis of the tax cuts that kept—came out right around the time of the vote. And you could ask Gary Cohn—invite Gary Cohn, you know what he thought about that timing. But I think that I was wrong to speculate about their motivations for putting out flawed, negative analysis about something right before the vote. I should have just said they did that, let somebody else think about whether or not they’re being partisan.

But the thing that made me laugh about this, and I’ve been advised by my wife not to say this joke, but it’s true, is that, you know, I have been completely out of the sort of disputes between the White House and the media. And there have been a lot of accusations about how the media is biased against them. And I’ve never said anything like that. But I did think it was funny that after I said that, there were all these stories about what an awful thing I did. And I just never thought I’d be in a world where the media would rush to the defense of Goldman Sachs. I mean—(laughs). You should think about that, because that’s really what happened.

RATTNER: Fair enough.

HASSETT: (Laughs.)

RATTNER: Let me—why don’t we turn to the domestic economy. Lots going on there as well. And I want to start with wages. You made the comment a minute ago about how—I forget exactly how you said it—but about how corporate taxes have been shown to have more of an effect on labor than on capital because of the immobility of labor versus the mobility of capital. And I know you’ve put out a wage paper. And I know you’re going to want to talk about it. But before we get to that, as best I can see from the data it does not appear to me, anyway, that we’ve had the kind of wage acceleration you would expect to have, both between the president’s policies—pro-growth policies, as well as simply the tightness of the labor market. And so could you please explain to us why we haven’t seen that?

HASSETT: Well, sure. I guess the question is, if you look at, like, the last three months and then extrapolate those at an annual rate, then you’re getting wage growth around four percent, which is a significant uptick. But it could be that it reverses itself with, like, a bad month of data. But I think that if you look at sort of three-month moving averages, you’re starting to see it. Don’t forget that wages—so how many people here get their wage—I would actually get a show of hands. And then it’ll be this glorious embarrassment to me if no one puts their hand up. But it’ll be on the internet all over, right? But how many people have their wage adjusted about once a year, right? Come on. So, right, everybody, right?

And so what time of year does your wage get adjusted? What time? And so, you know, it depends. Some people say it’s June. Some people say it’s January. But the point is that if you look at our analysis from the fall, we said that wages lag capital formation. That the first thing you get is the capital spending boom after a corporate tax cut. And then you get higher wage growth as the wage is more productive and that the wage growth takes three to five years to adjust to the higher level of capital. And the fact that, you know, the three months that we have right now are promising, that we’ve gone from wage—you know, up about a percent relative to where we were before the tax cut—you know, doesn’t mean we know that it’s happening. But we do know that the capital spending boom that we predicted is happening almost exactly according to our models—like you said, I think, up around eleven percent for this year, and it was up ten percent in the first half of the year.

RATTNER: Put aside the capital formation investment—and I don’t mean to minimize it, but just put aside for a second. Even if you guys hadn’t done that, if we were sitting in an economy with 3.7 percent unemployment, I think most economists would expect wages to be growing a lot faster. For example, Jason Furman did a study in which he calculated three years in the late ’90s when we had tight labor markets—not as tight as they may be now, but tight, right? We had 4.8 percent real wage growth. And now we’ve only—the last three years, and that isn’t—so that includes part of Obama—we’ve only had 3.4 percent. It does feel like the labor markets are behaving differently in this recovery, at this level of tightness, than they have in the past. Would you agree or not?

HASSETT: You know, I’m not sure that—we just put out a wage paper that goes into really gnarly detail about all this stuff. But there’s so many things going on. One thing is we’re—because the unemployment rate is so low, we’re drawing people back into the labor force. And they’re low wage people. And so that brings the average down. Baby Boomers are retiring at a higher—look, we’re at a point where there are a lot of Baby Boomers retiring. And Baby Boomers retire late in their career and they have high wages, and so that drives the wage down. You know, there—so there are a lot of factors that I think that once we fully adjust for them might make the wage data not so puzzling. But I do think that they’re trajecting up right now. We’ve got three months of data that suggest that there’s an upturn.

RATTNER: Let me—now we talked about economic growth globally. Let me drill down on the U.S. for a second. If you look at what other forecasters have to say, the CBO and the Federal Reserve are projecting 1.9 percent next year for us. The IMF is projecting 1.9 percent for us. Goldman Sachs said 1.6 percent. The White House says 3.1 percent. I’m guessing you think the White House is right and all these other forecasters, public and private, are wrong.

HASSETT: And if are, it’ll be the third year in a row that that’s been true, OK? And so—(laughter)—and it’ll be—you know, this year is definitely coming in above our forecast, which everybody said was rosy scenario last year. I just got to say that, you know, if you—if you look at—you said you don’t want to get into the capital thing, but that is kind of what I spent my whole career writing about.

RATTNER: No, I’m not—that’s fair.

HASSETT: But I just see Victor there, like, nod his head, that the capital thing is working exactly as our models predicted, which is giving us growth that’s almost exactly what the models predicted. And the thing about capital is that capital is the gift that keeps on giving, in the following sense, that if I decide, OK, hey, the U.S. is an attractive place to have a factory, then I put the factory in the U.S. And I got to buy a lot of machines and buildings, so capital spending goes up. OK. And then let’s just say I’ve been doing that since January. And then in July, my factory’s done. It’s finished. I finally got the thing up and running. And I turn the switch, and it goes on, and then what happens? I get output out of the new factory. And so output goes up again. And so output goes up when you buy the capital, when it’s I, but then you get output that turns into, say, retail sales or anything else in the second half of the year.

So when you get a level adjusted capital, like our models suggest, then you get sustained growth, because you—the capital spending boom takes a while to happen because there are adjustment costs for capital, and because once the capital is in, then it starts producing output. And so that gives you more growth in the future.

RATTNER: I thought—

HASSETT: So I really have a hard time imagining that next year won’t—so, like, we could come back and say I can’t believe you said this. I’m having a hard time imagining next year won’t be, you know, north of three, given how much capital spending we’ve already had this year. It’s like for that to happen—now, certainly there are negative shocks that could happen. You know, that’s the world that we live in. But absent negative shocks, we’ve had so much capital formation that the output from that capital would have to not come in for us to see growth, to go back to the 1.6 (percent) that Goldman said, for example. It’s, like, impossible that it be 1.6 (percent), given that much capital spending.

RATTNER: OK. Write that down. Impossible for it to be 1.6 (percent). But for all that to happen, I think that linkage—this is an easy one for you, a softball—the linkage is got to be productivity, right? We all learned in economics GDP is basically labor force times productivity growth. And therefore, to get to your 3.1 (percent), given that the labor force is growing slowly and isn’t going to grow that much faster, you’ve got to have much—you know, we’ve had very weak productivity numbers. You’re going to have very substantial productivity numbers. So that presumably is part of your forecast, or your thesis.

HASSETT: That’s right. And I can actually flip it another way, because one of these things that I did when I first got to the CEA was look at the models that government agencies use to forecast GDP over the next ten years, because I had to write down a ten-year forecast that I was going to sign my name to. And one of the things that the government agencies have been doing forever and ever is they have this thing where they call it a potential GDP model, where they say, OK, I get this much labor force growth, this much capital stock growth, and this much productivity. And then that tells me how much GDP I could have.

And then what I did with my staff, I brought in some really good time series guys, is I said: Well, let’s compare that way of forecasting GDP to other ways of the literature. And it turns out that the potential GDP model has almost no forecasting value whatsoever. In fact, it was outperformed by simple autoregressions and things like that for the time series guys. Really, really simple, stupid time series models outperformed it. And then we dug into why. And we wrote about this in the economic report. And it basically is, in part, because productivity is really hard to forecast. And so you can say, oh, well, productivity growth over the last ten years has been this, and therefore it’s going to be that over the next ten years. And it turns out that that thought is outperformed by autoregressive models.

And so what we do for our forecast is we base it on, you know, basically, more momentum-type models. Jim Stock, who was under Obama in the CEA, and his co-author, Mark Watson, have a great model that we think is the best at this. But it does suggest that productivity needs to go up. And, you know, if—to believe that, both in the short and the long run—you just have to believe that there’s a linkage between labor productivity and capital, which is kind of econ 101. But then for the longer-term thing, you have to think that there’s a linkage between higher capital output ratios and long-run productivity growth. That that linkage is, as it’s called, an endogenous growth linkage. And you might have noticed who got the Nobel Prize yesterday. It was the father of that literature.

RATTNER: We’re not going to give the audience a quiz on your last answer, but—(laughter)—I have—I have two minutes left and I have two questions.

HASSETT: They wouldn’t pass it.

RATTNER: They might, some of them. I want to—I wouldn’t. I want to get to—I want to get to two last subjects, and then we’re going to open it up quickly. One of the Fed. The Fed has been more openly critical of interest rate increases than his predecessors—

HASSETT: You mean the president.

RATTNER: I’m sorry, the president. Excuse me. He said about—he said—in the summer he said, about Jay Powell, I’m not thrilled with his raising of interest rates. No, I’m not thrilled. Should a president be criticizing the Fed about interest rate increases?

HASSETT: I think that we have to one hundred percent respect the independence of the Fed at all times. That’s our job. An independent Fed. There’s a huge literature that—I think you’ve summarized once too—about the independent Feds produce better long-run outcomes. And I think that if you look at the caliber of the people that we’ve appointed to the Fed, you’d have to agree that—like, so if you’re going to be worried about a White House that was going to try to politicize the Fed, then you can think of other people that they might have put there besides the people that we chose. I think that our nominees have been absolutely first-rate. And, you know, I think that part of President Trump’s brand is that he says what he thinks. He says what he thinks. But he respects the independence of the Fed. And that’s clear from his actions.

RATTNER: I don’t know. My mother told me not to always say everything I thought at the moment I thought it, but that’s OK.

Lastly, I don’t think you can have a conversation like this with you without talking about fiscal policy. We had a deficit of $666 billion in FY ’17. We’re going to have eight hundred billion (dollars) in the fiscal year that ended about eight or nine days ago. And it’s headed for about just under a trillion next year. And about half of that trillion is due to the tax cuts and spending increases that were put in place in the last two years. Is there a strategy in the administration for addressing the deficit? Or should we not care about it?

HASSETT: No, you should definitely care about it. The deficit is absolutely higher than anyone would like. And I think as you watch our next budget come out, and you’ll start to see things in the next two weeks, then you’ll see a much more aggressive stance. I think that there was an attitude in the White House that the president’s very much into prioritization. And his priorities really to start with were tax reform, because we were the highest corporate tax place on Earth. That’s why the factories were all abandoning ship. And military spending, because he got a lot of reports from Secretary Mattis and so on that there were things like planes and that couldn’t fly and boats that were rusty, and so on. And so those problems have been fixed.

And now you’re right that the deficit is higher. But, you know, it’s also true that over the next ten years that cumulative CBO GDP forecast is $6 trillion higher. So the deficit is about a trillion higher over the next ten given the policies that we’ve pursued and other things that have happened in the economy. And GDP is six trillion (dollars) higher. So I would ask you, is that a trade that you would take?

RATTNER: Look, and if you—and if you’re right, if the economy does grow at 3 percent then the deficit’s going to be less than a trillion, obviously. So—

HASSETT: Yeah, because the CBO numbers are below ours.

RATTNER: Yeah. They’re using 1.9 (percent), I think.

So the floor is open for questions. I’m sure there are microphones. This—yes, in the second row.

Q: Thank you. Paula DiPerna, Carbon Disclosure Project.

Very nice of you to come. I’m happy that all those problems have been fixed. Love to have a sidebar with you on that.

But the question, you referred to the Nobel Prize and pollution, litter. What is the economic rationale for ignoring the climate change issue? You can debate the science at the margins, but what is the economic rationale to keep outside the global consensus that this is economically positive to address? Coal miners notwithstanding, because they also have an upside.

HASSETT: Yeah, well, thanks for the question. And Bill Nordhaus got the Nobel Prize yesterday for really pathbreaking work folding climate science into economic models, which is a non-trivial—non-trivial thing. And I think his first paper on that was maybe 2005 or 2006. So it’s—yeah, that’s right. So my first paper in this space I think was 1992, where Gib Metcalf and I wrote a paper on the incidents of the carbon tax. And if you follow that literature, that’s something that I’ve put forward in my time in the White House. I spent a lot of time working on. And I think that, you know, the CEA’s job is to present people with the consensus of what economists think about what happens if you do this or that. And, yeah, and we would definitely, if asked to comment on, you know, what’s the likely future, long-run path, of global GDP, cite Nordhaus’s work. That would be something you could expect from us. And that’s my job.

RATTNER: Great. I should have said—I’m sure you all know this because you’ve been here many times—you know, please stand, say your name, keep the question short, and make it a question.

Q: Nick Brant from Lazard.

RATTNER: OK. And wait for the microphone. I should have said that too.

Q: (Comes on mic.) Nick Brant with Lazard.

Given you tell us that the administration is all in favor of reducing trade barriers, why are they making life so difficult for the WTO, whose purpose is also to stimulate world trade?

HASSETT: You know, I don’t know if making life difficult or not for the WTO is, like, high on the agenda for any president. Like, they’re trying to improve the welfare of Americans. And I think that the WTO served an extraordinarily important and useful purpose for many, many years, especially during the Cold War, when we’re—you know, WTO and predecessors—when we’re drawing people into the umbrella of Western economies. And I think that one of the problems with the WTO that has been apparent in the literature Peter Schott and Autor at MIT and so on have highlighted is that when China entered the WTO, I think that the WTO members just didn’t envision that there would be a country that would sort of misbehave to that extent.

And so while, you know, the WTO dispute resolution process is there, and we take advantage of it, and we tend to win, like, ninety-something percent of the time, then it still has led to a lot of negative outcomes. And so I think as we think about what the 21^st century WTO looks like, then it’s right to wonder whether there aren’t things that could be improved.

RATTNER: That person, right there on the aisle.

While he’s getting the microphone, I would just say, for the record, that some members of the administration describe the WTO in somewhat different terms than you just described the WTO, as I’m sure you would agree.

HASSETT: Yeah.

RATTNER: OK.

Q: Hi. I’m Paul Steiger with ProPublica.

You mentioned that there is a need to pay attention to the deficit, and obviously growth may help to some extent, but are—should we look to the administration to make very significant cuts in programs like Social Security, Medicare, Affordable Care Act, et cetera? In other words, is that a major focus of cutting? Or can you hit your targets without doing that?

HASSETT: You know, there’s a new budget coming out that’ll have a lot of detail that I can’t get out in front of. I think that as an economist who looks at the numbers, that I think two things jump out at me. One is that there’s a surprising extent to which discretionary spending is an important part of the story in the first 10 years. And entitlements are part of the story over the very, very long run. And so if you’re going to have a fiscal consolidation, modeled after other countries that have done it and succeeded, then you would want to account for those two facts.

RATTNER: Sorry, Paul, I didn’t recognize you without my glasses on. Yes, ma’am, in the back. Oh, I guess we’re going here. OK.

Q: Glenn Lewy, Hudson Partners.

It seems to me that many of the White House policies on immigration are anti-growth. And you can argue that some of them are supportable by security concerns and understand the notion of trying to limit illegal immigrants. But some of the things that have restricted engineers and have restricted other green card holders seem to me simply to be anti-growth without dealing with security issues or others like that. Would you like to comment?

HASSETT: Sure. Sure. You know, on the economics of it then, I think that—you know, without speaking to specific administration policies, but I’ll follow up on that. But on the economics of it, that I think that—and I’d written about this before I entered the White House—that something that sticks out about the U.S. is that we don’t have very much skill-based immigration compared to other countries. And that if—I think that the literature agrees that if you move towards more skill-based immigration, that that would be a positive for, you know, the trajectory of economic growth. And, yeah, I think that that’s consistent with what the president says about it, that he wants to move more towards skill-based immigration.

RATTNER: Yes, ma’am, in the back. Oh, I’m sorry. I’m in the back. This is the front, that’s the back. (Laughter.)

Q: Bhakti Mirchandani, FCLTGlobal.

Thank you for an interesting discussion. Given the importance that you’ve given to capital in this discussion and the relationship between capital and economic growth, what are your thoughts on the restrictions to FDI? The U.S. is the largest destination for FDI. China’s the largest source. There’s the rise of China. But how do you kind of balance long-term economic growth with some other concerns?

HASSETT: Yeah. Thanks for the FDI question. It’s very important. And I think that there are many, many factors to consider. And it’s precisely—you know, here in this building, it’s a place where there’s a lot of expertise on things like CFIUS, you know, what happens if we sell this to those guys, and so on. And, you know, I think that it’s clear that—you know, that there are things—there are industries that have strategic importance that the military guys can be concerned about, and that a lot of the innovation that’s, you know, very much at the frontier in those spaces happens in the U.S., often with small U.S. firms, that could transfer the technology to foreign governments if they were purchased by the foreign governments.

And, you know, a nice example—all of this is in the public—is you should, you know, go read some articles, if you haven’t, on quantum computing, and how quantum computing changes the effectiveness of current encryption. And the basic idea is that a digital computer that we basically use prime number factorization to encode things because a digital computer is really—it takes them a really long time to solve the problems that they would need to decode things. But prime number factorization is something, for example, that quantum computers can do really, really quickly. And so it doesn’t mean that there’s no encryption that works if we’re all using quantum computers. But it does mean that if somebody has a quantum computer while everybody else is using traditional digitals with prime number factorization as their algorithm for security, then the guy with the quantum computer is going to be able to read everybody’s everything and even control their network, and that it could be really quite a threat to national security. So for, you know, spaces like that, I think that things like CFIUS are very important.

The final thought about foreign direct investment is that the data on foreign direct investment are looking very noisy and weird lately. And I thought maybe you were going to ask about that. And we’ve been studying it at CEA. And basically one of the interesting things that happens is that we cumulatively—because of the old tax bill—had something like $4 trillion of money that was parked overseas. It’s kind of hard to say exactly how much, but we’ll say four trillion (dollars). Then a lot of that money’s coming home now, because of the tax reform. And then firms are using that money to invest, to pay bonuses and higher wages, and also to repurchase shares. When they repurchase the shares, then to the extent that the share was held by a foreigner, it shows up as, like, a decline in investment—foreign direct investment. And so that there are some sort of funny things going on in that data right now that, if you like, you could—you know, someone could follow up and ask me a question about it after the event. It’s getting down in the weeds here too.

RATTNER: I would—I would say so. (Laughter.) Yes, sir. Right here.

Q: Rick Niu from C.V. Starr.

Kevin, do you see that to sustain economic growth through 2020 a strong possibility of the president’s introducing a domestic infrastructure investment program and maybe another round of tax reform also? Thank you.

HASSETT: Yeah. Thanks for that. So tax 2.0 is something that congressional Republicans are talking about. And definitely there are, you know, things that we have strong opinions about that didn’t, you know, make it across the finish line in the tax bill, that are all public. For infrastructure, I would actually say that I probably spent as much time in my first six or seven months on meetings on the president’s infrastructure plans as I did on trade or taxes. And then, you know, Congress basically decided to prioritize everything this year. But I know that he cares a lot about it. But we also have, like, a lot of stuff in the can that I think is really good stuff.

And so, you know, I’m not the person who makes political decisions, but the president has made a lot of statements about his objectives to improve infrastructure in the U.S. I think those objectives should be shared by anyone who looks at the data. And, you know, the good news is that we’re kind of ready, if Congress is willing to move. I think the history of infrastructure is that if you can start to move it, you can usually get broad bipartisan support for it, because everybody understands, like, how bad the roads are. And the roads are bad in blue states and red states, right?

RATTNER: That’s a little surprising. I mean, infrastructure was a big part of his campaign. And I think it’s almost a bipartisan issue. But why hasn’t he just put out a plan, at least to try to get Congress to do something? Why not articulate what it is exactly he wants to do?

HASSETT: You know what? It’s a fair question, given that I just said that we’ve really been studying it a lot and we have a lot of ideas about what we want. But I think that the president had a view, if you go back and look at the tax bill, that we sort of stated our objectives, that we had some non-negotiables, and there were just big principles—three or four things—and then we looked forward to working with Congress to get to the finish line. Along the way, of course, we always expressed our opinions about things. So for example, my favorite thing in the tax bill is the opportunity zone thing, which is something that I wrote a lot about before I went into the White House and was a high priority for us in the White House.

So I think there’s a question of, like, how you proceed in Washington, given that you’re negotiating legislation with the legislative body. And that the president decided with the tax bill to lead with, you know, the big objectives, the big principles, and then to work sort of behind the scenes with Congress to come up with something that would pass. Not to draw lines in the sand, as previous presidents have done, but rather to negotiate getting to—and it worked. So I would expect that if there were an infrastructure bill next year, that we’d probably proceed the same way.

RATTNER: I won’t belabor infrastructure, but it would seem given how popular it is that Congress would want to get something done.

Yes, sir—I think it’s a sir—in the back. I can’t see very well that far.

Q: Thank you. Deroy Murdock with the Atlas Network.

Thank you very much for your presentation and your service to our country. There’s an interesting paradox right now, which is America, I believe, is the world’s largest producer of petroleum, oil products, et cetera. We’re drilling like crazy. And oil prices are going up, up, and away. Can you explain this? And when might we see oil prices going down?

HASSETT: Yeah, if I knew that I’d just leave the White House and go make lots of money. (Laughter.) But, no, I think that, you know, output is going up, but world demand is too. And when the global economy is strong, then oil prices tend to increase. And those increases can be quite non-linear, as you—as this guy writes about. He’s advising investors. And so we’re at a point now where if you look at the oil curves, they tend to kind of look like that. And we’re at this point right around here that is somewhat troubling. I think that if the IMF revisions of the growth forecast is correct, then that would put less pressure on oil prices.

RATTNER: There’s also the matter of the Iranian sanctions, right, that would impact oil prices.

HASSETT: That’s true. That’s true.

RATTNER: Yes, ma’am.

Q: Hi. Robyn Meredith, the author of The Elephant and the Dragon.

I wanted to go back to China, if I might. Obviously this trade skirmish has caused some uncertainty and damage in the financial markets, particularly in China, actually. But a lot of people think that China hasn’t really taken off the gloves yet. And it seems to me that it’s the bond market that is the most vulnerable on our side. Can you talk about whether the administration has a plan B if China tanks the bond market, which, you know, would obviously hurt China too?

HASSETT: I—you know, I think that if I were a strategist for China, and I thought about pursuing a strategy along the lines of what you’re talking about, it becomes a very difficult game to play because you hold all these assets. And, you know, generally what goes on is that—you know, I have friends around hedge funds. And they’re always worried that other people are going to find out the trades they want to make, because they’ll get out in front of them. And so, yeah, absolutely the administration, Secretary Mnuchin, follows these things closely. And we’re very hopeful that, you know, we’re going to come to agreements and have talks with China someday soon that’ll be very positive. But we’re starting, again, from a circumstance where their behavior is something that we think needs to be adjusted.

RATTNER: Yes, ma’am. Right there.

Q: Michelle Caruso-Cabrera, CNBC contributor.

RATTNER: Oh, Michelle. Hello, Michelle.

Q: Good to see you again, Steve. Hello. Hi, Kevin.

HASSETT: Hey.

Q: Where do you think the ten-year yield is in a year? (Laughter.)

HASSETT: Yeah. You know, I’ve been meaning to vent about the Fed too, so what the—(laughter)—no, I’m kidding. But, you know, I think that when the economic report of the president comes out, there’ll be implicit in our forecast an interest rate trajectory too. And I think that the last time—I haven’t actually run—so we’re about to close the forecast for next year. We’ll do it within the next three or four weeks. And I haven’t run through the tables of 240 variables that follow from our forecast. But I did do that before we signed off on it last year. And when we did, then our growth forecast was not inconsistent with the CBO interest rate outlook or the Fed forward guidance.

Q: Which was?

HASSETT: You know, back then, well, you know.

RATTNER: Well, let’s put aside the Fed and all that. But in the last few weeks, long rates have gone up, like, fifty basis points. Did you expect that? Are you surprised by that? Are you unhappy about that? Is it just part of a normal economic recovery cycle? How should we think about it?

HASSETT: Well, just as an economist and not as a White House person who’s commenting in interest rates, but as an economist, when growth is higher interest rates can go up too because the natural rate of interest rises. And there are a lot of models that have that characteristic.

RATTNER: Yes, sir. In the way back. Yeah.

Q: Hi. Brandon Sokol, News Corp.

Same question, but with regard to the Dow. (Laughter.)

HASSETT: No. It’s the same thing.

Q: You’ve done this before.

HASSETT: I’m a random walker. I always have been.

RATTNER: You wrote a book about the Dow once upon a time.

HASSETT: But if you read it, it celebrates the random walk model.

RATTNER: OK. Next question? OK, in the back also, yes.

Q: Ed Cox, Republican Party in New York state.

The great economic growth, and it started with deregulation, and then the tax cuts came in afterwards because it went to care—administration wanted to take care of Obamacare first. Has the CEA tried to quantify the impact of deregulation? Now, with tax cuts it’s easier to quantify. Have you made that attempt to measure whether it’s deregulation or the anticipation of tax cuts that had a bigger impact?

HASSETT: Yeah, thanks. So I think that deregulation is very important. And basically, what happened in the first year of the Trump regulation is that new regulations stopped, and people got to work studying old regulations and thinking about, like, how to roll them back. And the thing that sort of struck us at CEA when we analyzed the response—especially as small businesses—to the freeze in regulation was that it was a lot bigger than we thought. And then we dug into it more.

And it made complete sense, although I’m not sure that there’s an academic paper in there someplace, that if there’s an old regulation and I’m a business then, you know, I figured out how to deal with it a while ago, and now I’m just operating. And the fact that the regulation’s there is almost invisible to me. But if there’s a new regulation, then I got to hire lawyers. I got to hire engineers. And they got to tell me now I’m going to change if I don’t want to go to jail. It’s a very stressful, costly thing, the new regulation.

And so I think that one of the things that explains the kind of explosion in, say, small business sentiment and other things when we froze regulations is that new regulations were growing at a really radical pace in the—you know, the eight years before President Trump went in. You know, and the hard part is that regulation is really hard to measure. It’s not like a tax rate, where you can say it was thirty-five and it went to thirty-six. But regulations grew at a very high rate and then they kind of stopped doing so. And that had a big positive effect on sentiment and investment in capital spending.

And now deregulation is something that is going on full time all the time. And it’s really, I think, for the people of Mick Mulvaney’s team especially at OMB and on OIRA, the people that are doing it are actually making a lot of progress on things that—there’s a lot of not very commonsensical regulation that they’re—that they enjoy doing and they love to talk about. And so let me just give you an example of a really small one, but an example of how much fun it is to be at OIRA right now.

We had this regulation about helicopters that said that, well, it’s risky that maybe, you know, a helicopter, you’d be out there flying and then the ambient light at night would make—would reflect off of the glass, and then you wouldn’t be able to see the ground, and you’d crash. That’s a legitimate concern, right? And so what they did is they had this regulation that before you could sell any helicopter you had to make sure that, like, somebody didn’t tilt the lights the wrong way in the factory. And so you had to have a test flight at night. And the test flight, it required, like, a test pilot who’s taking risk because he might be in a helicopter where he can’t see outside and stuff like that. And they cost a little less than $40,000 per helicopter.

And then people studied it. They talked to people who know about these things. And the Coast Guard has a lot of helicopters and stuff. And they figured out that alternatively, you could turn the lights on in the helicopter inside a dark room. (Laughter.) And that you could construct a test that would be as effective but cost basically nothing. And so they changed that. And there’s a whole bunch of that kind of stuff going on. And so I know that Steve wants to avoid the weeds, but sometimes the weeds are fun. (Laughs.)

RATTNER: No, that’s a kind of fun weed to get into, absolutely.

Well, this gentleman, right—oh, why don’t you pick the person who’s going to answer and I’ll just—

Q: Thank you. Nise Aghwa (ph) of Pace University.

One of your predecessors, Ed Lazear, had argued that a naïve forecast of GDP of around three percent beats any sophisticated forecast. Now, going forward, are you confident that the naïve forecast is still around three percent? Or has it dropped to two percent? Or are we just having a sugar high?

HASSETT: Yeah. Well, so, thank you. Yeah, I think that—I guess that it should be reassuring that my forecast conforms to the naïve forecast, right? (Laughter.) But one of the things that suggested that I was on the right track to me—you know, sometimes if you’re modeling something and then you find something that you didn’t think about, then you check it and it’s kind of true, and then you say, oh, that’s interesting. I had one of those moments with this that suggests that I think three percent is, like, the old normal is new normal. And it was just this that after rejecting potential GDP as a model that’s good at forecasting, we ran horseraces with all these different models to find, well, what’s the best model for forecasting ten-year GDP? And we’re going to use that as our baseline for the last year’s forecast. And then we are going to increment the baseline based on what we thought the tax reform effect would be, and so on.

And the baseline that came out of that model before Trump policy—when we ran it last fall, when we wrote about this in the economic report—was that growth would be 2.2 percent over the next ten years. Two-point-two percent over the next ten years was exactly the average growth forecast that President Obama’s team had in their last budget forecast. And so then I thought to myself, yeah, I think that if I continue to pursue their policies, that I’ll get 2.2 percent, but that if we pursue our policies we could go up from there. And we have. And I think that can be sustained. So I think Ed’s point is right. But I think Ed’s point wouldn’t be right if we didn’t change policies. So maybe what happens is that the politics and economics is self-correcting. And then when you get low growth, then you elect people who change policy. And so therefore you get back to three percent.

RATTNER: Yes, sir. Right on the aisle. OK, either one.

Q: Hi, Kevin. Chris Isham with CBS News.

Just a very general question. I think a lot of us have probably read the Woodward book, which paints a portrait of the White House as being a dysfunction—

HASSETT: I didn’t read it, by the way.

Q: Well, probably a few people here have. But it paints a portrait of a White House in chaos and dysfunction and verging on madness at times. And I just wondered if you could just give us a little bit of a picture of what it’s like to work in this White House and interact with the president. What are—what are those interactions like? Does he understand the details of what you’re discussing? Does he ask good questions? What are the debates like? Just to give us a little bit of a picture of that? Thanks.

HASSETT: Yeah. You know, I don’t recognize—there’s a lot of talk in the media about what the White House is like. And I don’t recognize that place that I see in the media. It’s not the place I go to work to every day. I work with—Steve and I were talking about this at lunch—that I work with a great group of people that are fun to hang around with. I love going to work every day. I’m privileged to serve my country. I—to my knowledge, no one’s tried to, like, slit my throat since I’ve been there in the media or anything else. Maybe you’ve been trying to talk them into doing that, but they haven’t yet. So I don’t recognize the kind of chaotic thing. I just—I go to work at a place that’s fun to work at, that’s very well-organized, and has, you know, people with strong opinions, as all White Houses do, that sometimes, you know, someone loses an argument and then, you know, they try to relitigate it in the press, or something like that. I think that’s happened in the past. But it happens much less now. But I really enjoy going to work every day.

And as for the president, I would say the biggest surprise for me when I—when I started, I didn’t go in, as a lot of people did, with a strong relationship with the president. I didn’t work on the campaign or anything. And so as I went in, one of the big uncertainties for me was would I be able to maintain the strong role of CEA that Jason Furman had under President Obama, where Jason Furman, you know, did a great job of making sure CEA was involved in every decision that that White House made. And the thing I can say is the biggest surprise for me, not knowing the president, is how much he enjoys consuming, you know, economic product, and economic data, talking through things. You know, I have had phone calls late at night about things that are bugging him about the data and so on. And so, yeah, he’s very much, I think, a traditional president that likes—I think the CEA can be kind of like a telescope that helps you look at the economy. And that it’s kind of fun to look through a telescope. And I think that we’ve served that function well.

And that’s, for me, the thing that I was uncertain about when I got—whether I would have trouble trying to—you know, some people say—somebody—I talked to previous CEA chairs. And somebody said, oh, well, everybody wants to keep CEA out of the meetings, because you’re going to be the economists and you’re going to be, like, Scotty, you know, captain, you can’t go warp eleven, and they want to go warp eleven. And then, you know, so they don’t invite you to the meeting after that. And that hasn’t—that hasn’t happened to me once.

RATTNER: Well, we’ve reached the adjournment hour. And I think it’s a good moment to adjourn, because I think we all owe you a thank you, not just for being here today but for your public service.

HASSETT: Thanks. And thank you for coming too, Steve.

RATTNER: Thank you. (Applause.)

(END)