Great Britain gets a snap election. The Fed debates whether it's gone high enough and invidious, shoots
the lights out again. This is Bloomberg Wall Street Week. I'm David Westin. This week, former New Jersey Governor
Christine Todd Whitman tells us that small nuclear reactors may be the answer
for our air data center needs. The demand for power of these data centers
is enormous. Nobel Prize winning economist Paul Krugman
on why he doesn't know where interest rates
are headed on interest rates. I am fanatically confused. And Henry McVey of KKR reports on his trip to China and what needs to come next
that can actually encourage more urbanization. We start with the week in the markets where equities ended strong
after a sag in the middle of the week. The S&P 500 ended up just a bit at 5304,
which keeps them above the Bloomberg L's median year
end number of 5200. The Nasdaq added 1.4% for the week,
while the yield on the ten year was up just over four basis
points to end the week at 4.46%. Take us through what we've seen this week. Welcome back. Now Scott Cronin. He's Citi, U.S. equity strategist. Scott,
always a delight to have you with us. So give us a sense of what we think
you saw this week. As I say, it sagged
and it came back at the end. What's going on? Right. So I think what's going on is the market
continues to navigate where we think we are regarding economic conditions
and the read through to Fed policy. Okay. So we're back and forth between stronger
economic data, which would signal a higher for longer fed versus signs of softening
and ongoing deceleration in inflation, which gives a little bit more confidence
that you get a Fed pivot. So we're back and forth
between this ongoing debate and the data. It tends to be supportive
on a transitory basis on both sides. In the meantime, we continue
to have this new growth driver in town. We're now a year into this generative
AI craze. If you will,
and it was reinforced this week. So a number of things going on in
both the macro and then let's call it the micro and new growth
paradigm approach as well. Well, Scott, as I listen to you,
I wonder if that's a little bit of a microcosm of the year so far, because if you go back and look,
the first quarter, the equities were really on the march
up, the S&P 500, then it dipped at the beginning the second
quarter and it's come back up again. Now, we went into the year expecting,
what was it, six rate cuts and now we're down to maybe one
one and a half. Yeah. So it's really interesting
the way the market is navigating this, the way we tend to think of it
and the data tends to show this, is that the growth profile
and the growth influence on equities can often outweigh
the interest rate influence as it as it pertains to the discounting mechanism and
the expectations for economic activity. What's been happening
is that growth has been winning as more and more companies
are now getting on this this generative phase
and really going more aggressively down the path of investing in future
opportunities that should support longer term growth
drivers for the broader US equity markets. And what about your views? Because you are,
I'm delighted to say, one of our elves, as we call you, the Bloomberg elves here,
when the analyst you started out the year
toward the top of the pack of elves and now you're sort of toward the bottom, did you move
or did the rest of the pack move? You see essentially
what's happened is the rest of the pack has been marking with the market and
is leapfrogging us a bit, which is fine. I think the way we're looking at it is that we're still expressing
a very constructive view on the fundamental set up for US equities
at this point, particularly the S&P 500. But we do have to recognize that
a lot has happened pretty quickly from a performance perspective
and more recently, our ongoing panic euphoria
model is tripped into euphoria, which is usually not a great sign
for forward performance. At the same time, we've seen valuations
move higher to a point where the implied growth expectations supporting
this market are getting pretty aggressive. So put us in a ongoing
fundamentally construct to view. But shorter term, we think the risk reward
is pretty balanced right now. David, what about the breadth
of the market going into the year? We were really concerned.
It was so narrow. There was some hope of broadening out. Is it broadening out from that magnificent
Seven or whatever you want to call them? I think it is, but not in the way
that many were expecting. We began talking about a fundamental
broadening last summer where we thought we'd see more sectors contribute
to the underlying index growth rates. That's still unfolding. But from a performance perspective,
off of the rally that began last November, we saw areas such as industrials
and financials participate quite strongly. As this year unfolded,
then as we hit the middle part of this year, thus far,
we began to see other areas. Energy kicked in for a period of time,
and more recently it's been utilities. So while tech communication services
are still your leading sectors, you are seeing different pockets
of the market kick in at different times and it ends up supporting this broader
index move. So Scott,
you mentioned actually a year ago, you pointed out
it was just a year ago that a company I know you don't talk
individual companies, I'll name the company in video
came out with those blockbuster numbers. We had some more this week,
but it spread out from Nvidia. There are some other companies as well
that seem to be along for the ride. Give us a sense of that investment. And I mean, it's good for some companies
who are making these microchips. At the same time, a lot of the carriers
are spending money right now. They're investing money. So why does that buttress their stock? Because they actually have an expense
coming in. Yeah. So I think the way this is setting up,
we're spending a lot more time now talking about capital expenditures. And I think one of
the dynamics is at hand right now is that you're seeing
a lot of the investment into AI and related applications
and the semiconductor portion. A component of that feels that quite a quite directly,
as does the software component. But so we're watching this
AI narrative unfold through two paths. The first is you're going to have
companies that are directly exposed. These tend to be your MAG seven
or Big seven components, where we're going to be measuring them
directly on the way A.I. is feeding their fundamentals
in the months to come. On the other hand, the bigger picture
and perhaps the more important longer term picture
is that now, as more and more companies embrace the opportunity in generative AI,
they're putting a lot of effort into establishing their own ways
of of benefiting from AI. What this is going to mean over time
as they see investment and spending that's unfolding right now
should translate it into various forms of productivity
enhancement, perhaps margin improvement. And ultimately what we really want to see
is profitability, profitability enhancement,
which in turn leads to higher valuations. All told,
the setup is very clear right now. It's going to play out over,
as I mentioned, months and perhaps in some cases
over the next couple of years. But what it's doing
is providing the broader market, as we mentioned at the outset,
a very compelling longer term growth opportunity
that is taking fundamental expectations over and above
traditional economic sensitivities. How much time do we have before
they have to deliver on that productivity? It's going to vary, we think, for some of the more direct beneficiaries
they need to start showing it and then in the months and quarters
to come for companies where it's going to be more of a
productivity enhancing application. We're going to be watching for that,
I think probably as 2025 kicks in and beyond. So it's going to be in some cases
months, quarters and other cases. We have to give companies
a couple of years to build these these up products
and services and productivity. Thanks so much, Scott
Cronin, Citi US Equity Strategy. This is Wall Street week. I'm David West. And china is on everyone's minds right now
where it's going, where its economy
is, where investment opportunities may be. Henry McVey, he's the CEO of KKR. Our balance sheet goes around the world
and travels to places
like China, comes back with reports, and he's just come back from China
right now. We welcome him back now to Wall Street
Week. So, Henry, great to have you back with us. We've done different countries,
Japan, we've done India. Now let's do China. Great. Just come back. What did you learn? You know, I'd say on the positive,
the economy is bottoming. We heard a couple of different data
points, I think, from companies in the logistics
business that are seeing the U.S. consumer pick up a bit. So that was a positive. And I do think things have bottomed also in Europe
and there's a little bit more demand. But overall, it's still a pretty sluggish
economy, post-COVID, with very low inflation and the growth that is there is not evenly distributed. There are some areas growing
much more than others, as I understand it. You know, we've spent a lot of time. I've actually been to China
four times in the last five quarters, so I'll give you how I think
the evolution of the economy is changing. Really.
A lot of people focus on fixed investment. They focus on exports. I think the Chinese government
is really repositioning the economy towards a couple of different things. One is this whole idea of digitalization, particularly
as it relates to the industrial sector. They're trying to automate that sector to be more effective
and more competitive globally. In the past,
I think a lot of people thought about China in terms of e-commerce,
Alibaba, domestic consumption. The focus right now from the government
really is on industrial automation. China
today actually has about half the world's robots on the industrial side,
which is an amazing statistic. The second big driver is around
the green effort and they're trying to really dominate
by batteries, EVs and solar panels and that and they're
trying to export some of that globally. So those are really the growth drivers. The offset, which is still problematic,
is around housing. And our estimate is they have somewhere
between kind of 20 and 30 million too many homes. And so they're trying to clean that out
right now. But that's a disinflationary force
and it clearly has an impact on domestic psychology as well. Some of what China is investing in in
the green transition has gotten the attention of places
like the United States in Europe, whether it's solar panels
or batteries or EVs, because there's a concern
of a build of overcapacity. Do you see overcapacity
and what does that do to margins? I think what's going to happen
around the world right now is, is that industries such as autos
are going to become of national interest. We've already seen that, and technology
could expand into other sectors. So there's definitely
going to be sensitivity. You saw President Biden talked about,
you know, increasing the tariffs there. Europe, I think, is going to do a similar,
similar type of strategy. So you can have capacity. The question is, is
where can that capacity go? I think probably if you're China, you'll see more of it
go into places such as Latin America, other places, maybe Eastern Europe,
where, where or where they have partners that maybe there's increasing
kind of bilateral trade. That doesn't seem to be the case
in the US in Europe right now. So there is growth. You found growth
there. As you said, it's bottomed out. At the same time,
when you take into account the disinflation,
the nominal GDP actually is not growing at the same rate as at some of the places
like Europe and the United States. If I could give an insight to your viewers,
I mean, KKR typically has 150 businesses around the world, you know, upwards of 200
now where we operate. You got to focus on nominal revenues,
nominal GDP. What does that mean? It's real GDP plus inflation. A lot of times
the sell side focus is on real GDP. And what you've seen in China,
when I started going there in 1995 and when I started at KKR,
a nominal GDP was in the teens and 20%. There's a lot of growth and a lot of
profit that comes that comes with that. Today that number is probably
about a third of that. So you really that inflation
component has come down. And the second thing is on the real GDP,
the productivity has come down in concert
with slower labor force growth. So it is a big deal. At the same time, the Western world
has put a huge amount of fiscal stimulus into the system, and that's driving a little more inflation,
a little more nominal GDP. What about the animal spirits, as it were? I mean, because there are a lot of reports that both individual people
and corporations may be sitting on their money a little bit
because they don't have the confidence. Yeah, You've seen about a 300 basis
point increase in the savings rate. China has a high savings rate to start. It's about 28%. Normally it's upwards of kind of 31, 32%. So we estimate if that if they were able
to bring that savings rate back down by increasing confidence again,
that could add 2 to $300 billion of additional spending per year,
which is pretty meaningful. So but what's happened
is in a post-COVID world, zero COVID, really, you had some businesses
that didn't do as well during that period. I think people are looking for a little
more direction around the housing market as well as around just what's the strategy
for both exports and and domestic business posture. And so I think the more the government
can encourage that kind of visibility around the
where they're going to go, their better, it will be for overall both domestic
growth as well as is global growth. Remember, China still even in a
in its current state, is still about 25% of global growth,
which is just a massive number. So so let's turn to the question
of what China can and should do. You mentioned real estate in all the times and nobody talks about China these days without talking
about the real estate problem. How bad is it? What do they need to do? So what we did is we went back
and looked at a bunch of different housing crisis issues
to see what the best path is. And you usually have two,
two different factors. One is price and one is volume. China's had a real slowdown in volume. They probably need to have a little more in the form of price,
so that will be a headwind. So what can they do? One is they can actually encourage
more urbanization. They still have a ways to go
with their urbanization rate, kind of 66%. Get that north of 70, That'd be one thing. Second is you could grant more licenses
to the migrant population, which is actually very meaningful. It's got a hukou and you can give them permits
that would allow them to take up more permanent residence. Those are easy supply side reforms. Nothing's easy, but you could do that. The third thing I would do is I would
consolidate the number of developers. They have too many developers,
and I would really back the strong ones, and I would do a little more
of a government guarantee where one is I probably would abandon some of the weaker homes that are poorly
constructed homes and just raise those. But then I would invest and create
visibility around the good homes so that the Chinese population
feel strong about that. And to the government's credit,
what they came out with last week was about a $50 billion stimulus
to do exactly that. What's the say of the capital markets
in China right now? What do they need in order
to really get their growth going again? I think they need to get more foreign
capital to come back into the region. That has really slowed down. Foreign direct investments,
really dropped off a cliff. It's really fallen off dramatically. So there are a couple of things
you could do. One is,
I think you could have more domestic consumption
stories around in the capital markets in the form of IPO's in the a-share
market. That's their their local market. The second is I do think it's
not just about bringing capital in. You also have to have an exit of companies
so that people can access the capital markets and probably broadening
that is not a bad a bad strategy overall. So talk to our investors and give them
a little advice here if you could. KKR has been a player in China
for a good long time. You know your way around over there. Where are their opportunities right now? And China,
Is this a time to be looking for some places to go into China
or increase your exposure? We've been very focused on things
around the domestic economy. So think about lighting efficiency
in lighting pads, veterinarian clinics, beverages, things
that are going to continue as the Chinese population
enjoys the benefits of urbanization and growth, probably less so in areas
such as technology. For anybody
that's interested in Asia overall, I think one of the mega themes is intra
Asia trade. What's happening is since COVID, you've really seen China and its peers
trading more with each other. It's becoming
more like the Europe in the U.S. So in 1990, about 48% of our trade in Asia
was was intra Asia. Today, that number is meaningfully higher. We think it's going to be in the seventies
within the next 5 to 7 years. And that is what we heard from CEOs in not only in China but in Japan,
as well as what we hear in India. So I'd really focus on the infrastructure
around that. Fiber data centers, transmission lines, roads, ways that that companies
can benefit from that trend. And we're doing that through our infrastructure business,
our private equity business. Our credit business is lending
to those companies to allow them to grow. That's a great way to do it. Overall,
we continue to like Asia, so it's about a, you know, a third of our business
and we have a dominant position there and we've really enjoyed understanding. I think you have to be able to look at
relative value in Asia right now. China is, you know, some people have moved out of China
and India, but that does get reflected in valuation. So there's this intersection between
fundamentals and between valuations. And I would just encourage your
your listeners to make sure that they understand both India is a great long term market,
but it can be expensive at times. China right now is obviously had some,
you know, bumps in the road, but it's actually trading
at a pretty attractive valuation. Japan is probably the most interesting
because it's cheap and their fundamentals around
corporate reform are really improving. So those are probably some tips
to consider as you think about the region. Those are great tips.
Thank you so much, Henry. I always love having you on. That's
Henry McVey, CEO of the KKR Balance sheet. Coming up, if we're all going to use generative AI,
then we're going to need a lot more power. We talk with former New Jersey
governor and EPA administrator Christine Todd Whitman about whether nuclear power
could be part of the answer. Well, this is where small modular
reactors can be perfect because you just can put them there right
next to those data centers. That's next. On Wall Street Week on Bloomberg. This is Wall Street Week. I'm David West. And the sprint toward generative
AI has turbocharged the move to build data centers
and every one of them needs power. Lots of it, with some believing
they provide a good use case for those small modular nuclear reactors
we've heard so much about. Take us through the possibilities. We welcome now Christine Todd Whitman, co-founder and co-chair
of the state's United Democracy Center. Ms.. Whitman, of course,
earlier served as EPA administrator and as governor
of the state of New Jersey. So Governor Werner, thank you so much
for joining us here on Wall Street Week. As you know, generative AI is all the rage
these days, at least on paper. And as we talk about that,
we talk about a lot of data centers,
the need for them and the need for power. And that has really spurred
to the forefront the discussion of those small modular reactors,
something you've talked about in the past. Is this a spur to actually get
us going on those summers? I certainly hope so, because it is true
those data centers put a lot of power and most people
aren't thinking about that. They don't know what they're beginning to now to understand
just how much they draw down on the grid. So this is where small modular reactors can be perfect
because you just can put them there right next to those data centers and provide
the power for that particular center. And it makes a whole bunch of sense
when you look at the issues that we're facing and the economic price
we're paying for what's going on with with Mother Nature and the environment,
and that is due to changing climate. And I think
we all have to recognize that now. And so we need to do what makes sense. But that doesn't crater our economy. And this certainly wouldn't. We can build these things,
we can distribute these things, and it makes a great deal of sense.
They're mutually supportive. So it increases
the demand, the opportunity for these. What are the hurdles? Because as I say, you and I have talked
about this in the past. You've been an advocate for experimenting
and using these in the past. We haven't gotten there. As I understand. There are a lot of plans for them, but
I'm not sure any have gotten built yet. No, they haven't. In Canada, they're moving forward
and it's obviously a regulatory hurdles because we want to make sure
that they're absolutely safe and not all of those are federal. A lot of those regulatory roadblocks,
as it were, are things that slow it down, which, as we all know, costs
money or local or state regulations. And we've got to respect those. But I think what we're seeing now
is the pressure coming that is going to, I believe, as you mentioned,
perhaps spur a an effort to move these things through,
not to cut corners, but to make sure that you're not holding anything up
unnecessarily because they have a proven technology. They are easier to build. They're much safer to use,
they're easier to use, and they can be used in discreet ways,
such as putting them to a data center and having them supply
the power for that data or data center. You're very familiar
with the regulatory structure, and it was put in place for various reasons
with the very large nuclear reactors. Do those same considerations
apply with the small modular reactors? Should it be the same regulatory system
or should it be an entirely different way of approaching regulation? It wouldn't be entirely different,
but certainly the way these things are constructed is is entirely different,
and that needs to be regulated. We recognize this
from the regulatory perspective. So there are vast differences,
but because you're talking nuclear and people are very concerned,
even though our history with nuclear has been extremely safe,
you have to answer those questions. And so the NRC needs to take a step back and say,
okay, let's really look at the small cars, the small modular reactors, and identify
they use a different kind of materials. Some of them are molten salt reactors. That's tidily different way
of producing a nuclear power. They're done in one place,
which again, is entirely different. You're not moving pieces
sequentially to a site. You move the whole thing to a site. All those things,
it is a different process and it does need to be handled
differently. I'm just not sure that the NRC at the moment, and I don't know, I'm
not saying they're not looking at what they need to do to update the regulations,
but they certainly should be. Governor,
put this in the larger context of the climate,
something you've been very outspoken on when you were governor of New Jersey,
when you're administrative EPA. And since then, if we in fact, bio build
all of these data centers and do not use something
like small modular reactors, what is the possible risk
for the environment? Respect our use of fossil fuels. It's huge. It's huge because the demand for power
of these data centers is enormous and you're going to go to the fastest,
cheapest power, and that's going to put more pressure
on opening more coal and not closing coal. And you know, the thing that I think
you and I have talked about this, the thing that we're missing here
is the understanding that nuclear can be the bridge
if we ever get to making the they making our our renewable power base
power. It's going to take a long time
before we can rely solely on wind, sun or various forms of green power. And so we need a bridge. And this is the best way to my mind,
to do this pretty quickly. Many thanks to Christine Todd Whitman
of the state's United Democracy Center. Coming up, they tell us that
the growing federal debt is unsustainable. But what does that mean
and how big a problem is it? We ask Nobel Prize winning
economist Paul Krugman. The fundamental problem is not the debt. The fundamental problem is
that we are not managing to pay our way. That's next on Wall Street Week on Bloomberg. I thought Hamilton had it right, he said. A national debt could be
a national blessing and the national debt. Having a liquid market there provides
a good benchmark for the private sector. It probably underpins
the role of the dollar in the world. It allows the Fed to conduct
monetary policy easily. I think we have to keep in mind the costs of paying down the debt. There is a long,
some people single minded focus on it. But there's no free lunch in this world
and eliminating the national debt. While it may sound attractive,
it has its costs as well. The president, by the way, in
his program, is paying down as much debt
as we can retire in the next ten years. We're moving in that direction. But whether we should pay it all off,
I think is a more open question. That was Larry Lindsey,
director of the National Economic Council under President George W Bush, appearing
on Wall Street Week back in March of 2001, back when the concern was about possibly
having too little federal debt rather than too much. Let's take us through our current
very different situation. Welcome back. Now, Nobel Prize winning
economist and New York Times columnist Paul Krugman of the City
University of New York. So, Dr. Murray, we thank you so much
for being back with us. As I say, it was a very different time
then when they thought we may eliminate the national debt. But now we're hearing a lot from people saying
their concern has gotten to be too big. Is it too big? Is it a problem for our economy right now? Okay. So first of all,
I mean, that was silly even then. I mean, there were
you know, revenues were temporarily swollen by the dot
com bubble and all of that. And, you know, even in 2001, we knew that people like me were eventually going
to hit 65 and start collecting benefits. So, you know, so that was a little bit silly
to be concerned about that back then. Right now, the debt per say is not really a serious problem. I mean, you know, it's a big number, $34
trillion, something like that. But if we actually look at, you know,
what does it cost to service that debt? Well, interest rates are still below
the economy's growth rate. And so as long as other non-interest spending and tax receipts
are more or less in line, then the debt is really not you know, it's
not a problem to continue servicing it. There's really no reason
why that should be an issue. But what is a problem? Of course, is that government
spending and tax receipts are not in line. And so the fundamental problem
is not the debt. The fundamental problem is that we are not managing to pay our way. We're not actually adjusting our inflow
with our outflow. Well, one way of putting it,
I suppose, is not the debt. It's the deficit. It's how much we're actually coming up
short each and every year. And I think last year
was something like 8.5. 8.8% of GDP was in deficit. And this is a time when unemployment
was very low, by the way. And some of that was good. You know, some of that was interest
payments. And really should it's the primary
deficit, excluding interest payments. But that is a serious problem. We do have a an ongoing large primary deficit. Some of that or, you know, year to year
fluctuations, there's quirky stuff that that can move the deficit around. But at a fundamental
and fundamental sense, we're not living within our means
at the federal level. And that doesn't necessarily signal
any kind of immediate crisis. But it does say that, hey,
something's got to give. But the trouble is, you know,
what's going to get. So, yeah, that that is the real
problem is not the numbers. The real problem is that
we are not politically apparently able to reach any kind of agreement
on how to live within our means. Not an immediate crisis,
as you say at the same time. I remember back in the early nineties
when we talked about bond vigilantes and there was the discussion
within the Clinton administration actually about the issues with the bond market. At what point is it possible that the bond market might send
a powerful message to as we talked to Paul Ryan recently, who said
he thinks that it's quite possible in the next administration,
whoever is president, they could be faced
with what he would call a debt crisis. Does that sound reasonable to you? Not particularly. And I'm not sure I know why Paul Ryan would know this
any better than anyone else. But the truth is, I've looked at I've actually put in a fair
bit of work myself on. Oh, when when what are the what's the historical record of countries
that borrow in their own currency? Experian. And seeing that kind of debt crisis, a
strike by lenders, something like that. What are the historical examples
of that happening? And there's almost no examples of that,
meaning you start at the end of something. Well, maybe France in 1926. I mean, Japan has had huge debt
for decades now. Huge, persistent deficits. Still no crisis. It's actually I think we should focus
less on what's the risk of a single dramatic event and more on the kind of gradual erosion
of confidence that comes from the fact that we can't
seem to get our act together. There's no doubt that there are a lot
of political challenges. But before we get to
the political challenges, what about what the right answer would be
if we didn't have to worry about the politics? I mean, there were times in which
we actually did cut the deficit, right? Under George Herbert Walker Bush, there was a bipartisan effort
that was made at Andrews Air Force Base. And then under President Clinton,
it was not bipartisan. Actually, the Democrats did themselves. They cut back on that and the deficit. What is the right thing to do?
Is it more taxes? Is it less spending
or is it all of the above? There is no right answer. The but what we know
from cross-national comparisons is that it's certainly possible
to have a thriving economy with a lot more taxes
than than the United States. The United States is is near
the bottom in terms of tax receipts. So the share of GDP
among advanced countries. So we could be raising
substantially more money. And there's no there's no real indication that that higher tax rates would be a
a a problem for U.S. economic growth. On the other hand,
we don't have to provide essential health care to to to everybody. That's that's not a that's not a question
of economic rightness or wrongness. It's a question of your values. We don't have to provide
adequate retirement income to everybody. Again,
that's not an economic imperative. So you can't
actually divorce this from politics. This is all about the political decision
of what are we going to try to close this gap by making mostly the lives of older
Americans tougher? Or are we going to do it by raising taxes? But probably I mean, that includes
raising taxes on the rich, but probably also at least a little bit
more taxes on on the middle class. And finally,
what interest rates assumptions should we put into the model
in deciding how we deal with the deficit? Because some people think
we will have elevated interest rates for the foreseeable future,
given some of the demands on us, even though the interest rates
thus far have surprisingly not hit the economy
as much as one would have thought. Yeah, on interest rates, I am fanatically confused. I mean, I actually think that you can make
a really strong case either way that we went through a long period
of extremely low interest rates, which we thought were grounded
in fundamentals, especially demography. And then now we've been going through
a period of much higher interest rates with the economy remarkably robust
in the face of those rates, as you know, have long run sustainable interest rates are star
if you talk to you know Fed
officials has asked are actually gone up. Is this just kind of a transitory phase. And I couldn't make a case. I mean we certainly have one thing that the demographic situation
has changed which actually does, by the way, help our long run
budget position because of all things. I don't think
what people were counting on, but it looks like we have substantially
increased immigration right now. We also have possibly a lot of new business investment driven by new technologies,
AI and all of that. We have the Biden industrial policy,
which is inducing a lot of manufacturing investment. So maybe all of that has changed the picture or maybe actually, you know, 2019 is still
what should be our benchmark. I'm going to go back to very low
interest rates. And I actually anyone who claims to be to know for sure
what the answer to that is, is deluding themselves. I'm delighted to say Professor Krugman
will be staying with us as we turn from the fiscal issues that will face whomever
is chosen to be the next president to what differences
that choice will make for the economy. That's next. On Wall Street. Week on Bloomberg. This is Wall Street Week. I'm David Westin. Dr. Paul Krugman of the City
University of New York. And The New York Times
has remained with us. So, Dr. Krugman,
let's look forward to this election we have coming up in November
and what economic choices the American people will be making
as they go to the polls. Give us your sense of how different
these two people that is, Joe Biden and Donald Trump are in their approaches
to the economy. Okay. So this is one of those cases
where if you look at past experience, you would say, well,
how much difference does it make? I mean, a lot of ways the economy of 2024
looks a lot like the economy of 2019. You know, pre-pandemic full employment, fairly low inflation. That's worrying a little bit. But we were worrying about the difference between two and three,
not not anything major. It's it doesn't look as if it has made a whole lot of difference
who's in the White House. But if there's a Trump two, then there's a lot of reasons to believe
that it could be very different. This is there were what's amazing. If you go back and look at Trump's
first time in the White House was how little he did
when all is said and done. You know, basically he got a moderate sized tax cut through sort of period. And the story. There wasn't a lot else that that went on. There were that's largely because
there were institutional restraints. There were in the couldn't
get stuff through Congress, couldn't couldn't tell the Federal Reserve
what to do. That could be very,
very different right now. And if you take
seriously what the what Trump former Trump aides are saying, it would be very, very drastic. Named Biden would do continuity. Biden, if he can do it, will do more some some further tax increases, some more green industrial policy,
but probably not enough to make a huge difference
to the macro economic numbers. Big differences in other respects. TRUMP Well,
we know that one of his former aides has been talking a lot
about rounding up millions of immigrants, supposedly undocumented, though
it wouldn't be surprising if a lot of legal immigrants got caught up
in the net as well and deporting huge economic impacts, huge,
you know, disruptions to the labor force. Another Peter Navarro, who's being interviewed from jail
but has said that that Jay Powell
will be fired within 100 days and that we will basically have
the politicization of monetary policy. And there's a lot of reasons
to think that a Trump second term might see him become one of those autocrats who demands that you run the
printing presses for his political gain. I mean, think think of or don't in Turkey
or something like that. It's so huge uncertainty. But I think anyone assuming that a second
Trump term would look like the first one with what ended up being fairly
conventional economic policies, nothing. And the Federal Reserve
keeping a lid on things could be very in for a very rude shock. Picking up on your comment about monetary
policy in Fed Chair Jay Powell, we had Ken Rogoff on somebody
you know well, a fellow economist, and when I asked that question of him,
he said the markets would not let President Trump, a new President Trump
do that, that they would react really strong in the Treasury markets
and he would not have that option. Is that plausible? The markets would certainly react. We would probably see acceleration
in inflation, a plunge in the dollar. But, you know,
how does he respond to that? I mean, again,
if you look at much smaller countries with that are much more exposed
to market pressure like Turkey, authoritarian leaders,
I have a habit of saying, well, the markets are wrong
and I'm going to order them to stop. Or, you know, you might be surprised at how much, you know, socialism, or at least in the sense of of of a capital controls
and other things that might happen. They have Trump says to the Fed,
I want a booming economy. I want you to roll the printing presses
and the markets respond by driving the dollar down
and inflation up. He might well then say, Well,
I'm going to put on rules that stop that from happening
rather than changing the policy. Remember,
you know, we've had one, you know, since the immediate aftermath of World
War Two. We've had only one
episode of price controls in America, and it was Richard Nixon,
not some progressive Democrat who did it. So I think you want to be
I understand Ken's point. He thinks that the bond vigilantes
basically would would discipline Trump,
but I don't think that's a safe bet. What about the prospect of inflation? Obviously, tariffs tend to be inflationary
rather than disinflationary. At the same time, both President Biden and former President
Trump seem to like tariffs pretty well. Well, there's a big difference. I mean, yes, both are doing
tariffs and Biden has not rolled back most of the Trump tariffs, which is politics. That's there. He doesn't want to be accused of being
soft on China or something like that. But if you look at the new proposals,
they're actually although they're both are proposing
tariffs, they're are very different in the both
in the details and in the purpose. So Trump's view is clearly he thinks of trade as a zero sum game. If if we if we win, if we if other people
buy our stuff, we lose. If we buy other people's stuff. And so he wants to put a ring around the
colors of the 10% tariff on everything and the and maybe more
for some other countries. That's not at all what Biden is doing. What Biden is doing is some selective tariffs aimed at what he perceives as strategic sectors. And if I'm not mistaken,
you generally support the notion we have to do whoever the president is,
something have to do to prevent a second, as you call it, China shock,
such as we saw really around the time of the WTO in order basically
to protect some of our workforce? Yeah, it's it's not so much jobs in the
in in the aggregate. Sorry, I'm sounding like an economist there,
but it's not so much the total employment and we're not having a problem, at least
at the moment with overall employment. But what we learned rather painfully
from the first China shock was that sudden surges of import can be disruptive in ways that a lot of standard economic models don't capture,
although nonstandard models do. They can disrupt communities,
they can disrupt strategic industries. And particularly if you are doing
what Biden is doing, which is to try to sell climate policy in part by saying
also it creates manufacturing jobs. The political basis for
that is going to be undermined if it ends up creating
manufacturing jobs in China. So, no, this is a look, the China I don't think the Chinese seem
to fully realize, but they they are having a situation of of grossly inadequate domestic spending and relative to their production capacity and seem
unwilling to boost their own demand. And therefore they want
to dump both in the sort of, you know, common language sense
and probably in the in the legal sense, they want to dump the excess production
on the rest of the world. And it's not going to happen. We're not going to accept it. The Europeans are not going to accept it. So you have to do something. And finally, Dr. Krugman, let's go back to what Donald
Trump did during his first presidency. He certainly tried
to cut back on regulation, as we talked to former advisers
and even current advisers like Scott Bessant, who talks to Donald
Trump fairly regularly, he says we will get greater growth, economic growth,
because we will cut back on regulation. Is that wrong? As a matter of economics? In fact, if you cut back on regulation,
there may be other externalities that we don't like. But is it generally true
if we cut back on regulation, we will get more economic growth? Certainly not true in on,
you know, necessarily. And there's just no evidence for that. There is. We just what's actually been impressive,
if you look at the U.S. historical record is how little difference any of this stuff makes to long term
economic growth. You just cannot see that
that and that increased regulation certainly did that
environmental regulation has had a negative impact. And one of the things
that's worth pointing out, you know, if you particularly since environment
is probably at the core of a lot of this, we talk a lot about climate change,
as we should. That's an existential threat. But what people don't realize
is the extent to which air pollution to take the prime example, has relatively
short term economic costs as well. Professor,
it's always such a treat to talk to you. Thank you so much. Many thanks to our Nobel Prize
winning economist Paul Krugman. Coming up, brother, can you spare a job? The sad plight of the class of 2020 for. That's next on Wall Street Week on Bloomberg. Finally, one more thought. If opportunity doesn't
knock, build a door. That was the advice of comedian
Milton Berle for the last few years, employers have been knocking on the doors
of jobseekers with opportunity. Growth has slowed, but our labor
market continues to be quite strong and there are still firms on the hunt for more employees
to expand their businesses. Like in private credit at Aries,
our differentiator is our ability
to be in these local markets, developing relationships
with companies and and assets. So by definition
we have to grow our headcount in order to support the,
um, target and generative. He has brought to life a whole new job
category of something called an air prompt generator. I think that we all kinds of jobs
that I will create that we don't even know about, like prompt engineer is a new job
category. There's there's already lots of prompt
engineers. There's
going to be many more prompt engineers. Now, that may be changing. Some of those job
opportunities are drying up. Tick Tock employees
this week learned there will be about 1000 less of them in their operations
and marketing teams. Disney
told Pixar that it was laying off 14% of the staff
that gave us Toy Story and Ratatouille. I need this job. I've lost so many.
I don't know how to cook. And now I'm actually talking to
a rat as if you did, you not. You understand me? And Red Lobster employees at restaurants
across the country showed up for work only to find locked doors
as the chain went into bankruptcy. Now, seafood chain Red Lobster has filed
for Chapter 11 bankruptcy after facing higher costs and a disastrous,
unlimited shrimp promotion. But at this time of year, we're particularly mindful of our college
graduates for whom that Milton Berle advice about building a door
may be all too poignant. Members of the Class of 2024
have not had it easy from the beginning. They graduated from high school
at the height as a pandemic relegated to virtual graduations with
no hope of a senior prom or senior prank. Many of them started college with remote learning and picking up box meals
from closed cafeterias. To be sure, they got to see the COVID
vaccine turn things around dramatically. But just as they approached their first real graduation, one,
they would be able to attend in person. The war in Gaza
interrupted life on many college campuses, leading to graduation ceremonies
that have been marred by protests or canceled altogether at places
like Columbia. Columbia University today
canceled their main commencement event for the school year following protests
on campus in reaction to the war in Gaza. But however they got here,
they now, at least most of them, have their college diplomas,
only to be faced with a changed and changing job market,
particularly in finance and consulting. And technology firms are cutting back
on their overall hiring, and those who already have
the jobs are less likely to give them up. The other question is should we reevaluate
how we work and how long we work? It's easy for those of us at the other
end of our careers to say to those starting out that something better lies
around the corner of many disappointments. At the beginning of my career,
I was working for a judge in New York and wanted nothing more than to be hired as a law clerk
for Supreme Court Justice Lewis Powell. I knew former clerks of his studies
career and his decisions, and he was the one justice
I dreamed of working for. I got an interview at the court,
took the train down to Washington and spent time with him
and his clerks in his chambers. He was a reserved man, and I did not get any real sense
of whether I had a chance or not. So a couple of weeks later,
I was devastated to learn that he'd extended an offer
to another clerk on the Second Circuit. I was certain that he wouldn't
take two of us from the same court. I resigned myself
to going in a different direction, so you can imagine my joy
when I eventually got a call. And Justice Powell's long time assistant, Sally
Smith, asked me to hold for the justice. It turned out that
I got what I'd wanted all along. It just took me a bit longer and
a bit of emotional turmoil to get there. Now, I'm not saying it always works out
that way. Often it doesn't. But I do know that regularly
in the course of a career, what seems like a wall
turns out to be a door after all. There may be a Sally out there
giving us a call when we least expected. That does it for this episode of Wall
Street Week. I'm David Westin. See you next week.
