Is David Malpass Making Policy Errors?

Whenever a Trump advisor speaks to a media outlet, I am quick to analyze every detail because I am still trying to wrap my head around what a Trump presidency will mean in terms of policy. Campaign slogans need to be translated into actions. How this translation occurs depends on who Trump picks as his advisers and what their plans are for the economy. David Malpass did an interview with the Wall Street Journal. I’ll respond to his points. He makes sense with most policies, but when he gets into monetary policy, he goes off the rails.

His point on NAFTA was that over time it has become managed trade instead of free trade. The environmental chapter and the labor chapter made it more difficult on small businesses. This philosophy is excellent. It’s interesting to see how some are predicting Trump will cause a collapse in global trade. If NAFTA is renegotiated to include less regulations and restrictions, making it simpler, it could lead to more trade within the nations it represents.

The two nations Trump went after in his campaign were China and Mexico. Mexico seems fine as it is in NAFTA. The big worry is that Trump will label China as a currency manipulator and put extreme tariffs on trade with it. Obviously, that would be terrible policy, but given these comments on NAFTA, I don’t think massive Chinese tariffs are coming. China does manipulate its currency, but so does America, so there isn’t a logical point to this extreme measure. The Chinese government not allowing American firms to compete fairly in the country hurts the Chinese people more than anyone.

Malpass described the debt limit as a failure of a law because it is a vote on whether Congress will pay the bills it has rung up, not whether it will spend more money. This is an obvious point that I agree with. However, it doesn’t matter because if Trump wants to do massive spending cuts and a big stimulus then the debt will go up whether there is a debt ceiling or some other measure. If Trump’s advisors say the debt is bad and then call for more policies which create higher deficits, it is disingenuous. Disagreeing with the way the law is written is missing the forest for the trees.

The next part was about the Federal Reserve. He makes the point that the Fed is political and that its policies haven’t worked. It’s common sense its policies haven’t worked. It’s a mistake to say its policies haven’t worked because it’s political. The Fed is political in that it supports whichever party is currently in office. However, true capitalism would have no central bank and instead allow the free market to control interest rates. If the Fed was apolitical, it still wouldn’t do as good of a job at picking rates as the free market would. He says the Fed is responsible for hurting the integrity of the dollar, but provides no solutions for this problem. It’s tough to solve the problem if you eliminate the only answer which is ending the Fed.

He then talks about how the country needs more infrastructure investment. I’d rather the free market determine this. He states that everyone agrees we need more infrastructure. That must be a poll of Keynesian economists who think spending money on infrastructure is great for economic growth. He then makes one of the most bizarre statements I’ve read in a while. The quote is “All I have to do is show you an infrastructure project that returns zero, meaning—so for 30 years, you’re going to have a bridge. And it’s going to break even. And that’s good enough to beat the hurdle rate that the market is choosing right now.” This is bizarre because the market isn’t choosing this low interest rate; it is being created artificially by central bankers. Why would the market choose to get a negative return on a bond? The answer is it isn’t choosing that.

The next part is about Trump’s plan to issue more long term debt. The logic behind this is that the debt will be more secure which is a positive trade off compared to the higher rate that will be paid for longer durations. This concept is combined with the call for the Fed to stop buying bonds. I would agree that the Fed should unwind its balance sheet, but if it does the rates will go up and there will be no way to issue these new long term Trump bonds. It’s an impossible feat.

The next part is about how Dodd-Frank needs to be fixed. This makes sense, but it remains to be seen what parts are fixed. I haven’t yet read the comprehensive bill which Malpass refers to.

He also states a carbon tax isn’t a market based approach. I think Trump plans to avoid making any anti-business policies relating to climate change. Climate change was hardly discussed during the campaign. Many issues were avoided as the media decided to focus on various scandals which don’t matter now.

The final statement was about the Fannie Mae and Freddy Mac. He talks about how they are distorting the mortgage market. He says this climate is bad for the average American. The idea of putting the mortgage market back into private industry is great. He must not realize that if Trump’s plans create higher interest rates, it will be harder for the average American to get a loan. The reality is economic plans should not be made to help any single group of people; it should be about what plans defend liberty and free markets.