Former Secretary of the Treasury Robert Rubin on the Economic Recovery after COVID-19

Monday, August 31, 2020 - Former Secretary of the Treasury Robert Rubin takes questions on what the economic recovery looks like after COVID-19.

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Robert Rubin was the Secretary of the Treasury and Director of the National Economic Council under President Bill Clinton.
Robert Rubin was the Secretary of the Treasury and Director of the National Economic Council under President Bill Clinton.

Robert Rubin was the Secretary of the Treasury and Director of the National Economic Council under President Bill Clinton. He had a distinguished career in finance, joining Goldman Sachs in 1966 and eventually becoming co-chairman. Under the Clinton Administration, he served as the He is also a founder of The Hamilton Project, an economic policy think tank out of the Brookings Institution. In this episode, he will discuss the economic outlook in the post-COVID world.

Secretary Rubin says it might take until the end of 2022 for the US economy to return to where it was pre pandemic. As he notes, this is both a global economic crisis, and a humanitarian and health crisis, which will complicate the recovery. He also agrees with recent comments from former Treasury Secretary Timothy Geithner that the Federal Reserve acted responsibly in their strong response to the COVID pandemic. It was much more far reaching response than the one in the wake of the 2008 financial crisis, but Rubin believes it is necessary.

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In this Episode

Opening Remarks

Howard Marks:
Bob, I wanted to start off by asking you, what is your personal economic outlook or framework over the next year or two? How do you feel?

Robert Rubin:
You know, and you and I have talked about this, I think, Howard, I've had the same view for really, at least the last ... Well, since the COVID thing really took off. And so far, it seems to be acting ... It seems to be on the trajectory that, at least seemed to me the most likely, which is the following: that you'd have a 30 to 35% decline in the second quarter, which is obviously monumental.

You would have Jason Furman likes to call a partial rebound because you've fallen so far, but that there are a lot of impediments to the rebound becoming a V as ... I don't think anybody's talking about anymore, but they were at one time. I didn't think it was realistic, but in any event ...

And then so what you have after that, which is where I think we are now actually, Howard, is and I think it was pretty likely we would be here, is you're in a slow, difficult recovery with ups and downs. And I think the COVID is worse, frankly, than I think I would have thought just because of the management of it has been so terrible.

But even without that, it looked like there would be spikes in one thing or another. But I think it's a long road ahead. I really do. And I think, this is my view and I don't know if it's right or wrong. But I think even after you get a widely available vaccine, let's say, whenever it is. Just make up the first or second quarter of next year. I have no idea.

I think a lot of the effects of these two crises are going to last for a long time to come. A lot of small businesses are failing and most of them will never come back. A lot of our clients, and we deal with a lot of the Fortune 100, quite a fair number at least, are clearly rethinking how they're going to do business. There are going to be fewer jobs.

I don't know what's going to happen to the big cities. Hopefully, they'll be okay but who knows? There are a lot of other dimensions of what's happening. Our fiscal situation, I know there are people who think this can go on forever. I don't happen to think so.

I think we're doing the right now, but I think someplace out there, there's going to be a hell of an issue. The question of whether this Fed policy, which I think is absolutely right right now, where does that lead us? There's just a lot of uncertainties and complexities, Howard, and trade relations are breaking down. Maybe Biden could do something to bring that back. Maybe he can't.

So I think there's a lot ... I think a lot of our clients now, the big corporate clients are saying, "That 2020, they're writing off 2021, and saying, that really the time to think about now is 2022." And even then I think ... I was on a phone call, a Zoom call this morning with a former head of the CEA. Well, it was Jason Furman.

And Jason said some of these employee ... The employment effects, some of the effects on workers are going to go on for years. So I think there's a long haul ahead of us, Howard.

Howard Marks:
No, I think you're right, Bob. I feel that the idea of the V shape recovery is really a misnomer. To me, the V implies some symmetry. That you come up at the same speed you went down. And that's not going to happen. This was one of the ... The deterioration only took a couple of months. And the recovery, it looks like it's going to take a year or plus or minus at least.

And so would you say that GDP in '22 will be back to the '19 level, would that be your guess?

Robert Rubin:
Well, the last CBO numbers which came out, I believe, on July 2nd. I'm pretty sure that's right. I think, if I remember this correctly and I think I do, the last Congressional Budget Office numbers showed that by the end of 2022, is when you get back to you were at the end of 2019.

Howard Marks:
Yeah, yeah.

Robert Rubin:
If I had to make a bet, anyways that what's they show. Yeah, that's what they show.

Howard Marks:
You wrote an op-ed piece in April and talked about your experience at Treasury with the Mexican crisis and the Asian crisis. How would you say that this is similar? And how is different?

Robert Rubin:
You mean the crisis or the way it's being approached by the administration?

Howard Marks:
This crisis versus those?

Robert Rubin:
Well, this is different. I mean Mexico was ... People don't remember terribly well anymore, but Mexico was a real threat to the global economy, but it was in Mexico. And the United States at that time was a very strong participant in the global economy. And we could get together with the IMF, which we did. Larry Summers and myself and Stan Fisher and [inaudible 00:05:20] with the IMF.

And we were able to provide the assistance combined with their reform to get Mexico out. This is a global pandemic, and I think some aspects of this have not ... Are far from having fully developed yet. For example, Howard, I had another op-ed with the New York Times with the head of the International Rescue Committee.

And the point we made was that there's a humanitarian crisis right now in a lot of emerging market countries. And that's going to get worse not better most likely. And that will feed back in all kinds of ways, at least in my opinion, that the argument can be made there to us economically. So I think there's a lot ahead that is really very difficult.

Howard Marks:
Yeah.

Robert Rubin:
And we don't have ... Another thing. The Asian crisis. The Mexican crisis. The Russian crisis then. United States was in a powerful position economically. We were well regarded. We were a leader ... Well, the leader not a leader in global interaction. All of that has changed, Howard.

Howard Marks:
Right, right.

Robert Rubin:
And there's no leadership today. Because it's not coming from any place else and we've basically forfeited it.

Howard Marks:
Right, there is a great leadership vacuum.

Robert Rubin:
Could I make one other comment, Howard, if that's-

Howard Marks:
Of course, please do.

Robert Rubin:
There is another piece of this too. If you get into the September, October and COVID is still is omnipresent as it is today and then you have the flu season on top of that, I think that's something to be additionally troubled about. In any event.

Howard Marks:
How do you, what do you ... You mentioned that you think that what the Fed has been doing is right. If you look at the Fed and the Treasury, what's your assessment of their activities in the COVID?

Robert Rubin:
Yeah, I'm trying to ... I'm in the process of trying to an op-ed about this and I haven't had to time to do it. I mean I've got a draft, but I haven't had the time to really get it into shape. I think the following, Howard. I agree with Tim Geithner.

Tim said that what the Fed did this time is substantially more powerful than what he and Hank and all did ... Well, he and Ben actually did back in '09. And that we needed to be more powerful and so it was appropriate. I agree with Tim.

And I think on the fiscal situation, again, when you see GDP down 32, 33% in a quarter, you know that there's ... One needed to have this. That's on the one hand. But where I disagree a little bit with the current view of things is ... And I think we need to have another very big bill. I don't know if we'll get it. You can see what's happening.

But where I disagree a little bit with a lot of the people that I'm friendly with is I think at the same time, we should be focusing. And I suspect Howard, you would agree with this, on what do we do about our fiscal situation going forward?

We can't do it now. But and maybe we can do this for several years, and maybe we can't. And nobody knows the answer to that. So I think we should be giving a lot of intellectual engagement to the question of how to deal with this. So if it starts to go against ... If there's a collision between what we need to do for the demand side and the adverse effects that can come from fiscal conditions of the kind that we have, we'll be ready for it intellectually and politically.

And we're not ... Nobody wants to do that except me. But nobody cares what I think so-

Howard Marks:
Yeah, well that really raises my favorite question, Bob. Which is what do you think ... I mean let's say we continue to do somewhat more of what we have been doing for the last couple of months, what do you think of the consequences?

Robert Rubin:
The best, Howard, I think, far and away the best commentary these days and for years now in markets has been by Howard Marks. And the last piece that Howard Marks ... No, two times ago, Howard's piece, you'll remember this, was the most dangerous words in investing are this time is different.

Howard Marks:
Yeah.

Robert Rubin:
Two of the things you listed was this time is different. Deficits don't matter. This time is different. Debt doesn't matter. Well, there are people who argue that ... Serious people who I respect who argue that we can do this for years for all kinds of reasons we could discuss, though you probably don't want to.

And maybe that's right. But I think we should be preparing for the possibility that it's not right. And I think this could ... I don't believe levitation. And I think this could all ... Maybe this can go on for several more years. And people you and I both respect, Howard, think that the probabilities are it can. But maybe it can't. And I think that's a serious risk we should be thinking about.

Howard Marks:
I think I wrote in that memo that modern monetary theory is just a theory.

Robert Rubin:
Modern monetary theory, in my opinion, yes. But even people you are ... Even people you and I know well and respect who are great ... Dismiss modern monetary theory, still think it might be able to go on for years for all kinds of other reasons.

Howard Marks:
Right. Oh yes, oh yes. Well look, we've had extensive monetary positive and very low interest rates for 12 years. And there's no inflation. And there are very powerful deflationary forces around. So that's possible.

Robert Rubin:
Yeah, as an investor, I mean you and I have talked a lot about this when we were both on an advisory board together. Although you left and I'm still stuck there. But as an investor, I think one should ... I believe in the long run, this is my view. I'd rather invest in the long run in the United States than any other country.

But the premise there is at some point, our political system will re-establish, and this is what you all are about, re-establish sufficient effectiveness to deal with our issues reasonably well. So that's what I believe in the long run. But in the shorter run, I just think we're in for a very difficult period.

Howard Marks:
No, I think that's right. Of course-

Robert Rubin:
Or could be. I shouldn't say we are. That's wrong. I think the probabilities are that we're in for a period of great uncertainty and complexity that could go on for quite some extended period of time, with whatever effects that may have on market.

Howard Marks:
Yeah. Of course, Europe, I think has ... I think our national debt is 20% of-

Robert Rubin:
Our national debt?

Howard Marks:
Yeah. No, I guess I'm wrong ... Our deficit is rather small compared to GDP.

Robert Rubin:
Yeah, our ... No, well our deficit will be about five percent of GDP. And our debt ... Well, now our debt's gone up so quickly. It had been about 80% of GDP. The publicly held debt of the federal government.

Howard Marks:
Right.

Robert Rubin:
But by the end of this year, it will be about 100% of GDP and rising rapidly.

Howard Marks:
Interesting, interesting.

Robert Rubin:
Roughly.

Howard Marks:
Of course, a great deal of what's going on is a trade off between two difficult things. You, in your April op-ed, you talked about the dilemma between the opening of the schools and fighting the disease. And at many points in time, we've had this trade off between health and economy.

On the other hand, you see that Sweden put the economy first and didn't safeguard health and they have health problems and economic problems. So I guess it's really a genuine dilemma with no easy solution?

Robert Rubin:
No, but as an investor, I think that's exactly right, Howard. It didn't have to be that way though.

Howard Marks:
Right.

Robert Rubin:
If we had ... And I'm not talking about nirvana. But it we had some reasonable approach to dealing with COVID, I think we could have been in a very different place. Where I started to get to before was, so for me personally, and I'm not making a brief for myself.

But in fact, I wouldn't make a brief for myself, but I want to exposed to the US economy for the long term, but I also want to have a cautious bias, because I think there's just ... As I said a moment ago, in the short and intermediate term a lot of complexity and uncertainty.

And even in the longer term, there's a lot of complexity and uncertainty. So I adjusted my beta accordingly so I have one that I can ... If we do well I ... Hopefully we'll do well. And if we do badly, I'm at least in a reasonably ... In a reasonable position, albeit obviously, I'll suffer along with everybody else.

But that's the ... Mine is the exposure ... My view. Exposed to the US market. Exposed to the US economy more than any other economy. I have a lot of reservations about China. And maybe I'm wrong. And I want to have enough balance so if things go back, I'm still okay.

Howard Marks:
And when you say reservations about China, you mean reservations about wanting to have investment exposure there or reservations about the threat they pose to us?

Robert Rubin:
No, I was thinking ... Well, that's an interesting question which I thought was a very strong ... Well, not strong view. I have a view as to what ... I don't profess to be any expertise on China, but I hang around with a lot of people who do. So I'm reflecting my judgment about what they say.

Robert Rubin:
Somebody, Howard, that you and I have enormous respect for who ... Well, if I say what ... Well, everybody on this call will know ... Name will know of ... Knows a lot about China. And I was on a Zoom call with him last night.

And he made the comment and I agree with this, that if you sit here in the United States and you look at the strength of China. And you look at the 1.4 billion people. And you look at an autocratic government that can do what it wants, et cetera, there's a lot of enthusiasm here amongst many people for investing in China.

And it may all turn out to be fine. They've done well for a long time. On the other hand, they have a lot of problems too. They really do. And there's very little rule of law. There's pervasive corruption despite all that's been done. The demographics are terrible. The environmental conditions are difficult.

I don't know whether you could be a ... I don't know whether the repressive ... Kissinger says publicly it's most repressive regime by far since Mao. Now does that make any difference economically? I don't know. But I just wouldn't be comfortable having a lot of ... I actually have some ... Some of the private equity firms I'm involved with have investments. I wouldn't ... I'd be careful about China yeah.

Howard Marks:
Bob, let's switch from purely economic to also social. And the question of inequality. It's been rising for a couple of decades. And obviously there are some people now who don't think that's such a great idea and they're not happy with it. And that's putting it mildly.

Robert Rubin:
Okay.

Howard Marks:
What are your thoughts on what the government can do to address, at the federal level, to address the issue?

Robert Rubin:
Oh I think they could do a lot that would be very constructive with respect not only ... I think they could take three objectives, Howard, and pursue ... Which are, in my judgment, interdependent. I wrote a fairly good ... Well, I don't know if it was fairly good or not. I wrote an op-ed about this in the Washington Post before the 2016 election, thinking that Hillary would be President and maybe this would be of use to somebody.

Turned out that didn't work out quite the way I thought it was likely to. But in any event, I think they could pursue widespread economic well-being, reduced inequality and strong growth. And I think they're interdependent.

And what I would do if I were them, Howard, I would have a strong, inclusive growth, public investment agenda. I would plan to get my fiscal house in better order than it is. And I think if we can get back to some reasonable place, I think there's a lot of room to increase taxes, give ... Before this COVID thing started, tax revenue was 16.5% of GDP, federal tax revenues that is.

They were 20% at the end of our administration and we were doing just fine. And they're averaged about 18.75%, I believe, for full employment economies. So there's a lot of room, at least under those conditions. Now we're not in the same shape obviously, but I think there is a lot of room to do ... So I would do that.

And I think we could pursue both objectives. And if you have a progressive ... And I would raise them progressively. So if add them progressively, what are you doing?

You're promoting growth. That's the inclusive growth agenda. You are promoting widespread economic well being. And because your tax structure is progressive, you bring down the top and, therefore, reduce the inequality and that's what I would-

Howard Marks:
So on the fiscal side, primarily, a more progressive tax?

Robert Rubin:
I would. There is another thing you could try to do but the politics ... Well, the politics. All the ... Look everything. I think there's only one issue for our economy. As an investor, or as a citizen or anything else. I think there is only one issue over the long run with our political system working again.

It's what you all did with the labels. If our political system works ... Marty Feldstein said to me once and I've never forgotten this. It wasn't that long before he died actually. And Marty said "That if he," who was a very conservative Republican.

But I know, I didn't distinguish economists at Harvard. If Marty and the liberal equally convinced liberal, but both committed to compromise, the give and take of compromise, got together, they could solve most of the country's problems. And I think that's true.

The question is we've virtually totally lost that on both sides of the aisle. The question is will we get it back? I think we probably will. If we don't then I think we're in real trouble. If we do-

Howard Marks:
Well, Bob, we're doing everything we can to make it happen.

Robert Rubin:
Yeah, no, I tell you, that's what you all do and it is the only issue that matters. Because if we don't solve that problem, nothing else works. If we do solve that problem, we have tremendous strengths.

Howard Marks:
Well, I can tell you, we see encouraging signs from our point of view.

Robert Rubin:
I think what you all are doing is good, Howard. And you also have some relationships to the Problem Solvers caucus, don't you?

Howard Marks:
Well, yes. We organize and sponsor and work with it, yes.

Robert Rubin:
Another thing that may help, of the 235 Democrats in the House, 104, I believe in the new ... Well, they're not, I believe, they are. 104 are the new Dems, which is basically a ... Most of those people are people who really want to make the system work. And there'll be more after this time.

And if the Democrats get control of the Senate, it's going to be winning in states, Montana, Colorado and so forth. You're winning as somebody who wants to make the system work and winning for the ... You're winning from the center. So that should be ... Creates some possibilities of working.

Howard Marks:
Great, great. Maybe the last thing that ... Well, I'm starting to get questions from the audience, we'll turn to those in a minute. But the last thing I want you to do since you let us make a pitch for No Labels and you were kind to us in your remarks, I wanted to let you ... Give you a chance to talk about the Hamilton project which I've been involved with you in and tell us a little bit about that.

Robert Rubin:
It's an interesting thing and it tells you something about Washington today as Gene Sperling said to me. About 15 years ago, Peter Orzag and I were testifying at a committee hearing, opposing Bush's social security reform.

And when we left, I turned to Peter, who had been head of OMB as you know and head of CBO. And I said to Peter, "We're always opposing what Bush is proposing. What would it cost us to develop our own agenda? With an agenda paper and then policies pursuant thereto that are facts and evidence based. That are not partisan. They're not ideological."

So Peter came up with a budget. And a bunch of people got together, including Roger Altman and then Larry [inaudible 00:21:22] Furman and a bunch of other people. As Howard said, Howard's involved now and other. A lot of serious people.

And so we started this. We really started for ourselves. We wanted to reach out to the best minds around the country and bring their thinking together. Convene these kind of things, four, five, six events a year and so forth. But where we are right now is we do about five or six events a year. Or each one around some significant policy issue. And we have tremendous traction and tremendous platform in Washington.

And what Gene Sperling said and this is what it tells you about the system which is why new labels may be on to something. I asked Gene, "Why do you think this has gotten so much traction? We have a low budget. We don't have our own people." I mean we have a very good staff, but they're small. "We convene people from around the country, and yet we had tremendous traction."

And Gene said, "There was a real appetite." At least this was Gene's view. "A real appetite for series of purpose. Non partisan. Non ideological series of purpose around policy where people can come together and try to develop policies that are practical and sensible and can happen politically.

And so if Gene is right in his interpretation of why this thing has been successful, which has been very successful in terms of getting traction and so forth, it's a little bit hopeful at least, Howard, about there might be more appetite for this in Washington than the noise would make you think.

Howard Marks:
Great, great, well I've enjoyed my connection with the Hamilton project.

Robert Rubin:
Can I ask you a question, Howard?

Howard Marks:
Sure, sure.

Robert Rubin:
Given all the uncertainties and complexities, why do you think the S&P 500 is where it is? Or do you think that-

Howard Marks:
Oh that's so funny. We got that question from Bill Kauffman. And that was the question I was going to ask you next, Bob. And there are really a couple of explanations and they are not unrelated. The frustrated value investors explanation is that prices have nothing to do with values. But the market has, to use your word, has been levitated by the Fed.

And the injection of capital has reduced the cost of capital. And the demanded return on investments. When the risk free rate is zero, bonds at six percent look like giveaway, et cetera.

And, of course, the various programs. So it's just a manifestation of you can't fight the Fed. And the growth investor, his contribution is that a significant fraction of the S&P, for example, is the tech stocks and the software stocks. And that they are really terrific companies. They're much better than the big companies of the past.

They're growing much faster than the companies that dominated the S&P in the past. And they're competitive position is better because of their moats and various advantages. And they don't require more capital to grow because their product is not physical, et cetera. And so forth.

And that they have earned very high multiples. Oh and also that they either, in the COVID, they either had their growth accelerated by the COVID experience. Work at home and so forth. Or have had a chance to show that they are relatively impervious to the environment.

So this has been a beneficial period for them. They've been able to show their merit. That's why they're up 27% this year. The average stock in the S&P is down 11. But the wonders of the top stocks have brought the S&P to unchanged for the year.

Robert Rubin:
So Howard, is the 11, I should know this but I don't. I apologize. The down 11 ... I knew the down 11 number. But is the down 11 the average of all the others, other than the big four? Or is it-

Howard Marks:
It's the median. It's not the average. It's the median of the 500.

Robert Rubin:
Oh it's not the mean, it's the median?

Howard Marks:
Right, yeah.

Robert Rubin:
Down 11. Okay, well that's interesting.

Howard Marks:
And by the way, it's something like a quarter of all the stocks are down 26 or more. So it's been bifurcated and that it's almost meaningless to talk about the S&P.

Robert Rubin:
It's interesting about the fighting the Fed. We had a Zoom thing, was it Wednesday night, I think? Yeah, it was Wednesday night with some of the largest endowment managers ... This was not ... When I say we, it was just a few people that you and both know. There was no formal group. But some of the largest endowment managers in the country.

And some of them were making exactly the case that you ... I don't know if you agree with the case or not but that you can't fight the Fed. I made the argument that you can't levitate indefinitely.

Howard Marks:
Right, well that's the key, yes.

Robert Rubin:
And I, I-

Howard Marks:
Yeah, the image I have is we've seen these columns of water which rise and keep a bowl up in the air. Well, they only work as long you're pumping.

Robert Rubin:
Yeah.

Howard Marks:
When you stop pumping, it falls down. So I think that's right.

Robert Rubin:
But they would argue that they can keep pumping and pumping and pumping. And I would argue that if you keep pumping and pumping and pumping, all kinds of things can go wrong.

Howard Marks:
Right, exactly, exactly.

Robert Rubin:
But we had a pretty spirited on that.

Howard Marks:
Yes, good. Well, listen, you and I have occupied a half an hour. And we could go on for a long time, but I want to open it up to the other people who are with us today. And before I do, I want to mention Max Rose. Max is one of our Congressmen and members of Problem Solvers and he's with us today so I just want to acknowledge his presence and welcome him.

I see we're now ... I said before, we had 120 people. We've now doubled that. We're up to 240 people now which is great. And one of our greatest members and contributors is Mack McLarty. And I'd like to call on Mack for the first question. If you remember to unmute, there you go.

How do we rebuild the bridge?

Question:
Well, the question will be straightforward. Bob, I was going to thank you for your service and say it was great to see you and thank you for joining us at No Labels. But let me get a half a step ahead and knowing you'll overtake quickly here regardless but-

Robert Rubin:
Mack.

Question (cont'd):
Bob, put a little more specifics on this building this bridge is what we're trying to do to use one of President Clinton's formulations as you'll remember. But obviously the Fed and the Congress, with Max being on the phone as a member of the Problem Solvers caucus. But trying to build a bridge here with this unprecedented situation we're in.

But how do we start to rebuild that, particularly with the fiscal responsibility that you noted? Bill, put a little more flesh on that if you will?

Robert Rubin:
Yeah, what I'd like to see happen, Mack. And there isn't much appetite for this unfortunately. But as we now legislate, which hopefully we'll get a ... I know Max would have a better sense of this than obviously than I would. Max Rose.

But assuming we get a reasonable bill which is a big assumption. Maybe we won't. I would love to have seen, but it won't happen, I know that. A provision in there saying that we will look toward getting us ... Beginning to correct the increase in our fiscal trajectory once conditions allow.

Now there's nothing specific about that, but at least it commits you in principle.

Question (cont'd):
Attitude.

Robert Rubin:
And then if Biden needs another ... Which I think he's going to need another major stimulus in the early part of next year, do the same thing. And then as to what the specifics would be, I would take the corporate rate up. Look, Mack, you know this stuff better than I do. I think if you told the average CEO before the '17 tax cut that the rate would go to 28%, I think most people would have been accepting of that.

Question (cont'd):
They would.

Robert Rubin:
I think the pass through needs to be dealt with. [inaudible 00:30:00] basis on death needs to be dealt with. I would take the top rate up, maybe not that much, but the top rate up some. I would take the capital gains rate up some. I think you could do all this once conditions allow.

But I don't know if we ... But the problem ... What worries me, Mack, is that I say once when conditions allow, maybe conditions won't really be conducive to that for several years. And it may be that our fiscal trajectory will create a lot of trouble before it becomes conducive. In which case, we're going to have a hell of a problem.

Can I say one thing about Mack?

Howard Marks:
Yeah, sure.

Robert Rubin:
Well what's wrong with this thing? Oh okay. We had the NEC at the beginning of the Clinton Administration and it was very successful. But it was very successful because Mack McLarty as the Chief of Staff had the management judgment to recognize that this could only work if he allowed it to work.

And a lot of Chiefs of Staff have very big egos and they stomp all over things. And if that happened, I don't think we ever would have had the policy processes that President Clinton had or the success in developing good policy that he had.

And I used to say this a lot publicly, as you know, Mack, I think you really brought a management sense to the White House of a kind that Washington didn't fully recognize but that was enormously a part of what made President Clinton succeed in that first period.

Spending on Assets vs. Spending on Operating Expenses

Question:
Thanks, Howard. And thanks for being with us Bob. Really appreciate it. I have the same skepticism over modern monetary theory as both of you do. But I do think the conversation around the nation's finances could be improved if we change the way they're calculated that reflects spending on assets differently than it reflects spending on operating expenditures.

And when you think about what's necessary for our infrastructure, I think those conversations are disadvantaged by the fact that we don't think about building national assets and treating them better from an accounting point of view. I'd be interested in what both of you think of that as way to change the conversation?

Robert Rubin:
Well, as Mack will remember, we did look at the question of having some kind of an infrastructure or separate infrastructure account or something. And there were a lot of good arguments for it. I was always a little troubled by it because it has a lot of logic to it as you correctly say.

But on the other hand, you could argue that education is an investment. Fighting poverty is an investment. Basic research. It's a little unclear to me how that doesn't get you into a very bad slippery slope. And so I tended to be not in favor of it, even though I recognized that the power of the arguments for it, for the reason I just said.

Howard Marks:
Bob, I think that's a great answer. And Chris, when you asked it, I thought it was a great question and it's one that I've thought about a lot. But I think Bob's answer is a good one that it is a slippery slope. And people would be spending money on lots of things and capitalizing it. And we'd understate our budget.

Discussion on Entitlements

Question:
Good. With the entitlement ... Well, your accumulated deficits are about 25 to 27 trillion right now. Continuing well one to three a year depending on what it's sort of looked like. Do you take entitlements off the table in any ... Or do you reintroduce entitlement reform at some point in order to get the deficits down or more under control at some point?

Robert Rubin:
Look Andrew, Andy, that's, it's the ... Here's what I think whatever it's worth.

Question (cont'd):
I know it's a political hot rail.

Robert Rubin:
Yeah, well that's putting it mildly. I think our best bet is the following. I wouldn't ... I mean you could means test social security arguably, but as you know, there are a lot reasons not to do that. And I guess I would not do it because I think then you start to make it into ... I think you subject it to another political argument against it. Which I think we shouldn't want to ... Or at least I don't think we should want to engage.

But the way to get entitlements down is to keep, at least one way, you may like other ways, but one way would be to keep the programs as they are but take our national health care costs which are about 18% of GDP as compared to 10% in any other developed country with about equal outcomes and get our national health care ... Put in place health ... Cost reduction measures that affect our national health costs.

Because if we get our national health care costs down, that will feed back into Medicare and Medicaid and could save us serious money. And that's what I think we should do. And the ACA had some provisions like that in there as you know.

But unfortunately, the Congress in its wisdom has ... I think all of it ... My recollection, maybe I'm wrong about this. Certainly some of them were eliminated. And none of them, I think, have been effectively effectuated.

That's what I would do, Andy. I think I would not bring Social Security down. I wouldn't reduce benefits. You could make an argument that the CPI overstates the inflation and that the inflation adjustment should be changed, but I don't ... I wouldn't personally do that.

And I think on the Medicare, Medicaid, I wouldn't reduce the benefits, but I would try to get the national health care costs, which would not only make us a more efficient economy, but could also save us a lot on the fiscal side. But the politics are murderous.

Is Globalization Going to Reverse?

Question:
Thank you. It's just such an honor and pleasure to hear the comments today. Globalization has seemed inevitable for at least much of my working life. And I think more than maybe anyone I've followed, your appreciation for the way different countries are interconnected has been forefront on your work.

Recently, we've seen borders closing for COVID, but also some other reasons that cause ... The question is globalization possibly going into reverse or is this just a blip?

Robert Rubin:
I don't know. I mean I ... I know what I think we should do. But I don't know where this is all going to come out. There's no question that ... And you all know this. All of us know this.

China's trade practices, in some respects, really were very much at odds with global norms. But what Trump should have done is he should have gone to the EU instead of fighting with them. He should have gone to Mexico and Brazil. He should have gone to Japan.

And then collectively gone to China which would more than the GDP that was going to China. And then he should have done it quietly. Not make a lot of noise about it. And he should have had tariffs as his last resort, not his first resort. [inaudible 00:37:33] making real progress, I don't know.

We have to ... An awful lot of this hinges on the China, US relationship. And that's a ... I have pretty strong views. Again, I don't profess to know a lot about China, but I've been around this issue for a long time. And I hang out with people who have been around this issue professionally as much as anybody in our country.

And I have pretty strong views as to what I think we ought to do. Especially after the election where everybody's going to be bashing each other about China as they always do in elections. We get through it.

I think that the United States and China have an immense mutual self interest in a different kind of relationship than the adversarial one that is now getting so much attention and creating so much noise. Where we focus on climate change and nuclear weapons and terrorism and [inaudible 00:38:19].

We develop a working relationship around them. Then we try to work with the Chinese to get trade norms that are serious. And on the geopolitical issues like the South China sea and Taiwan which, by the way, one hell of a big issue waiting out there.

And whatever else, we do the best we can to work with them and they do the best they can to work with us. Now if Biden were to take that approach, will it work? It depends what Xi wants. And who knows what Xi Jinping wants. But you don't find out until you try.

So I don't know. I think it's a good question. I don't know where we're going. Plus, there's a lot of political animas toward trade in this country these days in both parties so I don't know where it's all going.

And I will say this, I do think there is a good case to be made for, I guess you'd call it, diversification of our supply chain relationships. But I think companies will do that on their own because of the problems that that's created. So we'll see where this goes, I don't know.

Can Biden promote bipartisanship?

Question:
Thanks, Howard. I would just like to know if the Secretary thinks if the Vice President Biden, if elected President, does he have the skills and will he promote bipartisan solutions to our major problems that we've been talking about? Inequality, immigration, infrastructure, entitlements, health care costs?

Robert Rubin:
It's interesting. Remember at the beginning of the campaign? Well, maybe not the beginning. Before the beginning of the campaign, there was a fundraiser. It got a lot of publicity. Where Biden, I was in the room at the time actually, Biden ... Eric [inaudible 00:39:55] did this fundraiser for Biden.

And at the fundraiser, he talked about how he had worked with Strom Thurmond and somebody else. I don't remember who it was. Really Republican people. Because he wanted to get something done that was constructive. And he was willing to work with people whose views he disagreed with. And even views he would consider repugnant.

And John Lewis. And then he was criticized for having worked with Strom Thurmond. And John Lewis said, "No, I think he did the right thing."

Which, by the way, was, I think, interesting with respect the wisdom of John Lewis. But I think Biden is ... I think every ... I've known him for God, this is ... Well, certainly north of 30 years, and I think he is absolutely built ... I think his every instinct will be to work across partisan and policy divides and try to bring people together.

But I think he'll do it and this is what I think ... I think he'll do it from a base that's sensible. He's a very sensible guy. He really is. At least in my opinion. And he's always had good people around him so I assume he'll have good people around him again. He's always had them.

But yes, I think he is built to reach out. Now if ... Then the question is how [inaudible 00:41:10] both reach out within his own party and then across, which is important too, by the way, and then across party lines.

Now whether that having said that, as Max could tell us, you could reach out and get ... That doesn't necessarily mean he'll be success at it. But I think he will absolutely do it and I think he'd be very good at it.

What is money?

Question:
Okay, Bob. I enjoyed your comments as I always do. I worry we face the greatest threat to America as we know it in my lifetime. Bob, what is money? People save for the future by putting off gratification for more later and expect the return.

But now there's no return on money so people are reaching for yield creating dangerous bubbles and real estate bonds and equity. Once the Fed loses the control, interest rates is then discredited, there's going to be panic as interest rates rise. And all this wealth will be created ... Will be destroyed as values come crashing down. How do we prevent that?

Robert Rubin:
Howard?

Howard Marks:
Yeah.

Robert Rubin:
Look it's a risk. I worry about that too. I mean you've stated it as absolutes. And for me, everything in life is about probabilities. But I think there's a ... I think that's a risk that it's not being widely discussed. And I think ... And a lot of very thoughtful people think that this can go on with the Fed. I said this before so I'm repeating myself, I apologize.

But people you all ... Names you all know ... Many of you know and respect think this can go on for many years if need be. I don't know. I'm more of the concern ... I have more of the concerns you just expressed though I would do it probabilistically and I don't know what the odds are, Howard?

Howard Marks:
Well, you can't prove by past events that these things have negative consequences. Because it has been going on to some extent for the certainly QE and low rates for 12 years. And deficits, by the way. You probably remember when [inaudible 00:43:14] they used to talk about is it okay for countries to have debt? And everybody seems to have gotten over that.

But it does ... There are possible ramifications out there to these things in terms of inflation, the value of our currency, et cetera, that I think it is important to say, and Bob implied it, the fact ... The things that the Fed and the Treasury have been doing have very serious possible negative consequences.

But the fact that something has possible negative consequences doesn't mean it's wrong to do. And we had to do the things that have been done or else we would have all had Depression on our hands. Period.

Robert Rubin:
I totally agree with that, Howard. The thing that I don't agree with ... I totally agree with that, is I think we should also be doing quietly some contingency thinking. And that's what we don't seem to want to do.

Howard Marks:
No, that's right.

Robert Rubin:
And that's-

Question (cont'd):
And that's my point because it's ... Now true, it hasn't bitten us yet. But it's building and building. And we look back through history over hundreds of years, it always leads to the same result. We just lived in an extraordinary times because of automation and greatly increasing productivity which has countered what would normally be inflation. But that may not continue.

Howard Marks:
Right.

Robert Rubin:
By the way, you just made an interesting point that somebody made to me the other night which is right and I think it's worth repeating. And it goes back to what we talked about with Max before. The more that we worry about our fiscal situation, the more important ... And of course, it's debt to GDP ratio that counts not the debt per se. So the more important it is to have GDP growth, which means more important it is to have productivity growth to absorb the deteriorating debt situation. So ti just accentuates the importance of doing that.

Howard Marks:
Well, growth is what made the latter part of the 20th century fabulous and it's what made the last 20 years dreary.

Robert Rubin:
Yep. That's right.

What does a cost reduction in health care look like?

Question:
Go after entitlements but to simultaneously said the way that you would get at that is try to improve health outcomes and reduce cost of health care to the country. I'm curious as to what a health care reduction, a cost reduction policy might look like?

Robert Rubin:
Yeah, I am really ... Yeah. I don't have a lot of expertise. In fact, I have no expertise in health care. But there's an awful lot that have been written about it and said about it. The idea of basically, as I understand it at least, is to try to get the consumer of health care to be in a position where they have a stake in the game.

And make decisions based on some kind of a judgment about cost and benefits themselves. But on the other hand having said that, you can't impose that on people who don't have any means so you have to provide ... At least I think you have to provide universal health care, but then provide some way to have rational judgments being made about the costs and benefits.

But as I say, I'm no expert. I don't have expertise in this, but there's a lot that's been done about it and written about what could be done. The problem is the politics of it.

Howard Marks:
Jeff Bloomberg?

Robert Rubin:
By the way, another piece of that, Howard, is defense of medicine. We have a litigation regime, medical malpractice, but torts more broadly, but medical malpractice which substantially increases the cost of health care because of defense of medicine. And so that's another piece of it.

Howard Marks:
Yeah. Jeff Bloomberg. You asked a question and maybe I'll read it for you. If we migrate manufacturing back to the US, won't it result in higher costs in de facto inflation? If we replace the cost savings of out placement.

Robert Rubin:
Yeah, I mean if you, it's not ... Yeah, I don't know about the higher inflation part. That remains to be seen. But if you had a more efficient way of getting your inputs because you have produced or manufactured good or whatever it is you're getting. Consumer goods, it's manufacturing inputs, whatever it may be from abroad and you now substitute domestic production that you have re-shipped, if you will, to the United States. Re-shored.

Then it would be more expensive and so yeah. It would be less efficient. Whether that also reduces rate of inflation or not, I don't know. But that's certainly is ... I think everything you just said is right. At least in my opinion.

Some of the caveat is it will be more expensive and it may or may not also raise inflation. It certainly be less efficient.

What is the risk to the dollar over time?

Question:
Quick question. And if you answered this before, Bob, I apologize as I joined late. What's the risk to the dollar over time? From a continuation of what you've described as the levitation scenario, I think Howard mentioned currency issues a moment ago. Does that differ ... How does that complicate the financing of deficits?

Robert Rubin:
Well, if it's ... And this is in my draft right now actually, if at some point, the international capital markets that they're wary of the dollar and as a response, they don't want to own our dollar denominated treasuries and they also decide that they're wary of our current long term interest rates in terms what's going to happen next because of fiscal and monetary policies, you could get a vicious cycle of which the currency ... I'm not saying, I don't know what the odds are.

Everything's a question of what Howard said before. Everything's a question of probabilities. Well I don't know what the odds are. But you've got a currency coming apart. The dollar's at a two year low by the way or roughly speaking.

Anyway, the dollar starts to go down. Investors don't want to hold treasuries, or at least foreign investors don't because their dollar denomination. If they start getting out of those, interest rates go up and you could get a real unraveling. What are the odds on that? I don't know. I worry about it.

On the other hand, we're in a situation right now where the rest of the world looks pretty lousy and the dollar is the still the reserve currency. And I think the dollar's going to remain the reserve currency for a long time to come.

For China to be a reserve currency, they've got to make all kinds of changes. It's just, they can't do it. That's not going to happen. I don't believe at least. They may substitute for us to some extent in trade. And for the Euro, maybe someday, but I think that's all way off in time.

Howard Marks:
Well, back in 2011 or '12, people were thinking about the Euro as the candidate and nobody talks about it anymore.

Robert Rubin:
Yeah, because look if you're a parity, with these recent deal that they managed to make, I mean Europe is a bloody mess. Well, I shouldn't say that.

Howard Marks:
One good-

Robert Rubin:
I actually think Europe is a bloody mess. And despite this recent deal which is the arrangement that they made of $750 billion or something, which is good. That I think was a sensible thing to do.

Howard Marks:
Well, good. This has been great, Bob. I want to thank you for it. I've enjoyed it. I'm sure everybody has enjoyed it. I'm going to call on Bill Galston who's the Reverend around here to say the benediction.

Robert Rubin:
Bill is a source of knowledge and wisdom, that's a good thing to do.

Sign Off with Bill Galston

Bill Galston:
Well, Bob, that goes both ways. Thanks so much for spending an hour with us. A lot of things have changed in the 27 years and six months since you and Mack and I and maybe others on this call walked into a little, but not insignificant, building together. But one thing hasn't changed, thank God, and it's you.

You give the same kind of advice you always did. It's evidence based. It's balanced. It's bipartisan. And if I can use an old fashioned word, it's humble. And what do I mean by the word humble? Very simply, the essence of politics and this is probably true of the private sector too is decision making under circumstances of uncertainty.

Not just risk but uncertainty when you know there's a range of outcomes, but you can't attach a probability to them. How do you think clearly in those circumstances? That's the fundamental problem we face. Now it's the fundamental problem we always face.

And every single sentence that you utter is suffused with a sense of what it is you don't know and we don't know. And humility isn't a guarantee of success, but arrogance is a guarantee of failure. So we need your voice which brings me to my second point.

We need your voice in the counsels of No Labels, if you'd be willing to share it with us from time to time. I believe that No Labels has created the most serious forum for discussion across party lines amongst experts and expert and elected officials that now exist in Washington.

And it's a place to do serious work. And we're about to get even more serious so please let's keep the dialogue going. Third and final point. We have reached a conclusion or perhaps more accurately are reaching a conclusion as an organization, which is a lot like the conclusion that Jay Powell stated a couple of day ago.

Whatever else is the case with the economy, we can't solve the economic problems until we first get a handle on the pandemic problem. Just can't. And we've experimented with the wrong approach for the better part of six months, and we are coming to the conclusion as an organization that a state by state approach has not worked and cannot work and we're going to have to develop and sell a serious national plan at the center of which is testing.

And everything else radiates out from that. And we're going to be working on that in real time over the next few weeks. And we wanted to put everybody on this call on notice that this is something we're getting really serious about as an organization.

Because if we can't crack this problem as a country, then we're going to be an object of global pity as we are now. Because remember Nixon's phrase about "pitiful, helpless giant?" Well 50 years later, there's finally something to it unfortunately.

So once again, thank you. And we hope this dialogue will continue.

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