Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / The World Bank, China, Corporate Taxes, and Opportunity Zones

Transcript

The World Bank, China, Corporate Taxes, and Opportunity Zones · The Capitalism and Freedom in the Twenty-First Century Podcast

0:00
>> Advertisement Agent: Its that time of the year, your vacation is coming up.
0:04
You can already hear the beach waves, feel the warm breeze.
0:09
Relax and think about work.
0:13
You really, really want it all to work out while youre away.
0:16
Monday.com gives you and the team that peace of mind.
0:19
When all work is on one platform and everyones in sync,
0:22
things just flow wherever you are.
0:24
Tap the banner to go to Monday.com.
0:27
[MUSIC]
0:44
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century Podcast,
0:47
where we talk about economics, markets, and public policy.
0:50
I'm Jon Hartley, your host.
0:52
Today, I'm joined by DJ Nordquist, who is the executive vice president of
0:55
the Economic Innovation Group, a senior advisor at the Center for Strategic and
0:59
International Studies, and is former US executive director of the World Bank.
1:03
Welcome, DJ.
1:04
>> DJ Nordquist: Hey, John, thanks for having me.
1:05
>> Jon Hartley: DJ, I wanna first get into how you first got interested in economics.
1:10
You are a Stanford undergrad, you did your master's at Northwestern.
1:13
You've worked in a variety of roles in DC, in Congress, two administrations.
1:18
You've worked across several of DC's top think tanks, Cato, Brookings, CSIS.
1:24
How did your interest in policy all start?
1:27
>> DJ Nordquist: I sort of fell into being an econ nerd.
1:33
Ironically, the only class I took pass fail at Stanford was econ one,
1:38
econ 101, because I was afraid of it and
1:42
I really wish I'd taken it for a grade, paid more attention.
1:47
And then I did a master's at Northwestern.
1:50
I was planning to go into documentary filmmaking and
1:54
I ran into a Stanford law professor who became a member of Congress,
1:59
actually on the Metro in DC, which was my last quarter at Northwestern.
2:05
And he had actually, he was currently sitting member of Congress and
2:09
he was running for Senate.
2:11
Tom Campbell, I'm dating myself and
2:13
I had actually covered him when I was a reporter for the Stanford daily.
2:17
And he recognized me right away and we sat down and we talked and
2:21
he said, you should go work on Capitol Hill.
2:25
And I was like, God, no.
2:27
But anyway, make a long story short, he arranged for
2:32
me to meet with his chief staff.
2:35
She gave me some advice about working on the Hill.
2:37
And so that's sort of how I ended up working on the hill.
2:41
So that was sort of my first taste of policy/politics.
2:47
And then I lived overseas for about six years, worked in the private sector,
2:53
and then came back and really wanted to work at a think tank.
2:57
And so, you know, went into think tank world and then ended up serving
3:03
in a number of domestic policy roles at the Department of Education.
3:09
I was at FDIC.
3:11
I worked on Hurricane Katrina, which was basically attached to the White House.
3:16
And then my last domestic piece of the tour was at HUD.
3:22
And then ended up at Brookings in economic policy studies.
3:29
I had come from really the domestic policy side, but
3:34
economic policy is really more macro, micro econ, monetary policy as well.
3:40
And so that's when I really learned a lot more about
3:45
academic economics and that side of the house.
3:50
And I really loved it and
3:52
just nerded out reading lots of peer-reviewed academic papers.
3:56
>> Jon Hartley: Many of our listeners love reading peer-reviewed academic papers,
4:00
myself included.
4:01
Now, most recently, you served as us executive director at the World bank.
4:06
Can you explain to our audience what the role of a country executive director at
4:10
the World bank does?
4:12
Like in particular, like the us executive director, you know,
4:15
how you work alongside Office of International affairs officials
4:18
at treasury and officials at the State Department?
4:21
Like, how are World bank projects, like, voted on?
4:24
What are the typical sorts of projects that come through?
4:28
>> DJ Nordquist: The World Bank, maybe some people don't know this,
4:32
is actually part of the UN system.
4:34
But unlike at the UN in New York, where every country has a vote and
4:39
a seat around that U-shaped, I think it's U, or
4:42
maybe it's semicircle, full circle, up in New York.
4:47
At the General Assembly, the World Bank is done by shareholding,
4:52
and so there are only 25 seats around the table.
4:56
It's a U, and those 25 seats are the executive directors,
5:01
and they represent 189 countries.
5:05
And so I was very fortunate in that, you know, of the 25 board seats, only six or
5:10
seven, depending on how you count, are what are called single constituencies.
5:15
Meaning I just represented one country, whereas, like,
5:19
the person who sat next to me was the mexican executive director, and
5:24
he represented, you know, seven countries, you know, Africans.
5:28
One of the Africans had 23 countries in his constituency.
5:32
The other one had 22, the other one had three.
5:35
So it's a complicated formula based on shareholding,
5:40
which is how much your country has put in to the bank by various measures.
5:46
And, yeah, so anyway, so you're literally sitting at what everybody sees on
5:51
TV when they look at the General Assembly,
5:53
a bunch of people sitting around a table and there are a lot of flags in the room.
5:58
So I'm sitting there and I've got the United States on my tent card.
6:03
And I remember when my first board meeting, I was really intimidated
6:08
because you sit there and you think, wow, I am representing my country, just me.
6:14
[LAUGH] What if I make a mistake?
6:15
[LAUGH] >> Jon Hartley: It's much smaller than
6:18
UN General Assembly.
6:19
When you think about that picture of the UN General Assembly,
6:22
every country is represented as one country, one vote.
6:25
So you have 200 some on countries, here, it's only 25 people or so.
6:28
>> DJ Nordquist: But it's still a pretty big, imposing room and
6:31
there's still a lot of staff in the room and all that.
6:33
And I mean, it's basically, even though there are fewer people,
6:36
it's the same number of countries represented.
6:38
It's just done by shareholding, and I was lucky because being an American,
6:43
the US is the largest shareholder, so I had more weight to throw around.
6:48
But there's a lot of- >> Jon Hartley: The US
6:49
gives the most money.
6:51
>> DJ Nordquist: Yes, the US gives the most money.
6:53
There are other things that go into the shareholding formula based on GDP,
6:56
based on other contributions to the bank, the different parts of the bank.
7:00
There are five or six different parts of the bank.
7:03
So, yeah, so the US is the largest shareholder.
7:06
Obviously, the US and
7:07
the UK were the ones who came up with the idea of the Bretton woods institutions
7:12
after World War Two to help rebuild the war torn economies of Europe.
7:17
And so the US and the UK used to be the two largest shareholders.
7:20
>> Jon Hartley: Right after the second World War, Henry Dexter White,
7:24
John Manor Keynes had a big influence in that,
7:27
it was a conference sort of up in New Hampshire.
7:30
>> DJ Nordquist: Yeah, fun fact about Dexter White is he was a communist.
7:36
[LAUGH] Communist sympathies and I think was investigated and all that stuff.
7:41
So that was our guy.
7:43
[LAUGH] And another fun fact is one of the first
7:48
loans to come out of the bank was to France.
7:53
Again, you go in the way back machine,
7:56
France is trying to rebuild after World War II.
8:00
And there was, What's called conditionality.
8:03
Big word at the big fancy word at the bank, which is like, conditions
8:07
are attached to whatever the loan is, and I can't even remember what the loan was
8:11
for, but the conditionality attached to that loan was that the communists were not
8:15
allowed to be part of the government, the coalition in France.
8:19
Otherwise, they weren't gonna get this World Bank loan.
8:21
I cannot imagine that would ever happen today.
8:24
The bank is supposed to be apolitical, and
8:27
there are a lot of messy politics out there.
8:30
There are 189 countries,
8:32
and all of them have different issues, some more than others.
8:36
But anyway, getting back to your question about
8:41
the main function of the board is oversight.
8:47
It's an accountability mechanism.
8:48
That's another bank phrase, although technically,
8:52
it's not considered an accountability mechanism, but it's really projects.
8:57
So these are either loans or grants come up through staff.
9:02
Staff meet with the various sovereigns, and the sovereigns say,
9:06
I'd really like a bridge between my two islands and the Maldives.
9:11
And the bank will study it and be like, well, okay.
9:15
Or, well, no, we don't think that's a good idea.
9:18
It doesn't make economic sense.
9:19
But anyway, when the staff says yes,
9:22
it goes through a two-year sort of project preparation lots of due diligence, etc,
9:27
etc, and then working with the sovereign, and then it goes to the board for a vote.
9:32
And so I think one of the things that surprised me when I got there was that
9:37
almost every project that comes to the board gets approved.
9:42
And I thought, like, my vote actually, like, it was a real vote.
9:47
And in fact, it's not.
9:49
When there's a project that is controversial,
9:52
which does not happen very often, but once in a while, there is one.
9:57
If it's going to be voted down, management just pulls the vote.
10:02
So you never know what happened.
10:05
You basically don't know that this project existed.
10:07
>> Jon Hartley: The World Bank president in this case.
10:09
So at the time, say, David Malcolm.
10:11
>> DJ Nordquist: No, no I mean, it's the staff.
10:14
The senior staff will pull the project down.
10:17
So I managed to defeat one project in my time there.
10:23
I mean, I certainly voted against a lot of them.
10:26
I actually was the first US executive director to vote against or
10:30
abstain every single project that went to China because I thought China
10:35
should not be taking World Bank loans.
10:37
It should have graduated from the World Bank years ago, etc, etc.
10:41
But, yeah, I did manage to stop what I considered was a BRI project and
10:46
that, you know, getting the Europeans, if you tell them it's a BRI project.
10:52
They actually don't care.
10:53
I had- >> Jon Hartley: What is a BRI project?
10:55
>> DJ Nordquist: Sorry, Belt and Road initiative of China.
10:58
>> Jon Hartley: Got it.
10:58
So I guess, just for clarification to our listeners, so, like the IMF and
11:03
World Bank, they were created right after the II world war.
11:07
They sort of, I think, evolved a bit in terms of their purpose.
11:10
Obviously, there was a big part of its early life was managing
11:15
the actual fixed exchange rate system, which was very complicated.
11:20
That broke down 50 years ago, 1973.
11:23
And then the main sort of focus of the World Bank, IMF, and
11:27
Burnwood institutions, has been on basically development aid and
11:31
concessional lending to sovereign debt issues.
11:34
And typically, I think the World Bank does a lot of work on sort of development aid
11:38
working with poor countries, whereas the IMF works on more the concessionary
11:42
lending to countries which may be a little bit more developed, but
11:46
are running into these sort of sovereignty issues.
11:48
>> DJ Nordquist: I mean, I sort of think of it as like macro and micro, right?
11:52
So, IMF is dealing with financial and economic stability and,
11:58
sort of larger economic issues versus the World Bank.
12:04
These are more like, we need a bridge, we need a road, we need an energy source,
12:10
we need housing, we need better human capital, better schools.
12:16
So it's more focused on what the sort of specific, like you said,
12:21
specific development needs versus IMF is more of a if your economy
12:26
is in freefall, we will give you a lifeline, but we will.
12:31
There's conditionality involved as well.
12:33
>> Jon Hartley: So with the World Bank, not necessarily.
12:36
So some aid is maybe unconditional, some is conditional in the sense that it has to
12:41
be paid back, targets that have to be hit.
12:43
One of the big, I guess, developments recently with the World Bank has been
12:47
whether China should continue to receive World Bank aid or not.
12:51
And the one thing that you're sort of alluding to for
12:54
is that GDP per capita is well above every other World Bank aid recipient country.
12:58
And critics alleged that China takes, say, a 0% World Bank loan or 0% financing and
13:03
lends it out to various projects, Belt and Road initiative-type projects,
13:07
earning a spread almost like a hedge fund would.
13:10
>> DJ Nordquist: Yeah.
13:11
>> Jon Hartley: And then it's received.
13:12
>> DJ Nordquist: And it's a good deal if you can get it, right?
13:14
Who wouldn't take that deal?
13:15
[LAUGH] >> Jon Hartley: Exactly.
13:17
>> DJ Nordquist: I mean, I'll correct you, it's not zero, it's not 0%.
13:22
It's what used to be pegged to Libor.
13:25
So for now, I guess, there's concessional and non concessional rates and
13:30
so China is not getting the rock bottom rates that they used to.
13:35
I have been told by staff at the bank that China doesn't actually need to
13:40
take World Bank money, that they could do better on the markets.
13:45
And so my response was, then why are they taking World Bank money?
13:48
Because every dollar that they take is $1 that doesn't go to Africa.
13:53
And in fact, between IBRD and IFC, that's the main part of the bank and
13:57
the private sector part of the bank.
14:00
I mean, they're taking about $2 billion a year in loans.
14:03
And like you said, [LAUGH] they've got a nice spread.
14:06
They turn around and lend it out to other countries.
14:08
And then basically it's debt drop diplomacy,
14:12
countries that can't pay them back.
14:15
And then in some cases, like the port in Sri Lanka, China will seize the asset.
14:20
So, yeah, but, I mean, there actually is the OECD laid out pretty good criteria for
14:28
what they thought bank graduation should be.
14:32
And so GDP per capita is one of the measures.
14:35
And then another measure is, like, whether you have sort of strong institutions, and
14:40
I would venture to say that China's got some pretty strong institutions.
14:45
They rule that country with an iron fist, and that also you have banking liquidity,
14:49
a decent banking system, right?
14:51
Which obviously China does, too.
14:53
So, I mean, China definitely should graduate.
14:55
In addition to the 2 billion that they're taking,
14:59
they also get the lion's share of World Bank procurement.
15:02
So, say there's some kind of school project in Ouagadougou.
15:09
More times than not, it's somewhere between 30 and 40%.
15:13
The contract to build the school is going to a Chinese firm.
15:17
And so if you count up what they're getting in procurement,
15:20
which is [LAUGH] nothing to sneeze at, and then in addition to the 2 billion,
15:24
they're definitely getting a whole lot more than they put in.
15:27
>> Jon Hartley: So China turns around, they invest a lot of money in Africa.
15:31
They also do a lot of work around the world to
15:35
influence various countries to go alongside them.
15:40
How does that dynamic work in the sense that you are sort of this vote against
15:45
a number of these Belt Road initiative projects?
15:48
How does China's influence work in these sorts of settings?
15:52
It's so amazing to me how long it's taken for there to be this realization that
15:56
maybe China's taking advantage of World Bank financing.
16:00
And I know it's something that David Malpass, both when he was Undersecretary
16:05
for International Affairs at Treasury and World Bank President.
16:09
Something that he took on was to transition China to try and
16:12
no longer be an aid recipient country.
16:14
But I'm curious, like, how does that dynamic work with other countries?
16:17
>> DJ Nordquist: So one thing I should add on on graduation, and
16:20
this gets to your question about, how does China influence?
16:23
So graduation, even though I laid out these three criteria,
16:26
which their OECD criteria,
16:28
I think they're widely recognized as those are the right criteria.
16:32
To graduate from the World bank,
16:34
you have to sort of nominate yourself to graduate, right?
16:39
So countries get to decide if they want to graduate or not.
16:41
So China, [LAUGH] China has not nominated itself to graduate.
16:47
And there are other countries that have graduated from the World Bank,
16:50
like South Korea is a really good example.
16:53
There's countries in the Caribbean, there's a Singapore.
16:57
I mean, there's a decent list of countries that have graduated over time.
17:00
And, you know, I think at least once a week I
17:03
would give a speech at the board about how graduation was something to aspire to and
17:08
that it's like the gold star.
17:10
Congratulations, you've made it into like the developed world club.
17:13
And basically I was aiming that at China, [LAUGH] but
17:17
they're gonna continue to take loans.
17:21
Interestingly, I learned that the Asian Development bank has made a policy and
17:25
I don't know how it was decided or whether it was voted on,
17:28
but they are not going to give China any more loans coming out of the ADB.
17:33
So good for them.
17:35
At the same time, of course, China started its own development bank,
17:39
the Asian Infrastructure and Investment Bank, AIIB, which the United States chose
17:44
not to participate in because it's basically run by the CCP.
17:48
So they're competing with the World bank and they get a lot of business through
17:53
AAIB and then also bilaterally through their ex Im bank and
17:56
through the China Development bank.
17:59
And as you said, they're going into these African countries.
18:01
And a lot of the time my belief is that these countries
18:05
would rather work with the World bank or the US bilaterally.
18:10
But the World Bank says, we don't think that's a good project or
18:14
we don't like fossil fuels, etc., etc.
18:16
And then China just swoops in right after and
18:18
they're like, you wanna build a coal plant?
18:21
We can do that for you.
18:22
We'll give you the loan.
18:23
We're going to bring in all of our own workers and all of our own technology.
18:27
And so you're seeing that all over the Global South, and
18:31
China, even domestically, China is continuing to build coal.
18:35
I mean, they're permitting two new coal plants a week.
18:38
That's sort of my climate change hat.
18:41
I don't know if we have time to get into that.
18:43
But if you want to do something about climate change,
18:49
China has to play ball.
18:51
And they're not.
18:53
So, I mean, there was just a recent australian study that came out that said,
18:57
I think it was the US and Europe that we had cut our greenhouse gas emissions,
19:01
I think, something like 5%, while China had increased theirs, I think 12%.
19:06
So we can't cut enough to make up for them.
19:09
>> Jon Hartley: It's fascinating to me, I feel like it's become such a lightning rod
19:14
issue in sort of these climate Paris climate talks.
19:17
And also, obviously, the World bank in recent years has
19:22
stepped up to try and make climate a priority in its own agenda.
19:27
But at some level, it truly is a global commitment to reducing carbon emissions.
19:32
And carbon emissions have been falling in the US and in other developed countries,
19:36
while in China and elsewhere, it's been rising pretty substantially.
19:40
And even though they made these promises to commit to start reducing emissions by
19:44
2060, it's so far out, barely seems credible.
19:47
I'm just curious, on the topic of China, I'm curious, how do you see the rise of
19:52
China influencing global affairs in the coming future?
19:55
There's a few things that we haven't really talked too much about, namely, say,
19:59
trade US China decoupling has become a serious topic in terms of trade relations.
20:04
They've been influenced since the Trump administration,
20:07
something that's continued through the Biden administration.
20:10
Everything from tariffs on down,
20:12
concerns about how American manufacturing sector has been impacted.
20:17
This is famously described in the China syndrome paper that looks at
20:22
the labor market impacts of increased imports from China.
20:26
Also, we've seen things like human rights abuses, the Uighurs, we've seen
20:31
the national security law in Hong Kong, overturned the rule of law there in 2020.
20:36
And now there's serious questions about whether China will invade Taiwan.
20:39
And then there's all the now these questions about semiconductors.
20:43
How do you see the future of US China relations?
20:46
>> DJ Nordquist: So, I mean, they're pretty low right now.
20:49
I thought it was interesting and perhaps I missed it, but
20:53
I think she met with Kissinger but didn't meet with Carrie.
20:57
But we did have like a parade of.
21:00
We had Blinken went, and then Yellen went, and then Carrie and Kissinger went.
21:05
And so I think- >> Jon Hartley: This is all in recent
21:08
weeks in summer of 2023 here.
21:11
>> DJ Nordquist: Right, we've definitely made an effort to go over there.
21:14
I am, I mean, I'm a China watcher, but I wouldn't call myself a China expert, but
21:19
I did live in Asia when I was younger.
21:21
And, you know, I think sort of our sending a parade of officials there, you know,
21:25
sends very bad signal.
21:27
We look pretty desperate.
21:29
>> Jon Hartley: Well, it's the first time since maybe 2018 or maybe even earlier,
21:34
maybe 2017 or so since there have been US officials going over there,
21:38
including cabinet level officials.
21:41
I know the CIA director went there recently, too.
21:44
It seems like a potential thawing of relations.
21:47
>> DJ Nordquist: Yeah, except our military,
21:48
the military guys aren't talking to each other.
21:50
And of all the parade of officials, those are the ones I really actually do want,
21:55
[LAUGH] more important than everything else.
21:58
I would really like the military guys to have open lines of communication,
22:00
and they don't.
22:01
And that does scare me.
22:03
>> Jon Hartley: Particularly as there's military exercises in South China Sea and
22:08
Taiwan straits that China's organizing.
22:12
All very concerning.
22:13
>> DJ Nordquist: Yeah, yeah, so I mean, I'm worried.
22:16
You know, I think the Biden administration has continued the Trump administration
22:21
policies.
22:21
You know, I think the US went through this period.
22:25
I mean, I think it sort of started where we thought if we let China into the WTO
22:29
and we started this strategic economic dialogue and the Bush administration.
22:33
That it was like if we open up and if we sort of have more interaction with them,
22:38
they will naturally become more democratic and more capitalistic.
22:43
And I think, unfortunately, that is not the way it has turned out.
22:47
And I think nobody really, it's hard that basically we have strategy and
22:51
we just have to accept that it didn't work.
22:54
And I actually got an argument with my french colleague once at the World bank
22:57
about this because I was like, I said, you know, we tried that.
23:00
Like, we've done that.
23:01
I don't know why you guys are still trying to do that.
23:04
Yeah. So, I mean, it's a difficult situation.
23:07
They changed the terminology from decoupling to derisking.
23:13
I think that that's probably right.
23:15
I mean, there are some things we're gonna wanna continue to trade with China.
23:19
I mean, trade in general is good for good welfare economics, right?
23:26
The issue is we don't want them controlling entire supply chains for
23:30
things that we care about.
23:33
Obviously, a lot of high tech stuff, green, that is,
23:36
you talked about sort of the human rights issues.
23:40
I mean, I said when I was at the bank.
23:43
Your human rights agenda is running headfirst into your green agenda,
23:46
because all of the green energy that the bank is purchasing is coming from all
23:50
the Uyghurs, right?
23:52
That's where Xinjiang is, where all of this stuff,
23:55
the solar panels are manufactured, etc., etc.
23:59
So do you care more about human rights?
24:01
Do you care more about green?
24:02
Cuz, I'm not sure you can do both.
24:05
And I do think the bank is struggling with that, and they're trying to figure out,
24:08
like, how to monitor the supply chain.
24:10
I mean, is it the point where you do, like, a Kimberly process, like,
24:13
with diamonds?
24:14
Like, I don't know that anybody can do that.
24:15
I don't know that China's gonna ever open up their books.
24:18
You know,
24:18
there was a big scandal when I was at the bank where it was a 2015 project.
24:23
It was before I had gotten there, where it was, and I'm not kidding.
24:26
Vocational education in Xinjiang.
24:29
[LAUGH] And, you know, shockingly, the project went awry,
24:33
which the bank didn't even know there was a whistleblower who came forward.
24:38
It was all over the New York Times, the Washington Post, etc.
24:42
It was determined that the whistleblower showed evidence that
24:46
the chinese government was taking World bank funds and not using it for.
24:52
I mean, Lord only knows what kind of vocational education they were doing, but
24:56
they were procuring barbed wire and riot gear and that kind of stuff.
24:59
And obviously, that was not the intent of the project,
25:02
nor would the World bank ever fund anything like that.
25:05
>> Jon Hartley: Wow, we had to just further oppress the Uyghur
25:09
population in Xinjiang.
25:12
I mean, that's incredible.
25:15
Thankfully, there was a whistleblower that stood up and made that clear.
25:19
>> DJ Nordquist: But the crazy thing about it was, I said, well, obviously,
25:23
we need to stop dispersing on the project.
25:26
And under World bank rules,
25:27
it's the sovereign that has to ask to stop disbursement.
25:30
And I was like, wait a minute, [LAUGH] what's in the loan covenant?
25:35
It's our money, how come we.
25:36
And China did, they did stop it.
25:39
They did ask for the end of disbursement, but at that point, I think 42 out of 50
25:43
million had already been dispersed, and they wanted to go away.
25:47
They didn't want the headlines.
25:49
But it was pretty bad, very, very bad.
25:54
>> Jon Hartley: Unbelievable.
25:55
>> DJ Nordquist: Again, why the bank shouldn't be in China?
25:57
China doesn't need the money.
26:00
The controls, obviously, are not there all the time.
26:03
>> Jon Hartley: Yeah.
26:04
>> DJ Nordquist: The point of what I was saying was, the bank sent in, like,
26:07
an investigative team, and
26:08
I worked actually closely with the treasury general counsel.
26:12
And basically China wouldn't let the bank team in for four weeks.
26:18
So what could possibly go wrong in the four weeks that they weren't allowed into
26:22
the country?
26:23
And so, lo and behold, the books that they saw, that they were presented were very,
26:27
very cleann.
26:28
And they took them on literally like, I'm not kidding you,
26:31
a cultural tour where the bank staff said that they saw some nice dancing and music.
26:36
[LAUGH] >> Jon Hartley: Wow.
26:37
>> DJ Nordquist: Yeah, I was like, well, did you look for the barbed wire fence?
26:41
We're not really experts in that.
26:44
And I'm like, well, did you think about bringing an expert?
26:46
I mean, I don't know.
26:47
I know what barbed wire fence looks like for sure.
26:51
>> Jon Hartley: Wow, now, I'm curious on the topic of semiconductors, and
26:55
certainly industrial policies is something that seems to be back in vogue now.
27:00
But I'm curious, from the perspective of the World bank,
27:03
how do topics like industrial policy get discussed?
27:06
Do you have any particular thoughts on, say, the Chips and Science act?
27:10
Certainly I think been a bit of a controversial piece of legislation in
27:14
the sense that there's those that argue that there needs to be subsidies for
27:19
domestic investment in semiconductor supply chain.
27:22
But at the same rate,
27:24
some people would argue that it's just a complete giveaway to companies like intel,
27:29
some of these chip makers that can't even seem to build fab sites in places like
27:34
Arizona, because in part they don't have the skilled labor that they might need.
27:39
And then on top of that, too, I think there's arguments that say that it's just
27:42
such an interconnected supply chain to begin with.
27:45
Even China needs inputs from the US to make it semiconductors.
27:50
And so I guess it's not as one sided of a production chain as 1 may think.
27:57
So I've seen sort of both sides of this issue.
27:59
I'm curious where you come down on it.
28:01
>> DJ Nordquist: So I don't think I ever really heard a discussion on industrial
28:04
policy at the World Bank.
28:05
I was there like 19 to 21.
28:08
So most of that time was dealing with COVID and
28:11
the debt sustainability suspension initiative, DSSI,
28:16
which was trying to get China to back off on all these
28:20
countries that were in very, very serious debt distress.
28:26
But I can say from the us perspective, and I would say when I was in the White House,
28:31
we did use the term industrial policy, but it was a bad phrase.
28:35
It was a bad thing,
28:36
which I think traditionally that's what most economists think.
28:40
And I think that obviously you're seeing this administration is there were parts of
28:45
the Trump administration that did believe in industrial policy for
28:48
national security purposes.
28:50
And I think the Biden administration has taken that ball and run with it and
28:53
run with it much farther.
28:54
But then they've also extended it, like you said,
28:59
to chips and other national security issues.
29:03
I mean, the Bureau of Industry and
29:06
Security at commerce is now super important part of the government.
29:10
There was actually a good, I think it was the New York Times piece.
29:12
I mean, it was the New York Times document, nobody'd heard of it before.
29:15
They're the ones that are doing all the export controls.
29:18
And so, you know, obviously the US has had a lot of export controls in the past, but
29:21
we're doing a lot more of them in the name of national security.
29:24
But, you know, I wanted to pick up on your point about, you know, the fabs and
29:28
the skilled labor.
29:29
I mean, I think this country has a really big problem with our
29:34
workforce right now because, as you know, you need people to grow the economy.
29:41
We've got serious demographic issues where I think,
29:44
was it 21 was the first time we had more deaths than births in the United States.
29:50
We're not the only developed country that's having this problem, and
29:54
it's been a problem for a while in Europe.
29:56
Interestingly, China now has that problem, and their problem is much worse than ours.
30:01
Korea is in big trouble.
30:05
I think I saw some estimate that by 2060 there's gonna be like, maybe,
30:08
I can't remember the exact number.
30:10
There's gonna be nobody left in Korea.
30:13
[LAUGH] Japan has had that problem for a long time.
30:16
So if we want our economy to grow, if we wanna continue to be prosperous,
30:21
we need to deal with our demographic challenges.
30:25
And, you know, you were mentioning skilled labor.
30:27
I think that they're gonna have to bring in some workers because we
30:30
just don't have enough of the skilled laborers.
30:32
And I think that, you know, that is important.
30:35
I, obviously, most of the immigration oxygen is focused on low skilled labor
30:39
coming across the border.
30:41
But I mean, we need both, but
30:43
we definitely need high skilled labor if we wanna stay competitive with China.
30:48
>> Jon Hartley: And it's fascinating, I think, yeah, I know that the national
30:51
security advisor, Jake Sullivan, he gave a talk recently on what he
30:54
calls the new Washington consensus at the Brookings Institution a few months ago.
30:58
And it's interesting to really wonder whether all these things, whether it's
31:04
from, say, industrial policy to free trade to free capital flows, all these
31:09
things seem to be under sort of a new lens of thinking amongst many people in DC.
31:14
Obviously not everybody, but I'm curious on the COVID concessionary lending.
31:18
Can you explain a little bit about what the World bank and
31:22
IMF was doing during the COVID crisis to lend to sovereigns that were troubled,
31:27
particularly in emerging nations.
31:29
What was it that the World bank was doing along with the IMF?
31:33
>> DJ Nordquist: Yeah, I mean, obviously the IMF was doing sort of
31:37
more direct fiscal injections into specific treasury.
31:41
The treasury and country acts or whatever.
31:43
The bank did some of that.
31:46
The bank also funded, like, there was a vaccine facility where they.
31:52
The bank purchased, you know,
31:54
from the developing world, since we were the ones that had the vaccine.
31:59
And so they would sort of broker the.
32:00
Purchase of vaccines for developing countries.
32:04
There was a lot of projects to, like, you know, increase healthcare capacity,
32:08
you know, hospitals, doctors, nurses, equipment.
32:12
Obviously, all the PPE, a lot of money went to purchase PPE.
32:16
Pretty crazy times.
32:17
And the bank, like most of the world, was completely shut down.
32:21
And so we were remote.
32:22
And I would, I struggled because a lot of the job of the executive director
32:27
is to try to form coalitions to get votes on your side or
32:30
to push for a different initiative.
32:33
And when you're not sitting next to somebody or seeing them in the hallway,
32:36
it's a lot harder to build coalitions.
32:39
So I don't think it was a good way for
32:41
the bank to operate much like the rest of the world.
32:44
It was just a very difficult working situation.
32:47
But, you know, the bank did manage to get a lot of money out the door.
32:51
And, you know, the vaccine facility was good.
32:53
And the bank, I think, worked with Gavi and
32:57
a bunch of the other sort of vaccine organizations to help save lives.
33:02
That's what it came down to.
33:03
>> Jon Hartley: That's fascinating.
33:04
What an amazing time to be at the World bank in the midst of such
33:09
a incredible global crisis and global pandemic.
33:13
One that scale hadn't really been seen in quite some time in almost a century.
33:19
I'm curious, just pipping from the World bank, prior to the World bank and
33:23
you becoming executive director, you were Kevin Hassett's chief of staff at
33:27
the White House Council of Economic Advisors in the Trump administration.
33:32
I'm curious, like, what do you think have been some of the largest sort of economic
33:36
policy accomplishments of the Trump administration?
33:39
And I'm curious.
33:40
I also wanna ask you a little bit about how you think CEA has evolved a bit,
33:44
cuz it seems like CEA has sort of been displaced in recent years,
33:48
sort of by the National Economic Council and Treasury Department,
33:52
particularly since you and Kevin Hassett left your post at CEA.
33:56
In the post, Kevin Hassett, CEA, I think Kevin's kinda the last CEA to have a lot
34:00
of real influence and a strong relationship with a senior us president.
34:04
CEA sort of now seems to be sort of largely focused on messaging, putting
34:08
together charts rather than actually being involved in policy discussions.
34:12
CEA chair has now been sort of demoted to a sub-cabinet level position,
34:16
all things that have continued through the Biden administration.
34:19
I'm curious what your thoughts are on the state of CEA as well.
34:22
>> DJ Nordquist: Sure, so I'll start with the sort of economic accomplishments.
34:26
I mean, top of the list would be tickshad Hex Cuts and Jobs Act,
34:31
which was corporate tax reform and also individual tax reform.
34:36
And part of that were opportunity zones,
34:38
which is a really interesting piece of legislation.
34:41
Yeah, I mean, so obviously, Kevin, most of his [LAUGH] life's work has
34:46
been focused on the impact of corporate taxation on the economy.
34:50
And so it sort of happened.
34:52
It was like he was in the right place at the right time.
34:54
It's very hard to pass tax reform through Congress.
34:57
It happens.
34:58
I think the last time it happened was 86.
35:01
And so, I mean, we were involved in a lot of the modeling and, you know,
35:06
we were focused on the economic impact of the corporate side.
35:10
But what's interesting about CEA is you've got politics and policy.
35:17
CEA, and this is the same, no matter who's in the White House is who is or
35:22
should be focused on the optimal policy solution.
35:25
And I always used to joke that, you can have really great policy and
35:29
then it runs smacks itself into politics.
35:32
And so with corporate tax reform came individual tax reform.
35:37
Not to say that we were against the individual side, but
35:40
we were more focused on the economic, the GDP impact of corporate.
35:43
And so those two got married.
35:47
And so a lot of that bill is expiring in the next couple of years.
35:55
I think it would be good to extend it.
35:58
My current job at Economic Innovation Group does.
36:01
We've done a lot of work on opportunity zones, which is an interesting way to get
36:06
capital that's been sitting on the sidelines into distressed communities.
36:13
So it sort of eliminates some of the risk for the private investor to come in and
36:17
do well by doing good, as the expression goes.
36:20
And then I'd say the other big accomplishment was regulatory reform.
36:25
CEA was involved in measuring a lot of the regulatory reform and sort of
36:30
modeling what impact it would have and how to shape very various pieces of it.
36:35
And if you look at the, at the statistics, you look at the charts, I mean,
36:39
the combination of tax reform and regulatory reform,
36:43
the economy was doing very,
36:45
very well until COVID basically knocked it on its ass, if I can say that word.
36:49
>> Jon Hartley: Yeah, absolutely.
36:50
I mean, it's fascinating how the corporate tax rates,
36:55
certainly, it's never a politically easy thing to do.
37:00
There's certainly a lot of animosity in general toward
37:03
anything that describe corporate in sort of the political sphere.
37:06
But at some level, the corporate tax rates were so uncompetitive.
37:09
At the beginning of the Trump administration,
37:12
the US had the highest corporate tax rates in the entire OECD.
37:15
>> DJ Nordquist: Yeah. >> Jon Hartley: And there's been
37:16
this massive, almost some people call race at the bottom in terms of just
37:20
competition for the lowest corporate tax rates and
37:23
trying to avoid corporations from leaving or doing inversions or things like that.
37:28
I'm just like, do you have any thoughts on what's been going on right now in terms of
37:32
sort of the global corporate taxation initiatives that Janet Yellen's let on?
37:36
The US Congress hasn't passed anything to give ground on this idea
37:41
that there needs to be a global minimum corporate tax rate.
37:45
Do you have any particular thoughts on that?
37:48
>> DJ Nordquist: I'm not a corporate tax expert.
37:50
I mean, obviously I've learned as I've gone.
37:53
But Kevin always used to talk about the importance of tax competition.
37:57
And actually, he used to, it's an interesting theory that
38:01
the EU basically sort of creates a monopoly for its member states, right?
38:05
They can compete with each other.
38:07
And that's the same with corporate taxes.
38:10
As you said, the US had the highest corporate tax rate in the developed world.
38:14
And so there are a lot of loopholes.
38:16
And companies were doing these funny things with transfer pricing.
38:20
And you're still seeing some of that today where companies,
38:24
they're going to optimize their tax policy,
38:27
they're going to try to pay the least they can because that's good shareholder value.
38:32
I think it's good to have tax competition.
38:34
We got beaten.
38:36
We reformed.
38:37
We're still not the low.
38:40
And so I think Yellen is basically trying to level
38:44
the playing field in corporate taxation.
38:49
I mean, there's some things in that OECD regime that make the US like a little bit,
38:55
seems to me subservient to what the EU wants to do.
38:59
And I think Congress has different ideas about that.
39:01
So I think the idea is to try to make sure that everybody,
39:06
quote, pays their fair share.
39:09
And certainly there are loopholes in the system that need to be fixed.
39:13
I'm not sure that this is optimal tax policy and
39:16
I think it's gonna really hurt American companies and American competitiveness.
39:22
>> Jon Hartley: Absolutely, I mean, it's fascinating to see such coordination on
39:26
tax policy, which is, I think, just an almost impossible thing to get such
39:30
a large group of nations to agree on in their respective congresses.
39:34
I'm curious, on the top of opportunity zones where you work now and
39:37
where you're executive vice president of the Economic Innovation Group played
39:41
a really significant role in the original conception original idea of opportunity
39:45
zones, something I think not a lot of people realize.
39:48
Something that Senator Tim Scott obviously ran with or
39:51
sort of a vehicle to get included in the Tax Cuts and Jobs act, which were passed,
39:55
beginning the Trump administration.
39:57
I'm just curious, in terms of some of the evidence.
39:59
So far in terms of,
40:00
it's still a fairly young policy in terms of just how many years it's been in place.
40:05
I'm curious, what would you say to the critics that argue that it's
40:08
really just a capital gains tax giveaway to real estate developers?
40:12
Is there a lot of evidence coming in in terms of outcomes for
40:15
up and coming communities that it's intended to help?
40:19
>> DJ Nordquist: Yeah, so, I mean, the initial idea for
40:21
opportunity zones came from EIG, and it was Kevin Hassett.
40:25
There's that name again.
40:26
And his co-author was Jared Bernstein, the current CEA chair.
40:30
So it had wide bipartisan support.
40:34
It was a standalone bill for
40:36
a couple of years before it got sucked into TCJA, thanks to Senator Scott.
40:42
And it was interesting because something that had wide bipartisan support suddenly
40:46
became known as a Trump thing because it was part of the Tax Cuts and Jobs Act and
40:50
it hadn't been.
40:51
And so it has sort of got a little bit of a partisan aura around it, and
40:55
it shouldn't, because everybody should want this policy to work.
40:59
Everybody should want to get that capital that's been sitting on the sidelines into
41:04
productive uses.
41:05
And in terms of evidence, there's been, it's still a young policy, but
41:10
the evidence that we've seen is that it's gotten billions of dollars.
41:15
When I was in the White House, we did an analysis.
41:18
I think we found it was 75 billion.
41:21
That was early on, so that was a projection, but others have found less.
41:25
But it's still getting money off the sidelines into
41:28
these distressed communities.
41:30
And it's been criticized as only going to the richest of the poor areas.
41:36
And we've seen evidence, Gao treasury actually just put out a paper on it,
41:41
the biden treasury, where it found that actually it's going to more of the bottom
41:46
than the top, and you're still going to the bottom.
41:49
Even if you're at the top of the bottom,
41:51
[LAUGH] it's still going into a distressed community.
41:54
As to the critique that it's property development,
41:58
I don't really understand that critique at all.
42:01
So what, people need houses, people need stores and restaurants.
42:06
To me, that doesn't really hold water.
42:10
I know there was criticism of one high end hotel, I think, somewhere in Oregon.
42:16
And so that was highly criticized.
42:18
The project actually didn't go through.
42:20
But I sort of laughed about it because I worked at the World Bank,
42:24
which is the world's largest development bank.
42:27
And I cannot tell you how many projects the bank funds that are high
42:33
end hotels [LAUGH] that can have good economic impact, right?
42:38
You've got construction jobs, you've got permanent jobs, reception, bellhops,
42:42
you've got restaurants, you've got cooks and all that.
42:45
So, I mean, that is considered economic development.
42:48
So I think there's some new legislation to tweak
42:52
opportunities on this to do better reporting.
42:56
I mean, it's certainly not a perfect law, but it's done well.
43:00
It's done much better than new markets tax credit, which is a lot less flexible.
43:04
And, you know, I think, I wish the politics would just fall away and
43:09
we could do something where we're using some good productive capital
43:14
into these areas that sadly have been left behind and they need it.
43:19
>> Jon Hartley: That's fascinating.
43:20
It's so interesting to hear from someone who's working at EIG,
43:24
the Economic Innovation Group, which essentially set everything in motion for
43:28
opportunity zones to become law across the US.
43:31
And here we are just about five years on.
43:34
Well, this has been such an interesting conversation, DJ,
43:36
it's been a real honor and a real pleasure to have you on.
43:38
Thank you so much for joining us today.
43:40
>> DJ Nordquist: Yeah, thanks, Jon.
43:41
>> Jon Hartley: Today our guest was DJ Norquist,
43:43
who is the executive vice president of the Economic Innovation Group and
43:46
the former us executive director of the World bank.
43:49
This is the capitalism and freedom in the 21st Century podcast where we talk about
43:52
economics, markets and public policy.
43:54
I'm John Hartley, your host.
43:55
Thanks so much for joining us.
44:05
[MUSIC]