This November's Economic Stakes

As this year's elections in the United States draw closer, the economic stakes are growing higher. I have made no secret of my concerns, including during my recent discussions with Gerry Baker , Larry Kudlow and AFPI Chief Economist Michael Faulkender , Fox and Friends , and Maria Bartiromo .

In particular, I would highlight that during my recent appearance with Neil Cavuto - the transcript of which I've placed at the end of this post - I made the point that the foundation of our free-market economy is based on the idea that a free people are able to produce better and faster.

The notion that government that can backfill when mistakes are made is terribly misguided, and we are seeing this destructive idea take root not just as part of the Biden-Harris economic agenda, but also at the Federal Reserve. Both entities are driven by the government allocating capital wherever bureaucrats deem it most relevant - a policy directive fundamentally at odds with basic free market principles.

This November, America will choose between two economic visions - one based on a return to free market principles, and one seeking to continue the current big government-driven policy agenda. Our national prosperity depends on us making the right choice.

With these stakes at hand, I was very pleased to join President Trump for his remarks at the Economic Club of New York, during which he made clear his plan to reignite explosive economic growth in America.

There is a strong contrast between his plan to reduce inflation by expanding manufacturing and energy production and defending the dollar, and the Harris plan to increase government spending, taxes, and regulation.

-David

Transcript - Fox Business: News with Neil Cavuto August 30, 2024

Neil Cavuto: David, great seeing you. I was thinking from your former perch looking over the financial conditions of the world, we’re all kind of in lockstep with a trend in most countries to lower interest rates. Maybe they will pick up the pace next year. How do you see that all falling out?

David Malpass: Hi Neil.? Well, Japan is raising rates because they've been too low, but others are cutting. The models are different in different central banks. One of the important things is to recognize where you are using old models to figure this out. Inflation is a lagging indicator. They are still using the Phillips Curve -- the idea that job growth causes inflation. I think it's important that we switch to a model where we recognize more production will hold down prices, and part of that is the cost of production is too high right now. That gives you the affordability problem we've got in housing and everywhere within the economy.

Neil: One of the things I noticed we are seeing in this election year is both candidates have actions and plans that will accelerate deficits and debt, whether through windowing tax cuts, and a lot of Republicans, conservatives say it's not the same as spending, but on paper, the debt goes another $5 trillion or more, a trillion under Kamala Harris. That is something not being addressed by either side. What do you think?

David: These are huge problems. The government is getting bigger and bigger and bigger, so whenever it sees a problem, it says the government is going to be the solution. That's the talk about having the government build housing for people because of the affordability problem. We have to look at the importance of private sector companies. The whole foundation of our free-market economy is based on the idea that people are able to produce better and faster, and it is not the government that can backfill when a mistake is made. That goes into the Fed's model as well -- it's really important we have a forward-looking model based on the new reality. The Fed is using the same model used for the gold standard. We talk about Milton Friedman and Bill Phillips. These are people from deep in history, and we need new models to make a more efficient economy. Last point, capital allocation is really important to be done by the market, and what we've got now is the government and Federal Reserve allocating capital where they think it is going to be productive. It's not a good mix.

Neil: The plan Kamala Harris has outlined was $20,000 for first-time homebuyers. That adds up as to the cost. It might stymie the Federal Reserve if it is trying to address inflation, more focused on a slowdown and trying to get ahead of that. It could complicate what the Fed has to do.

David: That's right. It would be good to know. They comment on the massive government spending and the effect on inflation. That should be discussed. I saw in the Jackson Hole conference that the Fed is starting a 5-year review process. I hope it will look for a new way to have dialogue as the debt and interest costs are going through the roof. The Fed has to have an opinion on whether it can be consistent with price stability and what the transmission mechanisms for that are. Some deep thinking would help. My view is that we can have faster growth by having sound money and sound regulatory policy from the Federal Reserve. That would go a long way toward helping on the supply side of the economy.

Neil: One take on it is that the Nvidia sell-off was a localized event that didn’t spread to a market contagion, and maybe that was a reflection that one company stumbling is hardly a day of reckoning for AI spending. Seeing as that is so important for this economy and these markets and globally if you think about it, what do you make of that? Is that a healthy development not to be focused on one company but to see this broaden out?

David: I think that is good for the stability of the market but we have to look at the exuberance in the S&P 500 and Nasdaq. The exuberance comes in part because the government has become one of the big risk modulators, risk takers. The Treasury Department is doing that by issuing short-term debt rather than long-term so they are not burdening the economy. If you’re in the private sector, you look at that and say they want us to take risks. The same on the Federal Reserve side. They are slowing down their balance sheet shrinkage, which is the same kind of support for the bond market and the stock market. So, if you are sitting in those markets, you’re getting this green light where the Fed says it has the tools to deal with any perceived risks that come up. So, you are getting this green light from the government to take risk, and I think that’s what’s showing up in the markets.

Cavuto: Very well put, my friend. Very good seeing you again. David, be well.