Secretary Scott Bessent Q&A with Larry Kudlow at the Economic Club of New York

Thank you, everybody. Thank you very much. Thank you, Secretary Peston, for an excellent opening speech. Secretary, let me begin. Of course, you mentioned Tara's opening speech, and almost everybody on Wall Street and the financial market are obsessed, I would say, crazed about Tara. And I thought perhaps we could take this opportunity to do some basic educational work on this subject. So, President Trump, in his speech to Congress on Tuesday, very forcefully talked about changing the unfair trading system, which you referred to in your own speech this afternoon. The President said there could be some one-time difficulties, if I have that right. One-time difficulties? Well, you talk about one-time difficulties, and perhaps the biggest question I hear all the time is, are tariffs inflation? Okay, Larry, there's a lot to unpack there. Right. So, let's start with a couple things. One, that I would think over the coming months, we're going to have a couple of adjustments. One was one that I talked about, as we de-leverage the government services, de-leverage the private sector, which we'll talk about later. And the tariff will be a one-time price adjustment, yes, but while I don't – I've agreed not to talk about the perspective that policy is going forward, I would hope that the failed and transitory to get back together and think that nothing is more transitory than tariffs is just a one-time price adjustment. And for those who say, oh, the tariffs are a tax, they're inflationary. I said, oh, so you're saying taxes are inflationary. I would like to challenge a lot of my Democratic friends who – so, as I said, the economic program is the whole government's political program, and I think that if we could get a one-time price adjustment, we've also got – barring the move yesterday and today in government bonds, the European bond rollout, the Japanese bond rollout, we have senior interest rates are lower, mortgage rates are lower, and as of last night, food prices went down 50 percent. So, across the continuum, I'm not worried about it. Yes, and I want just one follow-up on this. The president is a believer in the rest process. It goes back many years when I worked in the rest process. So people are – as I say, so many people in the financial world are worried about inflation, tariffs, and all the rest. But he has said also that if countries who have engaged in unfair trade and trade reduce their tariffs or their non-tariff barriers, then we will all have a lower tariff rate. He's said that for many years. People don't seem to understand it. I don't know if it's in the markets. I want to put it out there. It is possible over a period of time that tariff rates, both human and fraud, can come down, is it not? Well, as President Trump has said many times, tariff is his favorite word. I would say that it's typical, probably the second favorite word. And I think we have to be open to the idea that if you want to be a dumb fool like Justin Trudeau and say, oh, we're going to do this, then it's going to – tariffs are going to go up. But if you want to sit back, have a discussion with Commerce Department, USTR, as they all have my phone number too, I am happy to have a discussion with our foreign counterparts. This says that here's what we think we're doing. And do tariffs really actually go up? Because we know India does this with the rest of the world. Germany does this on – or the EU does this on their part. That's a quantitative number. But also, what are non-tariff barriers? Apple cannot sell the new iPhone 15 because of global content laws. Are you manipulating your currency? Are you suppressing the value of that? Are you unfairly subsidizing select industries, either via bank lending or suppressed labor markets? And then five, something that's come to our attention recently, the EU is putting these gigantic fines on our U.S. economy. And that's a non-tariff barrier. So we're going to look at that and then talk about what could happen on a reciprocal basis. It's going to be passed – much of that will come out April 2nd. And we will then – it's going to be passed by an independent, a partner trading partner, and there will be a discussion. When Prime Minister Keith Thompson and Team UK were in the White House on Thursday, we had a very good discussion about getting going on all of this and more. Thank you very much for that. I also wanted to circle back to you mentioning bond rates. Actually, very strong bond market value. More or less, it was operating. I don't know what the tenure is today. But we're looking for higher, higher money. And it was nearly 5 percent a month. It was 4.84, but not better. I like the round numbers. I learned that from Trump, round numbers. Anyway, to the point I'm making here, let's talk for a moment. When you and I talked on an interview after the conference, you said that you were focused on tenure, bond rates, the President himself was focused on the bond market. It has come way down. And on top of that, even while people are telling everyone that character inflation or money prices have come down, oil prices have come down, I just wanted to talk for a moment about the bond market situation, when rates are falling. So the two things that I talked about, that President Trump has talked about, you will notice that he has stopped calling for the Fed to cut rates because the purpose of cutting rates is to cut rates. And when the Fed cut rates, they did the I will criticize past actions before I was confirmed. Their past action in September doubled rate cuts, 50 basis points, and two more subsequent rate cuts, 100 basis points. The long end of the curve moved up. So our view is we want to focus on the tenure and what can we do as an administration to bring that down. And one of the things is sound fiscal policy. So controlling government spending, getting back to confidence. One of the reasons that I'm sitting up here now, not out in the audience, is I became so alarmed by the fiscal stance the previous administration had. 5.7 percent to 6.7 percent. It's increasing spending. We've never seen that. It's during wartime when we weren't at war or we weren't in a recession. And we've got to bring that down. And let me be clear, the U.S. does not have a revenue problem. We have a spending problem. We are right where we have been in the long-term averages, 17.5, 18.5 percent of revenue. That hasn't changed. What has changed is the blowout spending. Over the past 40 years, deficit has averaged about 3.5 percent or so. We were at 21, 22 percent of GDP spending. The previous administration blew it out to 25 percent. Some of the things they put in place, if we hadn't grabbed them by the horn, it was going to blow out even more. And so we've stabilized it. We're bringing it down. And we're going to go from there. So let's stay with that for a moment. I want to get to tax policy first. But let's just stay with that for a moment. Very important subject, budget deficits and overspending. I've known him for many years and he's been a great mentor. Glenn asks, you've wisely talked about the need to reduce the budget deficit in the U.S. In addition to consideration of revenues and spending, growth is important. A higher rate of economic growth that doesn't require more deficits to pull off can reduce deficits and the debt-to-GDP ratio while raising living standards. And I'm going to go through it. Well, I'm out of breath. What are the three best things we can do to reduce growth? What are the three best things we can do? You know, the previous administration did the three best things to reduce growth. So look, I think it's your best job. Larry, you do one of the things that's really important to me. We got to pass the tax cuts and jobs act this year. The sooner the better. And the President said he wants permanence in that. So, A, the permanence in that. Part of that, as the President mentioned at the address to Congress on Tuesday night, was making the full extension to capital investments retroactive to January 20th. Another thing that we are considering, and I'll talk about it because the President mentioned it, is perhaps having full expensing. We'll create a window. And perhaps having full expensing of factories. So equipment and factories. Not all structures, not airplane hangars, not used storage, but factories to create American jobs. So we think that could be very powerful. So that would be one. Cutting regulation. I think the real tax, or the under-explained, under-noted tax on the American people has been the regulation. Steve Morton's Committee to Unleash Prosperity has some great statistics on that if you want to go to their website. But not only does it slow down the velocity in the economy, it's been a real burden on American business, American households. I talked a little about the financial regulations, but it's across every sector. And a lot of these, the previous administration threw a lot more of these on their way out the door. So that's an ambitious and effective deregulatory agenda. And then three, our proposal to bring down energy costs, increase energy security, and for U.S. energy dominance, because what we're seeing, a lot of the affordability prices that we have, is not only the direct result of increased gasoline prices, home heating prices, but energy, as you know, Larry, permeates everything in the economy, whether it's the transportation of food to grocery stores, any kind of travel, any products that are petroleum-based. So I think that's a long answer, but it's getting the tax bill done, deregulating, and the energy dominance. Just to stay with it a little bit, first of all, the President, in his speech on Tuesday night, called for 100 percent expense. Retroactive to January 1, which I think is really quite extraordinary. And we've had very poor business, fixed business investment spending for several years. So that would be retroactive. Retroactive, so any of you considering a project, you can do it now. We're going to get this bill passed. And if you've got it and it's ready to go, there's no reason to hesitate. And part of this, also the scenario for one big beautiful tax bill, is one big beautiful bill. I mean, that's what it is. The income tax rates would stay down. The small business production would be restored, if not more. We talked about the expenses. Corporate tax rates become 15 percent, made in America good. Fifteen percent would put us at the very, very low end of the OECD. And this would all, I guess you could say, tax-free tips, tax-free overtime, tax-free senior benefits. And it would be made permanent. It would be made permanent. That is what the President called for. And it could be scored on a current policy baseline, which means, in effect, we don't have to worry. I mean, the issue here is to stop the $5 trillion tax hike, there's no evidence that this tax bill and tax proposal would actually reduce revenue. In fact, just the opposite happened in late 2017. Look, I think that certainty, the closer we get to the tax bill expiring, the more what I would call an uncertainty tax goes up. So the sooner we can get this done, I do something, so myself, Kevin Hassett, the Executive Director, Steve Peterson, Chairman of the Senate Finance Committee, Senator Crapo, Speaker Johnson, and the Chairman of the House Finance Committee, Dave Smith, and the six of us are going at this every day to try to get it done as soon as possible so that there is no glitch in what's going on. Because the longer we wait, the bigger the chance that the unthinkable could happen and we could have the tax cut at a profit tax increase. And I know that President Trump believes that one of the reasons the 2018 midterms were unsuccessful was that it was an amazing tax bill you put together, but that it wasn't focused on the first half. If you believe, and I know the President believes, if you believe, and I know that Glenn Hubbard believes, that with good policy, we should be able to project a 3% GDP growth baseline out over the next 10 or 20 years. I think, so, for those of you, when I used to sit out there for 35 years, I thought I knew how Washington accounting worked. And I was wrong. Now that I'm inside the Stockbrook factory, just so everyone, so we can kind of level set, see what CEO scoring makes Enron look conservative. I mean, it's crazy, the things that they have. And when Larry and I talk about current policy scoring, that if we don't use current policy, the current CEO protocol, and this is why I think, now being on the inside, we've got an individual indicator, an individual tax cut, that with the current baseline, any, we, I don't know why we're calling this extending the tax cut. It is the current tax policy. Extending the current tax policy does get re-scored. Extending current spending, current spending that gets put in, does not get re-scored. So, yes, this is easier to keep spending going, to have the tax policy, the tax level, to have to fight for every, depending on when they expire. So, this is why I'm on the inside. Yes, thank you for that. I think it's a really, really important point. As far as the big six is concerned, whether they're negotiating or not, Kevin has been in the House Senate member, you will, there will be a Trump budget, and there will be a Trump tax plan that will be formally submitted, you know, at some point in the future. Yes, and Larry, as you said, so, one thing we don't talk about a lot, and I think we're going to, is the tariffs. Right now we have substantial tariff income from China. And if we have new tariff income, we won't be able to score that since it won't go through the legislative process. But I can tell you that could be very substantial. And if you think about it, when people say, oh, tariffs are a regressive act, that, well, are they a regressive act if you then use the income from tariffs to no tax on ships, no tax on security, no tax on overtime, making auto loans tax deductible, those four policies which President Trump put forward during the campaign all accrue to the bottom 50% of wage earners of working Americans. So, could you have a tariff policy that is in finances, income tax cuts, and real income increases for the bottom 50%? I think that's a good question. Have you ever met William McKinley? I guess the President sent me text messages on William McKinley. I know I've been around, but I just missed him. I don't know. Perhaps you communed with him. I don't. Okay. I did in anticipation of discussing with the President. I did read his biography. Robert Mary Fox is very good. Okay. Other questions? I know we've mentioned tariffs, Mr. Secretary, but I want to do it again. We have questions from Mr. Glenn Hutchinson. There are two theories of tariffs. The first is they are a negotiating tactic which involves short-term pain for average Americans, but long-term gain. And then he goes on, the second is that they might be considered sound fundamental policy. What are your thoughts with respect to these two scenarios? Sure. So a couple of things. In terms of tariff policy, I think one thing that has become clear to me over the past decade, past few years, and I said it out in an editorial that I wrote in The Economist, is retarding an equivalent does not work if other countries have a very different economic and social policy. So China is exporting their policies to us. They have, if they've decimated our manufacturing sector, there's a new paper out called The China Shot. It says, Communities recovered, but workers haven't. So clearly the policy is not working for working Americans. So China exported their policies, and tariffs are one way to push back on this. So I do think it is good policy. And it is, you know, I've said, and I say this because I know it's what President Trump believes, but he believes three things. One, that it is a good source of revenue. Two, it protects our important industries and employees. And three, he's added third leg to the stool and he uses it for negotiating. You know, I often, we've talked about this for a while, is the free trade theory of the retarding equivalent. It is a very interesting theory. But there is no equivalent. As you just noted, I just wanted to highlight, the Chinese economic system and the Chinese political system is not equivalent to the United States. We are a free market democracy. They are a proletarian socialist political entity. It's like California versus Texas. Well put. Okay. Very well put. And I think that's the problem when you look at the world trading system. It is unfair because it's not equivalent. Yes, foreign tax, foreign tariff rates are much higher. But many of these countries are just not equivalent. We're not playing, it's not only a non-level playing field for tariffs, it's a non-level playing field for basic economies That has to be changed. The world trade system, world trade organization never took that into account. Well, it hasn't, Larry. The only good thing that I could say about COVID was it was a beta test for what we could have if we had a large-scale economic disturbance or a hot war. And it showed us that optimal supply chains are not secure. And I think it has made us refocus on many of the aspects. When you see President Trump talking about the rare earth strategic minerals reshoring, our medicine reshoring, the semiconductors, all of that is from the lessons we learned during COVID of not having reliable trading partners. And to your point, Larry, we can accumulate all of the strategic mineral deposits that we need, but China still does 85% of the processing. And every time a private sector company tries to stand up a processing facility outside of China, China drops their prices and puts them out of business. There are several in the United States that are just sitting idle because the Chinese saw what was happening and dropped it. And that's unacceptable. I just want another question for Mr. Glenn Hudson. He's asking, a principal component of the Trump campaign was that our deficits and debt are too high. Yes, I just talked about the spending. It is too high. And I think, Larry, you and I have talked about it. I've seen Glenn Hubbard talk about it in ECNY seminars. But if you can change the growth trajectory, then we can grow our way out of this debt. And, again, another one of the reasons that I'm sitting up here and not up there was I was afraid that four more years of life we just had would make it impossible to grow out of our debt, that the accumulated debt stock would be just too big, and you would have to go into a European-style system where you're working all the time just to pay off the debt. But I do think we are taking this seriously. I do think this is the last chance bar and grill to get this done. And imagine if we think about a growth trajectory. And, again, back to CBO scoring. CBO scoring scores, in the projections, they talk about or they use 1.7%, 1.8% baseline growth for 10 years, whether you cut taxes or raise taxes. So if we are sitting here in a year and we've just had the biggest tax hike in history, the CBO will not change their growth trajectory, will not have changed it, even though I don't even want to think what growth would look like. So if we could get above 3%, if we could hold expenses in line, flat, or even if we could do the unthinkable. If we think about kind of a naive reductionist model of government, with G equals S minus T, spending minus taxes, Republicans, we'd like more spending, but we just want to do it slower. We like lower taxes, Democrats like higher taxes. What if the S actually fell less or went down? That would be a pretty good story. You know, I saw a study just to finish this point. Over 10 years, the differential between 3% growth and 1.8% growth comes to about $3 trillion of equity money, which is important for any number of private sectors. And again, Larry, it's back to the predictability. If we can do that, and then all those benefits actually accrue out into the economy, not to the bondholders, not to the government. And just one last point on the budget. Those savings, I saw a poll, a Democratic poll. My friend Mark Mann, in his poll, 69% favored the idea of a $1 trillion budget save from the Democratic poll. But as you incorporate your big six projects, is there a doze spot for this? And perhaps how much money that is? Larry, I don't know yet, but if you think that there's no way for us to refute in the U.S. government, if you think about it, now that I live in D.C., 25%, 25% of U.S. GDP flows through Area Code 202. Everybody is trying, there are all these markets, same thing. Americans with health care, every Monday is paying for your health care. But when you think about 25% of GDP will include Area Code 202, everybody is trying to skim a portion of it, trying to reallocate it. I don't know what the savings level can be, but I've been examining a lot of these contracts and a lot of this report. And I was with Glenn Youngkin, Governor of Virginia, the other day. And I thought he was always in a state over a government layoff. And so his northern Virginia would probably be the area most affected. And I said, Governor, how are you handling this? How are you messaging this? And he said, we have 350,000 private sector jobs available in Virginia. My office has a portal up. And anyone can go on the portal and come and join us in the private sector. I mean, that goes to your ears, I think President Trump has said that. But it was your nose, your eyes. This has been a government-driven economy. We want to make this a private sector-driven economy. We want to, as I understand it, disempower the public federal bureaucracy and re-empower the kind of risk-taking and investment that goes along with private sector events. You'll see headlines, federal jobs are down. Oh, my gosh. The fact is, private sector should be vastly bigger than the public sector anyway. And new tax policies have a lot of incentive. So, Lee, I want to end on your theory. Should we privatize the economy, which I think is so important, and should, in fact, be a global model for other countries? Larry, everyone knows what they should do. It's just, do they have the willpower to do it? For any of you who haven't read it, Mario Draghi, two weeks ago in the FT, had a very good piece on European competitive papers that he put together, where he talked about that intra-Europe is actually carrying themselves more than America ever could because of their high regulatory burden. And when I think that as we bring down the spending, we're not going to do it all at once. I'm not in the habit of repeating private conversation, but I will tell you, the first time I went in to see President Trump, I was getting involved with campaigns. He looked at me and said, Scott, how are we going to get the debt and deficit down without killing the economy? And I've been thinking nonstop about that for 15, 18 months now. And I really do think it's this transition from public to private that will bring down or will deleverage the government. And as I talked about, that's why I wanted to lead with it today through this group, that we will re-leverage the private sector. And part of the key to re-leveraging the private sector is setting regulations, making the tax policy permanent, and getting our regulated banking system going. I think that private credit is exciting. It puts the breadth and depth of our capital market. It's something that is new in our capital market. But we also have to get the regulated entities lending in. I think that they can coexist. And I think Main Street, in terms of the regulated entities being squeezed, it really happens at the small regional banks, small banks and community banks, which is Main Street. And like I said, Wall Street has done great. Wall Street continues doing well. But this administration is about Main Street. Anyway, Secretary, we appreciate your visiting here, and we wish you the best of luck in God's work. Thanks, Loren. Great. Thank you both very much. I think, Mr. Secretary, thank you for choosing Economic Club as the venue for you to describe your ideas as they're developing. It's terrific and an honor for us to have you here today as a former club member and now as the Secretary. Exactly. Okay, great. And, Larry, thanks as always for engaging so thoughtfully. To our fellow members, thanks to all of you for being here. We have a great series of events coming up. Larry Fink is coming, John Gray, Dan Lowe. Also, for those of you who are online or are going to be in Florida, we're now trying to do events there. And tomorrow, Governor DeSantis will be addressing people in Florida on behalf of the Economic Club of New York. Let me also say thank you to the 400 Centennial members of our club who provide extra support so we can put these types of events on, and we're very appreciative. Let me also say, too, that these events don't happen because we snap our fingers. Barbara Van Allen and her team do an amazing job in a short period of time of making these things happen. So, everyone, those that are online, thank you for joining. Those in the room, please enjoy your lunch. And, again, thank you, Mr. Secretary, for being here today.