Dean BAI Chong-En Dialogue with President and CEO of the Federal Reserve Bank of Dallas Robert S. Kaplan

On 7th May 2019, Mansfield Freeman Chair Professor BAI Chong-En, Dean of the Tsinghua University School of Economics and Management (Tsinghua SEM) held a dialogue with Robert Steven Kaplan, who was warmly introduced by Professor XU Xin, Associate Dean of Tsinghua SEM, as an old friend of Tsinghua having attended a similar dialogue just a year ago.

Before becoming a central banker, Robert S Kaplan worked at Goldman Sachs for 23 years and among other positions, served as the Head of Investment Banking in the Asia-Pacific region. In academia, Kaplan also held the post of professor and senior associate dean at Harvard Business School. During the introduction, Professor XU acknowledged Kaplan’s wide expertise by describing him as a man with deep knowledge not only in the fields of policy making and education but also in the industry. Despite being held on a weekday evening, the event attracted a full house attendance with many students eager to hear firsthand the views of an industry veteran.

Current State of US Economy

Dean BAI kicked off the dialogue by pointing out that the US economy is currently doing well, citing evidence such as the low unemployment rate, strong Q1 GDP growth at 3.2% and relatively low inflation. Kaplan attributed this to the good shape of the US household balance sheet. He stated that the many years of deleveraging in the household sector are taking effects, adding that businesses are also investing more in technology, which helped boost productivity. Further, the fiscal stimulus and corporate tax reform have worked together pushing the US economy to perform better. He is confident that the economy’s healthy growth will continue and does not foresee any significant downturn in the near future. Nevertheless, he is remains cautiously optimistic and expected that the overall growth of the GDP to be around 2% in 2019.  

Responding to Kaplan’s explanation, Dean BAI asked whether fiscal stimulus, which has played a part in the US economy’s performance is a one-off push. Kaplan explained that there are 3 parts to the fiscal stimulus – tax cut, spending and corporate tax reform. He admitted that tax cut and spending are probably a 1-time boost to the economy and its effects will probably fade with time. However, he expected that the corporate tax reform would have advantages that might be more sustainable as they provide a significant assistance to corporate firms.  

On Future Challenges

As the dialogue shifted towards the subject of future challenges, Kaplan started by stating that he does not believe the perpetually increasing debt levels in the United States can be sustainable in the long run. He believes that the United States should start taking precautionary measures to manage its national debt. Kaplan also mentioned how demographics change will create headwind for the US economy as its population starts to age. He then explained how the GDP growth in a country is directly tied to the growth in workforce and productivity. While Kaplan mentioned that immigration is one way to mitigate the issue, he acknowledged that this is currently a sensitive topic and does not appear to be a likely solution.

Moving on to the global economy, Kaplan shared his sentiment that the global economic growth this year would not be as strong as last year when many major economies achieved good economic performance. He expressed concerned that there are far more uncertainties this year, such as the ongoing Brexit’s negotiations, a new administration in Mexico and China’s ongoing efforts to curb the influence of shadow banks, all of which could create volatility in the market.

Kaplan took the opportunity to share that he constantly takes into account of the economic situation in other parts of the world when formulating internal policy. He added this is, in fact, one of the reasons why he visits China frequently. Kaplan mentioned how the US economy is directly tied to the global economy, adding that if there is a global slowdown, the United States would inevitably be affected as well. On this note, Kaplan gave credit to China’s strong economic growth in the past decade as a vital impetus that strengthen global growth and helped ended the global recession which the United States also benefited.

Dean BAI then asked whether the world is now in a better position for the next slowdown, to which Kaplan responded that the answer is both yes and no. He noted that the lending institutions are now in a better shape as there are now more refined stress testing methods and a better regulatory environment. On the other hand, he noted that most economies are facing an ageing population problem (Kaplan listed Germany and Japan as countries with a severe ageing population issue), which will cause a strong headwind to any economic growth.

Kaplan then shared that the demographics spread is actually healthy in many developing economies. Once again, he alluded that integration through immigration and trade policies can help to alleviate the demographics problem in developed economies, although he conceded that most policies today are going the opposite direction, which he says is a worrying situation.

On US-China Relationship

Dean BAI then discussed the bilateral relationship between United States and China. Kaplan started by expressing that he is still optimistic that there will be more integration and collaboration in the coming years because both countries has a strong interest to settle any ongoing disputes. On this end, Dean BAI mentioned that in the many aspects of the current trade dispute, it might perhaps be easier to first manage concerns regarding market entry, intellectual rights and government subsidies rather than the trade deficit directly as they are more policy related.

Kaplan then proceed to elaborate that one of the multiple causes of current tensions is that there is a high level of dissatisfaction in many US communities as people are finding their jobs being restructured or eliminated. These people are vocal in their concerns that globalization are posing a threat to their livelihood. In light of these events, Kaplan worries that poor policy choices may be made in the short run and stressed that there is a responsibility for business leaders to communicate the importance of integration between the two largest economies in an apolitical way.

Kaplan emphasized that, in the long run, it is clearly in the interest of United States that there is more prosperity and opportunities in the world. For instance, he stated that the United States’ economy clearly benefits from multilateral trading. Nevertheless, Kaplan also acknowledged that there are significant cultural and operational differences between countries. He added that it is unfortunate that the media sometimes amplify these issues and cast a bad light on these differences.

Common Grounds

As the dialogue draws to a close, Dean BAI asked Kaplan on how the United States and China can work together moving forward. Kaplan believes that, for a start having a clearer framework and a set of well-defined rules will definitely benefit cooperation. He added that competition between the United States and China can be constructive and not be perceived as threatening for either country.

Kaplan stressed that it is imperative that the two countries find common grounds to do something good for the world. He listed a few potential areas that the two countries can work together, such as tackling climate change and exploring renewable energy. Kaplan reminded that these are issues in which neither one country can tackle or solve alone. On this note, Kaplan reached out to the crowd declaring that it could be the very people in this room that can step up and provide better solutions for these problems.

Dean Bai agreed, stating that if we can all work together, we will all live in a better world.



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