HomeBriefings – Foreign Press Centers...Wall Street Series: Ethan Harris, Bank of America

# 									Wall Street Series: Ethan Harris, Bank of America							

FPC Briefing

Ethan Harris, Managing Director and head of Global Economics at Bank of America Global Research

Wednesday, February10, 2021 at 2:00 p.m. EST

New York City, NY

February 10, 2021

## 								Background							

        -  This briefing is part of a series organized annually by the New York Foreign Press Center to give exclusive access to Wall Street experts. There are several briefings exploring this broad and important topic which will be scheduled over the next few weeks and we ask that interested journalists RSVP to each briefing once the media advisory announcing each event is released. Ethan Harris, managing director and head of Global Economics at Bank of America Global Research briefs on the United States and global economic outlook for 2021.  Following prepared remarks, there was an opportunity for questions. 

**NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR**

**MODERATOR:**  Okay, I think most everybody is connected, so welcome, everyone.  Good afternoon.  We’re pleased to have you here today for another installment of our Wall Street series, where we provide our members exclusive access to financial experts who share their views on the U.S. and global economy.  Today’s briefer is Ethan Harris, who is the managing director and head of global economics at Bank of America Global Research.  Welcome back, sir.  I know you’ve briefed with us several times before, and I apologize for the background noise.  That’s life here in Brooklyn teleworking, so if you could excuse the ambulance.

Anyway, Mr. Harris will share his perspective on the global economy, and then there will be an opportunity to ask questions.  As a reminder, this briefing is on the record, and the views expressed by our briefer are his own – do not necessarily reflect those of the U.S. Government or the Department of State.  We’ll post the transcript of this briefing later on our website at fpc.state.gov, and if you publish a story as a result of this briefing, please do share it with us.

After his prepared remarks, we’ll open the floor for questions.  If you have a question, please go to the participant field and raise your virtual hand, or you can submit it in writing in the chat box and I’ll ask it for you.  When it’s time to ask your question, we ask that you do open your microphone and also your camera so we can engage that way.

And with that, let me pass it over to Mr. Harris.  Thank you, sir, for joining us.

**MR HARRIS:**  Thank you very much, and it’s great to be back together with you folks again.  I guess you say this every time you give a talk like this, but it’s an amazing time to be an economist.  I didn’t realize that I got the wrong degree when I became an economist.  I should have become an epidemiologist, because now we’re in the world of having to make this amazing transformation of figuring out loops between viruses and vaccines and the economy and all that stuff.  So what I’d like to do today is start with some broad comments on the U.S. and global outlook.  We’re trying to drum up a chart deck which I hope to bring on board to show you a few pictures at the end of my talk, but I’ll start off with just a kind of a general rundown.

So the big story of the day right now is the exceptionalism of the U.S.  The U.S. is now embarking on a fiscal stimulus package that is bigger than we’ve ever seen historically, much bigger than what our trading partners are doing.  It’s an amazingly aggressive fiscal policy, and that is the central thing we want to focus on.

The second thing we want to focus on, of course, is the COVID crisis.  We do – we’re optimistic that we’re going to extract ourselves from this starting in the spring and then into the fall and winter.  We think that in the big developed market economies there’ll be herd immunity sometime late in the year.  But one of the points I’m going to emphasize is you don’t need herd immunity to get the partial recovery of the economy.

The third topic I want to talk about is that along with this growth picture of exceptional U.S. growth and a recovery globally, you also have an inflation story which is very different across countries.  Inflation is going to become an issue in the next few years in the United States because we’re returning to full employment so quickly.  Inflation is not an issue globally.  Low inflation’s kind of here to stay.

And that finally brings you to a gap between policy across countries.  It’s not just fiscal policy that’s going to look different.  Over time, the Fed is going to reluctantly move from this super-easy stance to a gradual exit strategy.  It’s hard to see that happening anytime soon in mostly the big, developed market economies.

So those are the main themes that I want to go through.  Let me kind of walk you through each of these.

On the COVID crisis, I would say the news has on net been pretty good lately, and I think that there are a few themes that I want to push.  Number one, the vaccine process, while everyone’s wringing their hands about the fact that there aren’t enough vaccines and demand is way outstripping supply, vaccines are rolling out faster than we expected.  They’re – in the U.S. they’re going out at about 1 and a half million a day.  In the big five economies in Europe, they’re going out at about a million a day.  And in the UK, with a much smaller population, they’re going out steadily as well.

All of this, of course, is – everyone’s impatient for a vaccine, but the reality is that it was never going to be seamless, particularly in countries that have badly organized public health systems like the United States.  And so I view it as a good development that we’re getting this many vaccines out there, and I think it’s a reflection of the fact that we very quickly have learned how to do it right.  We’ve now got money devoted to the distribution process and the Biden administration’s much more serious about leading the effort than the Trump administration.

So now, what does this mean then – well, first, before I go to the implications, the U.S. is among the leaders in getting this done, and so it’s going to be among the leaders in reopening.  Europe will be close behind, but there is a lot of the world that’s going to get left behind in this vaccine race, lot of countries that depend on Russia, Russian vaccines, Chinese vaccines, and are down the queue in terms of the other vaccines.  So it’s going to be a very uneven rollout, and so the economy’s going to reflect that.

Now, what does it mean – what does this do to the economy?  Well, in the U.S., we think that by April we’ll start to see notable signs of an opening up.  And the reason I say that is that the driving variable of decisions by local officials to constrain activity is hospitalizations.  It’s not really cases.  I think that Americans have kind of accepted case – high case numbers, but hospitalizations are different.  You can’t allow your hospital to be overwhelmed.  And so one of the things that’s going to be quite positive here is when you vaccinate the vulnerable population, hospitalizations are going to drop dramatically.  If you just vaccinate people over 65, you’ll have a dramatic fall in hospitalizations, and that allows you to do a partial reopening.  Those people who had been sequestered in their home, the people who are most vulnerable, least likely to engage in the economy, they’re now going to be able to engage more.  And in addition, as the spring comes, warmer weather helps.  Cold weather worsened the virus.  The combination of holiday celebrations, colder weather, pandemic fatigue – all those things caused this big surge in cases.  Getting away from the holidays, getting warmer weather, and the vaccination process should continue to reduce the number of cases.

The only fly in the ointment here is these new variants coming out of the UK, South Africa, and Brazil.  Those will potentially give us a small new wave of cases in the next few months, but we feel confident that while cases may pick up, that the level of hospitalizations will continue to drop.

So re-engaging in the economy is partly about getting the vulnerable population taken care of, and then as the year goes on and more and more of the population’s vaccinated – and I believe that as people see that it’s working and they see the benefits of being vaccinated, a lot of the resistance to getting the shot will decline; they see the cost-benefit of it.  And so by late in the year, there should be enough people vaccinated in the U.S. and Europe to have herd immunity and a more broad-based opening of the economy.  Okay.   So that’s all going on, and – or obviously it’s very early to be celebrating this.  We need to first kind of get through the – this last battle with COVID.  But it does set you up for pretty strong growth in the second quarter and then into the third quarter even without any fiscal stimulus.  Okay.

What’s going on in the fiscal front is unprecedented, and let me, let me give you a sense of the numbers that we’re looking at here.  So if you include the two recent packages, the $900 billion package in December and the 1.9 proposed package, together that amounts to 13 percent of GDP.  Okay.  That is the same – slightly less than the 13 percent of GDP stimulus packages we got last year in the spring when the economy shut down.  So one way to think about this is in an economy that’s partially recovered, that is still growing, we’re seeing another package that’s as big as the last one.  So this is pretty, pretty amazing.

The other thing that’s striking about this package is even if you don’t include what happened last spring and you assume that that was a very unusual event, required an unusual, aggressive response, the packages that are being put out today are more than twice as big as all the fiscal stimulus in the 2009 recession.  Now, I know there are a lot of people talking about we don’t want to make the same mistake we made in 2009.  We had a very slow recovery; we didn’t have enough fiscal stimulus.  Well, I don’t think that’s going to be a problem.  We’re talking about a stimulus that’s twice as big, more than twice as big as at that time, and with potentially more to come.  So this is very big by historic standards as well.

And then the third point I think that’s important as we think about growth going forward, particularly in the U.S., is that there’s a lot of leftover money from last year.  So if you think about it, if you’re in a crisis where you’re shutting down big chunks of your economy or severely constraining activity in chunks of your economy, and you then transfer a large amount of spending power over to households, which is what happened last year, where’s that money going to go?  Well, some of its going to go into spending on what – the parts of the economy that are open, and a big chunk of the rest of its going to go right into savings accounts.  And so one of the things that happened that – when you think about the way fiscal policy operates in a COVID world, is there is a big delayed stimulus from those funds that couldn’t be spent when the service sector was closed and have been sitting there quietly in bank accounts.

And the numbers are huge.  If you look at bank – M2, which is the broad measure of the money supply, includes checking accounts, savings accounts, retail money funds, all of that liquid saving, there are about $3 trillion sitting in those accounts above and beyond the normal level of bank deposits.  It’s a massive amount of money.  Now, I don’t know how much of that will be spent when the economy reopens, but you can see that there’s a lot of leftover ammunition from last fall.  You can do a similar calculation by looking at saving statistics from the income accounts, and there you see, again, about 1.6 trillion in savings above and beyond normal savings.

And so all of this is kind of dry powder for the recovering economy.  So you’re going to bring together four things.  You’re going to have the latest fiscal stimulus, the leftover stimulus money from a year ago, the warm weather, and the reopening of the economy.  And that’s why a lot of economists, including us ,have – very bullish on U.S. growth.  We have growth this year of 6 percent with upside risk to that number, four and a half percent for next year.  That would be the best two-year period we’ve had in about 30 years for the U.S.  And again, I think there’s upside risk to that.  There’s going to be some leftover damage from the crisis.  There’s a lot of – small business sector’s been very badly hurt.  People have been postponing rent payments and payments on student loans and so on.  There’s going to be some lasting damage there, but the fiscal offset is extremely large.

The final point I want to make on this is that there are a lot of people who are trying to make the case that we should be worried about a replay of the last business cycle, right.  In the – after the 2009 recession it took five or six years – well, what did it take?  It took it took six years to return to full employment, to get back – the unemployment back to about 4 percent.  And part of the problem – and I went back and read our own research.  I started at BofA right at the beginning of the expansion in September 2009.  And I went back and read my – the research, and I said okay, so what happened?  Why was it such a terrible, slow recovery?  Why did it take so long to heal?  And the answer was part of it was that – the lack of fiscal stimulus.

The good news is today we’re doing much more than back then.  But part of it was also the nature of the shock.  I mean, when you have a banking and real estate crisis, you always get slow recoveries.  At the time, we referred to this as the “rehab recovery.”  That was our name for it.  And it – because what happened was you come out of the crisis, and the real estate sector is a disaster, the banking system is severely impaired, and household balance sheets were in terrible condition.  You had a big drop in wealth and households were desperately trying to rebuild their assets.  And so coming out of the recession, there’s a natural tendency for people to be trying to contain their spending, rebuild their balance sheets.  That created this very slow recovery.

So if I compare the two periods, today to then, I find that looking back at that makes me much more optimistic about today because we don’t have that deeply impaired banking, real estate, and household balance sheets that we had back in 2010.  So it’s, again, a reason for strong growth.  Now when you move outside the U.S., there’s a good case for recovery globally but not as strong.  There are a few countries like China that have weathered the crisis very well, did a great job.  Initially they bungled the control of the virus and then they got serious and got it right.  And they’ve been able to avoid deep shutdowns the way we’ve seen in Europe in the U.S.  And so China has been able to get back on track very quickly.

So there are a few countries in Asia that are going to do even better than the U.S., but most of the world’s going to lag behind because the fiscal stimulus you’re seeing outside the U.S. is I’d say in the order of maybe a third – quarter to a third what the U.S. is doing.  And in – the emerging markets are going to be particularly challenged because of the late arrival of vaccines.  And they’re going to be facing a world of rising interest rates as the U.S. improves.  So it’s a very unbalanced picture with China and the U.S. and a few other countries doing quite well, but most of the world kind of having a recovery like the U.S. had back in 2009, a very slow, tough recovery.

Now, the broader implications of all this are also kind of in the direction of American exceptionalism, that we are going to be different than other countries.  We’re going to hit full employment, we believe, which we would put at about 4 percent, by the end of next year.  That’s a very fast return to full employment.  And that’s going to create some wage growth, pickup.  It’s going to help heal the wounds of low-income families pretty quickly and going to create a little bit of inflation, not a massive surge.  Inflation is very sticky these days.  And the Fed will react very slowly to the inflation.  They’re – they want to overshoot their two percent target, and we don’t think that will happen until 2023.  So there’s going to be very slow exit by the Fed.  And you won’t be seeing that in most of the other major economies.  You’ll be seeing still near-zero rates in Europe and Japan, for example.  And you’ll be seeing very flat, low inflation globally as well.

And then finally, in terms of the impact on the interest rates and the market environment – so we’re talking about a world where the Fed is slowly exiting.  The U.S. is running very large budget deficits.  The U.S. is outgrowing the rest of the world.  It’s a rising interest rate environment for the U.S.  We’re expecting ten-year yields to rise to one and three quarters by the end of this year.  The consensus is lower than that.  I think it’s like 1.4 percent or something.  We’re now about 1.1 percent.  So we’re expecting that ongoing rise.  The only reason it isn’t bigger than that is that – is because the U.S. is kind of going it alone here.  And again, Europe and Japan, the other two kind of big bond markets that compete with the U.S. bond market, are going to continue to have near-zero interest rates.  So the spreads between U.S. rates and the rest of the world will be rising.  The – and the dollar will tend to be strong because of that, because again the U.S. is outperforming on interest rates, growth, inflation.  That’s an environment for a strong dollar.  So that would be part of the picture as well.

Now, when I look at the risks here, the big thing to worry about is the new viruses – I mean the new variants of the virus.  There’s no question that they are more contagious.  If a strand of the virus is more contagious, eventually it becomes the dominant strand, because it grows fast and the other kinds of strands don’t grow.  And so it becomes a challenge.

And we think that they’ll be some pressure – in countries outside of the ones where the virus started including the U.S. will have these strains circulating pretty significantly in the United States.  That will probably cause a little bit of delay in some of the reopening process.  But it’ll take time for vaccines to catch up, and in the meantime we need to watch that very closely.  So that is the biggest risk.  It’s really a risk for the next few months because once you get vaccinated fully, unless these variants don’t – aren’t protected by the vaccine, unless there’s – which would be quite a problem obviously – as long as the vaccine works, eventually the number of cases comes down quite dramatically.

The biggest concern I have further out is U.S.-China relations.  Now, I know things have been kind of quiet on that front.  I mean, we had a trade deal last year.  But I always felt that this was the temporary cease fire and that the – the challenges between the U.S. and China are quite broad.  And the – there was no real attempt to reach a detente under the prior administration, that the – that it was just kind of an ongoing battle.  I think that for now things will be quiet, but I do think that going forward this is the number one concern.

It worries me that – there are two things we need to worry about.  One is there’s certain areas where you absolutely need cooperation between the U.S. and China.  The most important thing is climate change.  You can’t have the two biggest carbon producers not joining enthusiastically into the effort to stop climate change.  So I’m very worried about that.  And the other thing I’m very worried about – and that’s – it’s ultimately an economics problem because climate change is very bad for the economy once you start having serious weather events.

The second thing we need to worry about of course is decoupling.  While in theory it sounds great to say that Americans are going to make all their stuff in America and China will make all their stuff in China, getting from here to there is going to be incredibly painful.  The global economy has been integrating now for 30 years and in a pretty strong way – this globalization process.  You can’t undo that in a – without some real pain. So I’m going to stop in terms of my opening remarks and let’s see if Melissa has been able to dig up my chart deck.  If not —

**MODERATOR:**Yeah, this – no, you’re fine.  Hi, everyone.  So his colleague Melissa is also on the line assisting him behind the scenes.

**MR HARRIS:**The other  —

**MODERATOR:**Is his slides available?  If not, we’ll move on to some questions and maybe we can throw up the slides after.

**STAFF:**They should be available shortly.

**MODERATOR:**Okay, great.  Well, in the meantime, Ethan, how about we take a couple questions and perhaps go back to your slide deck?

**MR HARRIS:**Sure.

**MODERATOR:**Okay, great.  I had a couple come in through the chat while you were speaking.  So we’ll start there and then perhaps we’ll go back to some additional remarks.  So the – this is a kind of a three-part question.  It came from our journalist over in the Netherlands.  His name is Gerben van der Marel.

So three parts – feel free to answer how you wish:  “Firstly, some professionals warn for the bubble territory on the stock market.  Are you on alert for a pullback?  Is there any canary in the coalmine that you have observed?  Secondly, people will always find a way to rationalize a bubble.  Some say that price to earnings ratios are dated as a metric.  Would you agree?  And thirdly, is there anything we can learn in these times from the market – from market bubbles in the past?”  I’m happy to repeat any of that.

**MR HARRIS:**Okay.  So, yeah – no, I don’t have a pen on me.  Let’s see.  You should always cheat, especially when you get to be older like me and can’t remember anything.  Okay.  So bubble —

**MODERATOR:**No, it’s fine.

**MR HARRIS:**Bubbles in the equity market.  So I’d tell you a couple things on that.  The first is that right now the valuation of the market is very dependent on an assumption that we’re in a low inflation, low interest rate world for the indefinite future.  I think that that is the core driver of this – these very high valuations.  Because if you think about it , historically with bond yield of five percent, inflation of two or three percent, the return on the alternative in cash at three or four percent, you could get decent returns outside the equity market.  Well, now you don’t.  And the discount rate you’d put into your equity holdings is very low.  So I think that this kind of goldilocks feel in the market is predicated on keeping that low – very low interest rate environment.

And I don’t think it’s a bubble if the interest rate environment is sustainable.  Now, the question is:  Is it sustainable?  And I am worried that we’re pushing things too hard in the United States, that the equity market is going to have to come to terms with the fact that no, the Fed is not on hold forever.  That’s not something I worry about right away, but it – but it’s something that could come up.  And remember with the Fed, right now the Fed is trying to hide under its desk, to be honest with you.  They don’t want to be seen as giving any clear message to the markets because they want to find out what’s going on here.  They want to – they’re not like me looking forward six months and saying, “Okay, I’m not going to get too worried about where we are now, let’s focus on how hot things are going to be later in the year.”  Their focus is on, “Well, right now we’re not there yet; we don’t want to disrupt the markets.  We’re going to keep a low profile.”

The challenge it’s going to be for the markets if we are in a hot economy and if inflation does get going, which it’s not – it’s way too early for that now – at some point, the market’s going to have to deal with this – the fact that this isn’t Goldilocks anymore.  And then the – then you’ll start to see risks of taper tantrum-type stuff in the bond market and equity market pressure.

So I don’t think – you asked if – whether this – there’s always an excuse for a good market.  And I think that it is different.  I mean, some of this drop in interest rates is permanent, I think.  There’s a lot of studies that show that the neutral real interest rate, the central bank rate that’s consistent with steady growth has dropped a lot.  There are a bunch of studies showing that.  And so a portion of the drop in rates is permanent, probably.  Inflation’s been low for decades now.  It’s going to be hard to get it higher, particularly outside the U.S.  So there’s an element of permanence to the low rates, but I don’t think it’s – it’s not etched in stone, and things can change and it could turn out that actually, inflation does come back.  And inflation is the killer for the equity market and the economy.

So did I miss a third component to that question?

**MODERATOR:**  Yeah, let me repeat them real quick just to make sure we have it covered.  Talking about bubble territory, alert for a pullback, canary in the coalmine you had mentioned, will people find a way to rationalize a bubble, and then thirdly, is there anything we can learn in these times for market bubbles in the past.

**MR HARRIS:**  Yeah, and I – the only thing I would add to what I already said was – like, so I was around for the tech bubble in the ’90s, and I – that was a bubble that was identifiable in real time, no question about it.  And I felt the same thing with the housing market in real time.  I looked at it and said, “Okay, I don’t know when this thing’s going to turn, but it doesn’t make any sense.”

And I remember during the tech bubble, people in the trading desk who traded tech stocks back in the late 1990s, I’d say to them, “Listen, how can you justify this on fundamentals?  I don’t know what any fundamental – it’s not an earnings-driven thing, it’s not an interest rate-driven thing.  What is this?”  And they said, “Well, it’s a momentum trade and you can’t get in front of it or you get run over.”  And so there was a kind of stepping back and acceptance of the bull run.

And with the housing market, the same thing happened.  You had – and again, I don’t predict – I didn’t predict exactly what would happen, but my tune on the housing market was changing steadily as we got deeper into bubble territory because of what you’re seeing on the mortgage front, that you can see that the lending behavior was getting out of control.  And you were seeing – as you correctly point out, a lot of people claiming that this time is different and coming up with all kinds of arguments for why this is justified, and none of it made sense to me.

And so in both cases, though, figuring out when the term would come was very difficult.  And one thing that contributes to a bubble is people who are too early in calling the turn get hit badly, and then by the time the turn actually comes, the pessimists have – are thought of as crying wolf and aren’t being listened to any longer.  But again, I think that the thing to watch here is: Is there a pickup inflation?  Do central banks have to start to hike?

And then the – I mean, there are other kind of shocks that could also undo it.  One would be if it turns out that this recovery just isn’t going to happen for whatever reason.  So that’s my view on the markets.

**MODERATOR:**  Great, thanks.  Just as a reminder for you all, if you have a question and you would like to ask that of Mr. Harris, feel free to raise your digital hand.  I will call on you.  You do not need to turn your camera on if you don’t choose to, but you can feel free to open up your mike.  Additionally, you can ask your questions in the chat function.  I’m going to check in with Melissa again before we go to another question just to touch base.  Melissa, are those slides available or should I move on?

**STAFF:**  Let’s take one more question and then I should be good to go.  Sorry for the delay, everyone.

**MODERATOR:**  No, it’s fine.  Thank you.  Okay.  Ethan, we did get another question in the chat function, which I will ask while we wait.

This is from Takenori Miyamoto out of Nikkei: “Junk bonds now yield less than 4 percent, a record low.  More companies are loading up on debt and the number of zombie companies is going up thanks to very low interest rate environment.  How will it affect U.S. economy in the short term and long term?”

**MR HARRIS:**  I think that in some ways, it’s the same question we just had.  I mean, if you look at the level of yields in the bond market, it’s people desperately looking for returns.  And again, that’s a sustainable thing if the basic ingredients are still there, is if you don’t see a – unusually high-level default, so if the economy is okay, and if you continue to be in a very low-rate environment without a serious risk of inflation.

So I think that we’ve been constructive on risk assets for a while.  On the ground set, we’re not close to the danger point there, that we have an economy that’s likely to keep recovering, but where inflation and rate hikes are coming with a lag.  So I think that I’d say the answer’s very similar to what I said about the stock market.

Now, I mean, the other element of this idea that there’s this partially permanent component to low interest rates is it also means you can borrow more.  The return on your investments doesn’t need – you can borrow money at very low interest rates, your servicing costs are very low, and therefore you can sustain higher debts.  It doesn’t mean you can’t get into trouble if your business doesn’t work, but it does raise the equilibrium level of debt for debtors.

Now, again, that – all that hinges on your ability to roll over your debt and to ongoing low interest rates, and that’s – again, it goes back to inflation.  It’s – that’ll – that’s what gets the junk bond market into trouble as well as the equity market.  It’s inflation.  It’s the bad guy here.

**MODERATOR:**  Okay.  I’ll ask another question.  This one is from Dorothea Hahn from the German daily Taz: “I would like to know Ethan Harris’s take on the impact of higher federal minimum wage on the job market and on businesses.”

**MR HARRIS:**  Yeah, I mean, economists have – minimum wage is a funny thing because economists have been studying – there’s like a thousand papers on it, and the view among economists has shifted over time to be much less concerned about minimum wage.

A lot of studies have found that modest increases to the minimum wage have very small employment impacts.  They do increase income for low-income people on average.  While they create a little bit of unemployment, the benefit in terms of higher wages for those that stay employed is much greater than that, and this would not be an exception to that.  It is a way to address widening income distribution in a fairly modest distortionary way.  It’s going to mean a little bit of price increases for products produced with minimum wage and so on, and it will raise unemployment a little bit among low-income people.  So there are – there are costs.

One of the benefits of being employed, even if you’re being employed at a very low wage, is you develop attachment to the labor force and work skills.  And so if you look at the lowest end of the income distribution in the United States is one of the fundamental problems is these are people who haven’t got good work skills, haven’t had the discipline of going to work every day, they’re not learning anything because they’re not working.  There’s a basic value in getting people into jobs and keeping them there.  So that’s one of the real costs to me is – from minimum wage.

The other thing I would say about this is it’s a bit – and I understand why some governors aren’t happy with this.  Minimum wage of $15 is not much if you’re in New York City, but it’s a lot if you’re in West Virginia or something, so it’s not clear to me that minimum wage should just be a flat national number.  It seems to me like it should be linked more to cost of living.  So it’s not like – it’s kind of a crude way to do this.  And – but again, economists – you look at – even relatively conservative economists admit that it’s not the job killer that people used to think it was.

**MODERATOR:**  Thanks.  That’s really helpful.  I’m just going to keep asking questions.  And when Melissa is ready, she can pipe in.

We’ve got another question.  This one from People’s Daily in China from Lejun Wu: “Relocate it or restructure the supply chain is one of the main concerns of many countries during the pandemic.  In your observation, do you see any new features about global supply chain change especially happened in the U.S., and how will it affect U.S. economy?”

**MR HARRIS:**  Well, I think that – I think gradual supply chain change is fine.  I mean, one of the things that was happening before the U.S.-China trade war kicked in was as costs rise in China, China becomes more of a middle-income country rather than a low-income country, certain kinds of manufacturing are no longer that economical in China and move elsewhere, and that was happening already.  They tend – don’t tend to move to the U.S., they tend to move to Vietnam or Mexico or something like that.  So some movement in China in supply chains is natural.  Supply chains also are sensitive to carbon footprint questions, reliability, and all that.

I don’t think it means a wholesale change in the U.S., though.  And I think it’s important to recognize that the U.S. isn’t alone.  Among the high-income developed market economies, the manufacturing sector is pretty small.  And really it makes a lot of sense to have high-end manufacturing that requires either being close to your customer or very interactive between your engineers and your production.  It makes a lot of sense to have that in a developed market economy like the U.S.  It doesn’t make any sense to have high labor costs, stuff that’s labor intensive.  It doesn’t make any sense.

So what I’m worried about is not so much the natural movement of supply chains that’s driven by the economics of it and the desire to kind of gradually diversify and things like that, those are fine.  I worry much more about a trade war restarting.  And I worry about – I felt in the last four years one of the things that was concerning to me about the whole supply chain thing is that it was very hard for companies to figure out where to put their production.  I mean, if you don’t know where the next tariff is going to come, you’re frozen in decision making.  And so it’s important that the – whatever happens on the trade front that it be done in an organized way where it brings clarity to international businesses about where the rules of the game are heading rather than have a tariff pop up out of nowhere.

And so we want to – we need to be careful about the way we try to move forward here.  The more you can have cooperative relationships and do this in an organized fashion that’s driven by economics the better.  And I think it’s better for everyone, because having a sudden breakdown of supply chains is – would hurt all the economies, not just the countries with a trade deficit like the U.S.  It would hurt – I’m sorry – not just the countries with surpluses, but countries like the U.S. that depend on foreign inputs.

All right.  Another question?

**MODERATOR:**  Thank you.

**MR HARRIS:**Yeah.

**MODERATOR:**  So I’m going to give it a moment for those journalists who have called in on a phone.  If you have a question, go ahead and unmute yourself and state your name and organization.  This is for an opportunity for those on the phone.

**QUESTION:**  Hello?

**MR HARRIS:**  Yes.

**QUESTION:**  Can I ask a question?

**MR HARRIS:**Sure.

**MODERATOR:**  Yes, go ahead.

**QUESTION:**  Oh, thank you for doing this.  This is Jin Yan with Caijing Magazine.  This is question related to U.S.-China relations.  You mentioned at the moment there is sort of a ceasefire moment for the U.S.-China relations and you talk about the trade war and the decoupling of the two countries.  We have seen the tension between the U.S-China has accelerated the collapse of the globalization.  Now with the Biden administration, do you think the trend is going to reverse?

**MR HARRIS:**  Well, I think that the – there’s some things I can say with some confidence and others that I can’t.  So I do think that the broader trade war is going to cool off significantly.  We’re not going to have the U.S. butting heads with Europe over airplanes and autos.  The U.S. will abide by the free trade agreement with Mexico and won’t try to reopen tariffs with Mexico.  I think that countries that are traditionally aligned with the U.S. can kind of breathe easy on the trade front.  It doesn’t mean there aren’t going to be conflicts, but they’ll be manageable within international institutions.

For U.S.-China relations, there’s a real chance for a reset here with a new U.S. president, but it really requires a buy-in from both sides.  It requires the U.S. accepting that China’s becoming a much more important regional power and needs to be allowed into the fold in that – treated as a regional power; it requires very careful negation; and it requires that China understand that a lot of things that – a lot of the stretching of the rules around intellectual property and state-sponsored business growth need to be altered.

There needs to be – we need to – it’s very hard for a state-managed company and a free-market company to compete with each other on a level playing field, because one of them is being driven by market forces and the other is being driven by government subsidy and encouragement.  And so you need to have a trade arrangement where there’s a recognition that having a state-managed company doesn’t mean – give you carte blanche to run over your competitors with subsidies.  It has to be a kind of attempt to not create an unfair playing field.  So this is a really hard thing to figure out and negotiate.  And of course, there are all kinds of other elements to U.S-China relations that create further pressure.

I would hope that there can be some wins here in some things where I think that are beneficial to everyone, and one of them would be to start moving down the path on climate change.  It’s in everyone’s interest.  The U.S. and China are the most important players in that field, whether it’s in terms of pollution or in terms of technology to get – to deal with the pollution.  Maybe you can get some wins there and start developing cooperative aspects of the relationship.

But again, it’s – there’s a lot of uncertainty here.  I don’t have a lot of confidence about exactly how this is going to play out, to be honest.

**QUESTION:**  Thank you.

**MR HARRIS:**  Thank you for the question.

**MODERATOR:**  Great, thank you for that question.  Another one that came in via chat from Carol from Wall Street TV:  “With the pressure increasing on semiconductor and chip manufacturing sector increase, Taiwan, especially TSMC, has become a key player in the U.S. and China tech war.  Does that complicate U.S.-China trade relations going forward?”  Yes, that’s the question.

**MR HARRIS:**  Yeah, I mean, I’m not an expert on the tech sector so I’ll kind of go off – a little bit off center in this question.  I think that this – we’ve got to figure this out.  We can’t – this is – the tech decoupling is quite a concern.  It’s very complicated because of it combines questions of national security, of cyber security, and of growth industries that everyone wants to participate in.  I think the more you can kind of figure out how to compromise on this and keep the supply chains together, the better.  Because you can’t – you can’t redesign supply chains immediately.  And countries like Taiwan are caught in the middle here, right.  I mean, this is the thing about decoupling:  It’s probably worst for countries that have strong commitments into both China and the West, where it’s – because they’re being forced to choose sides in these things and decide which market they’re going to supply and which they’re not going to supply.

So I only have general comments on that.  I do think it’s – this is one of the most important and most complicated of the – of these trade war challenges.

**MODERATOR:**  Great, thanks.  So that’s everybody who typed in the chat so far.  Again, if you have any other questions, feel free to raise your virtual hand, I’ll call on you, and you can ask that of Ethan or enter that in the chat function.  I know there’s still potentially slides coming, but if not we can give it just a second.

**MR HARRIS:**  Well, we will – Melissa you’re off the hook.  (Laughter.)

**MODERATOR:**  Yes.  We have a – let me go then to another question that came in via chat.  This is from Felicia Akerman.  “You’ve described a strong dollar environment.  What time frame do you see for a dollar strengthening?”

**MR HARRIS:**  Yeah.  I mean, we’re viewing this as kind of an inching higher.  I mean, the – I’m – in some ways I’m glad I’m not a foreign exchange forecaster, because it’s extremely complicated.  There really are two competing views around the dollar.  One is what I’ve been describing, which is outperformance of the U.S. economy, higher rates, higher inflation in the U.S., strengthening the currency with a more hawkish central bank.  So all of those things, kind of this U.S. outperformance benefiting the dollar.  So that’s, I think, going to be the main story.

But I think it’s offset by the opposite story, which is we’re hopefully entering a world where there’s more confidence and stability as we move out of this COVID crisis, and that means that investors no longer have this high incentive to pile into the safe currency countries like the U.S.  And so if we’re – if we no longer need to overweight into the U.S. in order to be in a safe haven, that reduces demand for dollars.

So there’s a tradeoff between those two stories and that’s, I think, why you’re hearing from different economists different views on this.  I think that the differential in terms of the fiscal push dominates the story.  And so we’re talking a very gradual, single-digit kind of appreciation of the dollar against most currencies.

**MODERATOR:**  That’s helpful.  Thank you.  This is – we have a couple more minutes.  Everyone, if you have a question, this is your opportunity.  We’ll just let it sit for a moment and see if anybody has any other questions, again, via the chat feature or you can ask it yourself through the Zoom.

**MR HARRIS:**  So one question while we’re waiting on the queue.  I get this a lot, and so I’ll just throw it out as I’ll question myself.  I always have good questions.  So the – one of the big questions, of course, is:  Can the U.S. get away with what it’s doing?  I mean, we’re pouring – pouring stimulus into the economy, very large budget deficits.  Other countries have also had very large budget deficits but the U.S. is pushing pretty hard on that.

What does that mean?  I mean, is this a free lunch?  Do we get away with this and there’s no cost?  The answer is a few things.  Number one, it makes a lot of sense to have big budget deficits during a recession.  I mean, that’s how you prevent an even deeper recession.  So a lot of this has been completely normal within the business cycle norm.  The problem is if you keep running deficits in a healthy economy.  So let’s say that we’re right and by next year we’re at full employment in the United States.  At that stage, you really do not want to be running big budget deficits because what the deficits are doing is they’re competing for resources with the private sector.  And so there’s a thing called crowding out where private investment is hurt by the fact that the government is kind of siphoning all the money.  I mean, if you have a big budget deficit, you’ve got to borrow from somebody.  Either you increase your external debt or you divert savings away from the private sector.

So it’s – the cost of the deficit is not so much that suddenly everyone wakes up and abandons the dollar, because I think the dollar is king and not going to be dethroned for quite a while.  It’s more about resource allocation, having a disciplined government that – where you fund what you can afford with taxes instead of deficits.  So there’s a longer-run cost to running these big deficits, but it doesn’t mean that we’re going to wake up one day and nobody is going to want to hold Treasury assets.  I don’t see that as a concern anytime soon.

All right —

**MODERATOR:**  Okay, good.  Yeah.  I think we might be wrapping up here, sir.  I don’t see any other questions in the queue.  I’ll give it – I’ll give it five more seconds, see if somebody – anybody has any comments or questions.

**MR HARRIS:**  All right.

**MODERATOR:**  Okay.  Well, I think that concludes today’s briefing.  I want to thank you, sir, for your time and preparation today.  Again, this briefing was on the record.  The transcript will be posted and shared as soon as it’s available.

As a reminder, we have our next briefing with the New York Stock Exchange, and that’s tomorrow, so if you haven’t RSVPed yet, please do so ASAP.

And with that, we thank you, Mr. Harris.  Wish you all a great day.  Thank you so much.

**MR HARRIS:**  Thank you.

**MODERATOR:**  Thank you.

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