DJ Nordquist (Former World Bank US Executive Director and Economic Innovation Group SVP) joins the podcast to discuss her experience serving as World Bank US Executive Director from 2019 to 2021 and as White House Council of Economic Advisers Chief-of-Staff, discussing topics ranging from China's graduation from being a World Bank aid recipient, COVID-19 World Bank/IMF fiscal aid, international corporate tax competition, and opportunity zones.
Jon: “This is the Capitalism and Freedom in the 21st Century podcast, where we talk about economics, markets, and public policy. I'm John Hartley, your host. Today, I'm joined by D.J. Norquist, who is the Executive Vice President of the Economic Innovation Group, a senior advisor at the Center for Strategic and International Studies, and is former U.S. Executive Director of the World Bank. Welcome, D.J.”
DJ: “Hey, John. Thanks for having me.”
Jon: “D.J., I want to first get into how you first got interested in economics. You were a Stanford undergrad, you did your master's at Northwestern, worked in a variety of roles in D.C., in Congress, two administrations, you've worked across several D.C.'s top think tanks, Cato, Brookings, CSIS. How did your interest in policy all start?”
DJ: “I sort of fell into being an econ nerd. Ironically, the only class I took, pass-fail, at Stanford was Econ 101, because I was afraid of it, and I really wish I'd taken it for a grade and paid more attention. And then I did my master's at Northwestern, I was planning to go into documentary filmmaking, and I ran into a Stanford law professor who became a member of Congress, actually on the Metro in D.C., which was my last quarter at Northwestern, and he was currently a sitting member of Congress, and he was running for Senate, Tom Campbell, I'm dating myself. And I had actually covered him when I was a reporter for the Stanford Daily, and he recognized me right away, and we sat down and we talked, and he said, you know, you should go work on Capitol Hill. And I was like, oh, God, no. But anyway, to make a long story short, he arranged for me to meet with his chief staff, she gave me some advice about working on the Hill, and so that's sort of how I ended up working on the Hill. So that was sort of my first taste of policy slash politics. And then, you know, I lived overseas for about six years, worked in the private sector, and then came back and, you know, had really wanted to work at a think tank, and so, you know, went into think tank world, and then ended up serving in a number of domestic policy roles at the Department of Education, I was at FDIC, I worked on Hurricane Katrina, which was basically attached to the White House, and then my last domestic piece of the tour was at HUD. And then, yeah, so anyway, that's, and then ended up at Brookings in economic policy studies, which was, you know, I had come from really like the domestic policy side, but economic policy is, you know, really more macro, micro econ, you know, monetary policy as well. And so that's when I, you know, really learned a lot more about academic, you know, academic economics, and that side of the house. And I really loved it, and just nerded out, reading lots of, you know, peer-reviewed academic papers.”
Jon: “Many of our listeners love reading peer-reviewed academic papers, myself included. Now, more recently, you served as U.S. executive director at the World Bank, can you explain to our audience what the role of a country executive director at the World Bank does? Like, in particular, like, you know, the U.S. executive director, you know, how you work alongside Office of International Affairs officials, the Treasury, and officials at the State Department, like, how are World Bank projects, like, voted on? What are the typical sorts of projects that come through?”
DJ: “The World Bank, probably maybe some people don't know this, is actually part of the UN system. But unlike, you know, at the UN in New York, where every country has a vote and a seat around that U-shaped, I think it's U or maybe it's semicircle, full circle up in New York, at the General Assembly, the World Bank is done by shareholding, and so there are only 25 seats around the table. It's a U. And those 25 seats are the executive directors, and they represent 189 countries. And so, I was very fortunate in that, you know, of the 25 board seats, only six or seven, depending on how you count, are what are called single constituencies, meaning I just represented one country. Whereas, like, the person who sat next to me was the Mexican executive director, and he represented, you know, seven countries. You know, the Africans, one of the Africans had 23 countries in his constituency. The other one had 22. The other one had three. So, it's a complicated, you know, formula based on shareholding, which is how much your country, you know, has put in to the bank by various measures. And yeah, so anyway, so you're literally sitting at, like, you know, what everybody sees on TV when they look at, like, the General Assembly, like, you know, a bunch of people sitting around a table and there are a lot of flags in the room, you know. So, I'm sitting there and I've got, you know, the United States on my test card. And, you know, I remember, like, when I my first board meeting, I was like really intimidated because you sit there and you think, wow, I am representing my country. Just me. Like, what if I make a mistake?”
Jon: “Much smaller than, like, UN, like General Assembly. When you think about that picture of the UN General Assembly, it's like, you know, there's every country represents one country, one vote. So, it's like 200 some odd countries. Here it's like only 25 people or so.”
DJ: “But it's still a pretty big, imposing room. And there's still a lot of staff in the room and all that. And it's basically even though there are fewer people, it's the same number of countries represented. And I was lucky because being an American, the U.S. is the largest shareholder. So, I had more weight to throw around.”
Jon: “But the U.S. gives the most money.”
DJ: “Yes, U.S. gives the most money. There are other things that go into the shareholding formula based on GDP, based on other contributions to the bank, the different parts of the bank, five or six different parts of the bank. So, yeah. So, the U.S. is the largest shareholder. You know, obviously, the U.S. and the U.K. were the ones who came up with the idea of the Bretton Woods institutions, you know, after World War II to help rebuild the war-torn economies of Europe. And so, the U.S. and U.K. used to be the two largest shareholders.”
Jon: “Right after the Second World War, Henry Dexter White, John Maynard Keynes had a big influence in that. It was a conference sort of up in New Hampshire.”
DJ: “Fun fact about Dexter White is, you know, he was a communist. Communist sympathies, you know, I think was investigated. So that was our guy. And another fun fact is, you know, one of the one of the first loans to come out of the bank was to France. Again, you know, you've got to go on the way back machine. You know, France is trying to rebuild after World War II. And, you know, there was what's called conditionality. Big word, big fancy word, the bank, which is like conditions are attached to whatever loan is. And I can't even remember what the loan was for. But the conditionality attached to that loan was that the communists were not allowed to be part of the government coalition in France. Otherwise, they were going to get this World Bank loan. I cannot imagine that would ever happen today. The bank is supposed to be apolitical. And, you know, there are a lot of messy politics out there. There are 189 countries and, you know, all of them have different issues, some more than others. So, but anyway, getting back to your question about like, you know, so the main the main function of the board is, you know, oversight. You know, it's an accountability mechanism. Although technically it's not considered an accountability mechanism, but it's really, you know, projects. So, these are either loans or grants come up through staff. Staff meet with the various sovereigns and the sovereigns say, I'd really like a bridge between my two islands in the Maldives. And the bank will study it and be like, well, OK, or, well, no, we don't think that's a good idea. It doesn't make economic sense. But anyway, when the staff says yes, it goes through like a two year, you know, sort of project preparation, you know, lots of due diligence, et cetera, et cetera. And then I'm working with sovereign and then it goes to the board for a vote. And so, I think one of the things that surprised me when I got there was that almost every project that comes to the board gets approved. And I thought, like, my vote actually, like, it was a real vote. And, in fact, it's not. But when there's a project that is controversial, which does not happen very often, but once in a while there is one, if it's going to be voted down, management just pulls the vote. So, you never know what happens. You don't know, you basically don't know that this project existed.”
Jon: “The voting president, in this case. So, at the time, like, say, David and I.”
DJ: “No, no, I mean, it's the staff. The staff will, you know, senior staff will pull the project down. So, I managed to defeat one project in my time there. I mean, I certainly voted against a lot of them. You know, I actually was the first U.S. executive director to vote against or abstain every single project that went to China because I thought China should not be taking World Bank loans. It should have graduated from the World Bank years ago, et cetera, et cetera. But, yeah, I did. I did manage to stop what I considered was a B.R.I. project. And that, you know, getting the Europeans, if you tell them, it's a B.R.I. project, they actually don't care.”
Jon: “What is a B.R.I. project?”
DJ: “Sorry, Belt and Road Initiative of China.”
Jon: “Belt and Road Initiative. Got it. So, I guess, like, just for clarification to our listeners, so, like, the IMF and World Bank, you know, they were created right after the Second World War. They sort of, I think, evolved a bit in terms of their purpose. Obviously, there was a big part of its early life was managing the actual fixed exchange rate system, which was very complicated. That broke down 50 years ago, 1973. And then the main sort of focus of the World Bank, IMF institutions, has been on basically development aid and concessional lending to some debt issues. And typically, like, I think the World Bank does a lot of work on sort of development aid, working with poor countries, where the IMF works on more of the concessional lending to countries which may be a little bit more developed, but are running into these sorts of social issues.”
DJ: “I sort of think of it as like macro and micro, right? So, like, IMF is dealing with, you know, financial and economic stability and, you know, sort of larger economic issues, you know, versus the World Bank. You know, these are more like, we need a bridge, we need a road, we need an energy, you know, source, we need housing, we need, you know, better human capital, better schools. So it's more focused on what the, you know, sort of specific, like you said, like specific development needs, you know, versus IMF is more of like, if your economy is in freefall, we will give you a lifeline, but we will, you know, there's conditionality involved as well.”
Jon: “So with the World Bank, not necessarily, so some aid is maybe unconditional, some is conditional in the sense that, you know, it has to be paid back, targets that have to be hit. One of the big, I guess, developments in recently with the World Bank has been whether China should continue to receive World Bank aid or not. And the one thing that you're sort of alluding to, of course, you know, GDP per capita is well above every other World Bank aid receiving country. And critics allege that China takes, say, a 0% World Bank, you know, loan, 0% financing and lends it out to various projects, you know, Belmonte Initiative type projects, earning a spread almost like a hedge fund would. And that it's receiving-”
DJ: “And if it's a good deal, you can get it, right? Who wouldn't make that deal?”
Jon: “Exactly.”
DJ: “And I'll correct you, it's not, they don't get, it's not zero, it's not 0%, it's what used to be pegged to LIBOR so far now, I guess. And there's concessional and non-concessional rates. And so, you know, China is not getting the rock-bottom rates that they used to. You know, I have been told by, you know, staff at the bank that China doesn't actually need to take, you know, World Bank money that they could do better on the markets. And so, my response will be, why are they taking World Bank money? Because every dollar that they take is $1 that doesn't go to Africa. And in fact, you know, between IBRD and, you know, IFC, you know, the main part of the bank and the private sector part of the bank, I mean, they're taking about $2 billion a year in loans. And like you said, like they've got a nice spread, they turn around and lend it out to, you know, other countries. And then, you know, basically it's debt draft diplomacy, countries that, you know, can't, they can't pay them back. And then, you know, in some cases, like the port in Sri Lanka, China will seize the asset. So, yeah, but I mean, there actually is, the OECD laid out pretty good criteria for, you know, what they thought bank graduation should be. And so, you know, GDP per capita is one of the measures. And then another measure is like whether you have sort of strong institutions. And I would venture to say that China's got some pretty strong institutions. They rule that country with an iron fist, and that also you have banking liquidity, like a decent banking system, right, which obviously China does too. So, I mean, China definitely should graduate. You know, in addition to the $2 billion that they're taking, they also get the lion's share of World Bank procurement. So, like, you know, say there's some kind of school project in, you know, Guadalupe, more times than not, somewhere between 30% and 40% of the contract to build the school is going to a Chinese firm. And so, like, if you count up what they're getting in procurement, which is, you know, nothing to sneeze at, and then in addition to the $2 billion, like, they're definitely getting a whole lot more than they put in.”
Jon: “So, like, China turns around, they invest a lot of money in Africa. They also do a lot of work, like, around the world to influence various countries to go alongside them. Like, how does that dynamic work in the sense that you are, you know, sort of this vote against a number of these, you know, Balmer initiatives, projects. How does China's influence work in these sorts of settings? Like, it's so amazing to me how long it's taken for there to be this realization that, you know, maybe China's taking advantage of World Bank financing. And I know it's something that David Malpass, but when he was Undersecretary for International Affairs at Treasury and World Bank President, something that he took on was to transition China to try and no longer be an aid recipient country. But I'm curious, like, how does that dynamic work with other countries?”
DJ: “So, one thing I should add on graduation, and this gets to your question about how does, you know, China influence. So, graduation, even though I laid out these three criteria, which, you know, they're OECD criteria, I think they're widely recognized as those are the right criteria, to graduate from the World Bank has to be, you know, you have to sort of nominate yourself to graduate, right? So, countries get to decide if they want to graduate or not. So, China has not nominated itself to graduate, you know, and there are other countries that have graduated, you know, from the World Bank, like South Korea is a really good example. There's, you know, countries in the Caribbean. There's Singapore. I mean, there's a decent list of countries that have graduated over time. And, you know, I think at least once a week, I would, you know, give a speech at the board about how graduation was something to aspire to, and that it's like the gold star, congratulations, you've made it into, like, the developed world club. And basically, I was aiming that at China. But they're going to continue to take loans. Interestingly, I learned that the Asian Development Bank has made a policy, and I don't know how it was decided or whether it was voted on, but they are not going to give China any more loans coming out of the ADB. So, good for them. At the same time, of course, China started its own development bank, the Asian Infrastructure and Investment Bank, AIIB, which the United States chose not to participate in because it's basically run by, you know, the CCP. So, they're competing with the World Bank, and they get a lot of business through AIIB, and then also bilaterally through, you know, their Ex-Im Bank and through the China Development Bank. And like, as you said, they're going to these African countries. And a lot of the time, my belief is that these countries would rather work with the World Bank or the US bilaterally, but the World Bank says, we don't think that's a good project, or we don't like fossil fuels, you know, et cetera, et cetera. And then China just swoops in right after, and they're like, oh, you want to build a coal plant? We can do that for you. We'll give you the loan. We're going to bring in all of our own workers and all of our own technology. And so, you're seeing that, you know, all over the Global South. And, you know, China, even domestically, China is continuing to build a coal plant. So, I mean, that's sort of my climate change hat. I won't, I don't know if we have time to get into that. I don't know if we have time to get into that, but, you know, if you want to do something about climate change, like, you know, China has to play ball, and they're not. So, I mean, there was just a recent Australian study that came out that said, you know, I think it was the U.S. and Europe that we had cut our greenhouse gas emissions, I think, something like 5%, while China had increased theirs, I think, 12%. So, like, we can't cut enough to make up for them.”
Jon: “It's fascinating. I mean, I feel like it's become such a lightning rod issue in sort of these Paris climate talks. And also, obviously, the World Bank in recent years has stepped up to try and make climate a priority in its own agenda. But at some level, you know, it truly is a global commitment to reducing carbon emissions, and carbon emissions have been falling in the U.S. and in other developed countries, while in China and elsewhere, it's been rising pretty substantially. And even though they've made these promises to commit to start reducing emissions by 2060, it's so far out, barely seems credible. I'm just curious, like, on the topic of China, I'm curious, how do you see the rise of China influencing global affairs in the coming future? There's a few things that we don't really talk too much about, namely, say, trade. U.S.-China decoupling has become a serious topic in terms of trade relations, and they've been influenced since the Trump administration. There's something that's continued through the Biden administration, everything from tariffs on down, concerns about how American manufacturing sector has been impacted. You know, this is famously described in the China Syndrome paper that looks at the labor market impacts of increased imports from China. And also, you know, we've seen things like, you know, human rights abuses, the Uyghurs. You know, we've seen the national security law in Hong Kong overturn the rule of law there in 2020. And now there are serious questions about whether China will invade Taiwan. And then there's all these questions about semiconductors. How do you see the future of U.S.-China relations?”
DJ: “So, I mean, they're pretty low right now. I thought it was interesting, and perhaps I missed it, but I think she met with Kissinger, but didn't meet with Kerry. But we did have like a parade. We had, you know, Blinken went, and then Yellen went, and then Kerry and Kissinger went. And so, you know, I think…”
Jon: “This is all in recent weeks.”
DJ: “Yeah.”
Jon: “Summer of 2023 is here.”
DJ: “Right. We've definitely made an effort to go over there. I mean, I'm a China watcher, but I wouldn't call myself a China expert. But I did live in Asia when I was younger. And, you know, I think sort of our sending a parade of officials there, you know, sends a very bad signal. We look pretty desperate.”
Jon: “Well, it's the first time since maybe like 2018 or maybe even earlier, maybe 2017 or so, since there have been U.S. officials going over there, including, you know, cabinet-level officials. I know the CIA director went there recently too. It seems like a potential thawing of relations.”
DJ: “Yeah, except our military, the military guys aren't talking to each other. And, like, of all the parade of officials, like, those ones I really actually do want, like, more important than anything else. Like, I really like the military guys now, but we can watch the communication, and they don't. And that does scare me.”
Jon: “There's military exercises in the South China Sea and Taiwan Strait. China's organizing, all very concerning.”
DJ: “Yeah, yeah. So, I mean, I'm worried. You know, I think the Biden administration has, you know, continued the Trump administration policies. You know, I think the U.S. went through this period. I mean, I think it sort of started where we thought if we let China into the WTO, and we started this strategic economic dialogue in the Bush administration, that it was like, if we open up, and if we sort of have more interaction with them, they will naturally become more democratic and more capitalistic. And I think, unfortunately, that is not the way it has turned out. And I think nobody really – it's hard that, like, basically we have strategy, and we just have to accept, you know, that it didn't work. I actually got in an argument with my French colleague once at the World Bank about this, because I was like – I said, you know, we tried that. Like, we've done that. I don't know why you guys are still trying to do that. Yeah. So, I mean, it's a difficult situation. Like, you know, they changed the terminology from decoupling to de-risking. You know, I think that that's probably right. I mean, there are, you know, there are some things we're going to want to continue to trade with China. I mean, trade in general is good for, you know, good welfare economics, right? You know, the issue is we don't want them, you know, controlling entire supply chains for things that we care about. You know, like, obviously, like, a lot of high-tech stuff, green, that is – you talked about sort of the human rights issues. I mean, I said when I was at the bank, you know, your human rights agenda is running, you know, headfirst into your green agenda, because all of the green energy that the bank is purchasing is coming from all the weeders, right? That's where, you know, Xinjiang is where all the, you know, all of this stuff is, you know, the solar panels are manufactured, et cetera, et cetera. So, you know, do you care more about human rights or do you care more about green? Because, like, I'm not sure you can do both. And I do think the bank is struggling with that, and they're trying to figure out, like, how to monitor the supply chain. I mean, is this the point where you do, like, a Kimberley process, like with diamonds? Like, I don't know that anybody can do that. I don't know that China is going to ever open up their books. You know, there was a big scandal when I was at the bank where it was a 2015 project. It was before I had gotten there where it was, and I'm not kidding, vocational education in Xinjiang. And, you know, shockingly, the project went awry, which the banks didn't even know there was a whistleblower who came forward. It was all over, like, the New York Times, the Washington Post, et cetera. You know, it was determined that, well, the whistleblower showed evidence that, you know, the Chinese government was taking World Bank funds and not using it for, I mean, the world only knows what kind of vocational education they were doing, but they were procuring, you know, barbed wire and riot gear and, you know, that kind of stuff. And, obviously, that was not the intent of the project, nor would the World Bank ever fund anything like that.”
Jon: “Wow, wow. Yeah, just further, you know, oppressed the Uyghur population in Xinjiang. I mean, that's incredible. I mean, thankfully, there was a whistleblower that stood up and made that clear.”
DJ: “But the crazy thing about it was, you know, I said, well, obviously, we need to stop disbursement on the project. And under World Bank rules, it's the sovereign that has to ask to stop disbursement. And I was like, wait a minute, what's in the loan covenant? Like, it's our money. How come we, you know, and China did, they did stop it. They didn't ask for the end of disbursement. But at that point, I think 42 out of 50 million had already been dispersed. And they wanted to go away. They didn't want it to have lines. You know, but it was just it was not it was, you know, pretty bad. Very, very bad.”
Jon: “Unbelievable.”
DJ: “Again, why the bank shouldn't be in China, like China doesn't need the money. You know, the controls obviously are not there all the time. The point of what I was saying was, you know, we the bank sent in like an investigative team. And I worked actually closely with the Treasury General Counsel. And, you know, basically, China wouldn't let the bank team in for, you know, four weeks. So what could possibly go wrong in the four weeks that they weren't allowed into the country? You know, so lo and behold, the books that they saw, you know, that they were, you know, presented were very, very clean. And they took them on literally like I'm not giving you a cultural tour where the bank staff said that they saw some nice dancing and music. And I was like, well, did you look for the barbed wire fence? We're not really, you know, experts in that. And I'm like, well, did you think about bringing an expert? I mean, I don't know. I know what barbed wire fence looks like.”
Jon: “For sure. Wow. Now, I'm curious on the topic of semiconductors. And certainly, you know, industrial policies is something that seems to be back vote now. But from the perspective of the World Bank, how do topics like industrial policy get discussed? Like, do you have any particular thoughts on, you know, say the Chips and Science Act? Certainly, I think been a bit of a controversial piece of legislation in the sense that there's those that that argue that there needs to be subsidies for domestic investment in semiconductor supply chain. But, you know, at the same rate, you know, some people would argue that it's just a complete giveaway to companies like Intel, some of these chip makers that can't even seem to build fab sites in places like Arizona because, in part, they don't have the skill labor that they might need. And then on top of that, too, like I think there's arguments that say that, you know, it's just such an interconnected supply chain to begin with. You know, even China needs inputs from the U.S. to make its semiconductors. And so I guess it's not as one sided of a production chain as one may think. So I've seen sort of both sides of this issue. I'm curious where you come down.”
DJ: “So I don't think I ever really heard a discussion on industrial policy at the World Bank. I was there like, you know, 19 to 21. So most of that time was dealing with Covid and the debt suspension, debt sustainability suspension initiative, the SSI, you know, which was trying to get China to back off on all these countries that were, you know, very serious debt distress. So but, you know, I can say like from the U.S. perspective and I mean, I would say like when I was in the White House, like we did we did use the term industrial policy, but it was a bad phrase. It was a bad thing, which I think traditionally that's what most economists think. And I think that actually you're seeing, you know, this administration is there were there were parts of the Trump administration that did believe in industrial policy for for national security purposes. And I think the Biden administration has taken that ball and run with it and run with it further. But then they've also like extended it, like you said, to like, you know, chips and other, you know, other national security issues. I mean, the Bureau of Industry and Security at Commerce is now like a super important part of the government. There's actually a good I think it's the New York Times piece. I mean, it was. Yeah. New York Times back about like nobody heard of it before. They're the ones that are doing all the export controls. And so, you know, obviously the U.S. has had a lot of export controls in the past, but we're doing a lot more of them in the name of national security. But, you know, I wanted to pick up on your point about, you know, the fabs and the skilled labor. I mean, I think this country has like a really big problem with, you know, our workforce right now, because, you know, like you need you need people to grow the economy. We've got serious demographic issues where, you know, I think 21 was the first time we had more deaths than births in the United States. We're not the only developed country that's having this problem. It's been a problem for a while in Europe. Interestingly, China now has that problem and their problem is much worse than ours. Korea is in big trouble. I think I saw some estimates that like by 20. The estimate that like by 2060, there's going to be like, maybe, I can't remember the exact number, like there's going to be nobody left in Korea. Japan has had that problem for a long time. So, you know, we've, if we want our economy to grow, if we want to continue to be prosperous, like we, we, you know, we need to deal with our demographic challenges. And, you know, you were mentioning skilled labor, like, I think that they're going to have to bring in some workers because we just don't have enough of the skilled laborers. And I think that, you know, that is important. Like I, obviously, most of the immigration oxygen is focused on low skilled labor coming across the border. But, I mean, high skilled, you know, we need both, but we definitely need, you know, high skilled labor if we want to stay competitive with China.”
Jon: “And it's fascinating. I think, you know, I know that the National Security Advisor, Jake Sullivan, he gave a talk recently on what he calls the new Washington consensus at the Brookings Institution a few months ago. And it's interesting to really wonder, you know, whether all these things, whether it's from, say, industrial policy to a free trade to free capital flows, all these things seem to be under sort of a new lens of thinking amongst many people in D.C., obviously not everybody. But I'm curious on the COVID concessionary lending. Can you explain a little bit about what the World Bank and IMF was doing during the COVID crisis to lend to sovereigns that were troubled, particularly in emerging nations? What was it that the World Bank was doing along with the IMF?”
DJ: “Yeah, I mean, obviously the IMF was doing sort of more direct fiscal injection, you know, into specific, you know, Treasury, you know, the Treasury and Country Acts or whatever. The bank did some of that. The bank also funded, like, there was a vaccine facility where they, the bank purchased, you know, from the developing world since we were the ones that had the vaccine. And so they would sort of broker the purchase of vaccines for developing countries. There was a lot of a lot of projects to, like, you know, increase health care capacity, you know, hospitals, doctors, nurses, equipment, you know, obviously PPE, like a lot of money went to purchase PPE. There were pretty crazy times and the bank, like most of the world, was completely shut down. So we were remote. And I would, I struggled because a lot of the job of the executive director is to try to form coalitions, you know, to get votes on your side or push for different initiatives. And when you're not sitting next to somebody or seeing them in the hallway, it's a lot harder to build coalitions. So I don't think it was a good way for the bank to operate, much like the rest of the world. It was just a very difficult working situation. But, you know, the bank did manage to get a lot of money out the door and, you know, the vaccine facility was good. And the bank, I think, worked with Gabby and, you know, a bunch of the other, you know, sort of vaccine organizations to, you know, help, help get, you know, help save lives. That's what it came down to.”
Jon: “That's fascinating. I mean, what an amazing time to be at the World Bank in the midst of, you know, such a incredible global crisis and global pandemic, one that on that scale had really been seen in quite some time, in almost a century. I'm curious, just pipping from the World Bank, prior to the World Bank and you becoming executive director, you were Kevin Hassett's chief of staff at the White House Council of Economic Advisers in the Trump administration. I'm curious, like, what do you think have been some of the largest sort of economic policy accomplishments of the Trump administration? And I'm curious, I also want to ask you a little bit about how you think CEA has evolved a bit, because it seems like CEA has sort of been displaced in recent years, sort of by the National Economic Council and Treasury Department, particularly since you and Kevin Hassett left your post at CEA, in the post Kevin Hassett CEA. I think Kevin's kind of like the last CEA chair to have a lot of real influence and a strong relationship with a senior U.S. president. CEA sort of now seems to be sort of largely focused on messaging and putting together charts rather than actually being involved in policy discussions.
CEA chair has now been sort of demoted to a sub-cabinet level position. All things that have continued through the Biden administration. I'm curious what your thoughts are on sort of the state of CEA as well.”
DJ: “Sure. So, I'll start with the, you know, sort of economic accomplishments. I mean, top of the list would be TCHED, the Tax Cuts and Jobs Act, which was, you know, corporate corporate tax reform and also individual tax reform. And part of that were opportunity zones, which is a really interesting piece of legislation. Yeah. I mean, so obviously, like, you know, Kevin, most of his life's work has been focused on, you know, the impact of corporate taxation on the economy. And so, it sorts of like happened. It was like he was in the right place at the right time. It's very hard to pass tax reform through Congress. It happens like, I think the last time it happened was in 86. And so, I mean, we were involved in a lot of modeling and, you know, we were focused on the economic impact of the corporate side. But, you know, what's interesting about CEA is, you know, you've got politics and policy. CEA, and this is the same no matter who's in the White House, is, is or should be focused on, like, the optimal policy solution. And I used to joke that, like, you can have, like, really great policy and then it runs, you know, like, you know, smacks off into politics. And so, with corporate tax reform came individual tax reform, not to say that I'm, you know, that we were against the individual side, but we were more focused on the, you know, the economic and GDP impact of corporate. And so, you know, those two, those two got married. And, and so, you know, a lot of those, a lot of that bill is expiring in the next couple of years. You know, I think it would be good to extend it. My current job at Economic Innovation Group does, we've done a lot of work on opportunity zones, which is, you know, an interesting way to get capital that's been sitting on the sidelines, you know, into distressed communities. So, it sort of eliminates some of the risks for the private investor to come in and, you know, do well by doing good, as the expression goes. And then I'd say, you know, the other big accomplishment was regulatory reform. You know, CEA was involved in measuring a lot of the regulatory reform and, you know, sort of modeling what impact it would have and how to shape, you know, shape various pieces of it. And, you know, it's, you know, if you look at the statistics, you look at the charts, I mean, the combination of tax reform and regulatory reform, like the economy was doing very, very well until COVID basically knocked it on its ass, if I can say that word.”
Jon: “Yeah, absolutely. I mean, it's fascinating how the corporate tax rates, you know, certainly like it's never a politically easy thing to do. You know, there's certainly a lot of animosity in general toward anything that, you know, is described as corporate in sort of the political sphere. But, you know, at some level, the corporate tax rates were so uncompetitive. At the beginning of the Trump administration, the U.S. had the highest corporate tax rates in the entire OECD. And there's been this massive, almost some people call race at the bottom in terms of just competition for the lowest corporate tax rates and trying to, you know, avoid corporations from leaving or doing inversions or things like that. I'm just like, do you have any thoughts on what's been going on right now in terms of sort of the global corporate taxation and issues that Janet Yellen's led on? The U.S. Congress hasn't passed anything to give ground on this idea that there needs to be a global minimum corporate tax rate. Do you have any particular thoughts on that?”
DJ: “I'm not a corporate tax expert, and obviously I've learned. as I've gone. But, you know, Kevin always used to talk about the importance of tax competition. And actually, he used to – it's an interesting theory that the EU basically sort of, like, creates a monopoly for its member states, right? They can't compete with each other. And, you know, that's the same with, you know, corporate taxes, as you said. Like, the U.S. has the highest, you know, corporate tax rate in the developed world. And so there are a lot of loopholes. And, you know, companies were doing these funny things with transfer pricing. And I mean, you're still seeing some of that today where, you know, companies, they're going to optimize their tax policy, right? Like, they're going to try to pay the least they can because that's, you know, good shareholder value. You know, I think it's good to have tax competition. You know, we got beaten. We reformed. We're still not, you know, below us. And so, you know, I think Yellen is basically trying to level the playing field in corporate taxation. I mean, there's some things in that, you know, OECD regime that make the U.S. like a little bit, seems to me, subservient to what the EU wants to do. And, you know, I think Congress has different ideas about that. So, you know, I think, you know, I think the idea is to try to make sure that everybody, quote, pays their fair share. And certainly, there are loopholes in the system that need to be fixed. I'm not sure that this is optimal tax policy. And I think it's going to really hurt American companies and American competitiveness.”
Jon: “Absolutely. I mean, it's fascinating to see such coordination on tax policy, which is, I think, just an almost impossible thing to get such a large group of nations to agree on in the respective Congresses. I'm curious to talk about Opportunity Zones, where you work now and where your executive vice president of the Economic Innovation Group played a really significant role in the original conception, original idea of Opportunity Zones. It's something I think not a lot of people realize, something that Senator Tim Scott obviously ran with or was sort of the vehicle to get it included in the Tax Cuts and Jobs Act, which were passed and began in the Trump administration. I'm just curious, like, in terms of some of the evidence so far, in terms of, you know, it's still a fairly young policy in terms of just how many years it's been in place. I'm curious, what would you say to the critics that, you know, argue that it's really just a capital gains tax giveaway to real estate developers? Is there a lot of evidence coming in, in terms of, like, outcomes for up-and-coming communities that it's intended to help?”
DJ: “Yeah. So, I mean, the initial idea for Opportunity Zones came from EIG, and it was Kevin Hassett. There's that name again. And his co-author was Jerry Bernstein, the current CEA chair. So, and, you know, it had wide bipartisan support. It was a stand-alone bill for a couple of years before it got, you know, sucked in by, you know, into TICSHA, you know, thanks to Senator Scott. And it was interesting because something that had wide bipartisan support suddenly became, like, known as a Trump thing because it was part of the Tax Cuts and Jobs Act, and it hadn't been. And so it has sort of got, like, a little bit of a partisan aura around it. And it shouldn't because everybody should want this policy to work. Everybody should want to get that capital that's been sitting on the sidelines into productive uses. And, you know, in terms of evidence, there's been, you know, it's still a young policy, but the evidence that we've seen is that it's gotten, you know, billions of dollars. I mean, when I was in the White House, we did an analysis. I think we found it was $75 billion. You know, that was early on, so that was a projection, but others have found less. But it's still getting money off the sidelines into these distressed communities. And, you know, it's been criticized as only going to, like, the richest of the poor areas. And, you know, we've seen evidence, you know, GAO, Treasury actually just put out a paper on it. You know, the Biden Treasury, where it found that like, actually it's going to more of the bottom than the top. And you're still going to the bottom. Even if you're at the top of the bottom, it's still, like, it's still going into a distressed community. As to the critique that it's property development, I mean, I don't really understand that critique at all. So what? Like, people need houses? People need stores and restaurants? Like, you know, it doesn't, to me that doesn't really, you know, hold water. I know there was criticism of one high-end hotel, I think, somewhere in Oregon. And so that was highly criticized. The project actually didn't go through. But, you know, I sort of laughed about it because I worked at, you know, the World Bank, which is the world's largest development bank. And I cannot tell you how many projects the bank funds that are, you know, high-end hotels. You know, that can have good economic impact, right? You've got construction jobs. You've got, like, you know, permanent jobs, reception, bellhops. You've got restaurants. You've got cooks and all that. So, I mean, that is considered economic development. So, you know, I think there is some new legislation to tweak opportunity zones, to do better reporting. I mean, it's certainly not a perfect law, but it's done well. It's done much better than new markets tax credit, which is a lot less flexible. And, you know, I think I wish the politics would just fall away and, you know, we could do something where we're using some good, you know, productive capital into these areas that sadly have been left behind and they need it.”
Jon: “That's fascinating. And it's so interesting to hear from someone who's working at EIG, the Economic Innovation Group, which essentially set everything in motion for opportunity zones to become law across the U.S. And here we are about five years on. Well, this has been such an interesting conversation, DJ. It's been a real honor and a real pleasure to have you on. Thank you so much for joining us today.”
DJ: “Yeah, thanks, John.”
Jon: “Today, our guest was DJ Norquist, who is the executive vice president of the Economic Innovation Group and the former U.S. executive director of the World Bank. This is the Capitalism and Freedom in the 21st Century podcast, where we talk about economics, markets and public policy. I'm John Hurley, your host. Thanks so much for joining us.
