eco TV

EcoTV – October 2020


TRANSCRIPT // EcoTV – October 2020 : October 2020

Hello and welcome to the October 2020 edition of EcoTV, the video magazine of BNP Paribas economists.

Given the electoral calendar, this month’s edition will highlight the United States. In our Focus, Jean-Luc Proutat will talk about President Trump’s economic record and compare the policy platforms of the two candidates, Joe Biden and Donald Trump.


In the Chart of the Month, William De Vijlder will talk about the future of debt in the United States. Have we reached the point of no return? William will give his response in a few moments.


We will conclude with Three Questions on Brazil with Salim Hammad. He will talk about the erosion of Brazil’s growth potential, and how there is still a crying need for structural reforms.

Enjoy the show!




François Doux: The big event of the year-end period is, of course, the US presidential election, which will be held on 3 November. The impact of this election reaches far beyond US borders and has a global dimension.  Jean-Luc Proutat, hello.


Jean-Luc Proutat: Hello.


François Doux: As an economist, how would you describe President Trump’s economic record in his four years in the White House?


Jean-Luc Proutat: It is best for us to look at his economic record through the end of 2019, before the outbreak of the Covid crisis, which is hard to blame on Donald Trump. At first sight, the economic results look good. Under Trump, there were lots of job creations, and the unemployment rate fell significantly. It dropped below 4% to an all-time low. The stock market has also been bullish, which is important for Donald Trump’s electorate, in a country that mainly uses a funded pension system. Note, however, that the economy had largely recovered by the time Trump was elected in 2016. Under Obama, unemployment had already fallen sharply, and this tendency was only amplified under Trump.

In terms of trade policy, the Trump administration also scored a victory: the renegotiation of the North American Free Trade Agreement (or NAFTA) under more favourable terms for the United States. He also orchestrated a change in attitude towards China and imposed tariff increases, but this was not a major source of contention between the two political parties. A large wing of the Democratic Party also supported this policy.


François Doux: Jean-Luc Proutat, to be fair-handed, let’s also talk about Donald Trump’s liabilities.


Jean-Luc Proutat: Three come to mind. Behind Donald Trump’s economic results and stock market performance, there has been a significant surge in corporate debt. This is cause of vulnerability that is often highlighted by the International Monetary Fund. Besides, the Trump administration has been focused on the short term. To stimulate growth, it has diluted health and environmental standards. Two universities, Columbia and Harvard, estimate that a hundred rules or laws have been weakened by the Trump administration. These range from pollution emission standards for vehicles and industrial plants, to the preservation of natural spaces and resources, or reporting obligations for firms.


François Doux: In terms of incomes disparities, his record is not very rosy either?


Jean-Luc Proutat: No, it is not. Income inequalities were already important in the United States, but they widened further under Donald Trump, notably after the 2017 tax reform, which concentrated tax cuts on the wealthiest segments of the population, and made it much harder to access Obamacare.


François Doux: Let’s talk more about the 3 November election. What is your prediction? Between Trump and his rival Joe Biden, who is going to win?


Jean-Luc Proutat: Normally, Joe Biden should win. He has a rather comfortable lead in the polls, with 50 percent of voters saying they intend to vote for him, and only 43% for his opponent, Donald Trump. This is slightly bigger than the gap separating Donald Trump from Hillary Clinton in 2016. Yet few observers or experts are willing to predict the winner.


François Doux: Why?


Jean-Luc Proutat: Simply because we are not dealing with a national election system, but one that is held in the fifty states using a rather peculiar electoral system. Americans do not vote directly for their president, but rather for members of the Electoral College, who will make the final decision. The voting system is also based on a “winner takes all” principle: the leading candidate in each state election wins all of that state’s electoral votes, regardless of his opponent’s score. In 2016, for example, Hillary Clinton won nearly 49% of the popular vote in Florida, or more than 4.5 million votes, but did not win any of the state’s 29 electoral votes. Florida is one of the famous “swing states”, which can swing the election results one way or the other. As a result, a candidate who wins the popular vote nationally can still lose the electoral vote, and thus the presidential election.


François Doux: Indeed, it is a peculiar system, especially seen from Europe. How is it justified?


Jean-Luc Proutat: Originally, the body of electors of the Electoral College were designated through a special procedure. They were thought to be better informed than simple citizens, and thus acted as a safeguard against a populist vote.


François Doux: What can you tell us about the two candidates’ platforms, Jean-Luc Proutat?


Jean-Luc Proutat: Here there are no real surprises. Donald Trump is running a law-and-order campaign. This theme resonates with his voter base at a time when protests and clashes are becoming increasingly frequent and violent. His opponent, Joe Biden, is careful to address the concerns of minority communities. Minority groups will be voting in great number during these elections, and their vote traditionally favours the Democrats.


From an economic perspective, it is no surprise that Donald Trump is driving home his “America First” policy. He has announced the “decoupling” of the US economy from China, but without offering any further details.

Joe Biden seems to be more open to trade, but he is not necessarily more conciliatory. Concerning trade tariffs on China, for example, he is willing to roll them back, but only if China makes concessions. The main theme that separates the two candidates is their attitude towards multilateralism. This is a big issue for Joe Biden. He has announced, for example, that if he is elected, the United States would immediately re-join the Paris climate agreement.

The Democrats also have a more open approach to the European Union. The Democratic Party, for example, has criticized the UK’s attitude towards the handling of Brexit.


François Doux: What about their tax platforms?


Jean-Luc Proutat: Joe Biden has said he would partially roll back the tax reforms of 2017, which were introduced by the Trump administration. He would raise the corporate tax rate, as well as taxes on the wealthiest individuals.


François Doux: Before talking with William De Vijlder about fiscal deficits, I would like to wrap up our discussion with Jean-Luc Proutat. The 3 November election will remove some uncertainty: we will finally know who will be the next US president.


Jean-Luc Proutat: Unfortunately, 3 November might not mark the end but the beginning of a period of great uncertainty. If the results are close, which might well be the case in a number of swing states, they are bound to be disputed. Donald Trump is already sowing doubts on the election results.

Mail-in ballots will lie at the heart of any disputes over election results. Welcomed in the midst of a health crisis, mail-in ballots risk delaying the announcement of the results. They are also being attacked by Donald Trump, who sees them as a potential source of fraud, without which he would easily be re-elected. There is a risk that we might not know the name of the next US president on 3 November, if both parties declare victory and launch recount procedures. At least, we should hope that this situation will be cleared up before 6 January 2021, the date when Congress must officially designate the new president of the United States.


François Doux: We will continue to monitor the US elections and this 6 January deadline.

Thank you, Jean-Luc Proutat. We will be back in a moment with William De Vijlder and the Chart of the Month.




François Doux: Let’s continue talking about the United States with our Chart of the Month. William De Vijlder has selected an instructive but painful chart for us: US debt as a share of gross domestic product (GDP), or the debt ratio.

Here we can see his chart. Let’s begin with the end. Projections call for the debt ratio to rise from about 80% in 2020 to as high as 200% in 2050. Things cannot continue like that, can they?


William De Vijlder: That’s right, François. I propose we call this chart the “Nightmare of Washington DC”.

No, things cannot go on like that forever. It is important to note, however, that the Congressional Budget Office, which made this chart, starts from the assumption that any existing policies will be maintained indefinitely. This explains the very sharp acceleration in debt, which is mainly due to greater spending on healthcare.

It is the real motor for the huge increase in spending, and thus for the increase in the deficit and debt.


François Doux: This chart is also interesting for what it says about the past. The rare moments when the debt ratio did decline were after major wars, or severe depressions or recessions. Yet when things are going well, like during recovery phases, the debt ratio does not decline. During these times, we normally take on debt to try to stimulate growth. Does this mean we are not making the right efforts?


William De Vijlder: I would like to say that there has been a big change. We entered a new regime in the early 1980s, after a long period of very strong, sustained growth which followed World War 2. Starting in 1980, in contrast, the debt ratio has climbed after each recession and we have been unable to reduce it. The only exception was in the second half of the 1990s, which was an almost euphoric period with strong growth and no inflation.


François Doux: There has been a kind of ratchet effect, or hysteresis as we say in economics. Despite growth, the debt ratio does not decline. Interest rates are low, so there is no need to think about debt reduction. Is that the problem?


William De Vijlder: Yes. And “hysteresis” is the right word. It can be applied to the unemployment rate but also to the level of public sector debt. It can take several years for an economy to recover sufficiently, especially after a deep recession like the one in 2008-2009. So for years we say, “we cannot afford a fiscal policy that tightens the screws.” As a result, the debt ratio barely levels off at best.


François Doux: With today’s very low interest rates, there is little incentive for debt reduction.


William De Vijlder: Yes, because today the new saying is that “with rates so low, it’s easier to achieve the magical equation in which nominal GDP growth exceeds the cost of public sector financing”. This gives the public sector enormous fiscal leeway, which is necessary in the current environment.

We must keep in mind, however, that even though the growth rate surpasses interest rates, other factors and types of spending also experience very strong growth. We will eventually be confronted with a situation that will be very hard to manage.


François Doux: Last question. What is the role of the central bank, in this case, the US Fed? We know that other countries are in the same boat. Has its role really evolved or not?


William De Vijlder: Yes, its role has changed tremendously, and not only in the United States. We should also look at this in the light of another very important factor. You mentioned the decline in interest rates. As a result, interest rates are now almost permanently verging on the lower zero bound. As a result, central bank policies now consist of increasing the size of their balance sheets by purchasing government securities or corporate paper. We are heading towards the permanent recourse to central banks during recessions. Basically we are saying, “our fiscal policy is designed to stimulate growth engines, but it is the central bank that will purchase any paper that is issued.”


François Doux: Almost like a public player?


William De Vijlder: That’s the big debate, and it’s far from being unanimous. This is the kind of disagreement that is particularly interesting for economists. It raises a real question: “just how long can the central bank agree to purchase more and more government securities?”


François Doux: This topic is sure to enliven several more editions of EcoTV.




François Doux: The Covid-19 pandemic has brought many economies to a sudden standstill. What impact will this have in the medium term? Modernisation policies and structural reforms have been put on hold or incurred delays. This is notably the case for Brazil. Salim Hammad is here to tell us more. Hello Salim.


Salim Hammad: Hello François.


François Doux: Let’s talk about Brazil’s growth potential, which is to say, the medium-term growth rate that makes optimum use of capital and labour without creating inflation. My first question about Brazil’s potential growth rate is where do things stand today, in 2020?


Salim Hammad: Well, before the Covid-19 pandemic, Brazil’s growth potential was estimated around 1.5% to 2.5%. By way of comparison, before the 2008 financial crisis, most estimates fluctuated in the range of 3.5% to 4.5%. In other words, Brazil has lost around 2 points of potential GDP growth in the span of about 10 years.


François Doux: Second question. Which factors have contributed to eroding Brazil’s growth potential?


Salim Hammad: In order to grow, an economy needs several ingredients. Above all, it needs some productive capacities in the way for instance of machines, equipment and infrastructure. This makes up a country’s stock of physical capital, which tends to be fuelled by investment. Yet, since 2013, Brazil’s investment rate has tumbled, suffering in particular from the 2015-2016 recession, the fiscal adjustment that followed, as well as the overall deterioration in the business environment.


Second ingredient. An economy’s potential growth will also depend on the quantity of workers that an economy has at its disposable to produce. Not surprisingly, this will be a function of demographic factors. Currently, Brazil is in the midst of a demographic transition whereby its population is aging rapidly, which contributes to curbing the growth of the number of active workers in the population. This phenomenon has been characterized as the gradual loss of the country’s demographic dividend.


François Doux: And the third ingredient?


Salim Hammad: A third ingredient to enhance the rate of increase of potential output are productivity gains. This involves making factors of production more efficient thanks most notably to technical progress. Unfortunately, in Brazil’s case, total factor productivity has been largely stagnant over the past few decades.


François Doux: My third and final question.

When are we going to see the resumption of structural reforms in Brazil? These reforms will be critical to stimulate investment and productivity gains.


Salim Hammad: Understandably, the health crisis has put a significant damper on the advancement of reforms. However, it should be noted, that even prior to the pandemic, the pace of reforms was rather slow. That said, over the past few weeks, the process has picked up again. Several projects were presented to Congress, including the first stages of the fiscal reform as well as an administrative reform. They both reflect the government’s desire to improve the business environment and transform the role of the state in the economy.


Unfortunately, the presentation of next year’s budget at the end of the summer, has also contributed to raising concerns over the process of fiscal consolidation. In particular, there appears to be divergent points of views on the issue across the executive branch. It is precisely these types of political risks that could hamper progress on reforms and constrain the rebound of investment.


François Doux: Salim Hammad, thank you for this update on Brazil’s growth potential and investment. Tune in again next month for a new edition of EcoTV.

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