We’ve had a really tragic pandemic and yet markets are at an all time high: Chicago Booth Professor Raghuram Rajan

Raghuram Rajan, Chicago Booth Professor of Finance & Former Reserve Bank of India Governor joins the Yahoo Finance Live panel with an update on the U.S. Economy following the pandemic.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Raghuram Rajan, Chicago Booth Professor of Finance and former governor of the Reserve Bank of India. Professor, it's great to have you on today. Brian was just talking about the IMF meeting. Things kicked off in this virtual meeting, with the IMF upgrading its global economic outlook.

Over in the US, they're looking at almost a 6 and 1/2% growth. A lot of that, though, attributed to the large amounts of stimulus that were poured in early on in the pandemic. You just came out with an op-ed raising concerns about the amount of debt that's piling up. What do you see right now that concerns you?

RAGHURAM RAJAN: Well, we've had a really tragic pandemic. We've had a really bad last year for much of the world. And yet, we have markets at all-time highs, right? And the expectations for US growth, absolutely fantastic. But also, growth in other parts of the world, much of it rebound. But there is a sense that we're going to do really well over the next few quarters.

And the question is, have we found some fantastic new economic tool which sort of, with a wave of a wand, banishes the consequences of recession? Some combination of massive fiscal spending and very easy monetary policy, and somehow the recessions of the past are history. What have we discovered that we didn't know in the past?

And of course, you know, people who are worrywarts like me start saying, well, you know, if it looks like a free lunch, it probably isn't. Where is the cost going to hit us? And really, what we've done is built up massive levels of debt in trying to deal with this crisis.

The debt to GDP in the United States is going to go up by 25 to 30 percentage points over the course of dealing with this crisis. And the question is, what ramifications does it have? Does it matter at all?

There are some people who say, no, debt is cheap. You're not paying anything. Don't worry about it. Well, the reality is somebody has to pay at some point. And the question is, who pulls the short straw?

AKIKO FUJITA: How much of that concern that you've raised about the debt, though, is about the price tag solely? How much of it is about the way in which it was packaged?

RAGHURAM RAJAN: Well, that's precisely the point. If you have debt, which is incurred in making investments for the future-- which I think the infrastructure package that is being contemplated will, as well as investments in human capital. The US has to make investments in human capital, in improving the education capabilities of many of its people. All that is to the good, because that generates income down the line.

It's when the spending goes in ways that don't generate long-term benefits that you have to ask, is this really necessary? And of course it's necessary when you're sending money to the unemployed who don't have any other resources, you're sending money to the really poor who are at this point trying to figure out how they put food on the table. It's less useful when it just adds to the savings of the middle class.

And the problem is, much of the packages we've seen-- the first package, undoubtedly, there's very little time. The CARES Act was necessary as a quick reaction to the crisis. Later, we found the crisis was more prolonged.

But we should have thought a little more on what we were doing there. I worry that a fair amount of money buried in this $3 trillion of additional spending is really not necessary. And that could have been spent on the infrastructure that we truly need.

ZACK GUZMAN: Yeah, it's a good point. I kind of like the tongue in cheek talk of the fiscal multiplier there when people who got stimulus checks might be investing in cryptocurrencies. But when you look at the impact of all of this globally-- and that's what we're kind of hearing from Janet Yellen, the way that she might be able to coordinate some sort of global effort here-- it seems like the vaccine rollout is going much better here in the US than other parts of the world.

You look at the EU and what's going on over there. India, a spike in cases. Talk to you about how right now with the US, if this recovery is going to be as strong as predicted, how it might allow for maybe some looser spending than in an alternative case?

RAGHURAM RAJAN: Well, certainly, everything we say today about the economy has to be qualified by the words "virus-willing," right? If the virus is unwilling-- if it's a shape-shifting virus and new forms come in, or we find out that the vaccines are more limited in their effectiveness, et cetera, et cetera-- all bets are off. But you know, as on current trajectory, the US is likely to come out of this sometime in the second quarter, because many of the adults will be vaccinated, and we will start vaccinating children. So this is good news for the United States.

Clearly, the rest of the world is behind. Europe may get there sometime towards later part of the year. Emerging markets and developing countries, probably next year or even 2023. And these are countries that have had much more scarring in the economy, because they haven't had the ability to spend as much as the US or Europe has done.

Small and medium enterprises hurting. Households hurting. Many of them gone into more debt. Debt on households worldwide has gone up by 6% in the crisis. Debt on corporations, 10%. This is over and above the 15% by which public debt has gone up. The level of debt has gone up tremendously. And other countries will not have the strong growth to sort of deal with that.

So more broadly, the US is an outlier and is going to do well. The rest of the world is further behind. Now, that still raises the question of whether all the spending was justified and whether this comes back to haunt us down the line. But nevertheless, the US is in a much better position at this point.

AKIKO FUJITA: You had Treasury Secretary Janet Yellen coming out talking about a need for a global corporate tax rate to prevent this race to the bottom. And it does seem like, at least in the initial conversation, a lot of countries are on board with that idea. To what extent-- I mean, if you look at the tax rate, if there is a bottom here, that would suggest at least additional avenues for revenue. And I wonder to what extent you think that could potentially ease some of the pressure off of the monetary side, as well as the fiscal side.

RAGHURAM RAJAN: Well, certainly, revenue raising is important to pay for what we have spent. And better we pay within our generation than pass it on to the next one, for whom we've left a lot of problems already.

The problem, of course, is that corporations have found tax havens-- like Luxembourg, like Ireland-- to place much of the intellectual property. A lot of this is tech corporations. But even Starbucks paid insignificant levels of taxes in England.

The question that is foremost on people's minds is, well, yes, one way to do it is to get some kind of a global agreement. But will there still be havens even after that that there are immune to pressure? And will corporations find new ways of hiding their profits somewhere else in some other forms? That's the trillion-dollar question, if you will.

Corporations have the best lawyers. They have the best tax accountants. And they can do a lot legally through various fields. And of course, countries have been cooperating with them, countries that want to attract them as headquarters. Can the global-- can the world sort of put enough pressure on those countries to sort of eliminate some of these loopholes? That's a huge question.

There's also the question of, how do we raise taxes on corporations in the United States? Because again, what you already see is a huge amount of pushback from the corporations to fund the infrastructure bill. We like the 21%. We don't want to go back to 27%, 28%. Let it be where it is. Otherwise, you will spoil the recovery.

So my sense is taxing the rich is probably not a bad idea at this point. But it's much harder than we think.

ZACK GUZMAN: And Professor, I mean, given your background too-- you know, former Reserve Bank of India governor-- I'd be curious to get your take too as we talk about global differences here, what your takeaway is from their stance, their evolving stance on cryptocurrencies, and potentially banning Bitcoin. We're still waiting with bated breath to see which way they're going to go there. But I'd be curious to get your take on what the possibility, what the realistic chances of that looks like, considering it's difficult to really regulate.

RAGHURAM RAJAN: You're talking about the Indian Reserve Bank banning or allowing cryptocurrencies?


RAGHURAM RAJAN: I mean, my sense is this is an evolving issue, right? I mean, I personally-- and I'm speaking for myself here-- would love to see some of these new innovations-- crypto, stable coins, et cetera-- sort of flourish at a reasonable level. Before they get too big, you want to understand that you've got the risks under control.

But you also have to watch them develop. You can't sort of stop them. And I think some amount of trading in these is certainly warranted. And it is-- I mean, I don't think there's a killer app right now for cryptos.

But it is quite possible that something emerge, what with these smart contracts, et cetera, something that makes it more than just a means of payment-- something that reduces the costs of using them, for example. This is something that, unfortunately, Bitcoin is very costly to use and very energy inefficient. But there are other ways that we can get payments and start thinking about micro payments, payments for every view.

I mean, there are lots of developments that can emerge from this. And therefore, I think it's important to allow innovation here, to see it flourish. And of course, be careful once it gets really big, because then it becomes a potential systemic risk. And if you don't understand it by that time, well, you have a problem on your hand.

AKIKO FUJITA: Raghuram Rajan, we always enjoy having you on the show. Appreciate your time today. Chicago Booth Professor of Finance and former RBI governor.