[music] I'm Alexander Heffner, your host on The Open Mind.

And I'm delighted to welcome our guest today.

He is vice chairman of Goldman Sachs and most recently served as president and CEO of the Federal Reserve Bank of Dallas.

We're honored to host him, full disclosure he is a generous benefactor to many important causes, including our educational programing.

Rob, a pleasure to see you as always.

-Thank you so much for your time -Great to see you.

Thanks for having me.

Rob, how you're assessing the economy in 2025.

I'm so curious to learn is it different from the way you were assessing the economy a decade ago, or two decades ago, or three decades ago, or fundamentally consistent with the same way you're analyzing our economy?

The frameworks may be similar.

The facts are different.

There's two types of developments that people focus on.

One I would call cyclical developments.

And if you pick up the paper any day of the week or watch TV, there's all these employment data, consumer sentiment, inflation outlook, PPI, CP, all these acronyms that are cyclical data.

That means data that's spewing out normally by the Commerce Department.

The second part, which we don't talk about as much in the press, is structural developments.

And on those, the structure of the US economy have changed.

It's changed dramatically over the last number of decades.

Globalization, technology enabled disruption, demographic changes, the nature of fiscal spending are all big structural changes.

And I would say, as you and I are sitting here today, the reason there's a lot of confusion at the moment.

We're embarking on 4 or 5 big structural changes right now that make analysis economy different than it might have even did three months ago.

And how much of that is impacted by AI, Rob?

Is it something we're just saying in the air, or is it really impacted by that?

So, let me go through the five big structural changes going on.

We're currently changing the way we do fiscal policy.

There's a feeling that a lot of our growth, some of our growth on the last 3 or 4 years has been due to excess fiscal spending.

And this administration now, as we sit here in March of 2025, is trying to deleverage.

We're much more highly regulated and we're deregulating, we are working on making it easier to produce energy.

There's an energy transition.

To your point, technology enabled disruption at which AI is a part of, is a huge structural change in this economy.

These days, if you're working in a whole range of industries, your job is more likely to be disrupted or even eliminated.

Your company may, in fact, be disrupted or eliminated, to think, if I worked at Kodak and I worked in the film film production industry, the iPhone overnight in effect, wiped out that industry.

That's a huge structural change.

AI is the most recent iteration of it.

What AI is doing is an example is making it such that we ideally are more productive, but it also means that people are more likely to lose their jobs, not due to globalization.

That would have been 30 years ago.

Today, it's more likely to be due to technology, and then they got to get retrained to get back into the workforce.

Those are examples.

But the fundamental thing I'd highlight about the US economy.

I grew up in an environment where workforce growth was strong because demographics of the country, the baby boom generation was growing, and it was a huge stimulus to growth.

Workforce growth it being high helps growth.

We are now on the flip side of that, where even though we've got Gen Z and Gen Y and Gen X, we're growing net more slowly and immigration is far more critical, and productivity growth is even more critical today than ever before.

And the need for, technology, productivity enhancements.

And this is not just true in the United States.

It's true globally.

And one of the ways we've dealt with these structural changes is at the government level, by leveraging up, we've masked some of these underlying changes by spending more, either on tax cuts or corporate government spending, I should say, which is stimulated GDP growth.

And we're kind of at the point now globally, not just here, here, China, Europe, we're aging, can't keep leveraging up.

We need now to find fundamental ways to grow and productivity.

AI is a part of that story is critical.

If we're going to continue to grow.

One of the speculations about the economic policy of the new administration is a tolerance for recession.

Some folks have gone as far as to say that the current administration.

Trump part two.

President Trump and Vice President Vance are actually wanting to engineer short term pain for long term, success.

Is that the way you're assessing it?

I doubt it very seriously that they want that, they want to make structural changes though to the US economy.

What is it they're looking for?

Fundamentally, I think they want a more private sector led, organically led economy less led by excess fiscal spending.

Okay, now that shift while we're going through it may in the short run slow growth.

But what they want to do is have instead of running 7% of GDP, annual deficits, which are historic, in an economy that's at full employment, debt to GDP has gone from the mid 70s to 100% and instead of continuing to leverage up, they're saying we need to control government spending, but we need incentives for more capital investing.

Domiciling manufacturing in the US, getting banks to lend more.

There's regulatory oversight and re-review is part of that.

And so no, they're not trying to engineer a recession.

Absolutely not.

We're highly leveraged.

We don't want a recession.

And it will hurt people if we have a recession.

But they're very aware that we need to make some structural changes.

The other thing they're aware of, there are two, two groups of consumers in this country.

There are 65 to 70 million workers in this country that make $55,000 a year or less.

And in the last four years, they've lost on average 25% plus purchasing power.

And they're upset and can't make ends meet.

They voted uncharacteristically for, Trump, where they might have historically voted a different way because capitalism is not working for them.

There's another 65, 70 million consumers that are 55 and older, own their home, have financial assets, and this period has been pretty good for them.

It's that first group that is suffering, wants to see changes, wants a more, affordable economy.

And I think that helped get this administration elected.

And I think they're very aware of that.

So tariffs is a part of that story.

Immigration is a part of the story.

We can go through all that.

But no, the challenge of this administration is to go through this restructuring, maintaining a acceptable level of growth while we're deleveraging.

They don't want growth to fall off, unduly because that will make this job harder.

You say organic, you know, and looking at the...

Private sector led.

Right.

So where do the tariffs fit into that?

And can they be efficacious in creating the outcome that the American people want?

Okay.

So there's, so I mentioned earlier a few of the structural changes, the two biggies, tariffs one, immigration is the other.

One of the ways we've grown over the last four years is through workforce growth from immigration.

This administration, rightly or wrongly, is saying we certainly want to limit undocumented immigration.

Unfortunately, for better or worse, undocumented immigration has been a big part of labor force growth in the last 3 or 4 years.

They want to shift to control the border, have documented legal immigration.

And we're in the middle of that shift right now and back to tariffs.

There are various arguments they've made on what they're trying to do with tariffs.

And they've shifted first, it's about controlling fentanyl.

We're using it as a bargaining tool.

Second argument has been we want to level the playing field.

We want reciprocity.

If you are charged tariffs then we're going to charge the same you charge.

Third argument is we want to induce re-shoring of manufacturing to the United States.

And we want to protect certain key industries like lumber, aluminum, pharmaceuticals, technology, semiconductors, I should say, and others.

And the truth is, one other argument for tariffs they've put forward is we want to generate more revenue.

We're highly leveraged tariff revenue will help us.

I think the key I would tell you and for your listeners is if you're going to have a trade war, you can debate the pros and the cons, but you want to preserve logistics and supply chain arrangements between the US, Canada and Mexico.

United States manufacturing is highly reliant for its global competitiveness on being able to source from Canada, and have logistics and supply chains with Canada and with Mexico.

40% of the imports from Mexico is US content.

And so the reason people are very on edge right now, is, yes, tariffs are part of I think this administration would say part of trying to create more organic growth here, more private sector led growth.

But companies are in turn are saying, if you're going to do that, preserve Mexico and Canada, because we need those relationships to be competitive globally if we're going to re-shore here.

And that's the tension I think you're see playing out right now.

You very clearly identify the tactics of the new administration.

Will it work?

The challenge will be this is a lot of structural change.

Government spending cuts to deleverage.

I understand why they're doing, but in the short run, it slows growth.

And then the question is do they have any capacity for stimulative, tax cuts beyond extending the Trump tax cuts.

Will regulation, how much will it help growth?

So, the issue will be, will it work will depend in my opinion on how much they're willing to prioritize.

If you try to do everything, it may undermine your ability to do to achieve the goals, you might have to prioritize and say, okay, we're going to go easier on the tariffs, but we're going to be tough on government spending, and we're going to give more clarity on immigration to undocumented immigrants who are here.

And if you're in the workforce and you're not a criminal and you're productive citizen, we're going to be clear.

You're going to be allowed to stay in ordered to stable.

But those are decisions they haven't made yet.

And they're trade offs.

And how they make those decisions and trade offs will determine whether this will be executed successfully.

In my opinion.

I ask you that as someone who's been engaged and informed, as a decision maker and an analyst in the American economy for some time.

And you've seen with respect to the Conservative Party in this country or the pro corporate, political force, you've seen some tectonic movement in the way they operate relative to the Reagan administration or the H.W.

Bush administration, or the W administration.

W Bush administration.

Would you say that ideologically, is that inconsistency, or would you say that it is consistent?

It's just that the times have changed.

So there's some fundamental changes.

I think I grew up, with administrations, Democratic and Republican, who believed in globalization.

What do I mean by that?

US had a role to play in the world.

We traded with other countries.

We fostered global, businesses and I think the theory of that was globalization is good for the world and in turn is good for us.

And by the way, the prospects for peace globally would, in fact, might be better if we were globally engaged.

That includes foreign aid, that includes our companies and commerce be more intertwined.

You know, it's good for the world.

That includes our alliances in NATO and other bodies.

Obviously, whether it's that risk of stating the obvious, this, this administration is sort of revisiting whether we should prioritize, America more than we have, and questioning some of that globalization theory that we grew up with.

I'll stay away from saying whether it's right or wrong, I have my own views.

But that's the big fundamental change I think you're seeing.

The other thing that's happening is over my lifetime, and your lifetime, wealth and income inequality in the United States have widened out.

And I do think this administration, it is looking at and I think politically they're being in office to that low moderate income group acting in a way that was different than they had in the past.

And I think party affiliations of that low moderate income group have shifted and including ethnicities, and I think there's, in their minds, at least part of this narrative is to help low moderate income families have more prosperous productive lives and professional careers here.

But, whether this how this works and the pros and cons of it I'll set aside.

But I think those are two fundamental changes.

And I think the administration will be measured, and accountable for that.

And how the American people look at success in, bridging the gap that you describe from your time as CEO and president of the Federal Reserve of Dallas.

This administration also came in at least some segments of it with aspirations to revisit the fed and policies related to the fed.

Is that something that has merit, in your view, as someone who is accomplished and tenured, in stewarding the economy, are there reforms that ought to be considered for the fed?

There are three key things the fed does, one of them has set the federal funds rate.

So we meet every six weeks.

When I was at the fed, and you make decisions on the federal fund rate, and I think there's a strong point of view, and I feel this strongly that the fed needs to remain politically independent in making those decisions.

What does that mean?

Divorced from political considerations or political influences.

And I think I'm hopeful, then we look back five years from now, I think that, I'm hopeful that will remain.

There's a second thing the fed does, which is supervise banks to regulate banks in the United States.

And I will tell people that has never been totally politically independent.

Fed, regulatory stance, and even personnel have shifted with new administrations.

You had, Dan Tarullo during the Obama administration, you had Randy Quarles in the, first Trump administration, you have Michael Barr in the Biden administration.

Very different approaches, very different views and regulation shifted, and we become much more highly regulated.

And I do think this administration will want to influence the fed here and move toward deregulation.

The third thing, which is kind of a gray area, is the fed has a very large balance sheet.

It owns treasuries and mortgage backed securities, is a relatively new developed in the last 20 years in the aftermath of the Great Recession, buying bonds, trying to affect interest rates beyond the curve.

And I think on that one, that may be in some ways a little bit in the gray area may get some discussion.

How much influence should the Treasury have on that?

Because it interplays with bond issuance by the government.

And how much should the fed have?

And, so I'm hopeful that, I don't know, they'll be groundbreaking changes made with this administration.

But in terms of how the fed operates, I'm hopeful it will remain politically independent on, particularly the fed funds rate and monetary policy.

In the present, are you confident sufficiently that the American economy is protected from a great recession?

Specifically, the kind of manipulation that led us down the path of 2007 and 2008.

And even with the deregulation that this administration -wants to realize.

-Yeah.

Do you think that we're enough insulated or protected, that the subprime crisis would not be repeated today?

Recessions will happen, and they should be expected.

And they're part of capitalism.

The Great Recession was unusual, and that what we found is, banks and non-bank financial institutions were taking outsize risks.

Credit default swaps, derivative related exposures, tail risks in huge size, that when home prices actually softened, there were so many derivative bets basically, either credit default swaps or, securitizations and securitizations of securitizations that we had gotten outsized financial risk.

So there were a bunch of reforms, as you know, in the aftermath of the Great Recession.

'08 '09, stress testing for banks, limits on a whole range of activities and derivative markets and, securitization markets that led to that.

And I'm hopeful that it's not perfect.

But yes, we now stress test our banks, I think stress testing and I would hope in any administration in the years end, might get tinkered with.

And, but you're going to have stress testing.

There's a little less visibility, I would tell you, in the non-bank financial market, if the fed oversees the banks, there may be a little bit lack of transparency in the non-bank financial market, but I do think, FSOC, The Financial Oversight Committee, various agencies are aware of that.

I think we're going to be vulnerable to recessions, but that's to be expected.

But a great recession and a financial crisis.

I think a lot of the reforms, that were made will make that dramatically less likely to happen.

You identified areas where deregulation might increase growth.

In the context of this administration's vision.

But one thing that is well understood, if not acted on, is that, crypto remains a Wild West.

From the perspective of both yourself as an expert economic thinker and from Goldman Sachs perspective.

Ought there be some lever of regulation for the crypto world that does not exist today?

Yeah.

So, people have to understand, when we talk about, digital currencies, crypto.

The thing about crypto, Bitcoin and others, the way you're describing it.

Crypto, unlinked, de-linked from underlying currencies, is intended so far to be an alternative, like gold is, to holding a paper currency.

Crypto does not tend to be used widely in transacting because it's so volatile that, you know, I don't want to buy, I can't buy a car or something with it because whoever's receiving it, whoever's paying it, I don't know what it's worth because it it's so volatile.

There has so far been the bulk of the regulation has been from the Securities and Exchange Commission to try to protect investors who the fear is they're going to lose money because they don't understand it, or it's becoming too speculative.

I would think, if crypto was ever used widely in commerce, you would see dramatically more regulation to limited its ability to be used for transactions.

So far, it's more, analogous to gold as a store of value.

And I think that in that regard, I think the bulk of the regulation will be FCC related, and others.

Is it central to the economic development of the United States?

It's not, the truth is why, the reason people want to own crypto and why they want to buy gold is they're worried that we're highly leveraged.

And countries around the world are high leverage.

And, man, I don't feel comfortable owning any one of these currencies because of the fiscal management.

So I want an alternative for part of my asset allocation to either gold or for somebody of crypto.

I want an alternative to paper currencies.

And so that's the genesis of it.

And I think I would guess still for as long as it's just a store of value, the bulk of the irregulatory debate is going to be -about speculation.

-Right.

And is there undue speculation and innocent people who, if they had better disclosure, should be better protected from losing money over it?

Has that flipped in the sense that the primary purpose of crypto now is to speculate, as opposed to have that source of reserve.

Well, I know a lot of people who are very staid, prominent, intelligent, insightful people who do not own it to speculate.

They own it because they actually think is a part of an asset allocation.

It ought to be a store value.

Then there's a group that, yes, is using that to speculate.

And that's where you need regulation and oversight to limit the extent of that and to protect not sophisticated investors from losing money.

Right.

The FDIC is one legacy of the New Deal and FDR's administration that has had a nonpartisan support.

You're not concerned that in the deregulatory mandate of the new administration that they would seek to unravel or end the FDIC.

I don't know exactly what their plans are, and obviously I work at a regulated bank, so I'm very respectful of these entities.

I would say the following.

In every administration, whether you want to admit it or not, regulation changes based on who's in the White House, it just has.

There's the OCC, there's the FDIC, there's the fed regulation.

Could I see some review of all these entities and are they coordinated enough?

Do they work together?

Sure, that could all happen.

The need for strong regulation, I think, will be the case for decades and decades to come.

As to whether the pendulum at points has swung too far one way or the other, I think that actually has been the purview of new administrations to weigh in on that, and I'm sure you'll see them do it here.

As to what the future that will mean for any one of these entities, I actually don't know.

I'm not smart enough to say, but I think the industry and I think as a citizen, people want a strong backbone and regulation.

I want it to be, you know, cost benefit analysis and sensible because while we want tough regulation, we also want growth.

And we're very highly leveraged and we need to find ways to improve productivity.

And so these are all the balances that reasonable people can differ and debate about.

And to be clear, for our viewers, the reason there has been something of an ironclad consensus on that is to protect people.

Specifically their savings, up to a certain amount.

Right.

I don't see that going away.

If we are to look at the Trump presidency part two and this project, as successful, what would be the economic data, in your mind, or how would the paradigm have shifted in 2028, that we would say, this was successful, in an objective way.

I do think Scott Bessent has said we want to, reprioritize this economy, a more private sector led, less government spending led economy.

Make it the most attractive place in the world for companies to locate, domicile, manufacture, create good, middle class jobs for population.

And I think another thing they would look at, have we deleveraged some extent at the government level, we can't keep leveraging up to drive our growth.

And so I think people will look at what's debt to GDP, what are annual deficits.

And I think part of the thing, are they still 7% close to 7 or they're close to 3 or 4 or 5?

And I think if and as always, they'll look at GDP growth, prospects for GDP growth.

But, I think those are some of the things people will look at.

Have they made progress, not solved, but made progress in a number of these areas, more private sector led, more attractive place to domicile businesses.

And is the federal government more under control, where we can sell a ten year and a 30 year Treasury, again in size and have longer list of buyers who want to invest in the United States?

I think those are some of the things people will probably look at.

President and CEO emeritus of the Federal Reserve Bank of Dallas.

And vice chairman of Goldman Sachs., Rob Kaplan, thank you so much for your insight today.

Alright, great to talk to you.

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