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Last week on our podcast, I spoke with Brad Setser, Senior Fellow and Acting Director of the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations.

A starting point for our conversation centered on the causes of the low-interest-rate environment we have today. A number of people seem to believe the central banks are artificially keeping interest rates low.

Professor Jeremy Siegel weighed in with a review of something he calls the “greatest myth on Wall Street.” Siegel discussed the fundamental economic forces he believes pushed rates toward zero: low inflation; low economic growth; high risk aversion; great demand for bonds, including from global demographics; and high global savings. 

Setser’s View of International Economic Policy

Setser reviewed his background, which included time at the U.S. Treasury, where he studied emerging market financial crises, and that led to his co-authoring a book with Nouriel Roubini. Setser became very interested in China’s contribution to global capital flows and how capital flows from emerging markets were financing the United States. Setser saw flows from emerging markets as a major contributor to the U.S. and European financial crisis.

On the economic policy front, we started off with another discussion on the border adjustment tax (BAT), continuing the conversation we had with Alan Auerbach the week before. Setser believes implementing this BAT is much more complex than Auerbach does. Setser likes the element of the BAT that would remove the incentive of technology and pharmaceutical companies from locating abroad more, but he is worried about removing a source of revenue from future exports. Setser believes the BAT will have a regressive impact by making imports costlier, as he is skeptical the exchange rate would adjust fully to offset the import tax hike, as Auerbach claimed. He also believes it could introduce new distortions where firms overstate their export revenue (which would be untaxed) and thus not generate as much revenue as implied.