Takeaways from the G-7 summit

Douglas Holtz-Eakin, American Action Forum President, joins Yahoo Finance Live to discuss Biden’s G-7 trip, the relationship between U.S. and China, and the global minimum tax rate.

Video transcript

KRISTIN MYERS: Let's talk more about Biden's trip. We're joined now by Douglas Holtz-Eakin, American Action Forum's president. Doug, it's always great to have you here with us. So let's start on what Jess was just highlighting, particularly the president's stance on China. What are you anticipating moving forward, especially given the previous administration's line that they had taken with China, quite aggressive, quite tough?

Of course, that back and forth, at least, when it came to those trade agreements. So where do you see the White House and also the United States going with China from here?

DOUGLAS HOLTZ-EAKIN: Well, I think the distinctive feature of the Trump administration's approach was the bilateral nature of it. And the Biden administration has signaled from the time he was a candidate that they thought they needed a multilateral approach, that they needed to get to the Western democracies united in a strategy against China. That's probably his most important mission on this international trip to lay the groundwork for cooperative efforts.

And I don't think one should expect that strategy to emerge from this trip. That's premature. But that's what they're talking about. How can they cooperate? They managed to make a statement about human rights and forced labor that I think that's a step. I'm sure the NATO Summit will be about security issues. But there will be a lot of talk about the economic approach to China in this trip and in the future.

- You know, while there was some unity and bipartisanship, if you will, among nations on China, some other areas were not resolved during Biden's trip, including coming to some sort of an agreement over coal-- the use of coal as it deals with the US and other countries also opening up the border between the US and Canada. That border is actually still closed really more because Canada and its concerns over the virus. Do you think we're going to see any movement on those fronts any time soon?

DOUGLAS HOLTZ-EAKIN: Well, I think the border issues entirely soluble. That's an issue of the public health mission. And again, internationally as has been true in the United States, it's very important to combat the virus. That's the number one economic mission in addition to the public health mission. It also allows you to address issues like the US-Canadian border.

So progress is made on that front as well-- an agreement to get vaccines out to the developing world. So the China issue and climate, it's going to intersect with what do we want on the infrastructure front? What do we want on the climate front? What do you want, economic front?

That's a crosscutting issue where they're going to have to talk for a while to make sure that they have both a strategy to get China some incentives to cooperate and to reduce its use of coal and some tactics to confront them where they think it's inappropriate. And that's going to be a tough mix to get everyone to sign off on.

So one of those things that did come out of that G-7 summit, at least an area of unity seemed to be that global minimum tax rate for corporations at 15%. Curious to know if you think that that might even be possible to implement moving forward if you think that this can come to fruition? I've seen so many articles arguing that there's no way that they're going to be able to get this done and that even if they can, that it is going to harm countries like the United States in the long run. What's your take there on that?

DOUGLAS HOLTZ-EAKIN: Well, I think it's going to be hard to get done. They agreed in concept to-- they have a 15% minimum tax, but they didn't agree on what to tax? I mean, there's a lot of details involved in identifying the tax base and implementation. And it's important to remember that this was one piece of a deal.

The US wanted the minimum tax. Secretary Mnuchin and the Trump administration have been negotiating this as well. But what the Europeans wanted was the digital sales tax. And what the US compromise then agreed to was a sales tax on large corporations.

So each side got a little bit of what they wanted. But getting it put in place is going to be very difficult. I believe it's true that that sales tax will require the US to alter its tax treaties. We have an income tax treaty, not a sales tax treaty. And that means a 2/3 majority in the US Senate. So that's a very tough lift. And it's far from obvious this will get done.

- Doug, I want to switch gears and talk about the $1.9 trillion stimulus package also known as the American Rescue Plan. We know that that extra unemployment benefit that was coming to millions of Americans is going to start going away. A lot of states have actually opted not to continue with that program. You actually believe that that plan was a policy error. Tell us why you think so.

DOUGLAS HOLTZ-EAKIN: Well, certainly, we know that the more of the regular wages you replace with unemployment insurance-- the so-called replacement rate-- as that goes up, spells of unemployment on average or longer. So you see more prolonged high unemployment. These sort of placement rates are over 100% for about a third of American workers. That's extraordinarily high.

Now, if everyone is trying to hide from the virus and not seeking work, that's one thing. But as we go forward, the number of people who are going to be out of the labor market for virus-related reasons are going to get smaller and smaller. And this will be an impediment to getting people back to work and getting the unemployment rate down.

And it's frustrating because this was knowable at the time they passed it. And it certainly was too big. And it's also lasting too long. I don't think in December anyone thought it would take until Labor Day to get the vaccine program up and running.

But there were lots of assurances that by late spring or early summer, we'd be in very good shape. So it should be gone now, and it's not. And it's too big. And I think it is an impediment to getting the labor market back to normal.

KRISTIN MYERS: I want to ask you about something else that was in your notes. And you mentioned that the Fed needs to move quickly. And we do have this Fed meeting kicking off tomorrow.

How difficult do you think just the next two years is going to be, as we have some arguments that they might be removing the punchbowl or just as the party is getting started and other concerns that right now, the economy is actually overheating, as we continue to see some of these inflation numbers coming out. And they are just jumping every month.

Now, that is a move that the Fed says is transitory. But what are you anticipating over the next two years, especially as we try to navigate through this environment?

DOUGLAS HOLTZ-EAKIN: Well, I guess I'd emphasize that I thought the Fed would have to move more quickly than they had anticipated. I don't know how quickly they will actually move those policy instruments. But I think with the American Rescue Plan now showing up in the asset price inflation and now supply chain inflation, we're going to get some consumer price inflation.

They need to both stick to their game plan which is to let inflation rise, but not let inflation expectations and a wage price spiral get out of control. And that's going to be a tough communications job for them to move a little more quickly than they had anticipated. And it's going to be a tough policy job to navigate that without producing some sort of slowdown or recession. I mean, it's not the case that the Fed's ever successfully engineered a soft landing. And this puts them in a very tough position.

KRISTIN MYERS: All right, Douglas Holtz-Eakin, president of the American Action Forum. Thanks so much for joining us.