© 2014 Dow Jones & Company. All Rights Reserved. THEWALL STREET JOURNAL. Tuesday, December 9, 2014 | R1

JOURNAL REPORT

FINALLY A BREAK in Washington gridlock,hope for the future, real law making—and pros-perity for all!

Or maybe not.Chief executives at the Wall Street Journal’s

CEO Council in Washington last week had rea-son to feel a bit of whiplash.

Good VibrationsOn the one hand, the vibe at the meeting

was the most positive in years, and a recordnumber of CEOs were on hand to enjoy it. Cor-porate earnings are up. U.S. employment andstock prices are higher, too. The Dow Jones In-dustrial Average, at 16,030 during last year’s

Council gathering, hit 17,897 during this year’sevent. “Business is good,” says Steven Collis,CEO of AmerisourceBergen Corp., a drugwholesaler.

What’s more, Republicans won the Senate inNovember’s election, giving them control ofboth houses of Congress. That, in the minds ofmany CEOs, increases the chance that legisla-tion will start moving again. The CEO Councilleans right: 48% said they’re Republican, 10%Democrat, 38% independent.

“I’m hopeful, skeptically hopeful, that thistime might be different,” said the CEO of a bigmoney-management firm. “Something mightmove.”

But the briefings the CEOs heard from lead-ers of both political parties took air out of theballoon for several attendees. Whether it was

tax changes, immigration or national defense,the divergence of opinion between parties wasas sharp, and intransigent, as ever.

No new language of comity here. The Demo-cratic Party got a “butt kicking” Mitch McCon-nell, the incoming Senate leader, gleefully toldthe CEOs.

Positioning for 2016And no evidence of a gracious Republican

Party or humbled Democratic one seeking rap-prochement. Both looked to be positioningthemselves for 2016 and the presidential elec-tion, not the sticky business of compromise onlegislation.

Stanley McChrystal, who led U.S. forces inAfghanistan and now advises CEOs on leader-ship, says political chiefs handling national se-

curity in Washington would benefit from a bitof white-water rafting together. That wouldbuild personal relationships that promote coop-eration during times of crisis.

Not bad advice for Congress, too.“It left me rather depressed,” said Martin

Sorrell, CEO of WPP Group. “People seemed tohave strong philosophical differences. Itseemed to me we’re in a period certainly ofgridlock until…2016.”

It’s almost enough to make a CEO forgetabout all the good news.

Mr. Bussey is an assistant managing editorand executive business editor of The WallStreet Journal in New York. He can be reachedat john.bussey@wsj.com or on Twitter@johncbussey.

BY JOHN BUSSEY

CEOs Find Lots of Reasons to Cheer.And Lots of Reasons Not to.

At the annual meeting of The Wall Street Journal’s CEO Council, the chief executives werelooking for signs that the tone in Washington had changed. They didn’t find many.

Jeb Bush on what the Re-publican majority in Congressshould—and shouldn’t—haveon its agenda, R4

IMF Managing DirectorChristine Lagarde talks oilprices, the euro—and howthe U.S. will fare withoutmonetary stimulus, R4

Sen. Mitch McConnell’sgame plan for corporate taxoverhaul, immigration andthe Affordable Care Act, R6

Sen. Rob Portman and Rep.Chris Van Hollen search forcommon ground on corporatetax overhaul, R6

National Security AdviserSusan Rice defends theadministration’s strategy onIslamic State, Putin, Iran andclimate change, R8

Sen. Rand Paul makes thecase that both Republicansand Democrats get foreignpolicy wrong, R9

Paul

Morse/D

owJones(4);Ra

lphAlswang/Dow

Jones(2)

Sen. Robert Menendez onthe high price Western coun-tries will pay for not appear-ing strong, R9

Rep. Paul Ryan insists Con-gress is determined to over-haul taxes. The questionmark, he says, is PresidentObama, R10

Stanley McChrystal andMichael Flynn reveal whatwar has taught them abouteffective leadership, R10

Federal Reserve Vice Chair-man Stanley Fischer on thenormalization of interestrates, R11

Michael Daniel, White Housecybersecurity coordinator, onthe need for a new partner-ship between business andgovernment, R11

Rep. Jeb. Hensarling andSheila Bair evaluate Dodd-Frank and the health of thefinancial system, R11

PLUS INSIDE: The CEOs’ top priorities, and task-force recommendations in six key areas, including business in China and the future of health care.ONLINE: Rank the most influential business leaders of the past 125 years in a special interactive graphic, at WSJ.com/LeadershipReport.

INSIDE

‘Some countriesare already intodeflation. But forthe moment, it’smore sustained lowinflation, which isequally bad.’Christine Lagarde

‘We don’t have to makea point anymore asRepublicans. We haveto actually show wecan lead.’Jeb Bush

’We need to quitrattling the economywith things that areperceived by thevoters as disturbing.’Mitch McConnell

‘China has neverbefore made thekind of concreteand significantcommitments thatit made.’Susan Rice

‘We wrote the FourthAmendment for areason, to restraingovernment.’Rand Paul

‘I believe that it’stime for what Iwould call welfarereform 2.0.’Paul Ryan

R2 | Tuesday, December 9, 2014 THEWALL STREET JOURNAL.

More than 100 chief executives of large companiesgathered at The Wall Street Journal’s annual CEOCouncil conference to discuss today’s pressing public-policy and business issues.

The CEOs divided into six task forces to debate pri-orities about doing business in China and what govern-ments can do to help; how public companies can stayfocused on the long term; the future of health care;dealing with disruptive technology; balancing energysecurity with environmental sustainability; and how toexpand middle-class jobs. Each task force presented itsrecommendations, and the full conference then votedthese five as the top overall priorities:

1. 21ST-CENTURYWORKFORCE

A competitive work force re-quires action on all fronts, fromexpanded early childhood edu-cation to reform of fundingmechanisms. Involve businessin the education system, includ-ing curriculum development, tohelp students prepare for avail-able job opportunities. Encour-age schools and parents to signup for programs engaging busi-nesses. Improve focus onSTEM and technical training.

2. PRO-GROWTHFUNDAMENTALS

Focus on pro-growth funda-mentals including corporate in-come-tax reform and freetrade. Promote smarter regula-tion by eliminating constraintson starting and growing busi-nesses to generate additionaljobs quickly. Expand H-1B visaprogram and grant a visa to ev-ery technical graduate. Allowimmigrants who already re-

ceived a STEM degree (or arepursuing one now) to stay.

3. MODERNIZEINFRASTRUCTURE

The market needs clear rules tospur private investment in arange of infrastructure, includ-ing modernizing and expandingthe electric grid, pipelines andtransportation sector. Stream-lined permitting is especiallyneeded. Investment would alsohelp electrify the transportationsector. Establish a national in-frastructure bank, aimed atprofessionalizing public infra-structure investment and beinga model for states. Also usepublic-private partnerships forfunding. Establish independent,nonpolitical leadership with astructure similar to the FederalReserve system.

4. TAPER CAPITAL-GAINS TAX

Structure the capital-gains tax

to create an incentive for inves-tors to hold their shares for anextended period, reducing thetax rate as time goes on. Itwould discourage traders andattract investors, and help alignexecutives’ interests withshareholders’. This would helpU.S. companies grow, hire andcompete in the global market-place.

5. EMPOWER HEALTH-CARE CONSUMERS

Give consumers more informa-tion to make smart economicchoices and promote wellness.Cost, quality and outcome datamust be made available in away that will advance payingfor quality and value. Shiftmore accountability to consum-ers, but make sure they’re in-formed. Allow insurance com-panies and employers toprovide consumer incentives.

The CEOs’ Top Priorities

JOURNAL REPORT | CEO COUNCIL

The Journal Report welcomesyour comments—by mail, fax oremail. Letters should be addressedto Lawrence Rout, The Wall StreetJournal, 4300 Route 1 North, SouthBrunswick, N.J. 08852. The faxnumber is 609-520-7256, and theemail address is reports@wsj.com.

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CEO Council Videos>>For the full lineup of CEO Council video interviews with former Gov.Jeb Bush, International Monetary Fund Managing Director ChristineLagarde, Sen. Mitch McConnell, National Security Adviser Susan Riceand others, go to WSJ.com/LeadershipReport.

(Chief executive officersexcept as noted)

Nicholas Akins, AmericanElectric Power

Joel T. Allison, Baylor Scott& White Health

Mitch Barns, NielsenGeorge S. Barrett, Cardinal

Health Inc.John F. Barrett, Western &

Southern Financial GroupDominic Barton, Global Man-

aging Director, McKinsey& Co.

Jeffrey L. Bewkes, TimeWarner Inc.

Aneel Bhusri, Workday Inc.John P. Bilbrey, Hershey Co.Jean-Laurent Bonnafé, BNP

ParibasGregory W. Cappelli, Apollo

Education Group Inc.Mark S. Casady, LPL

FinancialGregory C. Case, Aon PLCDominic Casserley, Willis

Group Holdings PLCJohn Chen, BlackBerryMarcelo Claure, Sprint Corp.William Cobb, H&R Block Inc.Steven H. Collis,

AmerisourceBergen Corp.Michael D. Connelly, Mercy

HealthBrian Cornell, TargetRoger W. Crandall,

Massachusetts Mutual LifeInsurance Co.

Theodore F. Craver Jr., Edi-son International

Fred Crawford, AlixPartnersLLP

Kevin S. Crutchfield, AlphaNatural Resources Inc.

H. Lawrence Culp Jr., SeniorAdviser, Danaher Corp.

Doug DeVos, Amway Corp.J. Scott Di Valerio, Outerwall

Inc.Paul J. Diaz, Kindred Health-

care Inc.Dean Douglas, Unify Inc.Francisco D’Souza,

Cognizant Technology So-lutions

Rupert Duchesne, Aimia Inc.Wolfgang Eder, voestalpine

AGEric Elliott, Prime Therapeu-

tics LLCMatthew J. Espe, Armstrong

World Industries Inc.Scott D. Farmer, Cintas Corp.Thomas F. Farrell II, Domin-

ion Resources Inc.Olof Faxander, Sandvik ABEdward Forst, Cushman &

WakefieldEric Foss, Aramark Corp.Russ Fradin, SunGard Data

Systems Inc.Jeffery R. Gardner, Wind-

streamRobert C. Garrett, Hacken-

sack University HealthNetwork

Richard Gelfond, IMAX Corp.Pat Gelsinger, VMware Inc.Patrick Geraghty, Florida

BlueDaniel S. Glaser, Marsh &

McLennan Cos.Michael Gregoire, CA Tech-

nologiesRobert Greifeld, Nasdaq OMX

Group Inc.Anant Gupta, HCL Technolo-

giesJames Hagedorn, Scotts

Miracle-Gro Co.Daniel M. Hamburger, DeVry

Education GroupJohn H. Hammergren,

McKesson Corp.James B. Hebenstreit, Bart-

lett & Co..Patricia A. Hemingway Hall,

Health Care Service Corp.Thad Hill, Calpine Corp.Lance Hockridge, Aurizon

Holdings Ltd.James Hogan, Etihad Air-

waysDavid Holmberg, Highmark

HealthStephen C. Hooley, DST Sys-

tems Inc.Mark S. Hoplamazian, Hyatt

Hotels Corp.Robert J. Hugin, Celgene

Corp.Darren R. Huston, Priceline

GroupRalph Izzo, Public Service En-

terprise Group Inc.Donald L. Jernigan, Adven-

tist Health SystemJoseph Jimenez, NovartisJohn D. Johns, Protective

Life Corp.Steven Kandarian, MetLife

Inc.Alex Karp, Palantir Technolo-

giesBrian P. Kelley, Keurig Green

Mountain Inc.Declan Kelly, Teneo Holdings

Jerald L. Kent, SuddenlinkCommunications

Lawrence Kingsley, PallCorp.

Christopher J. Klein, FortuneBrands Home & SecurityInc.

Herbert V. Kohler Jr., KohlerCo.

T K Kurien, Wipro Ltd.Marc B. Lautenbach, Pitney

Bowes Inc.Donald H. Layton, Freddie

MacRichard I. Lesser, Boston

Consulting GroupWilliam Lewis, Dow Jones &

Co.Andrew N. Liveris, Dow

Chemical Co.Gerardo I. Lopez, AMC Enter-

tainment Inc.Peter S. Lowy, Co-CEO,

Westfield GroupTamara L. Lundgren,

Schnitzer Steel IndustriesInc.

Rob Lynch, VSP GlobalOwen Mahoney, Nexon Co.Rob D. Marcus, Time Warner

Cable Inc.Philip R. Martens, Novelis

Inc.Frank R. Martire, Fidelity Na-

tional Information ServicesInc.

Timothy J. Mayopoulos,Fannie Mae

John McAvoy, Con EdisonBill McDermott, SAP SEF. William McNabb III,

Vanguard Group Inc.Larry J. Merlo, CVS HealthAlex Molinaroli, Johnson

Controls Inc.Beth E. Mooney, KeyCorpCraig H. Muhlhauser, Celes-

tica Inc.Deanna Mulligan, Guardian

Life Insurance Co. ofAmerica

Rupert Murdoch, ExecutiveChairman, News Corp;Chairman and CEO, 21stCentury Fox

Dennis Nally, Global Chair-man, PricewaterhouseCoo-pers International Ltd.

Pierre Nanterme, AccenturePLC

Shantanu Narayen, AdobeSystems Inc.

David W. Nelms, DiscoverFinancial Services

Indra K. Nooyi, PepsiCoJohn H. Noseworthy, M.D.,

Mayo ClinicJames F. O’Neil, Quanta

Services Inc.Stefano Pessina, Executive

Chairman, Alliance BootsC. Michael Petters, Hunting-

ton Ingalls Industries Inc.Nicholas T. Pinchuk, Snap-on

Inc.Mike Pratt, Guitar Center Inc.David E.I. Pyott, Allergan

Inc.Thomas J. Quinlan III, R.R.

Donnelley & Sons Co.Kasper B. Rorsted, Henkel

AGDan Rosensweig, Chegg Inc.Gisbert Rühl, Klöckner & Co.Stephen H. Rusckowski,

Quest DiagnosticsManuel Sánchez Ortega,

AbengoaE. Scott Santi, Illinois Tool

Works Inc.Brent L. Saunders, Actavis

PLCStephen A. Schwarzman,

BlackstoneDavid T. Seaton, Fluor Corp.Mikhail Shamolin, JSFC

SistemaGregg M. Sherrill, Tenneco

Inc.Vishal Sikka, InfosysBarry E. Silbert, Founder and

CEO, Digital CurrencyGroup

Henrik C. Slipsager, ABM In-dustries Inc.

Barry Smith, MagellanHealth Services Inc.

Donnie Smith, Tyson FoodsInc.

Frederick W. Smith, FedExCorp.

Sir Martin S. Sorrell, WPPGroup PLC

Edward W. Stack, Dick’sSporting Goods Inc.

Robert Steel, Perella Wein-berg Partners

David P. Steiner, WasteManagement Inc.

Stephen Steinour, Hunting-ton Bancshares Inc.

Jeff Storey, Level 3 Commu-nications Inc.

Shivan S. Subramaniam, FMGlobal

Sam L. Susser, Sunoco LPJoseph R. Swedish, Anthem

Inc.Anthony R. Tersigni, Ascen-

sionTidjane C. Thiam, Prudential

PLCMark Thierer, Catamaran

Corp.Robert Thomson, News CorpAdewale Tinubu, Oando PLCJames S. Tisch, Loews Corp.Fredric J. Tomczyk, TD

Ameritrade Holding Corp.N.V. Tyagarajan, Genpact Ltd.Bernard J. Tyson, Kaiser Per-

manenteMyron E. Ullman III, J.C. Pen-

ney Co.Timothy R. Wallace, Trinity

Industries Inc.Mark Weinberger, Ernst &

YoungJeffery W. Yabuki, Fiserv Inc.Yang Yuanqing, LenovoSock Ping Yeoh, Managing

Director and ExecutiveDirector, YTL Corp. Bhd.

Harold L. Yoh III, Day & Zim-merman Group

PARTICIPATING GUESTSSheila C. Bair, Senior Ad-

viser, Pew CharitableTrusts; Former Chairman,Federal Deposit InsuranceCorp.

Jason Bordoff, Professor ofProfessional Practice in In-ternational and Public Af-fairs, and Founding Direc-tor, Center on GlobalEnergy Policy, ColumbiaUniversity

Jeb Bush, Former Governorof Florida

Michael Daniel, Special Assis-tant to the President andCybersecurity Coordinator,the White House

Larry Downes, Project Direc-tor, Center for Businessand Public Policy, George-town University; ResearchFellow, Accenture Institutefor High Performance

Janice C. Eberly, Professor ofFinance and Faculty Direc-tor, Kellogg Public-PrivateInitiative, Kellogg Schoolof Management at North-western University; formerAssistant Secretary forEconomic Policy, U.S.Treasury

Stanley Fischer, Vice Chair-man, Board of Governorsof the Federal ReserveSystem

Lt. Gen. Michael T. Flynn,Former Director, DefenseIntelligence Agency, U.S.Defense Department

William W. George, SeniorFellow, Harvard BusinessSchool; former Chairmanand CEO, Medtronic Inc.

Jeb Hensarling, U.S. Repre-sentative (R., Texas);Chairman, House FinancialServices Committee

Christine Lagarde, ManagingDirector, InternationalMonetary Fund

Gen. (Ret.) Stanley A. Mc-Chrystal, Co-Founder,McChrystal Group; formerCommander, U.S. ForcesAfghanistan and NATOInternational SecurityAssistance Force

Mitch McConnell, U.S.Senator (R., Ky.); SenateRepublican Leader

Robert Menendez, U.S. Sena-tor (D., N.J.); Chairman,Senate Foreign RelationsCommittee

Margaret E. O’Kane, Presi-dent, National Committeefor Quality Assurance

Rand Paul, U.S. Senator (R.,Ky.)

Rob Portman, U.S. Senator(R., Ohio)

Susan E. Rice, NationalSecurity Adviser, the WhiteHouse

Paul Ryan, U.S. Representa-tive (R., Wis.); Chairman,House Budget Committee

Derek M. Scissors, ResidentScholar, American Enter-prise Institute

Chris Van Hollen, U.S.Representative (D., Md.)

CEO COUNCIL MEMBERS

The Wall Street Journal would like to thankthe 2014 sponsors for their generous support

of the CEO Council annual meeting.

For more information please visitCEOCouncil.wsj.com.

© 2014 Dow Jones & Company, Inc. All rights reserved. 3C8114

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R4 | Tuesday, December 9, 2014 THEWALL STREET JOURNAL.

Last month, the GOP sweptback into control of Congress.What should their priorities be?And what shouldn’t they be?

Gerald Seib, The Wall StreetJournal’s Washington bureauchief, spoke with former FloridaGov. Jeb Bush—who says he’svery close to a decision aboutrunning for president—about thechallenges and opportunities fac-ing Republican lawmakers. Hereare edited excerpts of their con-versation.

Opportunity CrisisMR. SEIB: I was struck by some-thing you said a couple of timesin recent months when you’vebeen talking to groups: “This na-tion is experiencing a crisis ofopportunity.” Tell me what youmeant by that and what it meansfor people in Washington.GOV. BUSH: We’re missing the op-portunity to take advantage ofour skill sets, of our strengths.We focus on our weaknesses. Wefight over those. There’s massivegridlock. Yet this is the most ex-traordinary country in the world.We have everything that is nec-essary: abundant in natural re-sources, the most innovativecountry in the world, the most

creative place in the world, laborlaws that are unique in the de-veloped world, a big place, full ofchances to expand, the history ofproductivity.

All this stuff has just beencast aside, and we’re mopingaround like we’re France. I don’twant to be disrespectful, theyhave a lot of interesting thingsand great things. But we’re notFrance, for crying out loud. Thecrisis of opportunity is we’re notseizing the moment. We’re notaspiring to be young and dy-namic again. If we fixed a few re-ally big substantive things, wecould be American again.

MR. SEIB: So, which big, substan-tive things?GOV. BUSH: An energy policybased on American innovationand North American resources. Aregulatory system that wasbased on the 21st century econ-omy, not the 19th or 20th cen-tury, where we’re putting old,complicated rules on top of old,complicated rules, creating morecomplexity than perhaps any de-veloped country in the world.

Simplifying the tax code so thatwe take power away from Wash-ington and give it back to people.

The fourth thing I would sayis immigration reform. If wewould create an economicallydriven immigration systemwhere we controlled our borders,and we moved away from familyunification being close to thesole driver of how people cometo this country, we could, in es-sence, create a country thatwould have the first 200,000 or300,000 first-round draft picks.

Finally, I think we need radicaltransformation of how we edu-cate the next generation. It’s notworking. Reform is important,but I’d say transformation shouldbe the bigger argument.

If we started doing some ofthose, then we could actually dothe other big thing, which is en-titlement reform. No developed

country in the world has beenable to achieve this. If we do it,we’ll be young and dynamic andemerging again rather than a de-veloped country.

MR. SEIB: Let me pick up on twoof those items, immigration andeducation. The roadblock to com-prehensive immigration reformhas been your party in the House.GOV. BUSH: I would argue there’senough blame to go on bothsides. We’ve missed opportuni-ties on our side to shift the focusaway from the argument solelyon controlling the border, to howdo we shift to an economicallydriven immigration system. Ithink that’s the missed opportu-nity for Republicans. There’s notrust anymore that the executivewill enforce the laws.

MR. SEIB: Let’s talk education. In

your estimation, where did theU.S. education system go off thetracks? What’s the way to get itback in the direction you think itought to go?GOV. BUSH: I think we haven’tevolved away from local schooldistricts. I’m not suggesting get-ting rid of them, I’m suggestinggetting rid of the monopolisticnature of them—the politicized,unionized, monopolistic nature.The governance model is de-signed for the adults rather thanthe children. Reforming it on theedges isn’t going to change that.

If we started from scratch, wewouldn’t have this system. Wewouldn’t have unionized, politi-cized, government-run monopo-lies. We would have somethingthat would be child-centered,customized for their needs.

MR. SEIB: What do you advise thenew Republican majority in Con-gress to make their agenda? Theirto-do list and their not-to-dos?GOV. BUSH: Well, “not to do” is tofocus a lot of energy on thingsthat are just going to make astatement. Republicans have

gained the Senate majority andincreased the majority in theHouse. We don’t have to make apoint anymore as Republicans.We have to actually show we canlead. They should take the thingsthat are possible to achieve.They should try to forge consen-sus with Democrats in the Con-gress, and they should startpassing bills and showing adult-centered leadership. It could beaccelerating on energy, acceler-ating the leasing of federal landsand waters for exploration.

Republicans need to showthey’re not just against things,that they’re for a bunch ofthings. Not just to repeal Obama-care, but to replace it with some-thing that fits the 21st-centuryworkforce that we now have.

The Next ElectionMR. SEIB: What do you thinkabout 2016 and yourself?GOV. BUSH: I’m thinking aboutrunning for president. And I’llmake up my mind in short order.I know how a Republican canwin, whether it’s me or some-body else. It has to be muchmore uplifting, much more posi-tive, much more willing to bepractical now in Washington,lose the primary to win the gen-eral without violating your prin-ciples. It’s not an easy task.

MR. SEIB: Does your gut tell youthe 2016 election is about the do-mestic situation in the U.S., ormore about the U.S. role in theworld?GOV. BUSH: Six months ago, Iwould have said that it might bea continuation of the focus ondomestic issues. But there’s agrowing awareness that we can’twithdraw from the world andthat there’s an unraveling takingplace. And it impacts not just oursecurity interests, but our eco-nomic interests as well. So I dothink the foreign policy andmaybe a re-evaluation of whatthe role of the United States is inthe world will become important.And there are competing forcesin both parties to deal with this.I would argue that an engagedAmerica is better for Americathan a disengaged America.

FiveAreasWashingtonNeeds to FocusOnJeb Bush on what the Republican majority in Congress should—and shouldn’t—have on its agenda

Christine Lagarde, managingdirector of the InternationalMonetary Fund, is optimisticabout the global economy,thanks in part to plunging oilprices. But she concedes thattough decisions still lie ahead formany, particularly in Europe.She spoke to Gerard Baker, edi-tor in chief of The Wall StreetJournal, about both encouragingsigns and trouble spots. Editedexcerpts follow.

Oil and TroubleMR. BAKER: We’ve seen roughly a40% decline in oil prices sincethe summer, and declines inother prices as well. Whatstresses and strains is this pro-ducing, and what are the bene-fits for the global economy?MS. LAGARDE: What we do first istry to analyze whether it’s a sup-ply or demand effect. And in thepresent circumstances, it’s pre-dominantly supply. It’s 80% sup-ply, 20% demand. So that’s prettygood news. If I was to address anaudience in Saudi Arabia, Qataror Kuwait, I would probably notlook at it exactly the same way.But on a net basis, it is goodnews for the global economy.

MR. BAKER: How fragile is Rus-sia? What threat does its fragil-ity pose to the global economy?MS. LAGARDE: I think it posessignificant threats, but not just

from an economic point of view.If you were to ask me what I’mconcerned about at the moment,certainly the geopolitical threatcreated by the current [Russian]endeavors. The price of oil goingdown is adding to their fragilityand their vulnerability, and theyknow it. It remains to be seenwhat the reaction will be. But itis certainly something that is anadd-on to the ruble depreciation,to the sanctions actually affect-ing the Russian economy as well.

MR. BAKER: Will IMF interven-tion be needed, looking at someof these energy net-exportingcountries?MS. LAGARDE: I was in Kuwaitabout three weeks ago address-ing the Gulf Country Councils,and I said to them, “If it contin-ues the way it does, most ofyour economies will show fiscaldeficit. You should be preparedfor that and build the buffersthat you will need.”

If you look at who is going tobe most affected, we just men-tioned Russia; you have to thinkabout Iran, clearly; closer tohome, Venezuela; and a few Afri-can countries will be affected.

If the IMF was called upon tohelp not only Ukraine, as we doand have to at the moment, butmany of those other countries, Iwould seriously need some helpfrom [the U.S.].

MR. BAKER: It looks like Europeis in or very close to its third re-cession in five years. What’s theoutlook for Europe? What needsto be done?MS. LAGARDE: This is what I’vecalled the risk of the new medio-cre: a combination of low growthand low inflation, which is badnews for countries where debt-to-GDP ratios are close to 100%.

MR. BAKER: Risk of deflation?MS. LAGARDE: Some countries arealready into deflation. But for themoment, it’s more sustained lowinflation, which is equally bad.

MR. BAKER: But it could getworse? And if it did?MS. LAGARDE: It might very wellget worse because of the price ofoil. And high unemployment,which is the other very bad phe-nomenon of this new mediocre.

Now, you look at that, andthat’s bad news. But at the otherend, you have cheaper energy, aeuro that has clearly been depre-ciating, and, if you look at thebanking sector, which has beensanitized, stress-tested by theEuropean Central Bank andwhere remedies have been taken,you have three components thatshould be moving the euro areainto positive territory. I’m notsuggesting that this is a walk inthe park. It is not.

MR. BAKER: There’s a strongview from some in Europe thatthere should be aggressive mone-tary stimulus. But that isstrongly resisted by the Ger-mans, who want structural re-form. Where do you stand?MS. LAGARDE: Where they are atthe moment, they need to use allavailable tools.

That means growth- and job-friendly fiscal policies for thosewho can afford it; monetary pol-icy that is innovative and quiteaggressive; and it means, abso-lutely, structural reforms thatthey have been talking about andmust get on with.

MR. BAKER: But they never do, dothey?MS. LAGARDE: Some of them do.A lot has been done in Spain. Alot has been done in Ireland.

Now there are some big players…

MR. BAKER: France.MS. LAGARDE: Yes. Significantstructural reforms, particularlyconcerning the labor market andthe job market, have to be im-plemented, not just talked about.

MR. BAKER: The pope went to theEuropean Parliament last weekand said, “Europe is haggard andelderly.” And it feels like that.MS. LAGARDE: He said, “It’s agrandmother.”

MR. BAKER: Yes. Like a ratherpoor and sick grandmother. It islike that, isn’t it?MS. LAGARDE: I will have a pri-vate meeting with him nextweek, so I’ll ask him exactlywhat he meant.

MR. BAKER: The euro is making itworse, isn’t it? The creation ofthe euro was a terrible mistake.MS. LAGARDE: I think the mistakewas to have assumed that bymoving into a single currency ev-erything else would follow, andthe fiscal union would be a given,which has not happened. If youhave a currency union without afiscal union and banking union,it’s like not having all cylinders tofire with. And that’s, I hope, whatthey’re going to be working on.

Situations in AsiaMR. BAKER: Will China pull offthis balancing act of making

pro-market reforms while main-taining enough growth to keeppeople fed and happy and in jobsand from rioting in the streets?MS. LAGARDE: Many of us havefor many years in a way sus-pected China of not being able todeliver, and many have shorted

China. The truth is it actuallydelivers. We look very carefullyat the monetary policy and thestructural reforms, and this isjust happening.

MR. BAKER: Is Japan going to getback on track?MS. LAGARDE: You have to givethem the credit of trying some-thing that was really hard, and is

still very hard. Where clearly it’sa bit short on the delivery isboth on the structural reformsand fiscal commitment. Oursense is that once the election isover, and hopefully [Abe’s] handwill be stronger, he comes backto the fiscal plan.

For the moment, there is noslack in the Japanese economy.So when they do stimulus, whenthey put money into the construc-tion business, for instance, there’snobody to build because the labormarket is so tight. So they haveto open up not only to women—and I hope they do because Japa-nese women are very talented—but also to immigration.

MR. BAKER: Is the U.S. economystrong enough to stand on itsown feet without that amazingamount of support from the cen-tral bank?MS. LAGARDE: If we include theeffect of the oil-price reduction,our [growth] forecast for nextyear is 3.5%. That should bestrong enough for the monetarypolicy to follow its course.

MR. BAKER: Are we not just de-pendent continually on these re-peated injections of monetarystimulus?MS. LAGARDE: It has been mosthelpful in the last two years, andwithout it, we would not be talk-ing about growth in the U.S., orin England. Now it’s a questionof gradually phasing out.

The Economic Forecast:A Tour of Global Hot SpotsChristine Lagarde talks oil prices, the euro—andhow the U.S. will fare without monetary stimulus

JOURNAL REPORT | CEO COUNCIL

RalphAlswang/Dow

Jones

Source: Organization for Economic Cooperationand Development

The Wall Street Journal

Lagging PaceEconomic growth world-wide isslower than it was in the severalyears before the recession.Percentage change in global GDP:

-2

0

2

4

6%

’10 ’12 ’142004 ’06 ’08

‘This is what I’ve called the risk of the new mediocre: a combination of lowgrowth and low inflation.’

‘We’re not seizing the moment. We’re notaspiring to be young and dynamic again.’

Rank the Leaders>>A Who’s News game: Rate the most influential business leaders of thepast 125 years, from J.P. Morgan and Henry Ford to Steve Jobs andOprah Winfrey, and see how your choices compare with those of otherreaders in an interactive graphic, at WSJ.com/LeadershipReport.

The Wall Street Journal

Straw PollsCEO Council members' preferencesamong the following Republicancandidates for president in 2016…

And among these Democraticcandidates:

JebBush73%

Chris Christie16%

Scott Walker6%

Rand Paul3%

Marco Rubio3%

HillaryClinton72%

ElizabethWarren13%

Joe Biden8%

Jim Webb7%

THEWALL STREET JOURNAL. Tuesday, December 9, 2014 | R5

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R6 | Tuesday, December 9, 2014 THEWALL STREET JOURNAL.

Congress has gotten taggedwith a reputation for gridlock.Now that the House and Senateare both in Republican hands,what’s the prospect for real ac-tivity and real change?

For insight into the prospects,Gerald Seib, Washington bureauchief of The Wall Street Journal,spoke to incoming Senate Major-ity Leader Mitch McConnell.What follows are edited excerptsof their conversation.

The Responsible ApproachMR. SEIB: You’ve talked from theminute you guys won the major-ity about fixing the way the Sen-ate works. Talk a little bit abouthow you’re going to do that andwhat you have in mind when yousay that.SEN. MCCONNELL: There weretwo things that we heard allover the country this year. Peo-ple were very upset with the ad-ministration. But they were alsonot happy with the fact that wedon’t seem to do anything any-more. We have an obligation tothe American people to be a re-sponsible right-of-center, con-servative governing majority,which involves allowing votes onmatters. So we’ll be working lon-ger, we’ll be working harder, andthere will be an opportunity formembers of both the majorityand the minority to offer theirideas and to get votes.

That sounds revolutionary, Iknow, but we’re going to pass in-dividual appropriation bills thatfund the government, ratherthan balling everything up into acontainment resolution, whichonly further underscores thedysfunction.

MR. SEIB: So to the people in thisroom who want corporate taxreform, what do you tell themthe chances are that you getfrom here to there in the nexttwo years?SEN. MCCONNELL: Well, I wouldtell all of you to lobby the presi-dent to agree with us on whatthe purpose of this all is, tomake America more competitive.

We’ve had a tutorial here in thepast six years over spending,borrowing, taxing and overregu-lation.

On the front page of your pa-per today, it points out howmuch regular Americans havefallen behind. We know this stuffdoesn’t work. We’ve had an ex-periment here for six long years.If the president wants to makethe country more competitive,the single best thing he could dowould be comprehensive tax re-form.

I think there are two thingsthat we really ought to have anunderstanding about at the be-ginning: that large and smallbusinesses should be treated thesame and that it ought to be rev-enue-neutral to the government.If we have those kinds of under-standings before we start downthis path, I think we can getthere.

MR. SEIB: Another thing that peo-ple would ask for from Washing-ton is please stop the unpleasantsurprises. Give us predictability,no more market-rattling events.Can you offer assurances on thatfront?SEN. MCCONNELL: We need toquit rattling the economy withthings that are perceived by thevoters as disturbing. Having saidthat, there’s still a lot of changethat the American people wouldlike to see, and there’s no way towork around the president ofthe United States. I hope regard-less of what direction the presi-dent takes, that there will be 10to 15 or so Senate Democratswho do want to get back to nor-mal, who do want to try to dothings in the political center,even when the president doesn’twant to do it.

Immigration FocusMR. SEIB: Your Senate passed acomprehensive immigration re-form a couple of years ago. Is itpossible now?SEN. MCCONNELL: I think what’smade it really difficult for theCongress to swallow is the com-

prehensive nature of the way ithas been presented. Our Demo-cratic colleagues in the Senate,and I suspect this is the case inthe House, are focused like a la-ser on one issue, and that is thepeople who are in the country,no matter how they got here andwhat happens to them, what’stheir status?

The legal immigration systemis a pretty big mess. What Ithink we ought to do is bust itup, pass as much of it as we can,starting with border security,which is a way of reassuring theAmerican people that we’re notgoing to have another calamitylike we’ve had.

MR. SEIB: There is a questionnow about what a Republicanmajority does with the Afford-able Care Act. There was a “re-peal it or fix it” debate on yourside of the aisle for the past fewmonths. How do you approachthe Affordable Care Act now?SEN. MCCONNELL: I think it’s thesingle worst piece of legislationwe’ve passed in at least the lasthalf-century. Having said that, itbears the president’s name. Thechance of his signing a full re-peal are pretty limited.

There are parts of it that areextremely toxic with the Ameri-can people: the elimination ofthe 40-hour workweek, the indi-vidual mandate, the medical-de-vice tax, the health-insurancetax. I think you could anticipatethose kinds of things beingvoted on in the Senate. Suchvotes haven't been allowed inthe past.

Who may ultimately take itdown is the Supreme Court.There is a very significant casethat will be decided before Juneon the question of whether thelanguage of the law means whatthe language of the law said,which is that subsidies are onlyavailable for states that set upstate exchanges. Many states ha-ven’t. If that were to be the case,I would assume that you couldhave a major do-over of thewhole thing.

TheRepublicanPlanTo Fix the SenateMitch McConnell’s hopes for corporate tax changes,immigration and the Affordable Care Act

JOURNAL REPORT | CEO COUNCIL

Paul

Morse/D

owJones

Many observers are skepticalthat the return of a Republicanmajority to Congress next monthheralds the return of a smooth-running legislative process. ButRepublicans and Democrats aresounding one another out onsome possible common goals, in-cluding corporate tax overhaul.

Sen. Rob Portman, an OregonRepublican, and Rep. Chris VanHollen, a Maryland Democrat,discussed their parties’ concernsand priorities with Neil King, TheWall Street Journal’s global eco-nomics editor. Here are editedexcerpts of the discussion.

Will Congress Function?MR. KING: What is your senseabout whether this next Con-gress can do things?MR. PORTMAN: I’m very optimis-tic. The Senate has been largelydysfunctional, unable to dealwith the most basic issues. Nowwe have a chance, and we Repub-licans have a responsibility towork hard to make that happen.It includes a budget for the firsttime in probably seven or eightyears that will enable us to domore things, like tax reform andsome regulatory relief and some-thing on energy. And I believe wehave an opportunity to do some-thing significant on trade.

All four of those, by the way,have support on both sides ofthe aisle. There are differencesof opinion as to how exactly weought to approach them, but alladdress the fundamental issuewe have in our country, which isstagnant wages, low economicgrowth, the weakest economicrecovery we’ve ever experienced.

I hope the president will workwith us; health care, immigra-tion, other issues are also impor-tant. But we ought to focus, takea page out of Chuck Schumer’sbook, who said recently Demo-crats blew it by not focusing onjobs and wages. That’s whatwe’ve got to focus on.

MR. KING: Would it be fair to say,Congressman, that you’re a littlemore gloomy on that front?MR. VAN HOLLEN: I’m an optimistby nature, but I’m in the “waitand see” category right now.And just for the record, since myfriend Rob Portman mentionedthe Schumer remarks, I disagree

with his political and policyanalysis. But going forward,there are some areas of potentialagreement if people are willingto sit down and negotiate onthese things.

Rob mentioned some of them.With respect to the budget, thelong-term budget, right now, aswe speak, you’ve got a debategoing on within the Republicancaucus in the House overwhether or not to threaten agovernment shutdown over theimmigration issue.

So that’s just one example ofwhile Rob talks about what hesees as additional potential inthe Senate, I don’t see muchchanged in the House in terms ofthe sort of center of gravity andenergy in the caucus, and I don’tsee it being a spirit of compro-mise at the end of the day.

Areas where we may be ableto move forward—again, thatdoesn’t mean I assign a hugeprobability to them—but Roband I have talked a lot about taxreform, especially corporate taxreform. There’s actually a fairamount of overlap betweensome of the plans the adminis-tration and our Republican col-leagues have put forward over

time. It’s easy to talk about inthe abstract—everyone is for taxreform in the abstract.

The two plans that have actu-ally been put on the table didn’tget a very warm reception. Be-fore he left, Sen. Max Baucus puton the table a tax reform plan,especially on the corporate side,and didn’t get a warm reception.And Dave Camp, in the House,from my view had lots of flaws,but at least it was a credible ef-fort. The Speaker of the Housewas one of the first people towalk away from it last year. So itwould be great to see someprogress in that area.

Tax DetailsMR. KING: Senator, if your caucuscan rally around a distinct cor-porate tax-reform plan thatwould then advance, what wouldthat look like?MR. PORTMAN: The approach weought to be taking is it has toget done. If we don’t have thatapproach, we’re going to findourselves mired in the same par-tisan gridlock. Because the presi-dent is now asking for some rev-enue to come out of this process,when originally he said it couldbe revenue-neutral.

But we’ve got to get it done. Ilook around this room, and ev-ery day, another investmentbanker or a major accountingfirm is coming to you and say-ing, “Why are you an Americancompany? It makes more senseto domicile elsewhere.” And in-versions are the tip of the ice-berg.

We love foreign investment,but we’d also like to keep somecompanies here. I think we’llwake up five years from now andsay, “What happened?” We’regoing to see our corporate sec-tor hollowed out.

MR. KING: So what would a planlook like?MR. PORTMAN: It’s got to be alower rate, it starts with that.Chris and I have talked a lotabout this. We both served onthe Super Committee, whichended up not being too super.But we did talk a lot about cor-porate tax reform, because it’san obvious way to grow theeconomy. You’ve got to lower therate, and you’ve got to have amore competitive internationalsystem.

You can get to [a corporatetax rate of] 25%. It can be reve-

nue neutral, you can end upwith a competitive internationalsystem that’s comparable towhat Dave Camp set out, whichis a 95% exemption, kind of go-ing to a more territorial, ratherthan a world-wide system. It en-ables us to be competitive. Andby the way, 25% is just gettingus down to the average of theOECD countries now, which iswhat Ronald Reagan did back in1986 by getting us to 34%, whichat that time was just below theaverage.

Blocking the WayMR. KING: What are the impedi-ments to making that happen?MR. PORTMAN: It’s three things,in my view. One is the sense thatsomehow corporate tax reformhelps the boardroom. It’s notabout the boardroom. Frankly,it’s not about the people in thisroom. It’s about the workers. Wetalked earlier about wages andjobs. Wages are down about 8%since the recession. Median fam-ily net worth is down about 40%.Economic studies have shownthe No. 1 beneficiary of corpo-rate tax reform: workers. Higherwages, higher benefits. Prettyobvious. So, it’s about the people

you employ, and we’ve got to getthat message out there so thatpeople care about this.

Second, if folks in this roomare not willing to tell your lob-byists in this town, “Forget try-ing to protect this particularpreference, this is good for theeconomy, we’ve got to come to-gether and make this change forthe good of our country and tobe able to keep American com-panies here.”

Third, it’s just hard. There’s atemptation on both sides of theaisle to say, “Well, let’s have an-other repatriation holiday,” andsome of you in this room havebeen pushing for that. I think it’sa huge mistake. I think it takesall the steam out of tax reform,obviously. You can’t have an-other repatriation as we had 10years ago, which was disappoint-ing, by the way, in terms of therevenue it produced for the gov-ernment, but also in terms of theinvestment it produced.

MR. KING: Is there a plan Demo-crats could galvanize around?MR. VAN HOLLEN: The president,if you go back a number ofyears, put forward a frameworkfor corporate tax reform thatoverlaps in many big ways withthe Dave Camp proposal. The is-sue to date has been that the po-sition of House Republicans wasthat you can only do tax reformif you do all tax reform, corpo-rate and individual tax reform.When you say you can only docorporate reform if you’re goingto do individual tax reform, itcreates deadlock right away. Soif our Senate Republican col-leagues can convince our HouseRepublican colleagues to backoff that demand, look at the ar-eas of overlap, then there’s po-tential for moving forward.

The Dave Camp proposal alsogenerates some one-time reve-nue from a toll on the overseasholdings that both the presidentand Dave Camp use for invest-ing in our national infrastruc-ture, which we haven’t men-tioned but which is a hugeissue. The Transportation TrustFund is going to begin being in-solvent. Revenue will not meetthe demand for the programstarting this April. We need along-term solution.

In Search of Common Ground on Tax OverhaulSen. Rob Portman and Rep. Chris Van Hollen say reaching agreement is possible. Maybe.

Paul

Morse/D

owJones

RalphAlswan

g/Dow

Jones

Top IssuesThe percentage of surveyed Americanswho said each of the following was themost important problem facing the country

Economy in general 17% 17% 20%

Dissatisfaction 18 16 19with government

Immigration/ 12 7 13illegal aliens

Unemployment/ 12 10 12jobs

Health care 5 8 7

Federal budget 6 5 5deficit/debt

Education 3 5 4

Poverty/hunger/ 3 3 4homelessness

Terrorism 4 3 4

Ethical/moral/ 5 5 3family decline

Situation in 3 5 3Iraq/ISIS

Foreign aid/ 6 3 3focus overseas

National Security 2 2 3

Sept. Oct.2014

Nov.

Few Solutions?Congress’s approval rating is near a record low

Source: Gallup Inc. telephone survey of 1,252 adults Sept. 25-30; margin of error +/- 4percentage points The Wall Street Journal

Source: Gallup Inc. telephone surveys of about 1,000 adults;margin of error +/- 4 percentage points

Source: Gallup Inc.; latest data is from Nov. 6-9 telephonesurvey of 828 adults; margin of error +/- 4 percentage points

Dim ViewHow Americans see most members of Congress and their ownrepresentative

Out of touch81%

47%

Focused on needs of special interests69%

46%

Corrupt54%

27%

Most members Own representative

40%

0

5

10

15

20

25

30

35

’10 ’11 ’12 ’13 ’142009

Without a tax overhaul, ‘we’re going to see ourcorporate sector hollowed out.’Sen. Rob Portman

’Studies have shown the No. 1 beneficiary ofcorporate tax reform: workers.’Rep. Chris Van Hollen

‘We have an obligation tothe American people tobe a responsible right-of-center, conservativegoverning majority.’

THEWALL STREET JOURNAL. Tuesday, December 9, 2014 | R7

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JOURNAL REPORT | CEO COUNCIL

THE CHINA MARKET

1 China Investment TreatyThe U.S. should secure a

bilateral investment treatywith China that prioritizestransparency and business op-portunities for Chinese andU.S. companies, acceleratesinvestments in both directionsand encourages partnerships.

2 Push U.S.-ChinaWin-Wins

U.S. business should look forwin-win opportunities withChina in key areas: energy, theenvironment and food secu-rity. There is a tremendousopportunity for U.S. and other

Western companies to exportand partner with China onpower-generation technology,including clean-energy tech-nology, and to leverage U.S.expertise in food production.

3 Rebuild China TiesCommon understanding

is a critical building block ofstronger economic and busi-ness relationships. Key to thisis establishing transparencyand common definitions evenaround simple products andhow they are regulated. TheU.S. government and businessneed to reestablish trust with

the Chinese post-Snowden,particularly in technology. TheU.S. should become the natu-ral partner of choice for China.

CO-CHAIRSRichard I. Lesser, Presidentand CEO, Boston ConsultingGroupDonnie Smith, President andCEO, Tyson Foods Inc.

SUBJECT EXPERTDerek M. Scissors, ResidentScholar, American EnterpriseInstitute

THE TASK FORCES’ PRIORITIESCEO Council executives split up into six groups to debate priorities in the following areas. Here are their top recommendations.

RETHINKING ENERGY AND THE ENVIRONMENT

1 Spur InfrastructureInvestment

The market needs clear rulesto spur private investment ina range of infrastructure, in-cluding modernizing and ex-panding the electric grid, pipe-lines and transportationsector. Streamlined permittingis especially needed. Invest-ment would also help electrifythe transportation sector.

2 Boost Gas Tax ForHighways

Use higher gasoline and dieseltaxes, which have not beenraised in 20 years, to rebuildhighway infrastructure. Thischange should be pursued be-fore the end of this Congress.

The decline of oil pricesmakes such a policy changemore politically feasible in theshort-term.

3 Move Toward CarbonPricing

Put a price on greenhouse-gasemissions so producers andconsumers of energy internal-ize the social costs of theirenergy consumption, drivinglower-emission technologyand efficiency. In implement-ing a carbon tax, government-funded mandates and otherregulations that distort themarket should be eliminated.The U.S. greenhouse-gas pric-ing policy should be pursuedin the context of a global

treaty cutting greenhouse-gasemissions.

CO-CHAIRSTheodore F. Craver Jr.,Chairman, President and CEO,Edison InternationalTamara L. Lundgren,President and CEO, SchnitzerSteel Industries Inc.James S. Tisch, Presidentand CEO, Loews Corp.

SUBJECT EXPERTJason Bordoff, Professor ofProfessional Practice in Inter-national and Public Affairs,and Founding Director, Centeron Global Energy Policy,Columbia University

THE FUTURE OF HEALTH CARE

1 Empower ConsumerChoice

Give consumers more informa-tion to make smart economicchoices and promote wellness.Cost, quality and outcomedata must be made availablein a way that will advancepaying for quality and value.Shift more accountability toconsumers, but make surethey’re informed. Allow insur-ance companies and employ-ers to provide consumer in-centives.

2 Reshape Care-DeliveryModel

Reshape the care-deliverymodel to focus on wellnessand population health. Encour-

age innovation and allow in-dustry consolidation when itincreases choice and access,while maintaining affordability.Improve interoperability of in-formation systems and use oftechnology. Focus on improv-ing systems for elder andchronic care. Continue to pro-mote coordinated and team-based care.

3 Realign PaymentIncentives

Payments should be based onoverall value and results, notvolume and complexity. If aprovider becomes more effi-cient, generating better out-comes while providing the ap-propriate amount of care, it

should keep part of the sav-ings. Fair payment incentivesfor providers and create fairreimbursement methodolo-gies. Continue to move awayfrom fee for service.

CO-CHAIRSJohn H. Hammergren,Chairman, President and CEO,McKesson Corp.Stephen H. Rusckowski,President and CEO, QuestDiagnosticsJoseph R. Swedish, Presi-dent and CEO, Anthem Inc.

SUBJECT EXPERTMargaret E. O’Kane, Presi-dent, National Committee forQuality Assurance

THE CORPORATE LIFE CYCLE

1 Taper Capital-Gains TaxStructure the capital-gains

tax to create an incentive forinvestors to hold their sharesfor an extended period, reduc-ing the tax rate as time goeson. It would discourage trad-ers and attract investors, andhelp align executives’ interestswith shareholders’. This wouldhelp U.S. companies grow,hire and compete in the globalmarketplace.

2 Oversight for ProxyAdvisers

ISS and other proxy advisers

should be overseen and regu-lated by the Securities and Ex-change Commission, andshould have to disclose theirsources of income.

3 Reform SEC DisclosureRules

Regulations should help exec-utives resist short-term pres-sures. For example, the Secu-rities and ExchangeCommission should requireswifter disclosure when activ-ist investors take a sizablestake in a company.

CO-CHAIRSAndrew N. Liveris, Chair-man, President and CEO, DowChemical Co.Sir Martin S. Sorrell, GroupCEO, WPP Group PLC

SUBJECT EXPERTWilliam W. George, SeniorFellow, Harvard BusinessSchool; former Chairman andCEO, Medtronic Inc.

DISRUPTIVE TECHNOLOGY

1 Partner in DisruptionTeaming up with technol-

ogy companies can add valuefor both sides, and help largecompanies accelerate theirpace of development and in-novation. Be willing to collab-orate to solve problems; thereis no shame in admittingsomeone else has valuable ex-pertise.

2 Identify Key TalentYou need a knowledge-

able human-resources team torecruit and build a company,and it should be intimately fa-miliar with the business youare in. Identify younger work-

ers that aren’t accustomed tothe traditional method of do-ing things and are more likelyto embrace innovation. It canbe easier to go out and getnew disruptors than to per-suade existing employees tochange.

3 Celebrate Failure andRisk-Taking

You’re not going to succeed allthe time. It’s important to cel-ebrate risk-taking and failure.Talk about why projects fail.Reward employees for takinga chance, don’t fire them be-cause the project didn’t workout.

CO-CHAIRSFrancisco D’Souza, CEO,Cognizant Technology Solu-tionsEdward Forst, President andCEO, Cushman & WakefieldJoseph Jimenez, CEO,Novartis

SUBJECT EXPERTLarry Downes, Project Direc-tor, Center for Business andPublic Policy, GeorgetownUniversity; Research Fellow,Accenture Institute for HighPerformance

AN AGENDA FOR GROWTH

1 21st-Century WorkforceA competitive work force

requires action on all fronts,from expanded early-child-hood education to reform offunding mechanisms. Involvebusiness in the education sys-tem, including curriculum de-velopment, to help studentsprepare for available job op-portunities. Encourage schoolsand parents to sign up forprograms engaging busi-nesses. Improve focus onSTEM and technical training.

2 Modernize PublicInfrastructure

Establish a national infra-structure bank, aimed at pro-fessionalizing public infra-structure investment and

being a model for states. Alsouse public-private partner-ships for funding. Establishindependent, nonpoliticalleadership with a structuresimilar to the Federal Reservesystem.

3 Pro-GrowthFundamentals

Focus on pro-growth funda-mentals including corporateincome-tax reform and freetrade. Promote smarter regu-lation by eliminating con-straints on starting and ex-panding businesses togenerate additional jobsquickly. Expand H-1B visa pro-gram and grant a visa to ev-ery technical graduate. Allowimmigrants who already re-

ceived a STEM degree (or arepursuing one now) to stay.

CO-CHAIRSDonald H. Layton, CEO,Freddie MacDeanna Mulligan, Presidentand CEO, Guardian Life Insur-ance Co. of AmericaDavid T. Seaton, Chairmanand CEO, Fluor Corp.

SUBJECT EXPERTJanice C. Eberly, Professorof Finance and Faculty Direc-tor, Kellogg Public-Private Ini-tiative, Kellogg School ofManagement at NorthwesternUniversity; former AssistantSecretary for Economic Policy,U.S. Treasury

National Security Adviser Su-san Rice met with Wall StreetJournal Editor in Chief GerardBaker to discuss some of the big-gest military and diplomaticchallenges currently facing theU.S. What follows are edited ex-cerpts of their conversation.

The ISIL ThreatMR. BAKER: When the presidentannounced military action a fewmonths ago against IslamicState, he said the goal was todegrade and destroy ISIL. Canyou give us an update?MS. RICE: It has been degraded.This is not a campaign that’s go-

ing to be won overnight. It’s amultifaceted endeavor, not just amilitary one. It is also about pre-venting the flow of foreign fight-ers, degrading ISIL’s ability to fi-nance itself, and opposing itsnarrative of hate and its bastard-ization of Islam. We havebrought together now 60 coun-tries in a broad-based coalitionthat are engaged in all aspects ofthe effort to degrade and ulti-mately destroy ISIL.

On the military side, we havemade progress. We have begunworking with the Iraqi govern-ment under the new leadershipof Prime Minister Abadi to buildback what have been substan-tially reduced—both in numberand quality—Iraqi securityforces, and to combine thosewith efforts to build up theSunni tribes ultimately in a na-tional guard, combined with oursupport for the Kurdish Pesh-merga to create a more viableground force that can take backterritory from ISIL.

But the ISIL campaign is go-ing to take time. In Syria it’s go-ing to be even more challenging,because, unlike in Iraq, we don’thave a government with whichwe can and will cooperate.

Iran SanctionsMR. BAKER: Sen. Bob Menendez,the New Jersey Democrat, sayshe worries sanctions on Iran willgradually be weakened, so he’sgoing to produce legislation thatwill require you to increase sanc-tions. What is your response?MS. RICE: That would not be con-structive at this point. The nego-tiations have made progress. Ayear ago, there were 200 kilo-grams of 20% highly enricheduranium that the Iranians couldquickly convert into a nuclearweapon. All 200 kilograms areno longer in that form and us-able for that purpose. They arenot progressing beyond enrich-ment at 5%, whereas previouslythere were no constraints. TheIraq plutonium facility whichhad been on a fast track to giv-ing Iran a plutonium pathway to

a nuclear weapon has been fro-zen, and there is no continuedprogress on the facility.

So we are in a better, saferplace today. It would be foolishto jettison that progress whenthe prospect of a comprehensiveagreement remains in sight, ifnot imminent. If the U.S. were tounilaterally impose additionalsanctions, we would blow upthese negotiations.

MR. BAKER: Despite pressureand limited sanctions so far,Vladimir Putin hasn’t disgorgedany of the illegitimate gains thatthe world thinks he’s made inUkraine. He’s putting pressureon other countries in the region.You haven’t stopped him. Whatmore can you do to stop him?MS. RICE: What we have done isbuilt and maintained unprece-dented unity with Europe andother key partners and the G-7and elsewhere who all agree thatRussia’s actions are illegal anddestabilizing and have to come

at a cost. That cost has come inthe form of what few expectedwould be as painful and signifi-cant economic sanctions aswe’ve managed to impose.

The Russian economy has suf-fered substantially as a result ofsanctions, also as a result of de-clining oil prices. The IMF saysthey’re barely growing, if at all.

MR. BAKER: You expect that tomake him back down, to give upwhat he’s taken?MS. RICE: These are factors thatPutin has to take into account ashe considers his future steps.The news that Russia has pulledback from its South Stream pipe-line to Southern Europe is alsosignificant. That, too, is indica-tive of the mounting cost Russiais paying for its behavior. Mean-

while, we are maximizing withthe Europeans and others sup-port for the Ukrainian govern-ment. We are providing over$100 million just this year in se-curity assistance. At the sametime, we continue to considerother forms of support—eco-nomic, political and security.

The China DealMR. BAKER: President Obama’sclimate-change deal with Chinaseems to require the U.S. tomake a lot of sacrifices, and putssome long distant date on limitson China’s carbon emissions,which people think China’s prob-ably going to hit anyway. There’sa fear here, isn’t there, that thisis the way in which, unfortu-nately, the world is going, thatthe U.S. in these relationships is

not getting the better of them?MS. RICE: China has never, up un-til a month ago, agreed to anyconstraints in any binding fash-ion on its carbon emissions.

MR. BAKER: Are these seriousconstraints?MS. RICE: They are quite serious.If they are met, it will be a ma-jor contribution, along withours, to curbing global emis-sions, giving us real momentumalso going into the Paris confer-ence next year on the largerglobal climate-change initiative.

So to say that it’s uneven, weare different countries of differ-ent size at different stages of de-velopment. But China has neverbefore made the kind of concreteand significant commitmentsthat it made. And I think thatwas not a result of a lack ofAmerican leadership, but quitethe opposite, the product of vi-sion that we put forward thatthey embraced, that we wereable to achieve together.

ALitany of Global ChallengesSusan Rice defends the administration’s approach to Islamic State, Putin, Iran and climate change

Trouble SpotHow people surveyed last monthanswered when asked if theinternational coalition put togetherby the White House to defeatIslamic State was working:

The percentage of respondents inthe survey who said the U.S.military should have troops on theground in Iraq:

Source: Quinnipiac University Poll of 1,623registered voters, Nov. 18-23; margin of error+/- 2.4 percentage points for full sample, about+/- 4.5 points for party samples

The Wall Street Journal

Yes19%

No61%

Don’tknow/

no answer21%

37%

Total

53%

Republicans

24%

Democrats

30%

Independents

Paul

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‘On the military side, we have made progress.’

R10 | Tuesday, December 9, 2014 THEWALL STREET JOURNAL.

The demands of corporateleadership are changing as glob-alization and a growing flood ofinformation make chief execu-tives’ jobs more complex. The oldhierarchical style of leadershipcan’t keep up, but what shouldtake its place?

Retired Gen. Stanley McChrys-tal, former commander of U.S.and international forces in Af-ghanistan and co-founder of Mc-Chrystal Group, and Lt. Gen.Michael Flynn, former director ofthe Defense Intelligence Agencyand before that director of mili-tary intelligence in Afghanistan,spoke with The Wall Street Jour-nal’s John Bussey about the keysto effective leadership. Here areedited excerpts of their discus-sion.

Getting Things DoneMR. BUSSEY: Gen. McChrystal,you’re teaching at Yale Univer-sity, a course on leadership.You’re speaking to a number ofthese CEOs, coaching them onleadership issues. Tell us whatthey’re doing right and whatthey’re doing wrong.GEN. MCCHRYSTAL: The biggestproblem is an organization canget the strategy right but thencan’t execute it.

What I see in many firms is asiloing across different parts ofbig, geographically dispersedfirms, difficulty communicatingbecause of cultural barriers anddistance and other things. Thereare also problems with decisionmaking: People will meet andthen not make a decision or theywill make a decision and then itwon’t be implemented.

So it’s the execution of the or-ganization. And while that seemsmechanical, it’s really an art. Youcan’t do checklists and make thatwork. It’s relationships and it’sprocesses that you set up thatmake an organization effective.

MR. BUSSEY: You say in yourwritings that a CEO, a real

leader, should be a decision fa-cilitator, not a decision maker.GEN. MCCHRYSTAL: What I foundin my own experience at JointSpecial Operations Commandwas I’d grown up as an operator,so my tendency was to want tomake decisions on operations.They’d bring together intelli-gence and I’d want to get downand draw on the map how wewere going to do it.

But in reality things hadchanged enough where I didn’thave the most expertise in doingthat, and I had a lot of otherpeople who could. I found thatwhen I finally got it where Ithought it was closer to right, Imade very, very few decisions.

What I really did was I wassort of the ringmaster for thisconstant conversation across thecommand. That was my contri-bution, creating an ecosystemwhere the different parts of theorganization spoke to each other.

If I tried the hierarchical way,where they came up and askedme for decisions, by the time theinformation got to me and Imade a decision, even if it wasright when I made it, by thetime it got back down again itwas now wrong because the sit-uation had changed too much.GEN. FLYNN: One of the things

that we are facing today is thespeed in which information is al-most bombarding the decision-making processes that we arefaced with. For me, what I kindof describe is trying to maintaina fingertip feel for your organi-zation and the operating envi-ronment that they are in, at thesame time making sure that ev-erybody understands that wehave one big strategy that weare trying to achieve.

What Stan’s highlighting isthe ability to empower the orga-nization down as far as you can,to the point where you’re almostuncomfortable allowing deci-sions to be made at a certainlevel. And when you’re uncom-fortable, you’re probably doingthe right thing.

MR. BUSSEY: Gen. McChrystal,you talk about teams, and theimportance of that kind of or-

ganic unit driving decision-mak-ing in companies. What exactlyis a team, and how do you talkabout teams with executives andgenerals who are managing tensof thousands of people? Whendoes a team suddenly become adepartment or a battalion—justan unwieldy element to integrateinto decision making?GEN. MCCHRYSTAL: We’ve allbeen on sports teams or otherthings where you could finisheach other’s sentences. You hadenough familiarity that you hada common sense of what youwere about, identity, and whatyou were trying to do.

The problem is, that’s notscalable beyond a certain point.So when you get beyond a smallgroup where you have constantinteraction, you really have to goto something I call a team ofteams. It can’t be one big team,because you’re not rubbingshoulders with people. Instead,you’ve got to create a number ofsmall teams. But then you’ve gotto link them so that there is acommon, shared consciousness.

MR. BUSSEY: Gen. Flynn, tell us alittle about the leadership styleof al Qaeda, the Taliban, IslamicState. What have we learnedabout their leadership style?GEN. FLYNN: As Stan just high-lighted—I would describe it a bitdifferently, but we’re facing ateam of teams, if you will.

They are extremely adaptive.They have networks and subnet-works, and their ability to lever-age technology should not betaken for granted. They’re very

smart, the leadership, and en-lightened in some cases in howthey function and how they con-nect to each other, how they gettheir message out, how they in-ternally speak to themselves,how they learn. They are alearning organization and an or-ganization that pays close atten-tion to their failures as well astheir successes.

Lessons of WarMR. BUSSEY: What leadershiplessons should we take from theAmerican experience in Iraq andAfghanistan?GEN. MCCHRYSTAL: The first thingis we didn’t do due diligence be-fore we went in. We didn’t under-stand the problem to the depththat we needed to. We didn’t takethe time to do it, and we didn’tnurture the experts.

If we gathered all the Pashtunand Arabic speakers in the U.S.military, we could probably fitthem on this stage. And yet, af-ter World War II began, afterPearl Harbor, we trained morethan 5,000 military members tospeak Japanese. We just haven’tmade that level of effort.

The other thing is we go atthis with different parts of ourgovernment. Every agency wantsto help but they want to protecttheir equities, and you can’t do acomplex endeavor like this un-less you can build a truly inte-grated team in which everybodyis focused.

We had great efforts to try todo that. Made a lot of progress,but it was much more difficultthan it should have been. Part of

that is interpersonal. Part of thatis organizational equities. Partof that is cultures. But it stopsor limits our effectiveness to atremendous degree.

MR. BUSSEY: If you had the presi-dent and the chairman of theJoint Chiefs of Staff in a room,what would you advise themfrom a leadership standpoint onwhat to do now in Afghanistan?GEN. MCCHRYSTAL: I’d tell themto go get three cases of beer andgo white-water rafting. It soundslike a joke, but when you get inthe National Security Councilroom for your first time youthink, “Boy, I made it. I’m in thisroom. This is kind of amazing.”And you look around and you’renot really a team. You’re politeto each other, and you talk. Butthink about it. We’re fighting awar. You spend months prepar-ing a football or a baseball teamfor the season, but we take themost senior leaders, we putthem in a room, we expect themto be a cohesive team to maketough decisions.

And so, I would do things thatstarted to build relationships sothat you have something to fallback on when you disagree onthe issues.

I see the same thing in board-rooms for corporations. If theycome in periodically, they don’treally know each other, they’renot cohesive, you’re not apt toget a very effective outcome.And I think that’s huge. Thestrategy part is not that hard.Figuring out what to do, you cando on a Saturday morning.

LeadershipLessons FromThe GeneralsStanleyMcChrystal andMichaelFlynn onwhat war has taught them

JOURNAL REPORT | CEO COUNCIL

‘When you’re uncomfortable, you’re probablydoing the right thing.’Lt. Gen. Michael Flynn

‘The biggest problem is an organization can getthe strategy right but then can’t execute it.’Retired Gen. Stanley McChrystal

Shared LoadAmericans like the idea of sharing global leadership. The percentage ofrespondents saying the U.S. leadership role should be:

The Wall Street Journal

Source: Pew ResearchCenter telephone surveyof 2,003 adults conductedOct.-Nov. 2013; margin oferror +/- 2.5 percentage points

d Loadns like the idea of sharing global leadership. The percentants saying the U.S. leadership role should be:

The Wall S

Researchhone surveylts conducted13; margin ofpercentage points

Single world leader

No leadership role

Don’t know

72%

Sharedleadership role

51%

20%

WithU.S. mostactive

With U.S. asactive as others

12%

12%4%

Taxes—and how the govern-ment spends them—are some ofthe most contentious issues theCongress has to handle.

For a look at how the Republi-can majority intends to tacklethem, Matt Murray, deputy edi-tor in chief of The Wall StreetJournal, spoke with incomingWays and Means CommitteeChairman Paul Ryan. What fol-lows are edited excerpts of theirconversation.

The Tax QuestionMR. MURRAY: What’s going on atthis moment with the tax extend-ers deal?REP. RYAN: The president blewup the deal. We had a goodagreement, bipartisan, withHarry Reid. We were going toproduce certainty for businesson permanent extension of R&Dcredit, permanent extension ofsection 179, other longer-termextensions. The president blew itup, so we’re just going to do aclean, one-year deal.

MR. MURRAY: Part of the presi-dent’s objection was the earnedincome tax credit not being ex-tended, right? Which is some-thing you’ve talked about, you’vesupported.REP. RYAN: I do intend on takingup the issue of reforming theearned income tax credit. I thinkit works well. I think it needs tobe improved, and there’s someissues that need to be addressedwith it.

MR. MURRAY: What’s your honestassessment of the chances forgood tax reform taking shapenext year?REP. RYAN: It will not be for alack of trying. We think it’s thekey cornerstone for faster eco-nomic growth. The reason I hesi-tate to say it’s going to get doneis, I just don’t know where thisWhite House is going to comedown on these things.

MR. MURRAY: What about dy-namic scoring, to get tax reformdone. Do you anticipate changingto dynamic scoring?REP. RYAN: I think the right wayto describe this is, we shouldhave the most accurate score-keeping possible. One thing Con-gress does in its scorekeeping

now is, it assumes that people’sbehavior will not change if taxeschange. That’s ridiculous. So weknow that’s not accurate.

I’d rather call it just accuratescoring, or reality-based scoring.We will improve our capabilitiesso that we can have the most ac-curate scorekeeping possible, be-cause we think it’s importantthat policy makers make deci-sions with the best informationpossible. If we don’t do that,then we’re going to do tax re-form where we leave the eco-nomic growth on the table. Wewant to make sure that the deci-sions we make are maximizingthe potential for growth. Wewant the measuring stick we useto make sure that we can takethat into account when we enacttax reform.

MR. MURRAY: What about trade?That seems to be an area wherethere’s some meeting of theminds between the House andthe administration. Are you opti-mistic on trade?

REP. RYAN: I’m cautiously opti-mistic. This is one of the issueswhere we want to see a success-ful agreement with [the pro-posed Trans-Pacific Partnership].We want to open up markets.This is an enormous amount of

global GDP that could be in ac-cess for our export markets.

MR. MURRAY: You spent a lot oftime traveling around thinkingabout poverty. How will you be adifferent Ways and Means Chair-

man in 2015 than you might havebeen in 2013 or 2011?REP. RYAN: Emphasis and focus.One of the priorities I intend onadvancing is producing fastereconomic growth and upwardmobility, and removing the bar-riers that make it hard for peo-ple who are stuck in poverty toget up and on their way in life.

I do believe that this commit-tee has so much jurisdiction inthis. It’s the committee in chargeof our welfare laws. I really be-lieve that it’s time for what Iwould call welfare reform 2.0.When we reformed welfare in1996, that was one program.

In the last two years, in addi-tion to traveling the country andmeeting with heroic people do-ing a phenomenal job of fightingpoverty, grass-roots groups, wealso looked at all of the federalgovernment programs that are inthe poverty-fighting space.

This had not been done be-fore. No one in the federal gov-ernment had looked at all thatthe federal government does in

the space of fighting and ad-dressing poverty. Not only didwe quantify the 92 programs and$800 billion a year that wespend, we went through each ofthese programs to look at, arethey working or not.

It’s a real mixed bag. And allof the success until now, the 50thanniversary of the war on pov-erty, with trillions of dollarsspent, has been solely measuredbased upon inputs. How muchmoney are we spending? Howmany programs are we creating?How many people on the pro-grams? We haven’t been measur-ing it on outcomes. And so,[Democratic Sen.] Patty Murrayand I negotiated to move ourmetrics system in government to-ward measuring the effectivenessof these policies on outcomes.

Health-Care ProspectsMR. MURRAY: What’s the agendaon health care, then, in the enti-tlement front?REP. RYAN: To articulate what thealternative looks like.

MR. MURRAY: Is the alternativeoutright repeal and new laws?REP. RYAN: Repeal and replace. Ithink Obamacare collapses underits own weight for lots of rea-sons. And the faster we can ar-ticulate a better patient-centeredapproach, that truly gets at whatwe were trying to get to in thefirst place, affordable health carefor everybody in this country, in-cluding people with pre-existingconditions, where choice andcompetition drive the results,not price controls and arbitraryregulations from the federal gov-ernment, the better.

MR. MURRAY: You’re known tohave wanted the Ways andMeans job that you’re getting.You’re known for being a familyman who is worried about theimpact of politics on your chil-dren and going home for theweekend, so are you ready to de-clare that you’re not going to bea candidate in 2016?REP. RYAN: That’s a decision thatI have long been saying I’ll dealwith in 2015. Right now I wantto focus on 2014 issues. I’m aperson who likes deadlines andtimelines. I’m sticking to mytimeline.

Now theViewFromWays andMeansPaul Ryan insists Congress is determined to overhaul taxes. The question mark, he says, is the president.

Paul

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Note: Figures are for fiscal years ended Sept. 30; 2014 figures are estimates.

Source: White House Office of Management and Budget The Wall Street Journal

Funding the GovernmentFederal revenue by source

Personal income tax

100%

0

20

40

60

80

’70’60 ’80 ’90 ’00 ’10

Corporate income tax

Payroll taxes

Excise taxes

Other

‘I just don’t knowwhere this WhiteHouse is going to comedown on these things.’

THEWALL STREET JOURNAL. Tuesday, December 9, 2014 |

In the wake of the financialcrisis, has regulation of the fi-nancial industry gone too far, ornot far enough?

Jeb Hensarling, chairman ofthe House Financial ServicesCommittee, and Sheila Bair, for-mer chairman of the Federal De-posit Insurance Corp. and now aboard member at Banco Santan-der, sat down with The WallStreet Journal’s Dennis Bermanto discuss how regulation hassucceeded, how it has failed,and what happens next. Hereare edited excerpts of their con-versation.

The Dodd-Frank VerdictMR. BERMAN: What’s your com-fort level for where capital re-quirements have gone for thebanks?MS. BAIR: They need to be signif-icantly higher.

They need to be dramaticallysimplified, too. These riskweights are horrendously com-plex, they’re easy to game, theycreate all sorts of skewed incen-tives.

One of the crazier things theydo is they treat one bank lendingto another as lower risk than abank lending to IBM or to Coca-Cola or Google or whatever. Thatdoesn’t pass the laugh test. Itjust encourages them to becomemore interconnected, whichmakes it harder for them to failin an organized way.

MR. BERMAN: So even after all ofDodd-Frank, we are still not in agood place.MS. BAIR: No, we’re incremen-tally better, but we’re not nearly

as resilient as we need to be.

MR. BERMAN: So Dodd-Frank hasfailed.MS. BAIR: I wouldn’t say Dodd-Frank has failed. Judged by com-plexity and quantity, we have toomuch regulation. Judged by ef-fectiveness, we have too little.

MR. BERMAN: Chairman Hensar-ling, first on capital require-ments and second on your viewof Dodd-Frank.REP. HENSARLING: Well, I cer-tainly agree with Sheila. I’m veryskeptical of the risk weightings.They haven’t served us well inthe past.

I will certainly again concurwith Sheila that the complexity Idon’t think serves us well. And Iam concerned of one worldviewor one national view of riskmanagement. I think it is goingto be better handled by marketmechanisms.

With respect to Dodd-Frank,the large banks have becomelarger, the small banks have be-come fewer, the taxpayers havebecome poorer.

It is more difficult now forworking families to purchase ahome, even though a local com-munity bank may actually wantto lend them money.

As we implement standardson credit cards, we are findingthe dreaded annual fees comeback. Many of the perks areleaving. Free checking is becom-ing a thing of the past.

And at some point the sheerweight, volume, complexity, un-certainty of the regulatory bur-den slows economic growth.

MR. BERMAN: Would you agreethat we’ve turned the bankingsector into a regulated utility?REP. HENSARLING: We’re proba-bly on the way to doing that. Iwouldn’t say we’re there today.MS. BAIR: No. There’s still a lotof risk being taken. I do think,though, that the regulators aretrying too much through the su-pervisory process and throughhighly complex prescriptiverules to run the banks for them.

We need much higher capitallevels. And we need a credibleresolution mechanism to makesure the market takes the lossesand the market understands thatin advance. Those are the twoplaces where I would focus. Themarket can discipline these in-stitutions. The regulatory pro-cess cannot.

Now and ThenMR. BERMAN: Compared with2007, is the financial sector inthe U.S. healthier now? Is itmore stable and a greater con-tributor to growth?MS. BAIR: Liquidity and capitalare better. Not as good as theyshould be, but better. It’s moreresilient in that sense.

But monetary policy played arole in the search for yield andh i t b i l t

with the near-zero interest-ratepolicies. And the hunt for yieldis still very much alive, it’s indifferent places now.

So the system is more stablebut the risks are potentiallygreater. Because we don’t knowhow this is going to all turn out.Financial assets are inflated.[Banks are] desperate to makeloans. We’re seeing the govern-ment leading the way to loos-ened mortgage-lending stan-dards. Commercial real estate,you’re seeing a lot of the samekind of behaviors over again.And the regulators are trying toconstrain it. But how much canthey do that? I mean, monetarypolicy gets everywhere.

MR. BERMAN: Chairman Hensar-ling, compared with 2007, is thefinancial system now healthier?REP. HENSARLING: I think you canmake the case on perhaps somecriteria that it’s more stable. Butagain, at what price stability?

How much economic growthare you willing to pay for thisso-called stability? And I’m notconvinced that we’re not seeingthe calm before the storm.

I don’t want to say that all ofDodd-Frank is bad. But all in all,I consider Dodd-Frank to be af il A d I f f l th t

Is the Financial System Healthier?Jeb Hensarling and Sheila Bair say it’s more stable. With a big caveat.

JOURNAL REPORT | CEO COUNCIL

RalphAlswan

g/Dow

Jones(2)

Stark Divide on Monitoring Wall StreetHow people responded when asked whether, in regulating financialinstitutions, government has gone:Too far Not far enough

Republicans 64% Republicans 32%

Democrats 26%

Independents 41% Independents 51%

Total 43% Total 49%

Democrats 62%

‘There’s still a lot ofrisk being taken.’Sheila Bair

‘All in all, I considerDodd-Frank a failure.’Jeb Hensarling

Seven years after the FederalReserve began an easy-moneyexperiment to prop up a U.S.economy in crisis, central banksin Europe and Japan are takingor considering similar steps astheir own economies stumble.

These moves, along withslowing growth in China andfalling commodities prices, com-plicate the decisions for the U.S.central bank as it contemplatesraising short-term interest ratesin the months ahead.

Against that backdrop, FedVice Chairman Stanley Fischersat down with The Wall StreetJournal’s chief economic corre-spondent, Jon Hilsenrath, to dis-cuss the rate outlook, amongother things.

Here are edited excerpts:

Return to NormalMR. HILSENRATH: Everyone istalking right now about oilprices, which have fallen 25%this year. What does that tellyou about the global economy?MR. FISCHER: Well, there’s clearlya big supply factor, which is theU.S. in particular. People say,“We still are net importers ofenergy.” But we import muchless, and that changes the bal-ance of payment significantly, sothat’s a big thing.

I think it’s mainly good forthe U.S. economy, but obviouslynot so good for oil producers inthe U.S.

MR. HILSENRATH: Can the Fed

start raising short-term interestrates at a time when there’s somuch downward pressure on in-flation in the rest of the world?MR. FISCHER: Foreign demand orgrowth isn’t the main driver ofthe U.S. economy. If unemploy-ment continues to decline, if thelabor market continues tostrengthen, and if we see somesigns of inflation beginning toincrease, then the natural thingis to get the interest rate up.

We call it “normalization.”We’ve almost gotten used tothinking that zero is the naturalplace for the interest rate. It’sfar from it. And although the

first step is very important,there’s a process that is set offwhen the first step starts. Inter-est rates are going to go up andkeep going up for some time,and we need to start thinkingabout what’s going to happen inthe years to come as we go backto a normal situation.

MR. HILSENRATH: What do youdo if unemployment continues tofall, but inflation doesn’t moveor goes down because of what’shappening in the rest of theworld? Can you let things run alittle bit longer in this abnormalstate of very low interest rates?MR. FISCHER: We can do that,and if the inflation is reallyheading south, we will have todo that. We said we’re data-driven and if that’s where thedata drives us, that’s what wewill do.

MR. HILSENRATH: The Fed hasbeen saying since last Marchthat it would keep interest rateslow for a considerable time afterits bond-buying program ends. Itended in October. Is it time tostop giving the public that assur-ance?MR. FISCHER: The minutes of thelast meeting showed there wassome discussion of that, and it’sclearer that we’re closer to get-ting rid of that than we were afew months ago. But it wouldn’tbe appropriate for me to giveyou a guess as to what will hap-pen at the next meeting.

MR. HILSENRATH: When you dostop saying rates will stay lowfor a considerable time, doesthat mean that rates are aboutto go up?MR. FISCHER: As the likely datenears, we will use differentwords, I assume, to describe thesituation. We don’t want to sur-prise markets. On the otherhand, we can’t give precisedates, which is why the empha-sis always goes back to the data.

You may say, “How can themarkets have a correct date ifyou don’t tell them?” Well, theycan guess when the data will bein the situation that justifiesstarting the process of raisingthe interest rate.

A Clear MandateMR. HILSENRATH: How do you re-spond to criticism that quantita-tive-easing programs can stokeasset bubbles in the markets andtake governments off the hookfor putting through difficultstructural reforms?MR. FISCHER: We have a veryclear mandate set out in the lawthat we should use monetary-policy tools to achieve maxi-mum, sustainable employmentand stable prices. We cannot bein the position of saying, “Well,we won’t do what we could dounless you, the politicians, dosomething.” That is wholly inap-propriate. We’ve been giventools, and we have to use themto try and achieve the goals thathave been set.

The bubbles question is morecomplicated. In an economy inwhich a financial system iswhole and sound, operating witha zero interest rate is likely toproduce pressure on assetprices, taking it close to possiblybubble proportions. In countrieswhere the financial system isbroken, as it was in the U.S. in2008-2009, you don’t necessarilycreate bubbles.

MR. HILSENRATH: Well, in the U.S.we’re seeing booms in leverageloans, junk bonds and other as-set classes. Doesn’t that worryyou?MR. FISCHER: We can’t sit aroundjudging every single asset price.You’ve got to leave the marketsbasically to do their thing, andfor us to make an overall judg-ment on the overall level ofwhat’s going on.

If we see a crisis that lookslike a bubble or a boom in a sec-tor, that looks like it will havemajor consequences for thewhole economy, we need to in-tervene. If it’s something whichthe markets should be correct-ing, the markets should correct.

FedGoal: NormalcyStanley Fischer on the outlook for interest rates

Tracking the MoodMonthly data for Gallup's EconomicConfidence Index since 2008. Theindex is based on two questions, oneon current economic conditions in theU.S., the other on whether conditionsare getting better or worse.

The Wall Street Journal

Source: Gallup Inc. telephone surveys of about15,000 adults; margin of error +/- 1 percentagepoint

0

–70

–60

–50

–40

–30

–20

–10

’09 ’10 ’11 ’12 ’13 ’142008

Cyberattacks have domi-nated the headlines over thepast year, with major breachesreported at Target Corp., HomeDepot Inc., J.P. Morgan Chase& Co., and most recently atSony Corp.

As the attacks have grown,so has confusion about howcompanies and the governmentshould work together both toprevent breaches and respondto them when they happen.

Michael Daniel, cybersecu-rity coordinator for the WhiteHouse, sat down with The WallStreet Journal’s Rebecca Blu-menstein to discuss the issue.Here are edited excerpts:

Nature of CyberspaceMS. BLUMENSTEIN: Is it ourimagination or are the attacksgrowing in both frequency andsophistication?MR. DANIEL: We actually debatequite a bit inside the govern-ment about whether or not weare seeing an increase in fre-quency or just our ability to de-tect them. My belief is it’s a lit-tle bit of both. That’s why thisalmost looks like exponentialgrowth that we’re seeing.

In terms of sophistication,[the attacks] are becomingmore technically sophisticated.But what’s probably more inter-esting is the organizational so-phistication that we’re seeing.

The criminal world hastaken a page out of the busi-ness world and applied busi-ness operations and opera-tional research ideas to howthey do their business. Thatposes a significant challenge.

MS. BLUMENSTEIN: What roledo state actors play in this?MR. DANIEL: When you look outacross the array of cy-berthreats that we are facing,you definitely see a significantchunk of them are state-spon-sored. The director of nationalintelligence, Jim Clapper, hassaid this in open testimony toCongress about the threat weface from China, Russia, Iran,North Korea, from other majorcyber actors.

And I would say that inmany cases the line is oftenblurred between those individ-uals operating for criminal or-ganizations, those operating onbehalf of governments andthose operating with a winkand a nod from their govern-ments.

MS. BLUMENSTEIN: Talking tosome CEOs here, there’s a sensethat while companies might geta call from the government ifthey’re being attacked, they’repretty much left on their ownto defend themselves. Do youagree with that?MR. DANIEL: I don’t think that’sentirely right.The argument that you oftenhear people make is that cyber-space has no borders and thatinformation sort of just freely[flows] around the globe. I

would argue that isn’t entiaccurate. Cyberspace, in fhas lots of borders.

We’ve got routers and fwalls and peering points ansorts of edges and boundato networks. In fact, I wouldgue that what cyberspace lais an interior. What that meis that our traditional modehow we think about doing srity, where we essentiallysign the federal governmthe role of doing border srity, for example, doesn’t w

There is no interior tocountry in cyberspace. Evbody lives right on the borSo now, all of a sudden, yogot a situation where, byunderlying nature, cybersrity is a mission that is inently shared between the gernment and the private secand, frankly, multiple levelgovernment.

What that means is we hto work out some new partships between governmentindustry. And these relatships aren’t going to be theditional regulatory relationswe’ve had. They aren’t goinbe the traditional contracrelationships we’ve often[Working this out] is probone of the defining challenthat we will face over the nthree or four years.

Snowden FalloutMS. BLUMENSTEIN: One ofelephants in the room herEdward Snowden. How mmore difficult have his spydisclosures made things, anthe National Security Agejust a bit of a toxic actor nin terms of which player shobe the head agency in deawith the private sector?MR. DANIEL: There’s no qution that the Snowden dissures made our lives moreficult. Just the sheer amountime and effort it took atnior levels of the governmmeant that they weren’t speing time on other issues. Talone is something that causome damage to us.

What was interesting tothough, is that it didn’t dethe development of the cysecurity framework of bpractices and standards.fact, industry participatiothat process, if anything, gafter that.

One of the other lessthat we’ve taken away istrying to put one agency oement of the federal govment in charge of cyber igoing to work either.

So when I look at the tewe have to deploy to deal wa major cyber incident, wgoing to pull from the Depment of Homeland SecuWe’re going to pull fromFBI or Secret Service or otlaw enforcement. We’re goto pull from the NSA andintelligence community,cause you need all of thskill sets.

Cybersecurity:A World ApartMichael Daniel says traditionalsecurity models don’t work

Top ThreatWhen people involved in nationalsecurity were asked what theyconsider the greatest danger tothe U.S. and its interests, more ofthem named cyberwarfare thananything else.

Trouble AheadMore than three in five peopa group of 1,600-plus peoplemainly Internet experts, saymajor cyber-attack is likely inthe next decade.

By 2025, will a majocyberattack have

caused widespread harm tonation’s security and capacito defend itself and itspeople? (“Widespread harmmeaning significant loss ofor property losses/damage/theft at the levels of tens obillions of dollars.)

Source: Defense News online survey of 352l i th ilit d f i d t

Cyber-warfare

45%

Terrorism26%

China14%

Iran

8%

Climate change

6%

North Korea1%

Source: Pew Research Center InternetP j t li f I t t

Q:

Yes61%

No39%

RalphAlswan

g/Dow

Jones

‘We’ve almostgotten used tothinking that zerois the naturalplace for theinterest rate. It’sfar from it.’

‘Everybody lives right on the border.’

R12 | Tuesday, December 9, 2014 THEWALL STREET JOURNAL.

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