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115
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Question and Answer Period – Afternoon Session
2
3
Commissioner Rumsfeld, would you like to start the
questions?
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5
COMMISSIONER
RUMSFELD:
Thank
you,
Mr.
Vice
Chairman.
6
I don't wish to oversimplify, but I would like to
7
try to simplify a couple of things.
8
the general impression in our country -- among non-economists --
9
is that a trade deficit or a negative current accounts balance is
10
a bad thing.
11
headlines in the papers.
12
our country."
13
I think it's safe to say that
That's kind of a general feeling when you see the
Let
me
ask
People think, "Oh, that's not good for
a
few
questions.
I
don't
get
the
14
impression from anything I heard this morning or anything I've
15
heard this afternoon that simplistic approach is the opinion of
16
any of the eight people who have presented.
17
So my question is, is the trade balance or the
18
current account balance, as a concept, a useful concept, or is too
19
aggregated to be really useful?
20
useful for?
And if it's useful, what's it
21
Second, if it's useful, should we really care what
22
the overall numbers are or should we really only care about the
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elements
2
aggregated numbers can’t be dealt with directly.
3
deal with the subelements of it, and so it’s a circular set of
4
questions.
5
thing, and, if so, for what?
that
it
up?
My
impression
I come back to the beginning.
6
7
make
VICE CHAIRMAN PAPADIMITRIOU:
9
VICE CHAIRMAN PAPADIMITRIOU:
One can only
Do you wish to direct
No, I don’t --- or whoever wishes
to respond?
11
COMMISSIONER RUMSFELD:
12
VICE CHAIRMAN PAPADIMITRIOU:
Yes.
Or maybe each one of
you can respond.
14
COMMISSIONER RUMSFELD:
15
MR. MAKIN:
16
overall
to any particular panelist -COMMISSIONER RUMSFELD:
13
that
Is this really a useful
8
10
is
Right.
I think Mr. Rumsfeld raises the right
question.
17
As it’s currently constructed, I don’t think the
18
trade
19
example, the treatment of intracompany trade.
20
dollar’s weakening a bit.
21
trade deficit.
22
produce and sell more inside the U.S.
deficit
is
a
very
interesting
or
useful
number.
For
We’re saying the
Maybe that’s going to be reducing the
Well, if the dollar weakens, maybe we’ll want to
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Computer companies are basically putting together
2
stuff in boxes, and if the dollar weakens, they’ll want to produce
3
and sell more inside the U.S., because it’s a more attractive base
4
from which to sell.
5
stuff to put in the boxes, and imports will go up.
And if they do that, they’ll import more
6
Somebody said, "Oh, the trade deficit’s going up,
7
and it didn’t do any good to depreciate the dollar, so somebody
8
must be cheating."
9
disaggregated basis and see that in today’s world, the location --
No, you just have to look at it on a very
10
the locational decision for companies is very important.
11
you raise money?
12
Where do you lend money?
Where do you market?
13
And
Where do
Where do you produce?
All these things are critical.
exchange
rates
--
if
you
have
a
sustained
14
movement in exchange rates, you may have more production activity
15
going on in the United States with a weaker dollar and larger
16
imports and a larger trade deficit.
17
So,
that’s
an
What’s wrong with that?
example
of
--
a
specific
way
of
18
suggesting that it’s not a good guide for policy.
19
much more useful -- it’s certainly useful to collet numbers that
20
suggest to you, overall, are we spending more or less than income?
21
I think it’s
The current account deficit will tell you that.
22
And why are we doing it?
If we’re doing it simply
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because we have to borrow to finance rapidly growing investment
2
opportunities, do we want to stop that?
3
I don’t think so.
If we’re doing it to consume, the markets will take
4
care of it.
5
that you’re borrowing on a unsustainable basis; you’re borrowing
6
to accumulate things that aren’t going to produce the means to pay
7
the foreign investors.
8
rates will rise, and absorption will go down.
9
If we’re doing it to consume, the markets will see
So,
I
You’re currency will depreciate, interest
think
it’s
a
bad
guide
to
policy
and
a
10
misleading guide to our position vis a vis the rest of the world.
11
I wish -- when I used to talk to my students about trade deficit,
12
I said, I don’t want to hear deficit called bad or good, just
13
deficit, because there’s not easy way to characterize it.
14
VICE CHAIRMAN PAPADIMITRIOU:
15
MR. BLECKER:
16
Well, I certainly agree that just looking at the
Professor Blecker.
Thank you.
17
deficit number and assuming that it’s bad is too simplistic.
18
it’s quite true that there are many good things that can happen in
19
an economy that can cause a trade deficit to rise.
20
would be
21
finance investment in order to grow, and such a country would be
22
expected to run a trade deficit.
a
poor
developing
country
that
needed
And
An example
to
borrow
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to
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But this brings me back to the analogy that Dr.
2
Makin raised earlier -- the young household that has a net debt
3
position but it’s only about one-eighth of their income.
4
problem with this is that the young household analogy is better
5
for a poor developing country than for the United States.
The
6
I view the United States more like a middle-aged
7
couple approaching retirement, in which case, we shouldn’t be
8
doing all this borrowing every year.
9
and saving for retirement, lending to those young folks out there
10
who are setting up their families and buying houses or building
11
their economies, as the case may be.
12
depending on how you use that analogy, it may not look so good.
13
We should be putting away
And, so I think that
Now let me flag a few reasons why I think it is
14
useful
15
conversations we’re having about the causes lead us back to these
16
underlying issues, which are so important.
to
discuss
the
trade
balance.
17
Secondly, the --
18
COMMISSIONER RUMSFELD:
19
First
of
all,
these
But can we deal with those
underlying issues directly, is my point.
20
MR. BLECKER:
Well, perhaps we can, but this is
21
where they all come together and where the public gets interested,
22
perhaps.
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But
also
the
current
account
number
tells
us
2
something.
3
abroad every year; therefore, it tells us what we’re adding to our
4
net international debt.
5
look very scary, if they keep going at the way they are going, it
6
will not be very many years before they do start to look scary,
7
and those investors who are now so happily parking their money
8
here may decide that it’s time to pull it out and send it abroad.
9
And it would not take a very large change in investors’ sentiment
10
And what it tells us is what we’re borrowing from
And while those numbers at present do not
to force a major adjustment here.
11
That is not accurate.
There are now over $5 trillion of outstanding U.S.
12
financial liabilities to foreigners.
13
of that was sold off, it would force us to balance the current
14
account
15
adjustments: either
16
significant recession.
overnight,
and
a
that
major
If only five or six percent
would
fall
require
in
the
some
dollar’s
very
painful
value
or
a
17
So, there is a vulnerability that is created by the
18
running of current account deficits year after year, and if we
19
don’t look at it, then I think we’re ignoring potential problems
20
down the road.
21
VICE CHAIRMAN PAPADIMITRIOU:
22
Commissioner Krueger.
Thank you.
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COMMISSIONER KRUEGER:
2
Thank you all for your testimony, and I think we
Thank you.
3
all
4
afternoon,
5
relationship underneath it and all that.
are
basically
that
persuaded,
we’ve
got
based
the
on
this
saving
morning
identity
and
and
this
it’s
6
But I’d like to follow up for a minute, if I can,
7
with Professor Blecker, because you’ve been -- we’ve got the young
8
couple --
9
MR. BLECKER:
10
I’m having trouble hearing?
11
12
Could you please speak in the mic;
COMMISSIONER KRUEGER:
Sorry, mic was turned that
way; my apologies.
13
We have this analogy going of the young couple and
14
their borrowing, and you’re worried about the United States being
15
middle-aged.
16
world.
17
here
18
judgment of the deficit on current account, as contrasted with
19
many developing countries where indeed the reason they’re not
20
doing well is the rate of return on investment is low?
is
There is evidence that the rate of return on investments
higher.
21
22
We are growing more rapidly than the rest of the
Does
this
not,
to
some
extent,
alter
your
And connected with that, you talked about the debt
we had here.
I think the examination of the capital inflow
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suggests that a great deal of it is equity and not short-term
2
borrowing.
3
might want to comment on in terms of your interpretation of the
4
deficit.
And that, it seems to me, also might be something you
5
6
MR. BLECKER:
many good questions.
7
Thank you, Dr. Krueger, you raise
Let me try to tackle a few of those.
First of all, as someone said this morning, equity
8
ownership
9
investment in a plant in the United States, that’s one thing; it’s
varies.
If
we’re
talking
about
direct
foreign
10
not likely to be sold off in a hurry.
11
shares of some stock on Wall Street is something you can sell off
12
very quickly, so that a lot of that equity ownership is quite
13
liquid and could be liquidated in a crisis or panic.
14
But a portfolio of 500
Regarding the rates of return, that’s a complicated
15
issue.
16
the last
17
debtor, why don’t we see large net outflows of investment income?
18
And in fact every time they revise the statistics, the point at
19
which it turns negative gets pushed up -- now, it’s up to 1998 I
20
think.
21
investment
22
outflows
One of the mysteries that you’re probably aware of over
decade
has
been:
if
we’re
such
a
big
international
And what’s happening is that the net inflows of direct
income
of
have,
interest
until
and
recently,
dividend
income
outweighed
on
the
the
net
portfolio
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investment and bank loans.
2
And some very good studies have been done at the
3
Levy Institute, where Dr. Kregel works, and elsewhere, which show
4
that for
5
abroad.
6
and we also have had a huge net inflow of direct investment income
7
relative to the net outflow of portfolio or interest income.
8
Thus,
9
financial investment, but is not true for direct investment.
the
direct
investment
the
rate
of
return
is
higher
We have a net, positive position for direct investment,
what
you
said
about
rates
of
return
may
be
true
for
10
Regarding the rates of return on financial assets
11
-- and this, again, gets back to the relative states of the U.S.
12
economy and the rest of the world -- it’s true that rates of
13
return on financial assets are higher here.
14
the glass as half empty or half full.
15
strength or is it a sign of the rest of the world’s weakness?
16
also should not forget that higher interest rates in the U.S. can
17
be
18
depreciation.
interpreted
19
as
And
signaling
what
an
concerns
But you can look at
Is it a sign of our
expectation
of
future
me
if
we
is
that
We
dollar
don’t
pay
20
attention to the other side of the coin, the weakness of the rest
21
of the world, that if we make adjustments that push us in a
22
downward direction without the rest of the world recovering, we
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have a recipe for some very serious global problems.
2
So, rather than just patting ourselves on the back
3
about how well we’re doing, we need to look about how to revive
4
the rest of the world economy, and in so doing, we will lessen the
5
amount of adjustment that we have to do.
6
VICE CHAIRMAN PAPADIMITRIOU:
7
COMMISSIONER D’AMATO:
8
This morning, we heard from folks who talked about
9
the deficit as being unsustainable.
Commissioner D’Amato.
Thank you, Mr. Chairman.
I believe that Mr. Rubin and
10
Mr. Greenspan both have called the deficit unsustainable.
11
having
12
unsustainability becomes some kind of crisis or recession.
13
a
little
trouble
According
to
understanding
the
numbers
at
released
what
today,
I’m
level
we’re
14
running a current account deficit at the annual rate of $300
15
billion, with half that deficit attributable to Asia.
16
worried about is the fragility of the global system.
17
have a four-engine airplane with one engine, and only one-engine -
18
- that being the American economy -- and that’s driving the whole
19
system.
20
And
we
keep
hearing
economists
What I’m
I mean, we
talk
about
the
21
fragile nature of the system.
22
Jeff Gorton, who as many of you know, was Under Secretary of
Yesterday, in the New York Times,
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Commerce, who is now at the Yale School of Management, had this to
2
say: "I interviewed 20 top officials on Wall Street and Washington
3
to get their views on what caused the Asian financial debacle last
4
fall.
5
for a series of financial crises over the next several years."
They didn’t agree on much except on one point:
6
Then
he
says,
"The
most
We are in
worrisome
set
of
7
circumstances relates to the United States, which for the last few
8
years has been single-handedly supporting the world economy," and
9
he cites the soaring trade deficits, and downward pressure on the
10
dollar as a sign that something is amiss and one of the things
11
that could trigger some kind of a problem.
12
Let me see if I can focus the question -- we’re
13
trying to predict the future.
14
the future -- that the darkness lies one inch ahead.
15
have a little trouble looking through the darkness.
16
The
There’s an old Chinese adage about
Economists’
Intelligence
Unit
I think we
predicted
two
17
weeks ago that American growth would reduce from about 3.9 percent
18
this year, to less than half that -- 1.7 percent in two years.
19
So, if our growth is going to be reduced by more than half over
20
two years, what would be the implication for the deficit and the
21
sustainability of those numbers.
22
Could
it
be
What if they kept going up?
triggered
by
an
event
abroad?
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I
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understand that the Chinese economy is getting more and more
2
dependent on exports to the United States.
3
United States from China drop off because of a rapid decrease in
4
American growth and that triggers a Chinese currency devaluation,
5
what
6
sustainability of this deficit?
would
7
that
do
So,
I’m
for
the
really
global
asking
a
If exports to the
economy
and
question
of
for
the
thresholds
8
here, which is hard to answer, but I’m hearing a lot of optimism,
9
today.
Yet I keep hearing the unsustainability argument, and I
10
don’t understand what that means.
11
So,
in
terms
of
a
reduction
in
growth
and
the
12
impact on our global partners and the increase in these deficits,
13
how long can we continue under this scenario before we reach some
14
kind of trouble?
15
try that?
16
And, what would that trouble be?
Who wants to
Mr. Blecker?
MR. MAKIN:
Well, these are important questions,
17
things I think about every day, and I’m reminded first of what my
18
friend, Herb Stein, says, if something can’t continue forever, it
19
won’t.
20
It’s
clear
that
the
good
performance,
the
21
extraordinary performance of the U.S. economy over the past year
22
with an actual strengthening of the dollar at least until July,
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lower interest rates, faster growth, lower inflation, was partly
2
due to the backwash of the Asian crisis.
3
the world is not demanding resources, if money is seeking a safe
4
haven in the United States, and the Fed is cutting interest rates
5
in order to give relief to the rest of the world, that’s going to
6
give a surge to U.S. absorption.
7
deficit will go up.
8
Flip
side,
That is, if the rest of
And, so the current account
probably,
as
the
rest
of
the
world
9
recovers -- we hope it does -- the proximate symptoms in the U.S.
10
will be initially negative; that is, interest rates may rise
11
negative for the rapid growth of the economy.
12
rise, the dollar may weaken as flows to the United States slow
13
down, and the rate of growth may slow.
14
Interest rates may
However, when people say, what if the rest of the
15
world
16
experiment,
17
performed when everybody was grumbling about the U.S. and the
18
strength of the dollar.
stops
19
investing
which
in
here,
1971,
I
always
then
like
Treasury
to
perform
Secretary
an
Connolly
He said, "Fine, let’s let the dollar depreciate by
20
25 percent.
21
the
22
percent.
U.S.
Let’s suppose that everybody doesn’t want to finance
current
The
account,
United
and
States
the
then
dollar
becomes
depreciates
the
world’s
by
major
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1
exporter of deflation, while others get to import some reflation,
2
and how would European producers and Asian producers like to
3
compete with American companies in a global marketplace with the
4
dollar 25 percent weaker?"
5
My guess is that the answer would be they would not
6
be terribly eager to compete under those conditions, and it’s that
7
fact and the implicit attractiveness of the U.S. as a strong, good
8
producer that will keep the dollar from collapsing.
9
It may go down a bit, and it may go down for
10
reasons that are perhaps constructive for the balance of growth in
11
the
12
recovering, and so we have to have some adjustments here where the
13
U.S. grows a little more slowly, and the rest of the world grows a
14
little more rapidly.
world
economy;
that
is,
Japan’s
recovering,
Europe’s
15
But I don’t see it as a sort of we’re heading for
16
the edge of a cliff, and the world’s going to come to an end;
17
rather, we’ll get an adjustment, and the rate at which the U.S.
18
can grow without inflation when the rest of the world is growing
19
may not be four percent, which is where we are now.
20
three percent, which is what the Fed guesses it is.
21
require a transitional period of higher interest rates.
22
It may be
And that may
These are all, it seems to me, natural adjustments
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that in the process of making them will be a little bit painful
2
but the key point to recognize is that it’s probably not good to
3
continue, to use your analogy, to have the U.S. be the only engine
4
of growth.
5
are also growing, we’ll have some adjustment pains for the U.S.
6
that will include higher interest rates and perhaps a weaker
7
dollar.
And if we go through a period where other countries
8
But there, again, I don’t -- I guess, ultimately,
9
these things come down to what policy measures ought to be taken?
10
Should we step in to strengthen the dollar?
11
newspaper
12
strengthen the dollar.
13
preventing an adjustment process that’s going on.
14
today,
the
dollar
goes
down,
oh,
It was in the
we
should
Why would we want to do that?
all
That’s
Should the Fed not raise interest rates, if we get
15
some pressure on inflation?
16
do that, interest ultimately go up more anyway.
I don’t think so, because when they
17
What we may be entering is a period where we are
18
seeing a desirable redistribution of growth from the U.S. to
19
elsewhere, and, ultimately, it’s a more sustainable global economy
20
where growth rates are a little more evenly distributed, and the
21
U.S. isn’t the only engine of growth.
22
So, I see these things happening.
I don’t see any
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1
major policy initiatives that are needed, and I don’t see anything
2
bad about it.
3
the kinds of things that happen when you’re going through an
4
adjustment.
I mean, this is a cyclical economy, and these are
5
We had an extraordinary event in Asia and emerging
6
markets since 1997, which was there a tremendous amount of excess
7
capacity in those economies, and that created a very constructive
8
situation for the U.S., because those countries weren’t bidding
9
for raw materials; for a while they weren’t bidding for capital.
10
So, we’ve had, kind of, the wind at our back.
11
As
those
countries
begin
to
recover,
we
get
a
12
little bit of a headwind, and I think we have to be prepared for
13
that.
14
with China with anymore," I don’t think that would leave us better
15
off; it certainly wouldn’t leave China better off.
16
COMMISSIONER D’AMATO:
17
MR.
But if we were to respond by saying, "Oh, let’s not trade
BLECKER:
I
Professor Blecker?
think
there’s
actually
a
fair
18
amount of agreement here that some kind of adjustment is coming,
19
and the question is, is there going to be a hard landing, a soft
20
landing, and so on?
21
I would not want to predict a collapse.
22
wouldn’t want to rule one out.
And certainly we cannot predict a collapse.
On the other hand, I
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1
One of the things we should have learned from the
2
Mexican and Asian crises and other crises in recent years is just
3
how unpredictable these things are.
4
the statistics in advance foreshadowings of what’s to come.
5
see the big current account deficits; you see the overvalued
6
currencies; you see the handwriting on the wall that an adjustment
7
is coming.
8
9
You can see if you look at
But it may be better or may be worse.
You
It may be
benign and gradual, as has been suggested by some experts here, or
10
it may be much more severe.
11
officials and business leaders before 1994 and by Asians before
12
1997 that said just what we’ve been hearing here, that their big
13
deficits were just a sign of the strength of their economies and
14
that the whole world wanted to pour funds into their emerging
15
markets.
16
We can look at statements by Mexican
Well, they did for awhile, but it didn’t last.
Now, we’re not Mexico or Thailand.
We do have a
17
much more capable Federal Reserve and regulatory system and so on,
18
but still we have to keep on top of these things, and we have to
19
not make those policy overreactions --
20
Dr. Makin -- not make those overreactions that would turn a needed
21
correction of the dollar into a rout for the real economy.
22
error, I think, would lie in excessively raising interest rates to
here, again, I agree with
That
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1
try to rescue the dollar.
2
worst thing we could do.
I think that would be just about the
3
COMMISSIONER D’AMATO:
4
MR. GRISWOLD:
Mr. Griswold.
If I could just add that economists
5
are on notoriously shaky ground when they make predictions about
6
the future.
7
of growth in the future.
8
happened in the last year, never mind predicting what’s going to
9
happen in the next year.
I wouldn’t put a whole lot of weight in predictions
They have a hard enough time explaining
10
But I think the U.S. economy’s on a fundamentally
11
different foundation than Mexico and the East Asian economies,
12
where I think we have a more transparent and efficient capital
13
market.
14
meltdown is to pursue sound domestic policies.
And the best we can do to avoid an East Asian type
15
But let me say, I think -- about the sustainability
16
of the U.S. current account deficit, if you look at the foreign
17
ownership of U.S. assets as a percentage of our assets, it’s still
18
relatively low.
19
something like 11 or 12 percent, which I don’t think is alarming
20
for any reason.
21
22
The Council of Economic Advisors puts it at
And also as foreigners accumulate more assets in
the
United
States,
it
increases
their
stake
in
our
economic
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1
success and stability.
2
want to yank their money out when it will just compound their
3
losses?
4
assets gives them a higher stake in ensuring our stability, and I
5
don’t think you’ll see the kind of panic that you saw in those
6
East Asian economies that were fundamentally unsound but that was
7
hidden from investors by their lack of transparency.
Why in the world would foreign investors
So, I think, if anything, foreign ownership of U.S.
8
COMMISSIONER D’AMATO:
9
MS. BATES:
Ms. Bates?
I would just add one point to this.
10
When we talk about unsustainable, I think people are generally
11
referring to the current account deficit and/or the strength of
12
the dollar rather than the growth rate of the U.S. economy.
13
make that distinction a little bit clear.
I’ll
14
The other analogy that I’d like to draw to build on
15
what we’ve been saying here is my experience being from Britain
16
when the pound came out of the ERM in 1992, there was a sharp
17
devaluation of the pound, and people were very concerned that this
18
was going to cause a similar crisis domestically as had happened
19
with some other countries, and it didn’t, largely because of the
20
institutions
21
economy.
22
were predicting, and the economy adjusted and actually had a bout
within
the
UK
economy,
the
flexibility
of
the
We did not have the high rates of inflation that people
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1
of growth as a result.
2
So, I think we’ve sort of all been saying that at
3
some point there’s going to be a readjustment, and a large degree
4
of whether that will have a negative impact on the U.S. economy
5
depends on domestic institutions and strength of the U.S. economy.
6
So, I’d say it’s less of a concern than it would be
7
for some Asian economies or other countries.
8
VICE CHAIRMAN PAPADIMITRIOU:
9
COMMISSIONER WESSEL:
10
Commissioner Wessel.
Excuse me, thank you.
We’re presently having a debate in Washington, as
11
I’m
12
surpluses, which some say will continue as far as the eye can see.
13
And there is a raging debate as to what to do with
sure
you
all
know,
due
to
our
14
that.
15
argue that we should pay down the debt.
large
and
growing
budget
First are those who argue for large tax cuts, and others
16
As
I
understand
it,
that
debt
is
negative
17
dissavings by the Federal Government, and my question would be:
18
Which would be the better policy option for us to pursue in terms
19
of looking at the trade balance itself and what impact it might
20
have on that?
21
22
MR. GRISWOLD:
I think if your focus is strictly on
the current account deficit, the best thing you could do is for
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135
1
the
2
outstanding debt, because that’s a form of public savings, which
3
would tend to shrink the deficit.
Government
to
hold
onto
that
money
and
buy
down
the
4
But I think you have to look beyond that and look
5
at the health of the U.S. economy, and then the debate becomes, is
6
that money better used to buy down the debt or to put back in the
7
private sector to fuel more investment?
8
economy to grow more rapidly, then that very well could expand the
9
trade deficit, but I don’t think that would be a cause for alarm
10
And if it causes the U.S.
for all the reasons we’ve tried to lay out here today.
11
MR. BLECKER:
I’d like to add to that that under
12
present circumstances, a tax cut, especially one heavily weighted
13
toward individual income taxes, would be just about the worst
14
possible thing, because it would only further fuel the consumer
15
boom that is leading to the low saving rate and contributing to
16
the large trade deficit.
17
And,
as
Dr.
Mann
said
in
the
morning
session,
18
consumers have the highest propensity to import of any group of
19
spenders in the economy.
20
balance, a personal income tax cut would only worse the situation.
21
22
Of
course
So, from the standpoint of the trade
all
those
forecasts
of
the
gigantic
future budget surpluses have to be taken with considerable grains
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1
of salt for the reasons I’ve stated about our ability to predict
2
the future.
3
deficits ad infinitum as far as the eye could see.
4
be very cautious, first of all, about whether or not the large
5
surpluses will really come to pass.
Just a few years ago, we were predicting large budget
So, we need to
6
But there’s also a third deficit, which is the
7
deficit in public investment, or the deficit in infrastructure,
8
education, health, and the many areas that the public sector is
9
legitimately responsible for.
And I think one of the things we
10
need to look at is a reorientation of our fiscal policy toward
11
providing more of that.
12
Hill right now, but I think it needs to come back onto the agenda
13
as a third option in terms of what to do with the budget surplus,
14
if in fact there is one, and such public investment could only
15
help to improve our international competitiveness.
16
I know it’s not on the agenda here on the
VICE CHAIRMAN PAPADIMITRIOU:
May I ask you to hold
17
off for one minute, because I know Commissioner Rumsfeld has to
18
leave --
19
COMMISSIONER RUMSFELD:
One question.
Newspapers
20
or
21
information revolution, the Internet and the advances in computer
22
power and telecommunications.
magazines
and
journals
are
filled
with
talk
about
the
There are economists who opine that
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137
1
these things that are happening at such a rapid rate are having an
2
effect on our economy.
3
implications for the current accounts balance or deficit?
4
Does anyone want to comment on their
MR. GRISWOLD:
Mr. Rumsfeld, you raise a very good
5
point, and I think that’s why it is entirely mistaken to think of
6
the United States in terms of a middle-aged couple about ready to
7
retire.
8
and economic revolution in the world.
In many ways, we are on the cutting edge of technological
9
In some ways, we’re the most developed economy in
10
the world, and yet we are a developing economy, and that’s why I
11
think it’s very shortsighted to think there’s something wrong with
12
us investing so much and investing it so effectively.
13
I
think
we’re
finally,
as
Chairman
speeches
recently,
Greenspan’s
14
pointed
15
reaping some of the productivity gains from technology.
16
think that’s reflected in the returns on investment, and that’s
17
what’s drawing investment from around the world.
18
out
in
a
So,
number
I
of
think
in
some
ways
the
we’re
current
finally
And I
account
19
deficit is a sign that the world sees that we are on the cutting
20
edge of a very important technological revolution.
21
it’s, I think, a big mistake to look at the current account
22
deficit as a problem when in fact it’s a sign of some very
And that’s why
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1
fundamentally good things going on in the economy.
2
COMMISSIONER RUMSFELD:
3
Dr. Makin.
4
MR. MAKIN:
Thank you very much.
It’s too bad the commissioner’s won’t
5
be able to get to hear us disagree on the panel, but I want to
6
register a sharp disagreement with the notion that cutting taxes
7
would be a bad idea.
8
One
of
the
problems
that
the
United
States
is
9
facing is that as the economy expands and as the stock of capital
10
has grown rapidly in an investment-led expansion -- and my numbers
11
on the capital stock relative to GDP are taken from the income
12
accounts, and they show it rising rapidly -- the rise in the
13
capital stock is pushing up labor productivity, and wages are
14
rising.
15
But, as Chairman Greenspan has clearly indicated,
16
one of the constraints we’re beginning to face is on the available
17
supply of labor.
18
tremendous investment opportunities that may be constrained by the
19
growth of the available supply of labor, that a reduction in tax
20
rates, to use the whatever we’re talking about here, an immediate
21
sharp reduction in tax rates, which increases the amount that
22
households get to keep after they work, would be an excellent
It strikes me that in an economy that has
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1
investment in maintaining both sustainable growth in the United
2
States and a sustainable and rising current account deficit.
3
If we have a rising current account deficit because
4
the available supply of labor rises and production opportunities
5
increase in the United States and people are more anxious to
6
invest here, I see absolutely nothing wrong with that.
7
I
would
add
that
the
evidence
on
the
rates
of
8
return to so-called public investment is mixed at best.
9
much rather invest in individuals by letting them keep more of
10
what they earn.
11
12
I would
VICE
CHAIRMAN
PAPADIMITRIOU:
Commissioner
Zoellick.
13
COMMISSIONER ZOELLICK:
Thank you.
I’d first like
14
to thank all four of you -- thank you -- for your testimonies,
15
which I found very helpful.
16
I think I understand the economic theory, but I’d
17
like to test it with some history.
18
have two -- is for Mr. Makin and Ms. Bates.
And, so my first question -- I
19
As I recall, the United States was a debtor country
20
until about 1914, and then we became a creditor country for a
21
number of
22
position.
decades,
and
then,
again,
we
moved
into
a
deficit
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140
1
So, my question is, if the argument today is that
2
because the United States is an appealing location for investment
3
and therefore we are drawing capital into the country and because
4
we don’t have the appropriate savings to supply that capital and
5
therefore we’re running the current account deficit, why wasn’t
6
that true in the United States for much of the 20th century when I
7
also would have thought the investment climate would have been
8
attractive other than in the Great Depression?
9
The second question is to Mr. Griswold and Mr.
10
Blecker, and it refers to more recent history.
11
is all a question of degree, but given the size and direction of
12
current account deficits and given the fact that I think all four
13
of you and the other four panelists all talked about the exchange
14
rate as an adjustment mechanism, why do you think the dollar has
15
stayed relatively strong given the increasing size of the current
16
account deficit?
17
18
MR. MAKIN:
I recognize this
Well, I’d rather answer the second
question, but I’ll try the first.
19
I
think
the
question
20
situation
21
opportunities in the United States --
22
COMMISSIONER ZOELLICK:
where
investment
is
why
opportunities
didn’t
we
exceeded
see
savings
And why didn’t we therefore
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141
1
run a current account deficit from 1914 to 60-something?
2
MR. MAKIN:
Well, you have the advantage on me,
3
since I don’t know what the numbers look like, but I’ll take it
4
that we ran a current account surplus during that time.
5
Again, the superficial explanation would be that
6
domestic savings relative to investment was more adequate; that
7
is, American households were more willing and anxious to finance a
8
rapidly rising investment in the United States than they are
9
today. And, so in that case we could have seen an investment boom
10
that was more financed domestically.
11
the right answer, but approximately that might be it.
12
The
Government
I don’t know whether that’s
budgetary
surplus
or
deficit
in
13
peacetime would have been fairly inconsequential at that time.
14
So, I’m guessing that we would have seen a much higher level of
15
participation by American investors in let’s say the rapid growth
16
in the ’20s than we are seeing today.
17
18
And that might -- let me just add, actually, now I
think I have the answer.
19
Well, in the ’20s, remember --
20
COMMISSIONER ZOELLICK:
21
MR. MAKIN:
22
The first one wasn’t bad.
In the ’20s, remember the Europeans
weren’t in a big position to invest heavily in the United States,
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1
nor were the Japanese.
2
in the mid-’20s and the Europeans were recovering from a serious
3
war.
4
And
so
The Japanese entered a serious depression
if
investment
growth
was
going
to
be
5
financed in the United States, it would have to come -- or it
6
would be more likely to come from domestic American investors
7
where
8
unscathed at home in terms of its productive capacity by the war,
9
leaving aside the tragic loss of life.
10
the
United
States
was
fortunate
COMMISSIONER ZOELLICK:
12
MS. BATES:
been
So, I think we came out of
Ms. Bates?
I’d just add a couple of points to
Obviously, in the 1920’s and ’30s, most countries
were still on the gold standard, and that had and impact --
16
17
have
that, looking at it from obviously the European perspective.
14
15
to
the war awfully well, and so we were able to finance.
11
13
enough
COMMISSIONER
ZOELLICK:
Could
you
speak
up
a
little?
18
MS. BATES:
I’m sorry.
During the 1920’s and -- or
19
at least
20
standard, and that had an impact in terms of capital flows around
21
the world.
22
at that point.
during
the
1920’s,
most
countries
were
on
the
gold
We were in a very different international environment
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143
1
And, historically, although people have made the
2
comparison that the early 20th century was a time of great capital
3
liberalization, similar to the period that we have now, one of the
4
points that’s often missed is most of that capital was flowing to
5
empire or ex-empire, and so there were very different motivations
6
for the sort of international investments.
7
source at that point was still the UK, and it was looking to other
8
parts of the world.
Of course, the major
9
So, some of the political and institutional changes
10
that have happened, certainly since the second world war, had a
11
major
12
therefore in investment decisions.
impact
13
14
on
the
flows
of
capital
COMMISSIONER ZOELLICK:
around
the
world,
and
And then my dollar value
question?
15
MR. BLECKER:
Actually, I think it’s related to the
16
first question, but the short answer, why does the dollar stay
17
high if the trade deficit is so big, is that, today, the causality
18
is starting with the capital account and the capital flows, and
19
since the financial flows are coming in pursuit of the higher
20
interest rates and the attractive financial market conditions, the
21
booming stock market, and so on, that’s keeping the dollar up, and
22
the trade deficit is the effect and not the cause.
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1
The reason this relates to your other question is
2
that if we think about the period where the U.S. mostly had a
3
current account surplus, let’s say from the ’30s through the ’70s,
4
it was actually a time of relatively closed capital markets.
5
And
we’ve
had
a
lot
of
capital
market
6
liberalization since the ’70s, or starting in the ’70s, and since
7
then, here and in other countries which didn’t previously allow
8
outflows.
9
somewhere around 1980, if I recall correctly.
For
example,
Japan
liberalized
capital
outflows
And, of course, the
10
pre-World War I period was a period of greater financial market
11
liberalization.
12
And it’s actually quite interesting, in both the
13
period before World War I and the last few decades of financial
14
market liberalization, both times, the U.S. has ended up being a
15
net borrowing country.
16
I’m not enough of an economic historian to think on
17
my feet about exactly what that means for us, but I would say
18
this:
19
driver’s seat, they are adversely affecting other sectors of the
20
economy, such as manufacturing, agriculture, and even services.
That to the extent that the financial flows are in the
21
The big surplus in services just shrank last year
22
with all the financial crises, and so I wonder if we have not
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145
1
gotten
2
financial markets and if it’s not time to rethink some of that in
3
order to stabilize financial markets and bring currency values
4
back more into line with balanced trade flows and more sustainable
5
and balanced growth.
to
the
point
of
overderegulating
6
COMMISSIONER ZOELLICK:
7
MR. GRISWOLD:
and
overliberalizing
Mr. Griswold.
I think the fact that the dollar and
8
the trade deficit have grown in tandem is evidence that the cause
9
flows from capital flows to the current account.
Basically, you
10
have a strong dollar because in order to buy U.S. assets, of
11
course, foreigners have to obtain dollars first.
12
And as to its impacting manufacturing, I think the
13
evidence I presented earlier shows that that is simply not true.
14
If you look at the industrial production figures, if you look at
15
manufacturing output, they have grown very rapidly during the
16
1990’s, at a time when our trade deficit has also grown, for the
17
reasons that as investment has grown so, too, has production.
18
So, I don’t think there’s any tradeoff between a
19
large current account and manufacturing.
20
a very strong investment environment in this country.
21
aiding our manufacturing; It is aiding the strong dollar, and
22
leading to our large current account.
At this moment, we have
It is
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1
COMMISSIONER ZOELLICK:
2
VICE CHAIRMAN PAPADIMITRIOU:
3
COMMISSIONER BECKER:
4
Most working people in the United States, their
5
families and communities believe that we’re on the wrong track
6
with our trade policies in this country.
7
taken that’s indicated this.
8
jobs,
9
deficits being run up every month.
and
there’s
some
Thank you.
Commissioner Becker.
Yes, thank you, Mr. Chairman.
Poll after poll has been
I think they relate the deficit to
support
for
this
when
we
see
record
10
At the same time, we see records being run that
11
sort of seem to parallel this, the loss of manufacturing jobs in
12
the United States.
13
These are the kind of jobs that help you participate in the
14
American dream; you can own a home; you can buy a car; you can
15
educate your children; you pay your taxes; you support the social
16
programs of the United States.
17
Medicare and the Social Security.
18
minimum wage jobs.
19
manufacturing jobs and industries in America today.
20
These are usually family-supported jobs.
These are the kind that pays the
You don’t provide for these on
There’s a lot of hurt going on in a lot of
One of you said a little bit earlier that we have
21
to suffer a little more pain, perhaps.
22
that’s suffering the pain.
Well, these are the people
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1
And I question the relationship between the trade
2
deficit and the manufacturing job loss, and I would ask to what
3
degree do you believe that the deficit causes job loss in the
4
United States?
5
loss increase the trade deficit?
6
Conversely, to what degree does manufacturing job
MR. BLECKER:
If I might begin on that, this is a
7
complicated issue.
8
about 30 years, 4.3 percent.
9
believe that the trade deficit is reducing the total number of
10
jobs in the economy, and there is some truth to what’s been said
11
here today, that because we’re a booming economy, we’re buying a
12
lot
13
depressed.
14
a trade deficit.
of
imports
15
Today, we have the lowest unemployment rate in
from
all
It is very hard, based on that, to
the
other
economies
that
are
more
They’re not buying our exports, and that’s why we have
However,
where
the
trade
deficit
is
having
its
16
impact, or the trade flows that underlie the deficit, are having
17
their impact is on the composition of employment.
18
goods
19
tradeable parts of services -- are the ones taking the hit.
20
so the way we’re maintaining the closest thing to full employment
21
we’ve seen in a long time is by changing the nature of employment
22
out of tradeable goods industries and into non-tradeable services.
industries
--
manufacturing
and
The tradeable
agriculture
and
the
And,
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1
And, for the most part, the comparison that you
2
made is accurate in that the jobs that we’re creating in those
3
non-tradeable areas are not as good jobs in terms of the pay, the
4
benefits, the security, and so on.
5
family is still feeling the pain you described.
6
job in the steel industry and you get a job as a night watchman in
7
a warehouse or something like that, it’s not the same in terms of
8
the income and the security and the benefits.
9
And that’s why the average
If you lose your
So, the effect is on the type of jobs, the quality
10
of the jobs.
11
gap between imports and exports over the last few years, actually
12
a lot of it is due to drying up export markets, which is certainly
13
hurting the manufacturing sector and agriculture, as well.
14
that’s what’s happening -- a change in the composition of jobs.
15
You can see, if you look at my figure 9, the yawning
And
But to the person who loses their job, the job is
16
lost.
17
McDonald’s, but in the aggregate that’s what’s happening.
It’s no comfort to them that somebody else got a job at
18
COMMISSIONER BECKER:
Let me put one more figure in
19
there, then.
20
billion dollars of exports that we generate in this country, we
21
create 13,000 jobs.
22
every billion dollars of imports that we have coming into the
The Department of Labor estimates that for every
Shouldn’t the same work in reverse?
For
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1
United States, we’ve lost 13,000 jobs?
2
the $300 billion deficit that we’re roaring into, or $360 billion,
3
or more by the end of this year, will amount to the loss of more
4
than 2.5 million jobs, right?
5
6
MR. BLECKER:
And if that’s true, then
Well, it does, but those jobs are
replaced by jobs elsewhere, just not as good jobs.
7
MR.
GRISWOLD:
I
think
it’s
a
terrible
8
misunderstanding to think that trade policy determines the total
9
number of jobs.
It does not.
It may determine the composition of
10
jobs and I think favorably so.
11
that are more productive than those that are replaced.
12
Trade allows us to move into jobs
If you look at the correlation between imports and
13
job creation, they’re actually positively correlated.
14
imports we have into this country -- the more imports grow each
15
year, the more jobs are created.
16
that, the more jobs we have, the more imports we can afford to
17
buy.
The more
And actually the causation goes
18
And if you look at manufacturing jobs, they were
19
actually growing significantly during this decade up until the
20
Asian crisis.
21
several hundred thousand manufacturing jobs in this country at a
22
time when the trade deficit was growing significantly.
If you look from 1992 until mid-1997, we had added
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1
What’s happened in the last two year is not because
2
of the trade deficit itself, but because the bottom has fallen out
3
of export growth, and that has hit farming and manufacturing.
4
up until mid-1997, when we had a very large trade deficit -- it
5
wasn’t as large as it is now -- but manufacturing was growing
6
significantly.
7
And one last thing on wages.
But
Over the last two
8
years, real wages in the United States have moved up sharply, up
9
and the down the income scale, at a time when you all know that
10
the trade deficit has grown even faster than before.
11
there’s no theoretical basis and there’s absolutely no empirical
12
evidence to link the trade deficit to either declining jobs or
13
declining wages.
14
of that.
So, I think
And the last two years stand in stark evidence
15
COMMISSIONER BECKER:
16
MR. MAKIN:
Dr. Makin.
I would be very sympathetic with Mr.
17
Becker’s comments, if I could see some numbers that showed some
18
pain in the manufacturing sector.
19
watch it very closely, because I’m very interested in possible
20
inflation pressures in the pipeline.
21
growth and decompose it into manufacturing, services, and other
22
sectors, what you will find is that the wages in the manufacturing
But, as a matter of fact, I
But if you look at wage
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1
sector, wage growth has accelerated rapidly.
2
In
1998,
wage
growth
in
manufacturing
was
3
relatively slow at a 1.6 annual rate.
4
reason
5
annualized rate of increase in hourly earnings in manufacturing is
6
7.5 percent.
7
picking up and going out and paying up for labor.
8
think that labor would be happy.
to
be
9
optimistic
--
in
But this may give you some
the
last
three
months,
the
So, I see evidence that the manufacturing sector is
COMMISSIONER BECKER:
So, I would
But this is precisely why the
10
Chairman
11
interest rates because the workers might get a few bucks more for
12
their work and consequently may be able to save some money.
13
we want to jack up interest rates now, so we’ll have a downturn
14
and curtail domestic spending and get people laid off.
15
the right track to be going on?
of
16
the
Federal
MR. MAKIN:
Reserve,
Greenspan,
wants
to
raise
So,
Is this
You can take that up with Chairman
17
Greenspan.
18
prospering here, and the real wage increases in manufacturing are
19
rising rapidly.
20
But my point is that the manufacturing sector is
Chairman Greenspan is not going to worry if one
21
sector does well relative to another.
22
what would concern him, if they were in excess of productivity
Overall wage increases are
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1
growth.
2
increases have accelerated to about a 4.5 percent annual rate over
3
the past three months, and so far as I can see, the Fed has raised
4
rates by 25 basis points after having cut them by 75 last fall.
5
It doesn’t seem too drastic to me.
And, there, the evidence if far more mixed.
Overall wage
6
I think what Chairman Greenspan would probably say
7
is, "Look, if there is inflation pressure -- and we could argue
8
about that -- if there is inflation pressure and we do nothing,
9
the market will raise interest rates."
10
So, you can pay me now or
pay me later is I think the Fed’s attitude.
11
But what I wanted to point out is that in this
12
period of time, when we have a rapidly rising trade deficit, there
13
are
14
certainly see as a positive for the manufacturing sector is that
15
real
16
available supply of labor is somewhat limited, and therefore wages
17
are being bid higher, and that’s a good thing.
some
wage
expressions
growth
is
of
concern.
One
accelerating,
18
COMMISSIONER BECKER:
19
MS. BATES:
of
and
the
it’s
things
clear
that
that
I
the
Ms. Bates?
I’d like to address your question about
20
trade and jobs by taking a slightly different tack.
21
of the points that hasn’t been brought up quite so clearly is the
22
impact of productivity change and general economic change on the
I think one
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153
1
economy and on the U.S., generally, over the last ten years.
2
Most economic theory would obviously tell us that
3
trade has been a major contributing factor to the economic growth
4
that’s been happening in the U.S.
5
boom.
6
debate is that the nature of trade and the movement to the higher
7
productivity jobs involves economic change and dislocation.
It’s been helping the recent
I think one of the points that’s missed a lot in this
8
And something that’s been happening in the U.S.
9
over the last decade has been an acceleration of that process of
10
change
11
recreation, and there’s a been a net gain, but there’s a sense of
12
churning and economic change in the economy.
and
dislocation
and
churning
and
job
loss
but
job
13
And I think that is where you hit the nail on the
14
head with the fear in the public in terms of what this means and
15
why it’s coming out in an attitude against trade.
16
that’s a slightly misplaced factor to be looking at.
And I think
17
It’s more a nature of economic change within the
18
economy, itself, feeding on a sense of insecurity, but it’s being
19
driven by a productivity change and economic development within
20
the economy rather than specifically through trade.
21
And, so looking at the policy implications of that,
22
it would be more important to look at some of the domestic labor
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154
1
market institutions and structures rather than looking at trade
2
policy as the answer.
3
COMMISSIONER
BECKER:
Ms.
Bates,
I’d
like
to
4
respond to that just a little bit.
5
think you came very close to being judgmental about the quality of
6
the manufacturing jobs that’s being lost in the United States and
7
your reference to the leather industry about whether that should
8
be a matter of concern.
9
I read your testimony, and I
I represented workers in the shoe industry very
10
early
11
industries in which community well-being thrived on that single
12
industry.
13
are gone. And to simply dismiss the value of this kind of work,
14
shoe workers in the United States is wrong.
15
fault with that, and I think you are being very judgmental about
16
the kind or value of the manufacturing jobs that’s being lost in
17
the United States.
on
in
my
career.
These
were
usually
community-based
They were generally good family-supported jobs.
Those
I really -- I find
18
There are people, economists mostly, that say that
19
we can live without manufacturing in the United States. I guess we
20
could, but it wouldn’t be the same country that we have now.
21
22
MS. BATES:
that.
I think maybe I could just respond to
My reference to the leather production in my testimony was
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155
1
simply to make -- not to make the point that you’re alluding to
2
but to make the point that if you’re measuring trade balance by
3
looking at one particular aspect of trade rather than looking at
4
trade
5
statistics.
as
a
6
whole,
you’re
getting
a
misrepresentation
of
And I just was saying you could say the same thing
7
about trade in oranges or trade in any one good.
8
at an accurate data picture of the totality of economic activity.
9
That was not meant to be disparaging to any particular industry.
10
You need to look
To follow on, I’m also not suggesting that the
11
decline in
12
address the point about the nature of -- the public response to
13
the nature of the economy that we’re in right now.
14
it’s come out in a sort of attitude against trade.
manufacturing
15
jobs
is
good
or
bad;
I’m
trying
to
As you say,
I think it’s really a broader sense of economic
16
change.
17
necessarily or bad, but that the nature of this economic change is
18
much more diverse through the economy than just being driven by
19
trade, per se, and that that’s perhaps what needs to be addressed.
I’m
not
meaning
to
make
judgment
20
VICE CHAIRMAN PAPADIMITRIOU:
21
COMMISSIONER HILLS:
22
whether
it’s
good
Commissioner Hills.
I’d like to ask Dr. Makin, if
the trade deficit is a factor of our buoyant, robust investment at
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156
1
home, which has given us many, many benefits and the fact that
2
we’re
3
domestic saving, are there any measure that you would recommend
4
that would encourage greater savings at home?
5
measures have any downside or upside with respect to the health of
6
the overall economy?
unable
7
to
finance
MR. MAKIN:
that
robust
investment
from
our
own
And would those
I hesitate because I’ve spent a lot of
8
time looking at savings behavior, and I’ll first say this one
9
specific thing I would do and then suggest that it perhaps isn’t a
10
major problem.
11
I
think
probably
if
we
wanted
to
increase
the
12
saving rate, the best thing to do would be to redesign the tax
13
system and go to a consumption-based tax that would remove what
14
now amounts to a double taxation of savings.
15
issue was contemplated in 1984 at the Treasury, and the Treasury
16
decided instead to reform the income tax.
17
And of course this
And I think had we gone to a consumption-based tax
18
at
19
today we would be seeing more inclination among Americans to
20
finance the very attractive investment boom that has come along in
21
this decade.
that
22
time,
low,
uniformed,
consumption-based
tax,
probably
Having said that -- so, that’s what I would do in
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157
1
the policy arena, a more neutral tax system, quite simply.
2
said that, when you look at savings behavior across the world --
3
Europe, Japan, and the United States -- and I’m leaving aside the
4
formidable
5
Americans will always save less, all other things equal, for a
6
very simple reason:
7
future than are Japanese or Europeans’ households, typically, and
8
with good reason.
measurement
problems
--
I
would
say
Having
simply
that
Americans are more optimistic about the
9
The history of the last 100 years would suggest
10
that American households don’t have to contemplate a possible
11
major conflict being fought on their soil; maybe some awful day it
12
will happen.
13
we haven’t had major conflict here, because America has grown up
14
as a country that has expanded, its manifest destiny expanding
15
across a continent.
16
will
17
elsewhere is that it always has.
always
18
But American households are more optimistic, because
turn
And, so Americans essentially think something
up,
and
what
really,
really
annoys
people
Having said that, I’m not sure it’s a good guide to
19
policy.
20
probably, we should neutralize the tax system and at least not
21
penalize saving and have a consumption tax.
22
On the policy front, again, I would go back and say,
COMMISSIONER HILLS:
Thank you.
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1
VICE CHAIRMAN PAPADIMITRIOU:
2
COMMISSIONER LEWIS:
3
Commissioner Lewis.
I’d like to ask a question
about wages and the effect of wages on this whole issue of trade.
4
There’s an article that I read a couple of years
5
ago -- there’s premises here.
6
exports more cars to America than we export to the rest of the
7
world, and this is a recent development in Mexico.
8
question is why did their automobile industry grow the way it has?
9
I read, today, that Mexico now
So, the
Is wages one of the factors here?
10
Number two, there was an article that said, no
11
longer do countries’ trade advantages depend chiefly on their
12
natural resources -- soil, climate, or raw materials -- and to a
13
lessening degree on the availability of capital but on the ability
14
of individual firms and entrepreneurs to find their niche in
15
making a specialized set of attractive, high-quality products.
16
Well, is wages a factor in what’s happening now
17
with the trade in the world, and are we trading and buying goods
18
from other countries -- and take the Japanese automobile out of
19
the equation, because technologically it is superior in a lot of
20
ways to ours in terms of fuel consumption -- but taking that out,
21
is wages one of the key factors in why we’re in a trade imbalanced
22
situation?
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1
And then, thirdly, I read an article that said that
2
in the last 20 years, until a year ago, of the five quintals of
3
American
4
quintals have actually lost ground and two have gained ground over
5
the -- from 42, I guess, to 90.
income
levels,
four
quintals
have
actually
--
three
6
So, if wages have lost ground here for the three
7
quintals -- and I don’t know if this is accurate or not -- but if
8
they’ve lost ground here, then why are we uncompetitive with other
9
places?
Are those wages still higher than in other countries?
10
11
If the booming economy has caused an increase in
wages, why has the three lower quintals lost ground?
12
MR. MAKIN:
I’m glad you weren’t setting my exams
13
when I was trying to get a Ph.D.
14
questions.
15
16
Those are very difficult
Do you want everybody to take a shot?
Well, I’ve
talked about a lot, so --
17
MR. GRISWOLD:
I’ll be glad to take a swing at
18
that.
19
differences in wages.
20
and investment balance, and if you look at wages, it just doesn’t
21
explain -- for example, we run a large trade deficit with Japan
22
and their real wages in some measures are higher than ours.
I
think
it’s
wrong
to
ascribe
the
trade
deficit
to
I think it really comes down to the savings
And
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160
1
the same with Europe.
2
3
COMMISSIONER
LEWIS:
But
that’s
because
of
the
automobile, essentially, in Japan.
4
MR. GRISWOLD:
Well, all right.
Then, look at
5
Germany.
Germany has higher real wages than here.
We run our
6
third largest bilateral trade deficit with Germany.
Mexico has
7
wages that are much smaller; we run a bilateral deficit with them.
8
It just doesn’t explain the differences in wages.
9
COMMISSIONER LEWIS:
You have to --
Well, you may have to look at
10
the goods that were imported from these countries and how large a
11
factor is wages in the price of those goods?
12
wages might not be a large factor in the price of automobiles, but
13
they may be a large factor in the price of apparel or sneakers.
14
And from Germany, we may be buying manufactured goods, not --
15
where wages is not a significant factor.
16
MR. GRISWOLD:
17
COMMISSIONER LEWIS:
18
MR. GRISWOLD:
In other words,
Well, I’d have to look at that.
Right.
But let me just address the question
19
about the trend of wages in the United States.
20
ways the decline in real wages has been overstated, because, one,
21
I think inflation has been systematically overstated, which would
22
tend to depress real wages, because the denominator’s bigger than
I think in some
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161
1
it would otherwise be.
2
which are an increasing share of the compensation.
And also those don’t include benefits,
3
And if you add in non-wage compensation and take a
4
more realistic measure of the cost of living, you’ll find that
5
wages have not been falling; they’ve tracked relatively closely
6
with productivity, which is just what an economist will tell you.
7
Wages tend to reflect productivity.
Productivity has taken a
8
spurt upward in the mid to late ’90s, and, lo and behold, you’re
9
seeing real compensation taking a spurt upwards.
10
And as far as trade goes, you can’t just look at
11
wages; you have to look at productivity.
12
a lot less than American workers, because they’re a lot less
13
productive, not because there’s anything fundamentally wrong with
14
them as people, but because they have less capital to work with,
15
they’re less educated, and their infrastructure is less developed.
16
COMMISSIONER LEWIS:
17
plants
18
opposed to being built in America?
being
19
built
in
Mexico,
MR. GRISWOLD:
Mexican workers get paid
Then why are new automobile
if
they’re
less
productive
Well, I think production plants are
20
being built all over.
21
United States, it’s up over 50 percent since 1992.
22
deficit
has
tripled
If you look at automobile production in the
since
1992,
manufacturing
Our trade
output’s
up
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162
1
percent, automobile and automobile parts manufacturing is up over
2
50 percent. The U.S. automobile industry is booming.
3
COMMISSIONER LEWIS:
4
in Mexico then?
5
if we can product it better here?
6
MR.
7
Why would automobile plants be built in Mexico,
GRISWOLD:
Well,
certain
parts
of
the
manufacturing process they can do more efficiently down there.
8
9
Then why would anybody invest
COMMISSIONER LEWIS:
I don’t know what that means,
more efficiently.
10
MR. MAKIN:
11
Let’s suppose -- these are very specific decisions
12
-- Ford says, "Okay, we produce automobiles. We have to assemble
13
the automobiles.
14
Let me take a shot at this.
We have to finish them.
When
Ford
decides
where
We have to ship them."
to
produce
automobiles,
15
they’re thinking about a number of things.
16
sell most of these cars, because we’re thinking about what are the
17
transportation costs from the production facility?
18
What is the real unit labor cost of assembling them
19
and if
20
produce the cars.
21
22
Where are we going to
it’s
lowest
in
Mexico,
that’s
COMMISSIONER LEWIS:
where
they’re
going
Why would it be lowest in
Mexico?
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1
MR. MAKIN:
Well, it could be -- I mean, it may or
2
may not.
3
that if you need, for example, unskilled labor and Mexico is
4
having a sharp slowdown as they did after 1995, the economy is
5
dead on its feet, then there are a lot of people available in
6
Mexico at a relatively low unit labor cost --
It could be a number of reasons.
7
8
COMMISSIONER
MR. MAKIN:
wages
becomes
a
major
And who loses?
The Mexicans are happy
to get the job --
11
12
So,
factor here.
9
10
LEWIS:
One of the reasons is
COMMISSIONER LEWIS:
or loses.
13
I’m not trying to say who wins
I’m just saying that -MR. MAKIN:
Labor costs, as you know, in most any
14
business, are between 60 and 70 percent of the total.
15
costs in what a big company like Ford’s going to do is break down
16
labor costs in terms of our production of the actual vehicle, then
17
labor costs as a part of our distribution of the vehicle, et
18
cetera, et cetera.
19
The labor
So, there’s -- location is a key element in every
20
decision of the production process for major multinationals.
21
is not an American company; Toyota is not a Japanese company.
22
They are all companies that happen to be headquartered in those
Ford
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1
countries
2
anywhere where it’s least expensive, and if the don’t, they’re out
3
of business.
4
that
will
produce,
finance,
Nissan is a good example.
sell,
market,
source
They’re practically out
5
of business, because they fell behind Toyota on sophisticated
6
production techniques.
7
And, certainly, if everybody is producing cars in
8
Mexico, initially, it’s because probably unit labor costs for that
9
particular kind of production are lower.
If everybody goes to do
10
it in Mexico, the cost will be driven up, because the demand for
11
labor will go up, and then they’ll try to find someplace else.
12
But
I
would
assume,
again,
not
knowing
the
13
business, that assembling cars in northern Mexico, which is close
14
to the U.S., is an attractive proposition if you’re out of labor
15
somewhere in the United States.
16
in the United States is an open question.
17
the vehicles back to the United States.
18
competitive with Japanese cars, you sell more cars in the United
19
States, et cetera, et cetera.
Whether or not that creates jobs
20
COMMISSIONER LEWIS:
21
MR. BLECKER:
22
Somebody’s got to move
If the cars are then more
Professor Blecker.
I’d like to take a few stabs at that,
and I want to start with the general and then come down to the
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1
specific.
2
In general, the importance of wages and labor costs
3
to trade varies depending on the nature of the product and the
4
stage of the production process.
5
United States exporting things like airplanes where labor costs
6
are relatively less important, and where technology and other
7
factors are more important.
So, you’re going to see the
So, that’s pretty clear.
8
But there are many goods or stages in production,
9
like labor-intensive assembly, where labor costs are the dominant
10
factor.
11
is a new phenomenon that is very well illustrated by your example
12
of the car factory in Mexico.
And what’s been happening in those sectors and industries
13
And
that
is
although
average
productivity
in
a
14
country like Mexico or China is very low, because the average
15
includes
16
cornfields in Chiapas or somewhere, in the new factories that are
17
brought
18
technology from the U.S., Europe, or Japan, the productivity is
19
actually close to our levels.
all
in
the
by
poor
farmers
multinational
in
the
corporations
rice
or
paddies
that
or
import
the
the
20
And this has been documented specifically in the
21
case of the automobile industry in northern Mexico in some very
22
good studies by Professor Harley Shaiken, who showed that the
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1
Mexican workers in those auto plants are almost as productive as
2
American auto workers -- 80, 90, up to 100 percent as productive
3
-- but their wages are only 10 percent of American wages or lower.
4
So, when you have that kind of comparison, clearly,
5
the
6
adjusted for productivity -- is going to be significantly lower,
7
and that’s going to create a shift in production and a shift in
8
trade flows.
unit
labor
9
10
cost,
which
is
COMMISSIONER LEWIS:
the
correct
measure
--
wages
Why shouldn’t that happen then
to every automobile plant in America?
11
MR. BLECKER:
Well, the automobile deficit, as I
12
understand it, is quite high.
13
lot of them, but there are different kinds of cars, there are
14
different parts --
15
components from Mexico, but some of them still get assembled up
16
here
17
difference between simpler cars and more complicated cars.
in
18
our
more
I’m
So, it’s probably happening to a
for example, we may get a lot of parts and
automated
not
an
assembly
expert
on
lines.
the
auto
There
may
industry,
be
a
but,
19
certainly, there are a lot of jobs that are being lost in the auto
20
sector.
21
but there are many auto workers who aren’t auto workers anymore,
22
and they or their spouses are doing something else at lower pay
It’s not that there aren’t any more auto workers here,
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1
and with lower benefits.
2
around, but many of the cars and a lot of the parts in them are
3
imported.
4
That
Maybe they’re chauffeurs driving limos
affects
our
income
distribution
5
ability
6
Commissioner Becker was talking about earlier.
to
generate
7
the
middle-class
MR. MAKIN:
standard
of
and
living
our
that
Or they may be working for Mercedes,
8
which has located its production facilities from Germany to the
9
United States or BMW.
And it would be interesting -- you know, I
10
don’t know the answer -- it would be interesting to ask why
11
doesn’t
12
Don’t
13
possibilities
14
effective
15
place.
Germany
know.
locate
their
Apparently,
and
place
to
decided
locate
production
facilities
I’m
sure
they
that
the
United
their
production
looked
States
--
in
at
all
was
cost
Mexico?
a
the
more
effective
16
Because what you have with German companies, which
17
are constrained to hire labor at a very high cost, is many of them
18
are simply saying, "We’re not doing it here."
19
COMMISSIONER LEWIS:
Well, unfortunately, a lot of
20
the reasons, a lot of the location decisions are dependent on the
21
incentives that the localities give them also today.
22
MR. MAKIN:
Why is that unfortunate?
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1
COMMISSIONER
LEWIS:
Because
I
read
where
in
2
Tennessee it will take like 50 years for that community to recover
3
the costs that they gave to whatever plant moved in there.
4
gave too much. Just like stadiums are built giving big incentives
5
to --
6
MR.
BLECKER:
There
was
considerable
They
tax
7
competition to get those BMW and Mercedes plants located in those
8
particular states they went to.
9
to be among the lower wage states in this country.
In addition to which, they happen
10
here, but they were handsomely rewarded.
11
MR. MAKIN:
12
MR. BLECKER:
13
plant.
14
So, they came
Is that bad or good, I don’t know?
It’s good if you’ve got a job in that
It’s not good if you were a German car worker.
CHAIRMAN WEIDENBAUM:
I’d like to toss in a little
15
positive spin to this discussion, and that is when you look at our
16
exports and imports through the filter of technology.
17
simple distinction, high-tech products and low-tech products, and
18
you can measure that very simply -- the Census Bureau does it
19
regularly -- viola.
20
after year we have a large and usually rising trade surplus.
21
low-tech products, the reverse -- we have a large trade deficit.
22
Make a
You look at the high-tech products, year
I think there’s some lessons.
For
Economists like to
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169
1
toss out such awful terms as comparative advantage and things like
2
that, but those industries where we have highly trained, highly
3
educated,
4
America’s leading the world.
5
highly
paid
So,
I
workers,
they’re
the
industries
think
a
discussion
that
focuses
having
a
hard
holding
where
on
the
6
industries that
7
incomplete unless you look at the positive side and that is those
8
many sectors of the American economy where we set the standard.
9
are
COMMISSIONER LEWIS:
time
their
own
is
I totally agree with that.
10
And that’s one of the reasons I was concerned when China, I
11
understand, said to Boeing, "If you want to sell us planes, you
12
have to build them here in China," which takes away the whole
13
theory of comparative advantage.
14
CHAIRMAN WEIDENBAUM:
15
COMMISSIONER LEWIS:
16
CHAIRMAN WEIDENBAUM:
Both sides are political.
17
COMMISSIONER HILLS:
I was late to come in on the
That’s
political economy.
Right.
18
auto question, but my perception is that joint production of
19
automobiles has made the industry much more efficient, and the
20
fact is that the automobile industry, from what I’ve read, has
21
done extremely well in the last two years, so that one cannot
22
complain about their situation.
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170
1
Elements of the industry have advised me that they
2
very often locate in less mature markets in order to tap into
3
those markets and to have geographic proximity to export markets.
4
But do any of you have a point of view -- perhaps,
5
Mr. Griswold -- whether by opening up markets so that efficiencies
6
can be maximized has been beneficial, not only to the industry
7
worldwide and industries worldwide, but particularly to the United
8
States?
9
MR.
GRISWOLD:
If
I
understand
your
question
10
properly, I think it would undoubtedly be good for the United
11
States as a whole and the automobile industry if foreign trade
12
barriers to U.S. automobile exports came down.
13
efficient industry, higher real wages.
We’d have a more
14
To get back to the point of the trade deficit, it
15
would not have an effect on the trade deficit, because what you’d
16
have -- if foreign trade barriers come down to automobile exports
17
or any of our exports, what you would have is foreigners would be
18
more eager to get their hands on dollars in order to buy those
19
exports that they now have access to, those U.S. exports.
20
dollar would go up.
21
to export less, perhaps, in those sectors where they were not
22
being rewarded with lower trade barriers abroad.
The
We would tend to import more, and we’d tend
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171
1
So, at the end of the day, the trade deficit would
2
not be affected, because you haven’t affected the savings and
3
investment balance.
4
But it would undoubtedly be a good thing.
COMMISSIONER HILLS:
We were getting off the trade
5
deficit and into industry-specific, and I was simply addressing
6
the efficiency of a particular industry that no longer is solely
7
domestic.
8
solely American, because so many parts are brought in from other
9
places.
10
It’s very hard to categorize an automobile today as
And that also goes to the assembly feature.
Mr. Chairman.
11
12
But, please,
VICE CHAIRMAN PAPADIMITRIOU:
Do you have response?
Yes?
13
MR. BLECKER:
Yes, because I think Mr. Griswold’s
14
last
15
changes in trade policy can affect the trade balance, and I think
16
it’s important to address this.
comment
gets
to
a
very
fundamental
issue
about
whether
17
The story he just told, which you can find in a lot
18
of textbooks, is that if we sold more exports so there would be
19
more demand for the dollar, it pushes dollar’s value up, and the
20
adjustments will work themselves out.
21
improvement in the trade balance.
22
I
think
that
kind
of
There would be no net
old-fashioned
story
just
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172
1
doesn’t work anymore.
2
kind
3
anything else, is a drop in the bucket in the financial markets
4
that
5
currencies.
6
on what’s going on in the financial markets, and they’re not even
7
going to notice whether auto exports went up or down.
of
commodity
are
And the reason it doesn’t work is that this
trade,
determining
whether
the
it’s
values
of
in
the
autos
or
dollar
steel
and
or
other
And the currencies are going to do things depending
8
If
you
look
at
the
figures
--
If
I
recall
my
9
calculations -- the amount of currency trading in today’s world I
10
think it’s, I don’t know, it’s at 1.5 or so approximately trillion
11
per day is more than our imports for an entire year in the United
12
States.
13
So, we just can’t believe in those kind of simple
14
stories anymore about these automatic exchange rate adjustments
15
that would balance trade.
Otherwise, we wouldn’t have had the
16
question
Zoellick.
17
wouldn’t have a trade deficit, because the dollar would already
18
have adjusted down.
from
Commissioner
If
that
were
true,
we
19
Clearly, something else is operating, and I think
20
that what’s operating in the currency markets is financial factors
21
are dominating trade flows.
22
VICE CHAIRMAN PAPADIMITRIOU:
I wonder if I can ask
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173
1
a question and bring us back to the relationship of the negative
2
savings rate and the trade deficit.
3
It seems that throughout the day we’ve heard that
4
there is a causal relationship, and yet, Professor Blecker, you
5
indicated that it’s not necessarily a causal relationship.
6
you mind elaborating on that comment that you made?
7
MR. BLECKER:
Would
Well, when you sort of balance out
8
the country’s accounts, it has to be true. The trade surplus or
9
deficit is going to equal savings minus investment.
The only
10
point is that the causal story doesn’t have to start with a saving
11
variable, which in turn includes several parts:
12
surplus or deficit, corporate saving, and household saving.
13
each time we put our finger on one part of that -- the budget
14
deficit in the ’80s or the personal saving rate -- we think aha,
15
we have the culprit, but in fact it’s only part of the story.
16
the Government
And
And not only that, the saving rate is what we call
17
an endogenous variable.
18
budget balance has gone up and we have this big surplus is because
19
we’ve had so much growth.
20
balance to improve and the trade deficit to worsen, as has been
21
discussed earlier.
22
So,
all
For example, one reason the Government
these
The same growth causes the budget
variables
in
this
identity,
this
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174
1
equilibrium condition are endogenous variables affected by the
2
same forces.
3
abroad; they’re affected by exchange rates; they’re affected by
4
financial inflows and outflows, and I think they’re also affected
5
by some
6
talking about.
7
a high profit rate, rising incomes of your workers, you’re going
8
to have a high saving rate as a result.
of
They’re affected by growth rates in the U.S. and
the
9
trade
policies
and
trade
barriers
we’ve
been
If you have a highly competitive economy, you have
I think some of the high saving in Asia isn’t just
10
cultural.
11
ago.
12
of exports while holding wages down, not absolutely -- their wages
13
have actually risen quite a bit -- but relative to productivity
14
and
15
actually attribute a lot of what happens to the saving rate to
16
income growth.
They didn’t have these high saving rates 50 or 60 years
It’s due to the success of their economies in selling a lot
depressing
17
consumer
There
was
demand
a
very
with
--
you
interesting
know,
study
you
by
could
Barry
18
Bosworth at Brookings in 1993, and in a little noted part of it he
19
tested for the reasons for the falling saving rate in the United
20
States, and he found that one of the main explanatory factors was
21
a slowdown in income growth of household income growth, and he
22
also showed an across country comparison that income growth rates
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175
1
were a major explanatory factor of the saving rate.
2
So, the saving rate, itself, is a variable that is
3
affected by other things, which can also affect other parts of the
4
trade equation or be affected by those.
5
think we can have simply one-way causality on the saving rate as
6
some sort of exogenous factor, which it is not, to trade.
So, that’s why I don’t
7
All of these variables are part of a larger macro
8
model, which in turn is conditioned by structural parameters,
9
which in turn reflect policies and institutions and practices,
10
including trade policies here and abroad.
11
that whole complex picture and also every situation is different.
12
There may be times when a change in fiscal policy is the driving
And we have to look at
13
force, but there may be other times when it’s not.
14
CHAIRMAN WEIDENBAUM:
One of the charges to our
15
Commission is to examine the statistics on the trade deficit and
16
to make recommendations for improvement.
17
specific suggestions for improving the measures of what we’re
18
talking about?
19
MS. BATES:
Does anyone have any
The one piece of work I’ve been made
20
aware of in this area is the sort of model being approached under
21
the International Trade Data System, which is work that’s been
22
done by some departments in the Treasury Department trying to
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176
1
establish -- to address some of the things I outlined in my
2
testimony about the fact that smaller value exports are often
3
undercounted, the fact that there are long time lags between the
4
time
5
statistics, as was obvious during the recent debates around steel.
6
We had to wait many weeks before the figures became available.
7
And also to try and make sure the small exporters are able to
8
file.
9
all the different agencies that are involved in trade can be very
10
at
which
trade
occurs
and
the
publication
of
trade
Sometimes their costs of filling in a lot of paperwork for
burdensome.
11
So,
what
I
understand
they’ve
been
working
on
12
trying to do is set up on a system which would have electronic
13
filing over the Internet coming into one centralized system that
14
would then disseminate data to various different sources and that
15
they have done some work on this.
16
I think that sort of approach where you use the new
17
technologies, such as the Internet and information technology, to
18
speed up the process of collection and dissemination of statistics
19
and make them more accurate, make sure more of the different
20
transactions that are going on are actually measured and included,
21
would do wonders to improve the level of debate and improve our
22
understanding of what’s actually going on in the economy.
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177
1
In one of the questions earlier on, we were talking
2
about
3
increasingly it’s become more and more anachronistic because the
4
nature of the economy is changing so much that we’re going to need
5
to make sure we’re measuring the new areas that are happening too,
6
so that we actually have an informed debate.
the
use
7
of
the
trade
MR. GRISWOLD:
deficit
as
a
measure.
I
think
If I could just add, I think the
8
benefits
9
account have to be weighed against the costs of the Government
of
having
more
accurate
information
on
the
current
10
collecting more data.
11
process that tried to count every last export and import became so
12
heavy in paperwork that it interfered in trade.
And I would be very concerned that a
13
We don’t count the trade between California and
14
Nevada for good reason that in the end it doesn’t matter, and I
15
think I would look forward to the day when we view international
16
trade with the same general benign indifference that we look at
17
trade between states.
I think we’d all be better off.
18
VICE CHAIRMAN PAPADIMITRIOU:
19
COMMISSIONER BECKER:
Commissioner Becker.
I think we need to look a
20
little bit as to the trade policies for the other countries and
21
our ability to compete with them.
22
Its generally thought that trade with the emerging
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178
1
countries enhances the workers’ standard of living, and they can
2
afford
3
everybody’s better off.
to
participate
more
in
their
own
economy,
etc.,
and
4
But the problem, as we see it, is that the workers
5
in most of these countries do not have the ability nor are they
6
permitted to share in the wealth that they help create.
7
don’t have freedom of association necessary to develop unions or
8
bargain to improve their lot in life.
9
subsidize
industry,
and
there’s
no
They
Governments most often
enforceable
environmental
10
regulations.
11
industry in the United States to compete in any real sense with
12
those countries.
And,
as
a
result,
it’s
almost
impossible
for
13
The question I would frame is to what degree do you
14
believe that the rights of workers, human rights, the right of
15
freedom of association and to bargain collectively, in order to
16
share in the wealth they help create, have on our overall trade
17
deficit?
18
as far as you’re concerned?
Is this something that we should even be concerned about
19
MR. GRISWOLD:
As far as it concerns the trade
20
deficit, I think the effect is minimal for all the reasons we’ve
21
talked about.
22
investment balance in the United States, the effect on the trade
I think if it doesn’t affect the savings and
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1
deficit is going to be minimal.
2
If you look at trade barriers, they just don’t
3
explain the differences in our -- for example, our bilateral
4
deficits.
5
and
6
relatively high barriers, while Mexico and Canada are virtually
7
open.
8
fair trade that everybody says we should have with countries.
yet
We have bilateral deficits with both Canada and Mexico,
we
run
a
bilateral
surplus
with
Brazil,
which
has
There we have basically the level playing field and the
9
If you look at Europe, we run our largest surplus
10
with
11
tariff, we run our third largest deficit with Germany.
12
barriers,
13
either our bilateral or our overall trade deficit.
the
Netherlands,
themselves,
and
yet
provide
under
the
virtually
14
VICE CHAIRMAN PAPADIMITRIOU:
15
MR. BLECKER:
exact
no
same
external
So, trade
explanation
as
to
Professor Blecker.
Well, I’d have to disagree with that.
16
Three-quarters of our current trade deficit is with the Asian
17
countries, and half of it is with Japan and China alone, and those
18
two countries, I think it is well documented, are very closed to
19
imports, not just because of official, legal trade barriers, but
20
because of corporate buying practices, the vertical integration of
21
the Japanese keiretsu, and the Chinese government’s ability to
22
manipulate
industries
like
aircraft
where
they
won’t
import
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1
airplanes unless we share the technology with them and build the
2
airplanes in China.
3
So, these are closed countries where we have the
4
lion’s share of our trade deficit, or at least they are much more
5
closed than other countries.
6
and it shows that trade barriers do matter.
7
they in turn reverberate on savings rates.
8
not autonomous.
9
you can artificially stimulate your industries like that, and
10
I think that’s not a coincidence,
They matter because
The saving rates are
You can afford to save a lot in a country where
where you repress consumption in order to force people to save.
11
Now, with regard to labor rights, I agree it’s very
12
important, and it’s important for workers in industries like steel
13
or textiles to feel a sense of fair trade and equal competition,
14
but I would have to say that in terms of quantitative impact on
15
the overall trade balance, it would probably be relatively small.
16
Imagine, for example, that workers got more rights
17
in China and Mexico and doubled their wages.
18
extraordinary.
19
in Mexico wouldn’t be one-tenth of ours, they would be one-fifth.
20
The wages in China -- I don’t know what exactly they are; we
21
don’t measure them -- but just to make up a number, suppose
22
they’re now one-fortieth, they would then be one-twentieth.
Imagine doubling your wages.
That would be
But then the wages
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1
We’d still have low wages in those countries.
Not
2
as low, and so it would help some, definitely.
3
in particular industries and sectors where there’s this ability to
4
create the low unit labor cost competition I described earlier.
5
But in regard to the aggregate trade deficit, it’s probably not a
6
major factor.
It would help some
7
VICE CHAIRMAN PAPADIMITRIOU:
8
COMMISSIONER D’AMATO:
9
I’d like to just follow up on this point you made,
Commissioner D’Amato.
Yes, Mr. Chairman.
10
Mr. Blecker, on the trade barriers in Asia.
11
judgment as to the quantitative impact of the whole range of those
12
barriers?
13
I’ve
spent
some
time
in
an
extremely
What would be your
China.
American
14
businessmen
15
business in China, and anyone who has done business in China I
16
think will admit that.
17
magnitude of the barriers, because a lot of our exports are, in
18
effect, deterred, simply because it’s just too difficult to get
19
them in there.
20
impact of these barriers overall?
21
22
in
China
have
difficult
time
doing
I know it’s hard to quantify the actual
Nevertheless, is there a way to quantify the
MR. BLECKER:
Well, we could try to estimate it.
There was a study several years ago at Catherine Mann’s group, the
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1
Institute for International Economics, by Fred Bergsten and Marcus
2
Nolan,
3
import barriers on the U.S. trade balance.
4
correctly -- this is off the top of my head; you’d have to check
5
-- it was somewhere around $15 to $20 billion.
6
the whole trade deficit, but it’s a significant chunk of it, and
7
this study was from a very pro-free trade organization.
8
think you have to give a lot of credence to this.
and
9
they
estimated
the
quantitative
impact
of
Japan’s
And if I recall
Now, that’s not
With China, I don’t know of any estimates.
So, I
Perhaps
10
there are some, and it’s something the Commission should certainly
11
seek research on, but one need only look at the proportional
12
imbalance between our imports from China and our exports to them
13
-- it’s a five times ratio -- to realize that if, let’s say, half
14
of that -- we’re talking $20 or $30 billion -- could be due to
15
barriers.
16
If
you
add
it
all
up,
my
guesstimate
would
be
17
somewhere in the $40 to $50 billion range, but that’s an area
18
where we should seek out studies and get more evidence.
19
20
COMMISSIONER D’AMATO:
that’s a pretty large chunk.
21
22
Well, $40 to $50 billion,
COMMISSIONER
HILLS:
Did
you
say
$40
or
$50
billion?
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1
2
MR. BLECKER:
particular number, but if you start with Japan being --
3
4
I don’t want to pin myself down to a
COMMISSIONER
HILLS:
That
would
be
their
whole
deficit with us.
5
MR. BLECKER:
I meant $40 or 50 billion for all of
6
Asia, not just Japan.
7
estimate for Japan, then maybe there’s something of a similar
8
order of magnitude for China, perhaps even more, and then there’s
9
other Asian countries, which also have structural trade barriers,
10
But if you start with the Bergsten-Nolan
it’s not hard to get up to numbers in that range.
But, again, I
11
don’t want to be pinned down to a specific number, because I
12
haven’t estimated it myself.
13
COMMISSIONER HILLS:
Is your analysis based upon
14
the fact that in Japan we compete rather head-to-head, because
15
we’re both industrialized countries?
16
17
We buy things from China that we don’t make here, and they buy
things from us that, for the most part, we don’t make here.
18
19
MR. BLECKER:
from us.
20
21
In China, we do not compete.
But the point is they buy very little
They buy much more from Japan than from us.
COMMISSIONER HILLS:
Well, actually, in 1998 China
was in the top three of our fastest growing export markets.
22
MR. MAKIN:
They’re buying a lot of computers, I
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1
understand.
2
3
VICE
CHAIRMAN
PAPADIMITRIOU:
If
I
could
just
follow up on the comment.
4
MR. BLECKER:
Our exports for the entire People’s
5
Republic of China last year were smaller than our exports to
6
Singapore.
7
consumer market in China is really buying our exports.
That makes it hard to believe that the supposed vast
8
COMMISSIONER LEWIS:
9
MR. BLECKER:
Say that again, please.
Our exports to China last year, our
10
merchandise exports, were $14.0 billion and to Singapore they were
11
$15.6 billion.
12
you correct for the difference in income levels, this is a closed
13
market.
There’s a lot more people in China, and even if
14
VICE CHAIRMAN PAPADIMITRIOU:
15
COMMISSIONER LEWIS:
Commissioner Lewis.
I’d like to ask each of you a
16
theoretical question.
As a nation constructs a foreign trade
17
policy,
should
18
foreign trade policy?
what
19
purposes
be
considered
in
constructing
a
Obviously, one of the purposes should be to provide
20
an
21
companies, because it causes them to constantly renew their plant
22
and equipment.
environment
in
which
competition
is
good
for
American
One purpose for foreign trade policy has to be to
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185
1
provide an environment to which American companies can make money
2
in the world.
3
4
What
other
purposes
would
you
say
should
be
considered as part of a foreign trade policy of a country?
5
MR. MAKIN:
Well, I’ll be radical and say I don’t
6
think a country should have a foreign trade policy.
7
mean I think a country should try to set up a set of conditions
8
under which its producers and consumers are able to produce and
9
compete
as
freely
10
society.
11
take care of itself.
12
13
as
possible,
consistently
And by that I
with
an
orderly
And that under those conditions, a trade policy will
COMMISSIONER LEWIS:
Well, then you’re saying the
policy should be just totally laissez faire.
14
MR. MAKIN:
15
COMMISSIONER LEWIS:
16
MR. MAKIN:
Yes.
Okay.
And let me just suggest that if we look
17
at the results of -- let’s say, is the United States more laissez
18
faire than China or Japan? Certainly, the United States is far
19
more laissez faire than Japan, and I’d certainly rather be in this
20
economy than that economy as a producer or a consumer, having
21
lived in Japan as a consumer.
22
in Japan.
Shopping is a very dismal prospect
Every place you go, the price is the same, and it’s
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186
1
high.
2
3
So, I don’t see any point in imitating that kind of
a system, and I guess I was wondering where --
4
5
COMMISSIONER LEWIS:
laissez faire policy.
6
MR. MAKIN:
7
COMMISSIONER LEWIS:
8
VICE
9
So, your policy would be a
Right.
CHAIRMAN
Okay, thank you.
PAPADIMITRIOU:
Commissioner
Zoellick.
10
COMMISSIONER LEWIS:
11
them their opinion on what policy.
12
MR. GRISWOLD:
No, I’d like to ask each of
I’ll be quick.
Two complimentary
13
objectives:
14
benefits, and I think that’s the problem with protectionism.
15
defends the interest of a small group at the expense of the whole.
16
One should be the broadest possible prosperity and
Second
should
be
the
liberty
of
It
citizens.
17
Government should not interfere in the ability of the citizens to
18
spend their hard earned dollars as they wish.
19
20
And both of those objectives I think point very
strongly towards free trade.
21
COMMISSIONER LEWIS:
22
MR. BLECKER:
Thank you.
Very briefly, I think that with trade
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187
1
policy, as in any other area, we have to look at the costs and the
2
benefits.
3
efficiency, scale economies, greater variety, the whole gamut.
4
But there are also costs of trade liberalization, including income
5
redistribution effects, adjustment costs, and -- in some cases, at
6
least -- loss of high wage jobs and their replacement with low
7
wage jobs in nontradeable services.
There are well known gains from trade -- gains in
8
9
I think we need to balance those things.
I think a
reasonably open but not purely laissez faire policy is best.
I
10
think we have to address sectoral issues where there are sectors
11
that have particular problems, and that we need to deal with the
12
fact
13
policies
14
remedies necessary to offset those factors that are making the
15
world market less than a level playing field.
that
there
in
are
different
different
institutions
countries,
16
COMMISSIONER LEWIS:
17
MS. BATES:
which
may
and
practices
make
trade
and
policy
Thank you.
I think I would say that I would rather
18
look at it in a broader sense than just strictly trade policy.
19
think you have to have a sort of approach to globalization and to
20
trade, investment, your domestic structure, and the structure of
21
countries overseas to broaden out a little bit from strictly trade
22
policy.
But,
generally
speaking,
to
have
open
markets
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I
to
188
1
encourage economic growth, bearing in mind that they’re a means to
2
an end rather than an end in themselves.
3
And I think the counterpart to that is you need to
4
have the right domestic institutions and infrastructure to make
5
sure that the largest number of people within the economy benefit
6
from the gains that you derive from having open markets.
7
And I think, as we go into the future with the sort
8
of economy we’re looking at in the U.S. that’s going to mean
9
things like portable pensions, portable health care for workers as
10
they move between jobs, lifetime access to education and training.
11
All
those
sorts
of
things
need
to
be
there
12
domestically to make sure that the vast majority of Americans
13
benefit from this gain that we will get from having open markets
14
with the rest of the world.
15
COMMISSIONER LEWIS:
Mr. Makin, I assume -- Dr.
16
Makin, I assume that when you were talking about laissez faire,
17
that would not include military defense.
18
MR. MAKIN:
Right.
I mean, obviously --
And I guess I was going to ask
19
you, do we have a trade policy?
20
don’t think the United States has a trade policy.
21
COMMISSIONER BECKER:
22
General
Electric
and
General
Does the United States have -- I
Sure we do.
Motors
and
other
It’s set by
multi-national
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189
1
companies.
2
United States.
They’re the ones that set the trade policy in the
3
4
VICE CHAIRMAN PAPADIMITRIOU:
one of the powers of the Chair here.
5
MR. MAKIN:
6
VICE
7
I’m sorry.
CHAIRMAN
PAPADIMITRIOU:
Commissioner
Zoellick.
8
9
I want to exercise
COMMISSIONER
ZOELLICK:
Just
two
follow
up
questions for Mr. Blecker.
10
You mentioned some studies, and I was wondering
11
whether you had reviewed any studies on Chinese exports to the
12
United States and their displacement of U.S. production?
13
my understanding is one of the same institutes you cited, IIE, has
14
done work on this question, and they have concluded that Chinese
15
exports
16
production from third countries that would be competitors with
17
them.
18
contrary?
19
have
And
primarily,
I’m
curious
in
fact
whether
almost
you
totally,
Because
displaced
have
information
if
were
to
the
That’s the first question.
The
second
question
is
I
on
the
Trade
20
Commission in the European Union and I said to you the European
21
Union has higher levels of union participation, higher wages and
22
compensation, at least I would argue as a European, higher social
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190
1
protection, is the United States being an unfair trader with
2
Europe because of that factor?
3
good for the goose, good for the gander?
4
with other countries, if Europe can’t make it with us?
5
6
MR. BLECKER:
exam.
And, if not, then isn’t what’s
How can we make the case
Those are tough questions on a final
With regard to China, I have not studied U.S.-China trade.
7
My colleague at the Economic Policy Institute, Robert Scott, has
8
worked a lot on that, and I understand he’s a witness for your
9
next set of hearings.
10
So, I think you might better direct that
question to him.
11
It’s
certainly
true
that
China
and
other
newly
12
industrializing countries are to some extent taking export markets
13
away from each other.
14
all
15
capacity.
16
imports from the U.S. rather than the exports taking away jobs.
17
Undoubtedly there is some mix of taking away jobs here and from
18
Mexico and Korea, and it’s a question of how much from where?
getting
19
into
I think that’s one of the reasons they’re
crises
and
that
they
have
all
this
excess
But what I was emphasizing was China’s closure to
Regarding
Europe,
actually
I
have
heard
some
20
Europeans say -- I don’t know if they use the word "unfair trade"
21
over there -- but I have heard them look
22
relatively laissez faire place, and depending on your perspective,
at
the
U.S.
as
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a
191
1
what part of the European political spectrum you’re on, that’s
2
either a good thing or a bad thing, but there is a sense that it
3
does put a pressure on Europeans to lower their wages and to
4
reduce some of their social policies.
5
Again, some welcome this and some very much oppose
6
it.
7
American South?
8
in labor conditions and unionization -- you notice they didn’t
9
choose Michigan where they might face the United Auto Workers.
Why did they move production of BMWs and Mercedes to the
I think clearly the difference in labor costs and
10
Those differences do matter, but we should remember that they are
11
much smaller than the differences between the U.S. and developing
12
countries.
13
COMMISSIONER ZOELLICK:
If I could just follow up
14
on this, because, again, it’s our role more to gather information,
15
but since people have mentioned BMW and Mercedes a number of
16
times, having talked to people from both companies, another big
17
investment reason -- of course there are many -- is to be close to
18
the
19
companies have learned over time that they will learn more about
20
their market and have a better sense of it, in addition to lower
21
transportation costs.
22
they plan to sell, I think we have to be a little careful about
market
in
which
you’re
going
to
operate,
because
many
So, if they produce in the market where
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1
stressing only the wage points for investment location decisions.
2
Obviously, once you decide to go to a market where you locate,
3
that’s one element.
4
But the reason I’m focusing on this European point,
5
not just making a debating point, is that it strikes me that as a
6
policy question, if the United States decides that it wants to
7
apply this logic to other countries, wouldn’t there be a risk that
8
other countries would apply it to us to our disadvantage, because
9
we do export a lot to Europe, as I recall?
10
MR. BLECKER:
Well, there’s a risk that the logic
11
would be to apply it to us.
12
disadvantage, again, might depend on one’s perspective.
13
Where that’s to our advantage or
COMMISSIONER ZOELLICK:
Could you explain that?
14
So, in other words we would raise wages, be more unionized, and so
15
on and so forth.
16
MR. BLECKER:
Yes.
If we lack social policies
17
that, say, Europe has -- I know I’ve heard this argument from
18
Canadians in the NAFTA context -- it creates a pressure to reduce
19
those social policies in those countries.
20
want us to harmonize upwards.
21
22
COMMISSIONER ZOELLICK:
So, they might indeed
So, just so I could trace
the logic of that, if we followed through on this policy idea, it
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193
1
would be a way of using trade policy to help establish our wage
2
polices, our social welfare policies, all the things that Congress
3
likes to do on its own.
4
MR.
BLECKER:
Any
time
you
enter
international
5
negotiations over these things, yes, it would somewhat abridge our
6
autonomy in those areas as it would for other countries.
7
would be a question of harmonizing standards.
8
some of the popular opposition to trade, which we’ve heard so much
9
about, might actually dissipate, if people had more of a sense
10
So, it
And I think that
that there was fairness and balance and equal treatment.
11
VICE CHAIRMAN PAPADIMITRIOU:
We seem to have been
12
carried away, and we’re in a time deficit, and therefore I think I
13
would like to bring this to a close.
And on behalf of the
14
Commission,
all
15
appreciate very much your coming and your comments.
I
would
like
to
thank
you
for
coming.
We
16
Thanks very much.
17
(Whereupon, the above-entitled matter was concluded
18
This session is adjourned.
at 4:37 p.m.)
19
20
21
22
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1
2
3
4
5
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