Public service by americas Cable Television companies. It is brought to you today by your cable or satellite provider. The American Enterprise institute here in washington, d. C. Posted a Panel Discussion on the impact of efforts to reduce the usa trade deficit. Following their presentations and rebuttals, panelists answered questions from the audience. There we go. Well start again. Good morning, ladies and gentlemen, im glad youre with us. Im alex pollock from the r street institute. Its a pleasure for us to welcome you to this timely conference on trade deficits and the Trump Administration. It goes without saying debates about trade, tariffs, other barriers to trade, balance of trade and payments and shifts in foreign exchanges, whether the flow of gold in old days or reserves nominated in fiat currencies now have a long and controversial history in economics and in politics. These debates feature the famous and essential contrast between the interests of producers on one side and those of consumers on the other, abiding asymmetry and pressures for adjustment between countries with persistent deficits like the u. S. Versus those with persistent surplus, germany for example. Naturally throughout this is the desire of politicians to get and remain in office. Political economy is certainly the accurate term here. Discussions of trade deficits cannot be divorced from the nature of the International Monetary system, levels of Exchange Rates or role of the u. S. Dollar as the dominant reserve currency or from the role of the United States as a safe haven for capital. We might say one of the key things the United States produced is a social system that does serve so well as a safe haven for saving some capital. You could say what john maken liked to call the wealth Storage Service effectively is traded internationally for net imports. Today, we have truly distinguished panel to address the economic questions of trade deficits amidst the current Political Forces in play. Each member of the panel will speak 13 to 15 minutes. Opening comments after which well give the panelists a chance to react to each others ideas or clarify their points. After that, well open the floor to your questions and we will adjourn promptly at 12 00. Let me introduce the panelists in the order in which they will speak. First will be jeff frankel, the james w. Harpo professor of Capital Formation and growth at Harvard University and in charge of a program in finance and macroeconomics at the National Bureau of Economic Research where hes on the Cycle Academy and Research Interests including international at finance commodities and financial crises and monetary issues. Next is ann krieger, professor of economics at Johns Hopkins university, senior fellow at the Stanford Center for International Development and senior fellow for the Hoover Institution and previously first deputy managing director of the International Monetary fund and past president of the American Economic association and has published extensively on the topic of the day. Our third speaker, bob aliber is Professor Emeritus of economics and finance at the university of Chicago School of business and bob has written extensively on economic finance and banking and Exchange Rates on the global flow of capital and its role in crises. Hes the editor of the fifth to seventh editions of the class manias, panics and crashes and author of the International Money game. Next will be Claude Barfield a resident scholar at aei, specializing in International Trade policy. His work includes trade policy in china and east asia, world trade organization, intellectual property and science and Technology Policy and his books include free trade sovereignty democracy, the future of the World Trade Association swap how trade works and hightech protectionism, irrationality of antidumping laws. Our last speak, desmond lachman, has been a resident fellow at aei since 2003, focused on the global macro economy. He writes on International Economics and International Trade and the euro area and financial crises, and sovereign debt. He was chief and emerging Market Strategist and a Deputy Director at the International Monetary fund and he has done a great job organizing this conference. Thank you, desmond. Jeff, welcome back to aei. You have the floor. Thank you, alex. Thank you all for coming. Its an honor to be leading off this very distinguished panel. I could try to cover all the things that President Trump has said and done in the area of trade that i would view as illadvised, but we have 15 minutes each so i cant really do that. I will say that the i dont think anyone but donald trump could threaten to cancel a u. S. Freetrade agreement in the midst of the worst Nuclear Crisis weve had in 55 years with north korea. But i am going to stick to five trade fallacies which are up on my slides when it comes up. I think you have to push your button. Advance it one and see if youre there. Very good. Thank you. These are fallacies, i mean theyre widely shared, not just donald trump. Fallacy number one, u. S. Trade negotiators have been outnegotiated by those from other countries. Wrong. Remember the president ial debate where trump kept interrupting his opponent and saying, wrong with an exclamation point. I will do that a few times. In most trade negotiations significant ones in the last 20 years included tpp and before that, nafta, the United States has been able to get most of what it asked for overwhelmingly. Thats a side effect of being recognized as the leader of the International Order. Most countries have benefitted from the International Order and we have benefitted at least as much as everyone else and thats been recognized. I think its important to retain that role as leader of the International Order and one ground i would fault trump is he doesnt even think thats worth trying to keep. Lets get on the subject how capable our trade negotiators have been versus other countries. Most of these trade agreements resulted in other countries lowering barriers against our exports much more than weve had to lower barriers against imports for the simple reason they started off with high tariffs on other barriers and we started off with low barriers. More recently agreements had to do with tariffs and deeper integration and u. S. Demands have completely driven the process and weve gotten most of what we wanted. People might talk about a different priority how important it is, something on this list is important to most people, labor rights, environment, investor dispute settlement and intellectual property rights. Weve been pushing that in the tpp. Were supposedly renegotiating nafta, a logical question since canada and mexico said, okay, lets do it. It can be modernized and so on, how would that be done . I have a list i wont go into the five or six different ways nafta can be modernized and expanded. Guess what, theyre all in the tpp. My advice there is go back to the tpp or else try to make nafta like the tpp. One of the funniest things trump has said, this is a direct quote, negotiators for germany have done a far better job than the negotiators for the u. S. If you take it at face value he believes theres a Job Description for trade negotiate for germany. Germany outsourced that job long ago to a union and dont negotiate their own trade policy. I infer what he really means is he observes germany runs a large bilateral trade surplus vi visavis the u. S. By lat lal trade is a stands for america and c stands for china, all three of these are relevant. First, country a has a trade deficit overall. Second, country c has a trade surplus overall. Thats true of the u. S. And china. Three, country c needs to earn a structural surplus with countries like a in order to pay for a structural deficit with some other countries which in this case would be exporters of oil and other commodities. Ill show you a graph in a minute because all three do describe the situation with china. In terms of the implicit prescription, if we were to stop importing some good Consumer Electronics from china we would import more from somewhere else, other Asian Countries, would not affect our overall trade deficit which is more relevant. I always tell my students about the folly of thinking bilateral trade imbalances are important. If i tell the guy who cuts my hair, i dont want to pay you any money, i want to give you a lecture in economics. He for some reason doesnt think thats right payment. He wants to me to pay in money and i earn my income teaching at harvard and they pay me and it all works out just fine. No need to look at bilateral balances. Heres just for china even though the trade surplus has come down quite a bit, they still have an overall slight trade surplus, moderate trade surplus, lets say, and they run a trade deficit in primary products and a trade surplus in manufacturing products. Thats part of why they run a surplus visavis the United States and run a deficit with common exporting countries. Fallacy number three. A trade deficit indicates the absence of a level playing field. Wrong. There is no correlation, at least no positive correlation between countries tariff trades and trade balances overall or bilateral. I have a graph on that for you in a moment. Rather, trade deficits are macroeconomic phenomena. Im sure the people on the panel are going to agree with this. They are in a proximate sense influenced by the business cycle, National Incomes and by Exchange Rates and bedrock. More fundamental sense determined by National Saving and investment. The u. S. Has run a current account deficit since 1982 because National Saving has been low since 1982. Ill show you a graph on that. This is private savings compared to our past and compared to other countries and low public savings namely budget deficit. We could think of examples along the way of the famous twin deficits. The period of 2001 to 2007 is a good example when we had big tax cuts, big increases in spending, both military and domestic. We converted a record trade surplus to record trade deficit and that showed up as a fallen National Saving as well as a trade deficit. Incidentally, six months ago i had the privilege of being on a panel in december before donald trump took office. Many of us thought he would be repeating the fiscal policies of bush and reagan, leading to a bigger budget deficit and a bigger trade deficit. As of now since he doesnt have any legislation through congress its much harder to predict what will happen there. One of the questions we were asked to talk about, china, germany, japan, they all run large currency surpluses. One line answer for the reason for that is they have high National Savings rates, doesnt have to do with their trade policies. Heres a graph i promised, which is from carolyn freund. The horizontal axis is the tariff rate. The vertical axis is the trade horizontal axis is is trade balance, from zero up to the surplus, down the deficit. If theres any relationship at all, its an inverse one. This is illustrating that its not the case that countries that are highly protectionist have higher surpluses. In fact free trade countries have the trade surpluses and on average, the countries with high tariff protection probably have trade deficits, probably because of other policies, excessive budget deficits or something. Heres we shouldnt need a graph, its actually National Savings identity, by definition that the current account balance is equal to savings minus investment. The only reason the graphs differ is theres a statistical problem in submission and it was strongly downwards in the current accounts, but the overall trend was downwards because it was downwards in National Savings. Fallacy number four, whatever the cause, trade deficits are bad, they subtract from growth. Gdp as the freshmen students learned, x minus m is the trade balance, seems like arithmetic that the trade balance expands with gdp. If you cut the trade balance, that adds to gdp, im not going to say wrong here. Its not always wrong, if you have excess capacity in the economy, if unemployment is high, boosting exports can add to employment. But as of right now, and the last few years, were basically at full employment, i would say, anda an increase in trade balane would have to pull workers from other activities and would not add to the employment. If countries have run current account deficits, that means International Debt is rising, and for normal countries, for most countries, eventually its a day of reckoning, it starts to impair their credit worthiness. The u. S. Seems to be immune from this. I was aware of this for quite a while, it didnt happen in 2008 and if it didnt happen in 2008, it being foreigners worried about u. S. Credit worthiness, its going to take a lot more doing before we squander our position as an elite International Currency and able to borrow easily at low Interest Rates on world markets. The important point here, to answer fallacy four is trade deficits are not all bad news, trade surpluses are not always good news. An example of a rise in the trade deficit which was actually good news was in the late 90s. It was a company with the longest u. S. Expansion on record, unemployment got down to even lower than it is today, 4. 3 . It was the one time that median Family Income was rising strongly. The second half of the 1990s, with parenthetically is very interesting because when countries were trying to advance trade, this is better than nafta, everyone seems to agree that nafta was selfevidently damaging. After nafta, the United States had the best economic record that we have had in the last 35 years, in terms of the longest expansion, strongest growth in productivity, strongest growth in wages, lowest Unemployment Rate, most widely shared in terms of distribution and so on. Im not saying thats because of nafta. Its largely because of an investment boom is what was driving that expansion. Brought unemployment as low as 3. 8 . What did i say a minute ago . 4. 2. By 2000. And conversely, you show me a country that has a sudden improvement in its trade balance, and ill show you a country thats probably just gone into recession, lower economy means lower imports. And an example of that, this is the last Great Recession of ten years ago, this is a graph of growth rates, gdp growth rates, its a blue line and the trade balance is the dotted red line, this is from michael kline. But the one time when in recent decades when the trade balance abruptly fell in half was the period of the Great Recession, when income fell sharply, so imports fell sharply. The point of that is that trade deficits, this is one illustration, trade deficits are not always bad news, and trade surpluses are not always good nice. A an aggressive trade policy would reduce inequality. Probably wrong. Of course, imports create winners and losers, that seems to be news to some people. But any big change does. If we block imports, thats going to be create winners and losers, take trumps imports of steel and aluminum and leave asaid that section 232 claimed a National Security issue, is flimsy at best. If we did succeed in blocking imports of steel and aluminum that would raise costs to steel and manufacturing. It would raise the cost of living in the United States and it would hurt our exports. There are various other ways in which blocking imports reduce exports. But since were running out of time, i wont name them. But it really is a case that the difference between imports and exports are if you block imports, youre going to reduce exports through various channels. Yes, specific industries and localities, if were concerned about it leaves out production on the plus side. People leave low wage jobs and they consumer goods, which studies show are disproportionately bought by lower income households. It clearly increases the size of the pie, what it does to the distribution of the pie is still an open question, there is debate about it. But its i think pretty clearly, not a major reason, the biggest reason for the increase in i inequality that we have had in the last three years, its probably less important that effect kn technological process and the fact that education hasnt kept up with skilled workers and these other factors that i have named. In my view, you dont actually need to be able to apportion the responsibility for the increase in equality among trade versus technology and other factors. The list of policies that would be advisable to increase the pie and do it equitably to raise median Family Income is pretty much the same policies regardless of how much emphasis you put on trade and other factors. Thanks, jeff. Anne . Thank you, were going to be plagued a bit today by ive got the appendixes. You can go through mine. Just go over to guests. In any event. Just go forward and well find anne in there. Go ahead. Okay, thanks. There we go. Okay, good. I started with the same thing that jeff did, namely its long standing issue. Theres a lot of confusion in the discussion between trade and the current account. The current account is what is important in terms of current earnings versus current expenditures, which includes services in which the u. S. Has been running a surplus, and to leave that out of the discussion is a problem because services are one of our big advantages and anything that is done on the other side is something thats going to Hurt Services in addition to the things that jeff talked about. Its always a fallacy to pick one component of Something Like the trade deficit or the current account deficit, because obviously i could pick one component and you could pick another one and you could say its really import of automobiles and i could say no, no, its chemicals and each could be right since each could be the same size as the deficit. So that kind of thinking i think is really erroneous and it hurts particularly in the United States manufacturing. And there are a number of reasons why its bad when we talk about that, but the main one is that a lot of what was counted as manufacturing is now counted as services. In the census bureau, everything is classified according to the main activity of what is done. It so you go to a factory, and ill take 3m as an example, simply because i happen to know it. 3m, mississip 3m, the whole thing was counted at manufacturing, what happened over time was that various things were subcontracted. Subcontracted for example for the janitorial services, subcontracted for the electronic maintenance of the various components of the building and so on and so forth, fire and security alarms and more recently it and so on. Part of cafeteria was part of it until they subcontracted it where it became a service. Same people doing the same thing as done before. But the manufacturing done directly by 3m as its counted went down. So we lost jobs in manufacturing. In fact some of them went directly into the services. In fact i have a soninlaw, and thats why i know it so well. He was at 3m in their electronics unit. Maybe 40 or 50 employees. And he was called into the front office, said were going to spin you off, well help with your tools and well help with the financing, but now you take work from 3m and anyone else you can find to do work for. They basically service 3m, but they serve other things. Actually they gained some jobs because they got some other work too. But we call it something different. And i think its important to remember that, as Services Become bigger and bigger in the economy and we talk about these, quote, bad jobs. Theyre not bad jobs, Business Services are big and many of them, finance for example are high paying, not including that what is going on is a huge mistake. Jeff already mentioned obviously account savings is expenditures minus our income, but its the same thing either way, and its an accounting identity and we have indeed been expending more on goods and services than we have been buying which is why by definition the deficit. It doesnt explain a thing, just a different accounting identity. Last point, borrowing from foreigners or importing capital in other ways can be enhancing to growth or it can be growth reducing, and i have two examples on the slide, korea in the 1960s, their average Economic Growth was 6 per year, adjusting for inflation then, and while their average rate of growth was 13 a year, they were borrowing 10 of gdp from abroad every year of those ten years. On average. And the debt to gdp ratio went down because their growth was even higher, because they had so many productive investments and they found out how to get their incentives right and found out they could do much more with more capital so they could afford to pay the 9 to 10 interest on it. And the 9 i saw in capital in korea was well over 25 . So you could pay 10 on your borrowing and come out way ahead. Or if you were like mexico in the early 1980s. Mexico had the biggest wind fall gain in terms of trade in the 1970s, because of huge Oil Discoveries and of course because of run up in the price of oil. So they had a big party. They not only spent all the oil revenues, they spent even more than the oil revenues and they built up debt and had no way to pay it. So you cant judge the deficit alone by what it is, you have got to go and look and see why it is what it is. And thats important there. The deficits been with us a long time. This is the goods and services, and between 2005 and 2015, they are not quite comparable and i did not track down why. And as you see, it is nothing new, it doesnt have to do with chandle china, it doesnt have to do with germany, it has a comparative advantage, to some extent, we never quite got it back, but on the other hand it certainly is not something you can say it started in 2001 or Something Like that, it started with the good growth years that jeff pointed out in the 90s, and the bad growth years around 2008. And we have the deficit. It has subsided somewhat in regard to gdp in recent years, and we are spending more than we earn, theres no doubt about it. And thats why we have a deficit. Bilateral deficits write are now turning. I put those on the board because as you can see, we have deficits with almost every region in the world, there are few exceptions, but when we have deficits, it means that you cant solve it by putting one finger in the dike over here, because the flow will just increase over there, as jeff said. The interesting question is more than that, the interesting question is suppose that somehow that you could negotiate a deal with mexico, which i hope we cannot do. But they committed to somehow cutting down their imports to the United States. How are they going to do that . They either have to cut back drastically on expenditures and have a recession, which doesnt make much sense, or they have to a change in export control. How are you going to do it . And we certainly dont want Exchange Control throughout the world. And yet asking for them to do it asks for one of those two things. Imposing tariffs, leaving mexico aside is quite illegal anyway. Because of the gap rules, thats discrimination, and if we did that we would have to do it everywhere, because we could not import the auto parts in another country at a price lower than it was before. A tariff on mexican, or all auto imports would cut down the tariffs to mexico. The idea that this can be done without tremendous damage to the other economies, to our economies is more than just fallacious. One thing even with the efforts to impose contra valuing a third country behavior has almost completely wiped out whatever effect it might have. Its very easy to shift sources of various things. And an economist looked at some efforts to put tariffs on some country, the only case it would be reasonably effective is south of can. Things go into iraq, via the desert, despite the policy of the u. S. , its very difficult to enforce Something Like this and its also ill advised and it would damage our economy probably as much as the other. So you have those. Then we go to is wto illegal . Our companies would be less competitive. If japanese Auto Parts Companies could get parts from a cheaper source, our country is going to be less competitive, not more. Then we want to import more autos, then we want import tariffs on them and how far does it go . Where does it stop . Does it affect export at all . Or do you get smuggling and all these things. I dont know, but i do know its a bad idea and i know it will not correct the deficit. What about jobs . As jeff said before, exports create jobs, not only directly but indirectly. Japanese exports to the u. S. Increased marketedly in the 1970s, as everyone knows, they increased markedly, and they made cheaper cars. Teenagers began to be getting cars which they didnt have before, families who had previously been one car became two cars, and three car and so on and so forth. Yes, we imported japanese cars, but what about service stations, what about auto mechanics, if you think of the Jobs Associated with the japanese export of cars, that offset a considerable amount. In fact they say Something Like one out of nine jobs in the u. S. Is related to the industry, including production and including services. One in nine is a big number, but of those, production is a very, very small part. Most of the jobs are in the others. And if we have more cars on the road, and so on and so forth, thats good. Of course theyre also safer. And thats not a bad thing, but there are also quite a bit of jobs in high schools. It might increase the bottom line if jobs are the only thing you care about. Am i running out of time . Youve got by three minutes. There are indirect effects, all the Service Industries, financial services, much of our Service Industries are based on businesses doing business abroad and the dollar being the yuan mi unit of International Currency. What do we do . This is going to sound heretic, but i have come to the view trying to talk about jobs and imports is but having said that, theres a second component to that and that is the job turnover in the United States is about 20 million jobs per year. And 20 million jobs per year is a lot larger than anybody can possibly attach to any kind of trade problems that we may have had. Even if you endure technical changes, the whole of the thing couldnt be that. It just cant comparable. We have a very fluid, very flexible labor market which is a good thing. We should supply more support for people who are without work. Some of the countries like in denmark, are in the lead where this is concerned. They have adopted policies called flex security. Any company thats going to lay off workers, they notify the equivalent of the Labor Department, the Labor Department has job centers everywhere. And workers who lose their jobs show up at these centers, they not only apply for Unemployment Compensation, they also advised as to where their skill set lies and if indeed theyre theyre told, okay, you dont have the qualifications now, because youre missing that training, they are sometimes subsidized the training in some cases. They have changed the unemployment substantially. They also have low Unemployment Rate overcall. They dont worry about why the job was cut. And they cant. Suppose a company goes out of business in the United States . Why did it go out of business . Probably in part because of poor management and other countries survived. Probably in part because of imports. So lets say that all three contributed. Lets say a third each, just to make it simple. Lets line up all the workers who lost their jobs, please tell me which third lost their jobs on account of trade . No way you can do that. Why do we want to treat workers who lost their jobs for one reason any differently for another. Why dont we think by way of a social safety net more generally. I can go even further along these lines but that will be another topic. But to treat job losses you dont know the indirect effects and you dont know who among those who have lost, even within a firm, lost it because of trade or otherwise, so i would argue that we have got to move away from the notion of trade adjustments. Politically, its so sensitive you got to do this. If we got to do something, why not support all the workers and give them and by the way, in the danish case, if they dont look for work, they get cut off from their Unemployment Compensation very fast. And you can do that if you have a system that works. Okay, well just give more unemployment comp and this is evidenced that prolongs the length of unemployment. It does help people, its not a bad thing, but it does lengthen unemployment. Lets finish quickly because alex asked this question. Objectly tho obviously inseptemberives to increase savings are important. Productive increasing measures is important. Tightening fiscal and monetary policy, if you think we have got excess expenditure, im not sure we do. I take alexs point that other countries are using our dollars as a financial service. Thats the way to do it. The imf tried in the 2000s to bring together the major six surplus deficit countries to get them to agree on a coordinated tactic so that the burden of adjustment, which everybody said they wanted, but it would be split between surplus and deficit countries. Everybody agreed on how much the cuts should be. No problem there. But of course the chinese thought the u. S. Should adjust, the u. S. Thought the chinese should adjustment a and so on a forth. There was no mechanism to get the grievance split. So in that process, nothing happened. It may come about again when we get to a point where there can be some mutual agreement as to youve got excess demand in your economy, we have got excess supply, that can be done and im not optimistic unless we come to some kind of crisis point. We are going to go to bob elder. Bob . Thanks to desmond, the organizer, great to be here. For 100 years i taught second year mbas at chicago. And at the beginning of every class i would hand out a blue book and ask the students to write down the answers to two questions. The first question i asked them to identify the course that they had taken in the previous quarter or the Previous Year that they have gotten the most out of. And then i asked them to write down the key ideas of that course. And i gave them a couple of minutes. And then i pointed a call in the front row, and said, cole, how many ideas did you write down . There would be a long pause and cole would say, two. So i would go to the board and i would say cole, what was tuition for the course . And he would say, 6,000, so we put the fraction 6,000 over 2, 3,000 per idea. And then oiled soi would sort o cole, how many hours, et cetera, 100 hours, 100 over 2, ive got 13 minutes and three ideas. And so the first idea is that the trade deficit, and i want to thank anne for introducing the distinction between the trade deficit and the current account deficit. When i say trade deficit, i mean current account deficit. Its just a convenience. The trade deficit, now 4 of usgdp as caused us to lose a million to two million jobs, its a nontrivial member, its just a very, very large number. I come from Northern New England and when i drive through towns like enfield and claremont, i could cry to see the devastation in these communities. So thats my first idea. And ill come back to that. The second idea is what has caused the trade deficit. So we come to the savings, investment and balance that both jeff and anne. In here im going to introduce the distinction between crowding out and crowding in. If i listen to my colleagues on this panel, i hear that theres a shortage of u. S. Savings. Maybe, but maybe theres an excess supply of foreign savings, and maybe the foreign savings request coming into the United States and driving up the value of the u. S. Dollar and having an impact on our savings rate so that is the crowding out crowding in distinction, and the third idea i want to get to, its involved in policies and it gets involved in the Exchange Rate system. We have an Exchange Rate system in which mrs. Watanabe and mrs. Zangs savings ininvestment happens are 21 . Were allowing shortterm money movements, plays on the leads and lags to drive the real Exchange Rate. And this is not a way to run a stable monetary system. This is the cause of instability. So let me come now to my first idea. How big is the job loss . And im really going to punt on the numbers, one of jeffs phd students, if you think about value added per worker in u. S. Manufacturing is 500,000. Thats a very, very large number relative to the wages. You come to the conclusion that 100 billion a 1 billion trade deficit would lead to a loss of 20,000 jobs. And an 800 billion trade deficit would lead to a loss of 1,600,000 jobs. And we need to understand how large the job loss has been because of the trade deficit. We may not be able to identify who has lost the jobs, but we would all i think share the conclusion that if essentially the trade deficit were to gradually decline, employment and manufacturing broadly conceived would increase. Let me come now to my second issue. Incidentally, the trade deficit begins, as jeff said, in the early 1980s. And its associated with a change, i would say, in the International Monetary system and with the large variability that we have had in the price of the u. S. Dollar and first half of the 1980s, the price of the u. S. Dollar went up 50 . A very large change. You will remember, i was then in the midwest, the midwest was being hollowed out. The iron belt became the rust belt. And that was essentially part of the adjustment to the change, the increase in the price of the u. S. Dollar. Now when i think about the crowding out, crowding in distinction, im reminded of that question that must have been in this room or its earlier counterpart in the early 1990s, when somebody said what would how would the u. S. Treasury finance its fiscal deficit if the doj werent willing to buy u. S. Dollar securities. So lets go through that. If the bank of japan did not buy u. S. Dollars, the price of the u. S. Dollar would be lower. The price at the end would bhaier. Bhabhae higher. If the price at the end were higher, there would be a smaller deficit. If our trade deficit had been smaller, our fiscal revenues would have been higher. So our savings investment balance in the United States is not independent of the foreign demand for u. S. Dollar securities. Now when i look at what i would call the cumulative u. S. Trade deficit, since 1980, its about 14,000 billion. It i then have tried to identify which countries have the counterpart trade surpluses. And i have sort of three broad categories. One category of sovereign wealth funds, the norways, the chiles, the singapores, the united air emirates. Their accumulated savings is 7,000 to 8,000 billion. They have essentially are involved in a consumption smoothing over time. And so they have exceptionally high Savings Rates, and a large part of their savings go abroad and a significant part of their savings leads to an increase in the u. S. Trade deficit. The second part will be, second opponent of the countries that have large trade surpluses are countries that have excess, what i would call excess reserve accumulation. What is happening in singapore is mindless. In terms of the savings, the cumulative private and public savings rate. A current account surplus of 15 to 20 for over 30 years. Other Asian Countries have extraordinarily high Savings Rates and extraordinarily high levels of foreign investment. And then we have countries that are a large reserve accumulators, china, i find sort of fascinating is the only poor rapidly developing country, in amazing contrast with south korea, south korea rapidly imported foreign savings, china grew rapidly in exported, a nontrivial part of its own savings. Let me come now to what i would call the policy observe vegass. Observations. Whats my objective . I want to stabilize the real price of the currency. I do not want mrs. Zang and mrs. Wantabes to get a real lag in the price of the dollar, that gets to the common currency role of the dollar, or on the depth breadth resiliency of Financial Markets. So what i would be willing to do, is to essentially adopt a version, a version of the tobin tax. One of professor tobin, when i was playing tennis with him, he said i dont like a tax being named after me. As it got high as it did in 83 and 84 or as it did in 97 and 98 or when the current accou accounts i want to minimize the surges in the u. S. Capital investment surplus. Were now in the contractive phase of the fourth dollar cycle since 1980. Each of these dollar cycles has had an expansive phase and a declining phase, the expansive phase leads to a brilliant performance of the u. S. Economy. Because of surges in consumption spending the decline in the savings rate, and then we go through in the detractive phase, the price of the dollar declines and capital and that ends up in a recession. The 1990s was a marvelous expansive phase, due to the surge in the u. S. Capital accounts surplus, that peaked in april of 2000, the inflow slowed the price of the dollar fell significantly and u. S. Stock markets fell significantly. The expansive phase of the third cycle begins in 2003, it peaks in the Fourth Quarter of 2006, we move into the contractive phase. House prices begin to fall and we end up with the most severe recession ever, due to mrs. Wantabe and mrs. Zang cross currency movements. So i want to tax foreign purchases of u. S. Dollar securities, when the price of the u. S. Dollar gets high, and i want to essentially increase the tax over time, secularly to charge for the housekeeping, money Housekeeping Services because the burden of providing those services are on the billions of people who have lost their jobs because of the increase in the u. S. Trade deficit. Thank you very much. Thank you. Claude . Thank you. When desmond and alex asked me to sit on the panel, i pointed out that by the time you got to me, my comparative would be lost because you have three, and des is going to continue so fourth lessons in fallacies as jeff put it in worries about trade deficits. So im going to go in another direction a little bit and talk a little bit about the United States trade position with china and trade policy toward china, with which we have the largest, not current account deficit, but product deficit. And so im going to be very specific and i should say that some of you have seen those, and most of you here who live in washington. So i think about three or four weeks ago, bob samuelson, the Economics Writer for the New York Post wrote a pie washi and bannon got one thing right, and that was about china. And i guess the theme that abe following through this morning, and i invite feedback from my fellow panelists, because this is in the spirit of what am i getting wrong here . Why shouldnt we do this . My theme would be the evolution of a reluctant trade hawk or interventionist. And let me explain what im talking about here. Im also not im basically going to, in the examples, will be mostly involved with what would be loosely called our hightech sectors and particularly hightech electr electron electronics, and Communications Technologies and interrelated companies, im not particularly as concerned with steel and aluminum as the Trump Administration is, and i should say in my writing the Trump Administration has come in even for, i dont think i have agreed with almost anything that they have done, so i dont start out as much of a trump supporter and very much a critic. But i think the situation with and i lost have to jump to something ill be saying at the end in policy have always exist exist existed in the view of others, reciprocity, strict reciprocity in terms of trade policies, all through the 1980s, i thought the ideas coming from the congress about strict reciprocity were a mistake. For reasons that ill go into, i think that china is different because of its size and because of where they are putting their resources and the way they are putting their resources, and let me just talk about what it is like at the moment to be a google or an apple, trying to compete in china. At the moment, almost half of the 20 most popular websites around the world are blocked in china. And that specifically hits u. S. Companies which have a comparative advantage, competitive advantage certainly in this area, and it includes the googles, the facebooks, the mike cr microsofts, twitter, and also outside the New York Times economists, not Companies Involved in it. But the point is that these companies and this sector right now and mostly this goes back to half a decade and in some cases a full decade have been blocked from competing in chinese markets, in the chinese markets. Now the chinese say these blocks are because of public morals, they dont want our National Security. But theres a very clear, if you go back and look at the history here, theres a very clear industrial policy aspect. When the chinese blocked google, it was just at the time that bidu was coming up. If you look at qualcomm, 10 cent and other Chinese Companies. While the chinese claim this was just something about public morals and about security, which is allowed under the wto, and ill come back to that. Clearly, when you actually look at what happened, there were other things going on here, and this is increased under xi jinping since 2012, we have just had the chinese to stop virtual private networks, which were one of the final outlets that people could get to the internet to be closed or under government control. So youve got that particular aspect. The other thing is that the chinese are mixing, which makes it difficult in terms of trade policy, Security Policy very clearly with economic policy, even beyond the closing of the internet. The new Cyber Security and National Security laws, those National Security laws, passed two years ago, the National Security law just came into effect last summer, clearly have Major Economic implications. The definition of security, both Cyber Security and broader National Security is sweeping. It includes all kinds of economic activities, agricultural activities, services, almost any aspect of the chinese economy has been swept up into their definition at any rate, of security. This has implications because under the Cyber Security and the National Security laws, there are certain obligations that companies assume, both Chinese Companies i would say and Foreign Companies. But its particularly important for Foreign Companies. It includes such things that Technology Must be controllable and secure. The companies also have an obligation under these laws to help and assist the government in all kinds of ways technologically, in terms of encryption, in terms of source codes in the name of National Security or Cyber Security. Now as is typical of chinese laws, the language is sweeping, but the administration is still being worked out. So the companies, whether its an apple or a google, which ever, even the Chinese Companies, still dont know what the ultimate obligations are going to be. So while they do know that they have new obligations, they are just they are gradually coming down, with the Chinese Government claiming were not going to do this in any competitive way, at the same time theyre moving forward in ways that are anticompetitive. Im not just talking about u. S. Companies, im talking about all Foreign Companies which are investing in china. I should say that beyond that, if we look at the larger picture, and theres nothing new about what im saying and most of you have probably read this at some point. The chinese are very clear about their intent, they dont tie the Cyber Security law or the National Security law to this. But the chinese are publicly saying that made in china 2025 means that to the degree that they can do so, they are going do substitute Domestic Technology for foreign security, whether theyre talking about the Cyber Security law or the National Security law or the other domestic regulations that are being put in place, it is all in the name of this particular goal, and as i say, the chinese are very clear about that. Now finally, what should we do about this . And there are a variety of possibilities. And i agree with those who are arguing, for instance, that we certainly should move forward very quickly with the bilateral investment treaty with the chinese, which would introduce some regulations, which would stop some or remove from barriers. The problem i see, though, is i dont think theres any chance in hell the Chinese Government today, beijing is going to agree to the kind of details and meaningful reduction of barriers that would come in what would be a vital bilateral investment treaty. So i dont see that happening. The second thing thats been argued and i agree with it if we can do it and should do it is to use the world trade organization, ill come back to an example of why that would be good. But the problem you face there is for the sectors im talking about, for the internet related companies and sectors and information technology. Wto laws by and large dont, or barely, cover the kinds of issues that come up. The last, i will point out to everyone, which is obvious, but you never think about it in terms of, okay, what kind of case would we do . The last wto legislation ended in 2005. Which was the predawn, you could say of the internet. So you could stretch some obligations that came under the Telecommunications Services agreement. But its really going to be a stretch. The one case i would argue that the United States should move forward in, i think there is some possibility and i think we ought to take the chance, i dont think we would absolutely win is a direct attack on the great fire wall, the great sensor ship wall that china has put around the country. Theres some indication from earlier wto cases, one of which the United States lost, correctly, in that the panels in the appellate body of the wto, would say the following. All right, to china, as an example. All right, if theres a New York Times article that you find offensive to your people or that somehow, some bit of information thats in the New York Times piece or the economist or something on facebook, you can certainly remove that. But what you cant do under wto law, is then sweep all of the New York Times off of the web, or all of facebook, because that is violates an obligation to have the least protectionist means of getting to your goal. Even under National Security or with public morals. So i think we ought to do that. But i dont think that takes us very far. That gets me finally to the reciprocity issue. I should say this, i am distrustful of the Trump Administration being able to pull this off with any precision. They will probably i think mr. Ross is going to china in november, hes going to tie it back to something that these panelists have pointed out thats nonsense, to doing something about the trade deficit. What im arguing may or may not affect the trade deficit, but we know the other things that actually are, that will govern that, but still, i mean having said that, i do think that i would i do support the administration Going Forward with bilateral negotiations with the chinese. And really doing it very specifically. These particular issues, what youre arguing that we have to have a partner, the definition you have of Cyber Security, we will not live with, and, and this is where we get to know the matter, i would invoke rest a reciprocity not on the trade side, but on the investment side. Where wto rules are less rigorous, there are very few investment riles in the wto, and ratchet up the process there. Whether it would work, i do not know, but i dont think the United States could stand still and this is a kind of new position for me, in terms of other countries, in china, the congress will just go overboard and really do things that really hurt foreign direct investment, beyond china. I think whats there now is probably not that bad. He does expand in his bill, this process of joint ventures which i think gets the process into i think more difficult territories, where its not possibly competent. But i think if we can get away with that type of amendment, i would be quiet happy. And let me end by saying, again, to my fellow panelists, come back. What am i missing here and where i am getting it wrong . Thank you very much. Thanks, claude. Desmond . Thank you, alex. At this stage having heard three professors talking about trade, theres nothing much left for me to do. Im really tempted to try to quote the trump case, but im afraid if i try to do that, my university might ask me back for my diploma. So im not going to do that. I went to a university thats a little bit more strict with the standards. So what im going to do is just talk about four things, first i want to talk a little bit about the myths that jeff spoke about so well, you know, and which i agree, ill be very brief on that. The second thing i want to talk about is what seems to me basic inconsistencies in the trump approach to the trade deficit and ill elaborate on that a bit, that hes wanting to use import restrictions, but hes got a different kind of budget policy and it doesnt all square. The third point i want to talk about a little bit is, you know, what i call United States exorbitant privilege and it comes to bobs point about capital flowing into the United States, and the last thing i want to do is just raise the question as to whether the dollar might be losing its safe haven status. So just in terms of the myths, ive got the same two charts as jeff put up. But i think that theyre worth repeating. This clearly shows that theres absolutely no correlation or if there is a correlation, a negative correlation, so if you have 180 countries that over a 14year period, those with the high tariffs didnt necessarily have low trade deficits or vice versa. This is absolute nonsense that going the tariff grroute is the way to bring the trade deficit down. The second point as jeff noted, is it looks like theres a negative correlation between trade deficits and economic performance. That when the economy is doing really well, and youre strong sucking in the imports, you have a rise in trade deficits, likewise when the economy is weak, you have a trade surplus. But the Trump Administration is totally misguided to make the trade surplus with the trade deficit an objective of economic policy. It only intermediasbeer meeimme states, what are your growth, what is your trade deficit, those are the things they should be looking at and not what the trade balance is. The question now as to the inconsistencies of trumps policies is that i too learned about this famous equation on agate bond, y plus c plus y plus x minus m and youre left with the identity that tells you that you just rearranged that equation. That a current account balance is the result of the difference between a countrys savings and its investment rate. Itch it if its got a very high savings and low investment, its going to be running a trade deficit. And as anne mentioned, just looking at the trade deficit, you cant tell whether its good or bad, youve got to ask what is really driving it . If its being driven by very high investment, thats a big trade deficit, it means the country is going to be able to repay the debt later on. But the tra what we have to worry about is very low savings. Those countries that have very good trade performances, that theyre running very big current account surplus, for instance, are the countries generally that have got very high saving rates. So china, germany, korea, those are the ones that really extend out and those are the ones that are giving us problems. So let me mention why im really very concerned about the whole trump approach to trade is that what theyre not saying is that if we have import restrictions, if we go after currency manipulators, we got after the trade deficit, thats going to what the trade and investment equation is telling you, is that immaterial on what they do on that store, youre still going to be running a trade deficit, if your savings falls way short of your investment. My concern with the Trump Administration is that what theyre doing is at the same time that theyre pursuing this misguided policy on import restrictions, what theyre doing is theyre proposing a budget policy is that would be very expansionary. So what theyre proposing is a very large unfunded tax cut, theyre proposing very big infrastructure expenditure, what one would assume is that that is going to give rise to larger budget deficit. If you have a larger budget deficit, it means that the company is saving less. If the country is saving less and at the same time through your deregulation pot licy and l the rest, youre getting investment to big up somehow, youre going to be getting a trade deficit that is going to be widening rather than narrowing. And my fear is that what they do, if they manage to get their policies implemented, which is eat b another big question, what theyre going to find is even if they put on the import restrictions, because theyre following a budget policy, that is wrong to bring down the deficit, the deficit goes up, theyll then double up on the import restrictions and that is whe really a key source of my concern. Let me go to the second point about the exorbitant privilege, that was something that was made popular in the 60s. What they did is they complained that the United States had this exorbitant privilege, that the dollar was the reserve currency, everybody wanted to hold the dollar, that capital came into the United States, which meant that the United States could go on indefinitely consuming morn they produce because people wanted to bring the money into the United States and thats essentially how we were financing the vietnam war. The truth of the matter is, as bob was alluding to, if youve got a freely floating system. If you brought a positive capital account, that necessarily means youre going to be have a deficit in your current account. The balance payment has to balance. Not intervening. Capitol is coming in. Youre going to have a trade deficit. If you try to stop that, by putting on import restrictions and the like. What youre likely to do is cause the dollar to depreciate further. In exchange the market you now got more dollars coming in. Your Exchange Rate appreciates. That could cause the capital to flow further. Youre not really going to solve that problem. So what i come to the conclusion is so long as youve got huge amount of savings coming in to the United States, the United States is going to be running a current account deficit and what one would also be looking at is that the correction of the current account deficit from the United States point of view is that the United States should be trying to save more to finance its investment but at the same time, ive got sympathy for the United States in saying that a country like germany which is now running an 8 of gdp current account deficit, this is the largest surplus in both absolute terms. Its around 300 billion as well as in terms of gdp. In fact, Something Like three times the level that china has, that theres an obligation on the germans to do their part. They really cannot hide behind the fact that they dont have a currency or that theyve got a debt break on their budgets that they cant do anything about the budget. This just happens. The current account somehow happens. I think theres responsibility on their side as well and going to anns point that what you need to do is get some kind of coordination or policies in order to lead to address those imba balances. Let me make the last point i want to make and its something thats been bothering me. Its about the dollars performance over the past year. Since trump came in, the chart will show is that since he assumed office, the dollar has fallen by roundabout 12 and this raises a question in my mind is that at the start of the year what people thought is that the United States was further on the cycle in terms of recovery, therefore what it meant is that the fed was going to be starting to raise Interest Rates to reduce the size of its Balance Sheet and begin selling off some of the bonds which all of this is happening at a time that the japanese and the europeans were printing money like it was going out of fashion. They were still engaged in quantity of easing. For that reason alone you would think the dollar to strengthen. The dollar, in fact, weakens. A second thing that you wouldve expected the dollar to strengthen from past behavior is that once geopolitical tensions arise around the world, once youve got problem you might be creating these problems, once those occur, if you got problems in korea, youve got problems in russia, youve got problems in the china seas, in the gulf, money comes in to the United States, pushes up the dollar. So those two considerations just raised a question in my mind whether something might not be going on that the United States is in the process of losing its allure as the place to bring money in times of trouble and if that is the case, we really do have a problem because then the adjustment is going to be forced on us just on this notion if the capital doesnt come in to the United States like any other country, were going to be obliged to reduce our deficit and then what were going to find out is that when that occurs, we really arent going to no longer enjoy the option of consuming more than we producing. Well have to tighten our belt, Living Standards are going to go down because were going to be absorbing less than before when theres 3 of gdp of current account deficit is forced out. So this might all occur but it wont be occurring in a organized proper fashion. It could be fairly disruptively and itll be occurring not because of President Trump but despite him. Thank you, desmond and thanks to all the panelists for their interesting perceptions. I want to get the panelist to react to something somebody else said or repeat something if you want to. Maybe about two or three minutes each. Well just go down in the same order and if you get to three minutes ill let you know. Jeff . One quick thing about each of my fellow panelists. First, claude, i agree that ipr is an area where the u. S. Has some valid complaints against china. Second, bob, yeah, weve all said to the current account is a macro account phenomenal. National saving and other countries matter as well. I already mentioned high savings rate among current account surplus countries and in the case of countries like singapore and maybe china and germany, saving is too high. But its really too high for their own good and the thing is every country gets to choose the mac crow policies that they think suit them whether rightly or wrongly. Facilitates each country running the policies that it thinks suits its situation. That doesnt mean that we cant and shouldnt and we do talk about these issues and in International Forum like the imf and the g7 and g20 and make deals like the plaza accord and all that. I dont see an ability do that today. For germany its really their partners in the European Union that need to bargain with them to cut down their fiscal posterity. Ann, im going to build on something she said. She sort of pointed to the down sides of trade adjustment assistance and how can you tell when a workers loss, his or her job for trade versus Something Else due to technology. Thats right. Why exactly do we care . Dont we want to provide the same safety net or help workers regardless of whether theyve lost their jobs due to trade or technology and she said Unemployment Insurance has a problem that it provides a disincentive to go back to work and i think the answer is wage insurance, which provides compensation, but if you accept and go back to work at a lower wage, then the job you lost, the government makes up the difference and that is actually it was proposed by president obama in unof the state of the union messages. Its on my list of one of ten policies we should be doing for shared prosperity and to make sure we dont leave the median worker behind regardless and my list of ten is fiscally balanced. That wage insurance would cost some money but theres other places to make up for it. Lastly, desmond. It is a question thats come up this year, is the u. S. Losing the the u. S. Dollar losing its safely haven status. You might think that that would happen based on things that were doing, the dollar would use its special safe hachbl status, but so far i dont think so. I dont think its happening. Its true that the dollar is deappreciated quite a bit since january but theres a ready explanation for that. Last year and the year before the u. S. Was expanding and growing more rapidly than our Major Trading partners and that appears to have reversed this year and that briefly i think is a major reason. Its true, i think, that geopolitical risks are huge and other risks are huge, but the fix is really low. Were in a risk environment and the risk on assets like equities most notably which are at highs and currencies like Australian Dollar and the emerging market currencies theyre all up. Its not just the dollar. The swiss frank is down as well. Ann . Lots in that much time. First one being your calculation talk in the mike. Sorry. Your calculation on loss jobs by my reckoning you said 1. 6 million jobs were lost. We will already have an Unemployment Rate of 4. 3 . How much lower do you think it would go . I would tend to think that we lost some jobs of course but we gained them elsewhere and were pretty much at full employment and obviously there might be more jobs in tradeables relative to nontradeables. There are pockets of concern. There are cities or areas where there are difficulties but i go back to the we want uniformed treatment of all people in that situation not simply on a commonality. On the tobin tax i have questions as to what would you tax . Would you tax any capital inflow and outflow including fdi or not . If you include everything then you got a problem. Money is fungible even there and i doubt seriously you do very much. U. S. Companies hold lots of assets overseas. It would be very difficult to make a difference in that regard for a bunch of reasons. The benefits i suspect would be small if not negative and so money is fungible afterall. And to cut down on transactions in such a way that you dont do enough to make a difference is going to mean to make enough difference so theres going to be incentive for smuggling for invasion and that kind of thing. Many developing countries have been there. I dont want the u. S. To be a developing country like that, so i guess id be very build on jeffs point for a be minute and i would go wage insurance. Id go basic income guarantee which is a big departure for me. I would do it only if subsidies and other measures were cut off at the same time. So that you had a basic income guarantee. The rich can pay the taxes on it and the poor can have it and we will dont get into foreign subsidies or these other things. Unthing, everybody. Theres no more costly than the wage insurance. Might even be less and meanwhile there it is and you dont get into all of these discussions about what to do. So me, ive becomed convinced that a uniform wage income subsidy, everybody, there are technical questions and some of which im sympathic with. Im not sure i want 18yearolds to get it. There are issues. Its not clearcut. It would be if the other subsidies were removed and of course we know what congress likes to do with subsidies which is increase them so it would have to be pretty iron clad in that regard but the sympathy for the poor worker would be much less if he had the basic income. And we will see how it works in scan da nafia. Final little on claude. Just a couple of things. In the 1980s there became a big fuss because japan was the one with the trade surplus and among other things the japanese had built a better super computer than the u. S. They had a better tv pixel whatever it is and so on. The argument was that we had to have our own Super Computers for defense reason. Nobody thought of the problem if we had our own super computer that wasnt as good might hurt our defense. If there was a better super computer to be had why shouldnt the military have it . The ones i think the best way to make sure were in deficit in the communications and what have you high tech stuff would be a protection against the chinese. I do believe in competition. I think theyre hurting themselves far more than us. The better off we are if we let everybody in our country use the best technology. It seems to me thats the way out. Im sympathic to the argument that women dont play fair especially when its a state enterprise. There are problems because theyve got unlimited resources from the government. On the other hand, protection is a solution i really worry that we would do ourselves more harm than good by trying it. Ill stop there. Thanks. Bob . Yes. We talked a lot about the shortage of u. S. Savings, et cetera. As an explanation for the capital inflow. Ill buy lunch for anyone on the panel or in the group who can identify a country that is increased its savings rate or diverted its savings to the United States at its own cost to help finance the u. S. Savings deficit. Thats it . Okay. Good. How good a lunch . Claude . Just one thing, we can talk about industrial policy thing in a minute. I will say that this is not mill area so i dont know the details here but i would say. You said in passing this is ironic about something doing with trade adjustment assistance and wage subsidies, whatever. If you look at the work of michael strain and other economists here, they are moving in that direction. Ill leave it to you and them to get the details of that. This is not an ironic thing to say any longer. Just a couple other things. On jeffs point about i didnt mention this, the administration has launched investigation of ip theft. Im a little sceptical there. Weve had all these figures thrown around 6 billion an independent Commission Said weve lost. Im sceptical for this reason. You cant just in the end, i applaud the administration for starting it, but you cant just say without some sort of factual basis where the intellectual property has been stolen. You look foolish in the world. The 600 billion or whatever it is we cant do much about that. What i dont see happening is that, as we did with the Chinese Military, those five Chinese Military officers three years ago that we had chapter and verse of what they had done and i dont think the administration is going to be able to come up with that, certainly not if you turn to the usdr. To do Something Like that youd have to go to fbi, cia, underneath of what was happening. Others have argued in terms of reciprocity that we should try to do this with other nations. Im happy to do that but i cant see it. Another thing that i didnt mention at the end was that high tech sector, the High Tech Companies in the United States are deeply divided on this so whatever the u. S. Government does whether its trump or his successors, they will have to do it alone. You cannot expect the googles of the world or the apples of the world to step up here. It has to come from the u. S. Government itself in terms of whatever we do including taking action against the chinese measures. Desmond . Make three points. First i very much agree with ann that if the United States economy is at 4 unemployment its difficult to see how much tloer that employment can go so if we do eliminate the trade deficit were not going to get more employment, well get the economy overheating, well get the need for policies to bring down our level of consumption to be consistent with our level of employment so i dont see it as generating jobs, i just think that what it might do is generate inflation and we really want to avoid that. Just on the dollar issue, im not convinced i dont know yet whether the dollar is losing its safe haven status but i think that theres a question mark rising there but what it is very important is this is a very important question for the federal reserve, because what weve seen since the start of the is the dollars depreciated by 10 . Weve seen conditions now at the easiest level theyve been because together with asset prices all being so void that i dont really get why the fed is holding off on the next operate increase or moving ahead more quickly with the wind down of the assets. I think ive been here before, the fed getting behind the curve. Just with the last point id make is i dont think that countries should have the right to choose how much it is that they save as if theyre operating in isolation. Theyre operating in a global system. When a country like germany runs a current account surplus of 8 of gdp, theyre part of the problem. Its not just the United States thats got a problem on the deficit side and that what we wanting to do is to get the germans to move in the correct direction, help us correct these global imbalances by doing something, use the fiscal space youve got, get out of the euro but thats another issue. And not have everything on the deficit country do all of the adjustment. Thank you. Now ladies and gentlemen, all of us up here could have a whole lot of fun just talking to each other for the next half hour or moral but instead were going to open the floor to your questions and i just want to remind you of our rules. Youll have the first one in just a minute, which is please wait for the microphone. We are being recorded here and youll be preserved for posterity. If you wait for the microphone. Tell us your name please and your affiliation and ask your question. If you feel an overwhelming urge to give a lecture before your question, at one minute the chair will remind you that its time to ask your question instead. So i have the first one here then well come to you second. Hi, its shawn doneen from the financial times. I wanted to get at something that you havent talked about here so far this morning thats the issue of measuring trade flows and trade deficits and the work that the oecd has been doing for example, on trade and value added. The argument being that actually traditional measures of trade and trade deficits just are not up to it any more, just dont reflect the modern realities of Global Supply chains and the way things move. So can you talk us through a little bit that and how we should be thinking about that . Should we be paying attention to these numbers . Are these just Old Fashioned measures that arent up to it any more . Ann, you touched on that a little bit, how about the measurements against todays reality . Measurements better of course when regulations arent as strong but thats a different issue. Obviously theres a difference between value added so less so for the United States than any other country because were so big we have smaller faction in trade. Singapore last i looked and some time ago has its gdp is oil exports are 180 of gdp which is what tells you quickly whats wrong with measuring exports as gross value added and measuring gdp has net value yet you want to measure gdp as net value added. Mexico is exporting the auto parts that go in automobiles if the u. S. Were selling a broad elsewhere so theres clearly conceptually very strong case and the oedc is to be commended. On the other hand, especially for the United States, im not persuaded it would make that much difference. It might change the time series more or less aprorgsat amount over time i dont think it would change the fundamental facts. Singapore being a good example, it would make a huge difference and some countries like that. The effort is well worth doing and the effort is about even more important given the people do tend to say theres an import, thats hurting our economy which isnt true in the first place. Have imports used in exports and showing that more clearly would help the debate so im all for it. Meanwhile we dont have the numbers to do it as accurately as wed like yet and the oedc is on the lead with that. I got jeff then to you. The point about value added change and computing value added makes a big difference for the bilateral balances. So for example, the fact we have a big bilateral balance with china importing all the smartphones, most of the components come from korea or the u. S. Or some where else. It makes a huge difference for the balance balances. Id argue we shouldnt care about that any way and it doesnt change the story for the overall trade balance. I think maybe were over measuring the current account deficits for technical reasons but i dont agree with the idea that the situation looks fundamentally different from what we should care about which is the overall trade balance if you Pay Attention to detailed attention which is useful for other reasons to the value added chain. Claude . Jeff made the point i was going to make. We do face politically and it does is help to make the point that you made that china really is just gives all kinds of other parts, and the final product comes to the United States as if it were a chinese export to the United States when that isnt true. Its good in the political sense. You dont want to get involved in any debates on bilateral trade deficits or surpluses. Okay. I have a question right here. Wait for the microphone please. Thank you. Great job by the panel. Ill start with the question and then ill have to explain why im asking the question. And the question is, why is the wonderful science of economics not understood the need and developed a system of Balance Sheet accounting to complement the income accounting that has been so well developed . And the reason why im asking the question is because as i hear all of you say so many good things, i am finding some huge missing links in your analysis and in some of your conclusions and just to name two huge missing links, youre not accounting for Human Capital, appreciation and depression of Human Capital. When we have immigrants coming in every year, that is a equivalent to about a trillion dollars of savings im going to have you to. I was explaining it. We have time limits. Make your second point quickly. The other one is financial capital. When you have three to four trillion of foreign profits parked overseas, they could be here, all of that is mark to market price earning in the Financial Markets here all of it is savings that is matching the production thats being put overseas and its reflected in exports and imports in u. S. Companies because we do not measure assets and liabilities and mark them to market for the u. S. Economy as a whole. Were missing those links. Okay. Thank you. How about Balance Sheets and all of this . Bob, i was going to say that this should be right up your alley. Ill answer the first question and let the panel sorry ill answer the question, and let the panel deal with the first. So if apple has a claim, apple has a claim of 10 billion is 10 billion of cash sit not guilty limerick, thats the u. S. Direct foreign investment. Its measured. Other comments on Balance Sheets, ann . Im sorry. Two things. We do have investment position which the imf is putting out and the u. S. Has become negative but u. S. Net earnings are still popular so theres something in the measurement thats strange there. I havent seen although i havent looked carefully i havent seen any explanation. On Human Capital the big argument would be quite different. One of the things we didnt mentioned to is that it is true that u. S. Companies are holding a lot of dollars overseas because of the tax exempt status of their profits when its left overseas and one of the interesting questions long before you went to a toeb bin tax, why not do something about the corporate profits tax so you had made it more neutral to bring profits back and that would make a difference so youre quite right about that one. Any other comments from the panel . Next question right here, please. Wait for the microphones coming. Thanks. John independent economist. I sense an incongrutty between the reference to full employment and professors point about these pockets of depression and the there was a suggestion that we might guarantee wages, subsidized wages or guarantee income and i was wondering and this goes back to nicks work on low Labor Force Participation and men without work, if indeed that is not the problem and there might be a problem with providing income support with this issue of Labor Force Participation and these people that have been pulled out the only reason i mention this is that, people may tend to confuse trade issues with this underlying structural problem. Okay. Someone want to take that up. Just to agree that when we say that were at full employment or the natural rate of unemployment, we dont mean that 5 is low as we would like it to be. Clearly, there is this problem that prime age males, white males are out of the labor force and whether you want to blame video games or Opioid Crisis or alcoholism or what, its clearly theres clearly a problem and it should be addressed but macro economics cant address it. Trade surplus cant address it. Anybody else . I would just like to speak briefly to that issue. So desmond picked on me and desmond said were at full employment, what would happen if the trade deficit declines . So lets go down that route. And follow that mental experiment. While we have full employment and current account deficit of 4 of gdp and we have a large fiscal deficit, so in my view the trade deficit essentially has meant a loss of jobs and weve essentially had to provide work for a number of people by having a larger fiscal deficit. I dont want any abrupt changes in the economy but id like to get gradual decline in the trade deficit and my model would provide more jobs in the tradeable good sector and a smaller fiscal deficit. Thank you for the question. Another question right here, please. Danny bachman. Chinese demographics are remarkable in the future that essentially were heading toward a china with a huge number of old people and no way to support them. So im wondering if you could reflect on this panel 20 years from now and how it would think about the chinese surplus and whether chinese balance surplus with the United States and whether thats related to the that no one talked about the japanese surplus with the United States when 20 years ago that probably would have been the main topic. We do have that interesting shift from the from our previous chinese demographics, bob and well take anybody else that wants to comment. This is just a great question, we get great incites i think from the japanese experience. So for the last five years ive been predicting an implosion of the chinese Property Price bubble and the bastards keep pushing it off but its going to occur. Just as it occurred in japan. There is a massive Property Price bubble and we at that stage, what well see happening will be that the chinese demand for imports will decline very sharply, chinese exports will surge this is japan 1991, 1992 repeated. And china will have a massive trade surplus and washington will no longer be able to justify that large trade surplus because its the biggest Aircraft Carrier that we have, so the trade issues are just going to become immensely intense when the combination of the surge the excess supply of housing and the demographics hit. Other comments on demographics. I think theres another scenario. Partly because the chinese so far have not built that much of a Pension System and theres a lot more work to be done which does explain the high savings rate in china. If you go along that route you would forecast that theres a decline there meanwhile their labor forces is already constant. Not the rising any more. If there is an increase in subcomponent unless they get the productivity growth up from where it is now, theyll have problems and at the moment they do not seem to be taking actions that seems to me theyll do much on the productivity side. The more likely thing in the near term is what weve seen a bit of their surplus is going to diminish as the demand for some of these Services Domestic pli decreases. Both of these forces at work and how they play out could be quite different just depending on but my own guess is based on reading what little ive read on it that indeed the pressure for the more social services will outweigh the pressure the other way which bob is speaking about. Desmond . I think you obviously had a stimulating question. Youre pointing to a very important issue in terms of demographics and how it affects savings to the extent that it affects savings what weve been saying before is that that is going to have an impact on current account balances because its going to impact the savings not necessarily the investments so you get that change. But the point id make is when youre looking at this from a question of hows it going to effect that particular countrys current account balance, youve got to take into account that demographics are going on in other countries as well. So you put many countries that are aging at rapid rates and i guess i would think that the country thats going to have its current account hit the most through this means is the country that is aging at the most rapid rate. So id be really concerned i dont know about china as much as im concerned about japan, because japans got this huge amount of debt, public debt. They still running a big fiscal deficit and the population is aging like crazy, so youd imagine that as in the same way as when there were anticipating retirement they saved a lot but once theyre in the retirement they begin to dissave. You can really get big movements i would think in japan over the next few years. Jeff . I agree with what the others have said. By the way, the two countries that are looking forward aging the most rapidly in the world or korea and singapore and i think you will see that the effect as they people retire, the saving rate will come down and their surpluses will come down and also with china. I agree with ann that china should develop its Pension System and social safety net system more. Just to crystallize it, i agree very much with the president and i think its already happened. In the 80s when everyone was so upset about japanese surpluses, we economist gave the same speeches about National Savings and next and audiences werecal. It seemed so abstract. But surely the reason japan is running such large current account surpluses has to do with semiconductors and trade negotiations. We cant believe its driven by savings and investment. The prediction was at that time we already knew that japan was the most rapidly aging country in the world. As they aged and retired the surplus would come down. That is whats happened. I think economist had it right and i think the same were not always right. On this one we got it right. Same thing is true with these other countries. Thank you. Bob . Go ahead. Then hell go to the next question. The immediate shortterm experience as the prices fell and that led to a surge in the current account. And the china case when Property Prices fall, Household Net Worth is going to decline by 50 and it is predictable that there will be a massive increase in the savings rate. I want to take the privilege of the next question myself and this is from my good friend bob. Bob do you share do you share desmonds concern about the potential loss of safe haven status for the American Securities markets and for the and of the u. S. Dollar . No. Thats why its premature. Premature . Come back to the issue in 20 years. Ill have a contract. My question, what would be the alternative . Would there be its not going to be china. Where else would you go . They are getting to places like the euro, to the swiss frank or to the japanese yen. Youve just given that japan is not a great place to go. The markets are thinking about the United States. Ann . The other side and i am somewhat worried, the other side is that if indeed the kind of infrastructure expenditures and tax reductions, et cetera that are proposed comes into effect, already theres at least from what ive heard and seen overseas a fair amount of greater concern about the stability of the United States than there was and if inflation begins taking off here as given that our close to full employment now could well happen. The latest consumer is 2. 4 for last month which is cpis and its been a long time. If thats taking off right now and that came in, i can well imagine the people might not necessarily said, ill take it out of dollars and put it into yen or whatever but i can well imagine theyll decide it to keep it in their home occur ren sill than in dollars. Hard to believe there plb stability and theres still a lot of holding within europe of u. S. Dollars Assets Holding dollar assets and we need to have we need to have some increase in their hold our macro together. Once that stops, then there would be a reversal in getting out. As always when these things happen its not something that happens solely. Other questions from you all. Right here, please. Hi. I wanted to see if i could get some of the panelists to respond to the contention over here more clearly about crowding and crowding out in terms of the s minus side not being independent of foreign demand of u. S. Securities. Why dont we hear economists maybe talk about that if you do agree why dont we hear economists talk about that more . On crowding and crowding out, other comments. No one has taken me up on my offer of lunch. Do you mean a country that has voluntarily decreased to do the United States a favor. No. The United States is the baed guy in all of these scenarios. We drink too much and save too little, et cetera, et cetera and the lone ranger from switzerland or asia comes to the rescue and sends us savings, so that country is either increased its savings rate or its reallocated more savings to the United States at a cost to its domestic residence. Name the country for a free lunch. I think the bottom line is when when the u. S. Is at the actual rate of employment, whether you think that its a low u. S. Savings or high foreign savings or tariffs or whatever you think it is, its not going to effect increasing the trade surplus from here on will not improve employment and growth. You just have to take the resources away from some where else. Were up against the constranlt. It was true as in turn of the century 2000 and its true now. And to add to that of course and as was pointed out earlier by the panel. If indeed by somehow, some miracle congress did decide to do something today that did somehow as bob wants us to do to cut the trade deficit, of course that makes a difference but that makes a trade difference is cut and its not going to come out in the form of anything like youre wanting. Its going to come out in the form of less inflation than we will have because we have this much demand already in the system and these higher taxes lower taxes and more infrastructure will put increased pressure for price increases. I would guess the true alternative right now is to get some degree of correction in the aggregate demand or well have more inflation in the near future. Weve been looking at some time and its just beginning now and even the fed is beginning to look at all the increased [ inaudible ]. Go ahead. To amplify that point go back to the 1990s. Why was that the longest expansion in u. S. History . Part of it was the fed louled it to run without raising Interest Rates and part of the reason they were able to do that they didnt worry about inflation and part of the reason they didnt worry about the inflation, they had this safety value. High rate of demand. Low import high imports and low prices for imports kept inflation down and they were able to let the growth run for longer. We may be back in that situation again. I just have a question, just in terms of future trade policy around the world. In terms of all the things we talked about this morning in terms of savings or investment, aging of populations, various other issues, what impact is any of this going to have on say the next ten years and world trade policies whether its the wto or will it move or not . Or has it any implication at all from what you see . Claude, thats a great big picture question for us and were going to end on it given the other panelists a chance. What about the whole global regime of trade as we look over the next decade either comments on what will happen or what should happen . Seems to me that at the moment given the what we think we hear the president saying about trade protectionism, if he is able to and follows that route to anything like even an intermediate degree, he goes protectionist, i think that is going to be far more important in driving trade policy in the rest of the world over the next ten years than these other things weve talked about simply because we were to our credit at least before this, the leader in opening up the trading system to everybodys benefit and if now we retreat, there is no obvious natural successor in terms of the that could lead the process in the short run i regret to say. Some countries are beginning to try to induct their policy and try to put together coalitions that might work. I dont see anything that offers a lot of promise to offset people want to be protectionist. Theres something that human nature wants it and if the u. S. Terms more protectionist that will become another argument for protection in other countries. Thats far more important than the demographic. Its far more important. Chinese surplus is going down. Thats not changing things. Thats not the argument people are having right now. Lets give jeff a moment and then desmond as the organizer and chief well give you the last word. As the organizer i might override you. I just i agree its very worrisome. If trade policy didnt keep moving forward that we would fall over and move backward and its happening. Im not sure if that theory is right. I would be happy if we could just stay where we were and instead were falling over and moving backward. Its part of a more general pattern. U. S. Abdication of leadership in the world not because we cant afford it. We can afford it. Thats not the issue at all. Were throwing it away with both hands just because we dont understand. It applies not to trailed and International Finance it applies to science and interNational Security. And so on. Dez mondays, last word. I hate to end on a down note. You would be out of character otherwise. Where have you been . What i would just observe is that it has to be of concern that weve got these kind of trade frictions at a time that were experiencing a synchronized Global Recovery that employment looks good in a lot of places, the world is getting on so the question you have to ask is, what happens if the Central Banks through a huge amount of monetary easing over the past eight years theyve increased their Balance Sheets by like 10 trillion, what theyve done is theyve created an bubble, greenspans talking about a bond bubble, equity prices being at elevated values. Theres a huge amount of credit mispricing. Theres a lot of fault lines in the global economy, youve got to ask if weve got problems now in terms of trade frictions, whats going to happen during the next down turn and it looks to me as if what the Central Banks have done is theyve set the stage for another major down turn going ahead, so on that happy note, i thank you all for coming. Thank you. Lets show our appreciation for the panel. [ applause ] its always been identified as a wall of slavery. Believe me. No soldier on either side gave a damn about the slaves. They were fighting for other reasons entirely in their minds. Southerners thought they were fighting the second american revolution. Northerners fought they were fighting the holy union together and that held true throughout the whole war except for some people who were absolute partisans on both sides. For the past 30 years the Video Library is your free resource for politics, congress and washington public affairs. 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