[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
U.S. FOREIGN ECONOMIC POLICY IN THE
GLOBAL CRISIS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 12, 2009
__________
Serial No. 111-18
__________
Printed for the use of the Committee on Foreign Affairs
Available via the World Wide Web: http://www.foreignaffairs.house.gov/
______
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COMMITTEE ON FOREIGN AFFAIRS
HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American CHRISTOPHER H. SMITH, New Jersey
Samoa DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey ELTON GALLEGLY, California
BRAD SHERMAN, California DANA ROHRABACHER, California
ROBERT WEXLER, Florida DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts RON PAUL, Texas
GREGORY W. MEEKS, New York JEFF FLAKE, Arizona
DIANE E. WATSON, California MIKE PENCE, Indiana
RUSS CARNAHAN, Missouri JOE WILSON, South Carolina
ALBIO SIRES, New Jersey JOHN BOOZMAN, Arkansas
GERALD E. CONNOLLY, Virginia J. GRESHAM BARRETT, South Carolina
MICHAEL E. McMAHON, New York CONNIE MACK, Florida
JOHN S. TANNER, Tennessee JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, CaliforniaAs TED POE, Texas
of 3/12/09 deg. BOB INGLIS, South Carolina
SHEILA JACKSON LEE, Texas GUS BILIRAKIS, Florida
BARBARA LEE, California
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
Richard J. Kessler, Staff Director
Yleem Poblete, Republican Staff Director
------
Subcommittee on Terrorism, Nonproliferation and Trade
BRAD SHERMAN, California, Chairman
GERALD E. CONNOLLY, Virginia EDWARD R. ROYCE, California
DAVID SCOTT, Georgia TED POE, Texas
DIANE E. WATSON, California DONALD A. MANZULLO, Illinois
MICHAEL E. McMAHON, New York JOHN BOOZMAN, Arkansas
SHEILA JACKSON LEE, Texas J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida
Don MacDonald, Subcommittee Staff Director
John Brodtke, Subcommittee Professional Staff Member
Tom Sheehy, Republican Professional Staff Member
Isidro Mariscal, Subcommittee Staff Associate
C O N T E N T S
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Page
WITNESSES
Simon Johnson, Ph.D., Ronald A. Kurtz Professor of
Entrepreneurship, Global Economics and Management (GEM), MIT
Sloan School of Management (former Chief Economist of the
International Monetary Fund)................................... 8
Lori Wallach, Esq., Director, Global Trade Watch, Public Citizen. 23
Philip I. Levy, Ph.D., Resident Scholar, American Enterprise
Institute (former Senior Economist for Trade on the President's
Council of Economic Advisors).................................. 36
C. Fred Bergsten, Ph.D., Director, Peterson Institute for
International Economics (former Assistant Secretary for
International Affairs of the U.S. Treasury).................... 47
Peter Morici, Ph.D., Professor of Logistics, Business and Public
Policy, Robert H. Smith School of Business, University of
Maryland (former Director of Economics at the U.S.
International Trade Commission)................................ 61
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Simon Johnson, Ph.D.: Prepared statement......................... 11
Lori Wallach, Esq.: Prepared statement........................... 25
Philip I. Levy, Ph.D.: Prepared statement........................ 39
C. Fred Bergsten, Ph.D.: Prepared statement...................... 50
Peter Morici, Ph.D.: Prepared statement.......................... 63
APPENDIX
Hearing notice................................................... 102
Hearing minutes.................................................. 103
The Honorable Brad Sherman, a Representative in Congress from the
State of California, and Chairman, Subcommittee on Terrorism,
Nonproliferation and Trade: Article dated January 6, 2009, from
the Christian Science Monitor.................................. 104
The Honorable Gerald E. Connolly, a Representative in Congress
from the State of Virginia: Prepared statement................. 105
The Honorable Sheila Jackson Lee, a Representative in Congress
from the State of Texas: Prepared statement.................... 106
The Honorable Donald A. Manzullo, a Representative in Congress
from the State of Illinois: Prepared statement................. 111
U.S. FOREIGN ECONOMIC POLICY IN THE GLOBAL CRISIS
----------
THURSDAY, MARCH 12, 2009
House of Representatives,
Subcommittee on Terrorism,
Nonproliferation and Trade,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:40 a.m. in
room 2172, Rayburn House Office Building, Hon. Brad Sherman
(chairman of the subcommittee) presiding.
Mr. Sherman. We will now bring the subcommittee to order.
We will start, of course, with opening statements. I thank the
witnesses for being here. But, I especially want to thank
President Barack Obama for taking note of the timing of this
hearing and coordinating the release of his international
economic plan with the timing of this hearing.
I just can't voice my appreciation for that strongly
enough. Today's hearing aims to examine the effects of the
global economic crisis on how the United States and
international trading partners may adjust their economic
policies in response.
We know that early next month our President will be
attending the G-20 summit in London. The administration has
released an international plan, the provisions of which are
just now coming into view.
It involves the G-20 countries committing to a stimulus
package of 2 percent of GDP, and that the countries should
spend significant additional amounts on export promotion
through their export credit agencies. In our case that would be
the Export-Import Bank.
While we don't have all the details of the President's
plan, we have checked with Treasury. They are not going to be
seeking budget authority for this effort, and the export
financing will be short term, using the existing Ex-Im Bank
facilities.
OPIC, over which this subcommittee has legislative
jurisdiction, is not anticipated to be involved in this plan.
The countries are going to be urged to put in matching amounts
to the World Bank, and also in other multilateral banks, to
help less-developed countries finance exports.
And, I do want to make a note about the use of the World
Bank. The World Bank lends money to Iran. It is helping to keep
the Mullahs in power. It is helping indirectly to finance
nuclear weapons that will threaten the United States.
The World Bank either needs to adopt a policy, not only of
not making additional loans to Iran, but also of not making
further disbursements on loans previously approved if it is to
be regarded as a healthy agency with which the United States
should continue to do business, and to make additional
investments.
Also, under the Obama proposal the United States would
increase its line of credit to the IMF from $10 billion to $100
billion, with a view to increasing other countries to do
likewise, so that the total increase would be $500 billion.
Now obviously we need to see the President's full proposal.
I want to work with the administration to ensure an aid package
is crafted that maximizes support for American economic and
foreign policy goals, and this hearing is the beginning of that
process.
I do think that two things need to be more clear. First,
how we are going to plan for dealing with the trade deficit.
You just can't sweep $.5-.75 trillion under the rug year, after
year, after year.
And the second thing that remains unclear is whether our
commitment to increase a line of credit to the IMF is
contingent upon similar commitments from Europe, Saudi Arabia,
and China, or whether it is something that we are going to do
in the hopes that it encourages these other nations to act.
I would point out that it appears that Japan is already
acting consistent with President Obama's plan. This hearing
will also focus on the big brouhaha of the Buy American
provisions in the stimulus package, and compare them to the Buy
France and Buy China provisions in the stimulus packages of
other countries.
The extent of the crisis is well known to all. On March 8,
the World Bank announced that the world economy will actually
shrink for the first time since the end of World War II.
The International Labor Organization expects global
unemployment to increase between 18 million and 30 million
workers, and may increase by 50 million workers if the
situation continues to deteriorate.
By some estimates as much as 40 percent of the world's
wealth has evaporated. Most of those focusing on how we got
here focus on the non-regulation of derivatives and absurd
mortgage lending standards in the United States.
But we cannot forget that the trade deficit of the United
States has spiraled out of control, reaching $800 billion in
2007. This is a symbiotic malignancy in which the rest of the
world becomes economically dependent on a malignant trade
relationship with the United States, and Americans become
dependent upon living a lifestyle where we consume far more
than we produce.
Things that cannot go on forever don't, and one would
expect that the United States' trade deficit will either be
straightened out by the current economic calamity or will
result in the next economic calamity.
Our trade deficit expense, I believe, comes from our faith-
based trade policy. We have faith that if we open our markets
others will do the same, and we have faith that since we are a
country that believes in the rule of law, because we believe
that the only way government can effect, should effect, or ever
does effect private sector and economic decisions is through
written regulations that other countries follow the same rule
of law.
And, that if we can simply get those countries to adjust
their written regulations, we have thereby eliminated any
governmental pressure or interference in decisions of private
actors seeking to maximize their own utility by in many cases
purchasing American goods.
A faith-based trade policy works well as long as one does
not look at the results. Now those who became rich and powerful
in a system that led to our trade deficit are not going to roll
over and move to any other system.
They are using every technique possible to either avoid
discussion of our trade deficit or to attack those who dare to
mention it. Their favorite tactic is to talk about the Smoot-
Hawley Tariff Act of the 1930s, while failing to mention that
when that act was adopted the United States had a trade
surplus, and continued to have a trade surplus in all the years
relevant after it was adopted as well.
So you can't have a less similar circumstance to today, and
when comparing today with the days of Smoot-Hawley. Second,
Smoot-Hawley involved tariffs on various goods.
It is different from anything that anyone would propose,
and accordingly when you mention Smoot-Hawley, therefore you
are talking about a proposal radically different from anything
that anybody is proposing today.
And you are talking about circumstances radically different
from those that pertain today, but aside from those things, it
is directly relevant to the discussion of today's trade policy.
When the House set steel and iron procurement standards for
Federal funds for mass transit and highway projects, there were
cries that we were going to start a trade war. There were a
number of ironies in this, the least of which is the fact that
the United States specifically exempted several types of
projects that were subject to our procurement obligations under
the WTO agreement on government procurement.
Who was crying most loudly? It was the Europeans and the
Canadians. The EU Ambassador to the United States called the
Buy American language a dangerous precedent. The Canadian
Ambassador said that the Buy American provisions would fuel the
economic crisis.
This is particularly ironic because both Canada and Europe
have retained essentially the same or greater procurement
restrictions in their WTO commitments. Canada retains
restrictive domestic procurement rights for aspects of its
transportation sector, including some systems and components,
and not just iron and steel.
The EU has retained the right to restrict procurement in
its WTO procurement commitments. Now to comfort these critics,
the Senate included language that clarified what was already I
think well understood, that the provision would be carried out
consistent with the United States' trade obligations.
And the Senate simultaneously expanded the Buy American
provisions to include United States manufactured goods. So,
this expanded version of Buy-America became law. Did the world
come to the end? No. In fact, after the bill became law, its
critics have been relatively silenced.
The importance of the subject of this hearing is
illustrated by the fact that my statement has already gone on
too long, but I will use my time during the questioning period
to illustrate how the government procurement and stimulus
efforts of our trading partners are far more restrictive to
United States competition than anything imagined in the United
States stimulus bill.
I look forward to hearing from our witnesses, and I look
forward with even greater anticipation to the opening statement
of our ranking member, Mr. Royce, and our other colleagues.
Mr. Royce. Thank you, Mr. Chairman. I look forward to
working with you and cooperating as we did last year. I wanted
to just make a few observations.
The world is changing ever more rapidly, and unfortunately
not for the better. Our Director of National Intelligence calls
the global economic and financial crisis, today's subject, our
greatest threat. It is certainly near the top.
As the United States economy sinks, so is the world's. All
over, growth is down, employment is up, and markets are
sagging.
Trade is a big concern. World trade, Mr. Chairman, has
quadrupled since 1982. President Obama's USTR-designate,
testified last week that the world trading system has
``expanded the economic pie.'' This winning streak,
unfortunately, is over. Trade is now declining for the first
time since 1982, and it is declining very rapidly. Some have
warned that the ``golden era of trade'' is over. That depends
upon whether protectionism gains the upper hand in this
argument.
Ideas have consequences. The policies that spark trade's
growth were under attack well before this economic crisis
began. United States exports were the biggest contributor
frankly to economic growth last year. Yet, the last Congress
blocked trade deals with Korea, with Colombia, with Panama, and
with others. This Congress appears set to do the same. A key
House Democrat reportedly warned colleagues this week not to
refer to trade agreements as ``win-wins.'' Don't call them
that. These agreements though amount to billions in
``stimulus'' that would not cost a dime.
Now there has been a discussion of blocking trade in the
1930s with the Smoot-Hawley law. Of course Smoot-Hawley, with
the 200-percent increases in tariffs, is not identical to some
of the initiatives being pushed today.
But what we are talking about when we are talking about
Smoot-Hawley is the blow back from our trade partners. The
reaction in Europe, in terms of the trade barriers that went
up; the reaction in Latin America, in Chile, and in other
countries, that then impose trade barriers, and the fact that
once that happened, economic decline put a very severe
recession into a great national depression worldwide.
I guess one difference is that when President Herbert
Hoover signed that bill, reportedly beforehand, he said, you
know, I know better. He said that I think the economic
consequences of these are great, but to be honest, it was the
most popular legislation that Congress probably ever passed.
And certainly it was just as easy for the Canadians and the
Europeans to follow in the footsteps of Smoot-Hawley, and it is
just as easy today for those parliamentarians in Canada, and in
France, to push for protectionist measures.
I guarantee you it is a popular argument to make in those
countries, but I also guarantee you that if we are successful
in undoing liberalized trade, and if those forces in Canada and
France, who would like to do the same, are just as successful
that some would like to be here, the consequences will most
assuredly not be an economic benefit to the people of the world
in my opinion. There are very real trends that indicate that we
are heading back that way.
The World Bank reports that 17 of the G-20 countries have
implemented trade restrictions. As the world's largest
exporter, many high-paying United States manufacturing and
service jobs are at risk. Protectionism, combined with
collapsed commodity prices, threatens to throw hundreds of
millions into poverty worldwide. The implications of this for
our national security are frankly beyond comprehension.
Protectionism will infect other issues requiring
international cooperation. It will be harder to work together
on counterterrorism, on financial sector reform, or nuclear
nonproliferation, if you are treating trade as a zero sum gain.
One focus of this committee will be foreign aid reform.
Nearly everyone agrees that our aid program is dysfunctional,
incoherent with its hundreds of goals. The administration's
budget aims to double foreign aid. There is no justification
for that given our aid program's sorry state. Never mind our
dire economy. Many types of aid are simply harmful. I saw that
certainly with the impact that it had on Mobutu's Zaire or
Congo today. The administration's plan announced yesterday to
multiply United States spending through the IMF is ill-
conceived. Where did this come from? Many Europeans are right
to balk about this.
Calls to increase development aid make no sense while we
are denying developing countries market access, the most
powerful developmental tool. That is the most powerful thing
that can be used for development. The African Growth and
Opportunity Act doubles trade between the United States and
Africa. Encouraging is the administration's indications that it
will move against agricultural subsidies, which punish American
consumers and the world's poorest.
Pakistan is a great concern. The country is a powder keg
with a nuclear arsenal. Radicalism is spreading, and the
economic crisis will weaken the remaining forces of moderation
in that country. There is no reason to believe that the very
large aid package for Pakistan being proposed will turn this
around.
Closer to home some have discussed Mexico as a ``failed
state.'' Economic pressures are intensifying there. The Mexican
Government's battle with the drug cartels is a death match
spilling into the United States. More so than ever, border
security is national security. Yesterday I wrote President
Obama asking that he resume Operation Jumpstart, which deployed
National Guard troops along the Mexican border to great
benefit.
Authoritarian governments in Russia, China, Venezuela, and
elsewhere already have blamed the United States, deflecting the
tension from their own shortcomings. But as Venezuela and
others nationalize companies and embrace stateism, their
economic demise will intensify.
The idea that a nation's business can be well managed by
its government, that politicians and government bureaucrats
have the ability or inclination to manage business is a conceit
and power grab that has made people poorer again and again. I
hope that we understand that at home. Thank you, Mr. Chairman.
Mr. Sherman. I thank the ranking member, and just one brief
comment. There are, I think, three groups in trade at least
that are protectionists associated with Smoot-Hawley. There are
those who support generally our present policies, and there are
those of us who believe in open markets with a sledge hammer.
And so I am sure when he was talking about Smoot-Hawley, he
knew that I was in that third group and not in the first group,
and I now yield to our vice chairman, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman. We have five very
distinguished guests before us, and I want to move this along
so we can get to their comments. It is very important.
I think quite honestly that between you and Mr. Royce, who
basically covered the waterfront. However, I do want to say
that fear is just not an option for us. The world is in a state
of uncertainty with many other countries economies in dire
shape.
And we need to be very, very careful how we approach this.
We need to do it with a calmness and a confidence, and be very
careful about how we view and how we are viewed, in terms of
isolationism.
It has not worked in the past. We have been at our greatest
as a country. We have shown the way without fear, without
trepidation, and we have in many ways set the standards, in
terms of using our trade diplomatically, fairly, and
understanding that that is the main way that we keep avenues
open to countries by having economic relationships with them.
And I come down on the side of wanting to keep those
opportunities of trade open and not close our borders. With
that, I will reserve for the rest of the questions so we can
get to our panelists. Thank you, sir.
Mr. Sherman. I now recognize the gentleman from Texas for
any opening statement that he may have.
Mr. Poe. Thank you, Mr. Chairman, and thank you for being
here. I am concerned about four countries: China, Russia, Iran,
and Mexico, and our relationship with each of those.
China, are they going to take advantage of this situation
worldwide to expand their political influence through their
economic programs. I am concerned about the debt that the
United States owes China, and that growing interest on that
debt.
And Russia, are they going to use their global influence
during this crisis to move into more former Soviet states, like
they did in Georgia. Is Ukraine next, or who is next.
Is the Russian bear going to come out of hibernation or are
they just going to be complacent. I don't know, but maybe you
do. And, of course, Iran, with the energy prices being what
they are, is that affecting the stability of the Iranian
Government or it has no effect.
I am mostly concerned about our neighbor to the south. I
think that the United States needs to have a better neighborly
relationship with Mexico, and the economic crisis there, and
the drug war in Mexico has led some to warn that some of the
ungoverned areas in that country may become sanctuaries for
terrorists.
Is that a valid concern or is that just some concern or
fear. Is it time to renegotiate NAFTA or is it time to
reinforce NAFTA. And, of course, the answer to the question,
the question being what should the United States do to
stabilize Mexico economically so that it is stabilized
politically.
And, lastly, I, too, am concerned about our foreign aid
policy. We just write the check every year and maybe we need to
figure out why we do that to so many countries all over the
world. So, with that, Mr. Chairman, I will yield back my time.
Mr. Sherman. I thank the gentleman from Texas. I recognize
the Ambassador and Congresswoman from California.
Ms. Watson. Thank you so much, Mr. Chairman, and thank you
for holding today's very important hearing to examine the
effects of the United States foreign economic policy and trade
effects in this global financial crisis.
It is important that the United States continue to work
with our friends around the globe to carefully craft, manage,
and redirect this crisis in order to restore confidence in the
capital markets, consumers, and developing nations.
As the recession began in December 2007, many foreign
leaders around the world believe the economic downturn was
isolated to the United States. However, as the situation
snowballed into a global financial crisis, the most severe
since the great depression, many people around the world began
to fall into poverty.
In November 2008, the World Bank reported that with each 1-
point percentage drop, 20 million people could be trapped into
poverty. We know from past recessions that when people lose
their jobs, no matter which country one lives in, that
desperation often leads to increase crime rates. We see that
here in our country.
In emerging and developing nations desperation among
unemployed youth can turn into acts of terrorism and
retaliation against their own governments, and in some cases,
this activity has spawned uprising and has been the cause of
coup d'etat in several states.
It is my hope today that we can learn from our most
distinguished panelists, and take away some information that
will help us as the policymakers so that we can continue to
navigate our way through this global financial crisis in a very
positive and effective direction.
So, Mr. Chairman, thank you, and I look forward to today's
testimony and I yield back my time.
Mr. Sherman. I now recognize the gentlemen from New York.
Mr. McMahon. Thank you, Chairman Sherman, and to your staff
for putting together this very important hearing. Recently I
met with the German Ambassador and members of the German
Bundestag, and representatives of prominent transatlantic
businesses, to celebrate the achievements of the transatlantic
community.
But we are faced with the unfortunate fact that the
transatlantic community is falling into what could be perhaps
its deepest recession since World War II, and has weighed
heavily on everyone's mind.
But during our conversation the delegation did not take aim
at the United States, and instead proceeded to discuss how the
global economic crisis should be credited to the greed that
crossed international borders and infiltrated the practices of
worldwide businesses.
There are many who blame the United States for initiating
this crisis, and many in our own country prefer to look inward
for solutions to this crisis, but these seemingly divergent
notions are actually one and the same.
Although there can be no recovery in the global economy
without recovery in the national economies, the current crisis
is not uniquely an American phenomenon, and that is why this
discussion today is so important.
The United States must continue to look outward and look
for ways to not only maintain, but increase its credibility on
the world stage. With that in mind, I would like to hear the
suggestions from our distinguished witnesses on how to do just
that, while also successfully focusing on our crucial domestic
responsibilities, and I look forward to your testimony, and I
yield the remainder of my time. Thank you, Mr. Chairman.
Mr. Sherman. I thank the gentleman from New York, and I
will now introduce our five witnesses. First, I want to welcome
Simon Johnson. He is the Kurtz Professor of Entrepreneurship at
MIT Sloan School of Management.
He is co-founder of a Web site on global economic and
financial crisis, baseline scenario.com. From March 2007
through August 2008, he was the chief economist for the
International Monetary Fund.
Second, we are honored to have Lori Wallach, who is the
director of Public Citizen's Global Trade Watch. She is also
founder of the Citizen's Trade Campaign, a national coalition
of consumer, labor, environmental, family farm, religious, and
civil rights groups representing over 11 million Americans.
I also welcome Philip Levy, resident scholar at the
American Enterprise Institute. Dr. Levy studies international
trade and development. Before joining AEI, he was senior
economist for trade on the President's Council of Economic
Advisors.
Next we have C. Fred Bergsten, who is the director of the
Peterson Institute of International Economics since its
creation in 1981. He has also served as the assistant secretary
for international affairs at the United States Department of
Treasury from 1977 through 1981.
I hear that they have some empty space for you there, or
for anybody who knows their ways around the halls of the
Treasury.
And finally I want to welcome Peter Morici, a professor of
international business at the University of Maryland. Prior to
joining that university, he served as director of economics at
the United States International Trade Commission. With that,
let us hear from Mr. Johnson.
STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ PROFESSOR OF
ENTREPRENEURSHIP, GLOBAL ECONOMICS AND MANAGEMENT (GEM), MIT
SLOAN SCHOOL OF MANAGEMENT (FORMER CHIEF ECONOMIST OF THE
INTERNATIONAL MONETARY FUND)
Mr. Johnson. Thank you, Mr. Chairman, and let me start by
saying a few things about the global economic outlook, which
was the subject of my written testimony, and then link some of
the broader points to the latest statements and policy strategy
laid out by Secretary Geithner yesterday.
First of all, in terms of the global outlook, I took note
of all your opening statements, and I think that you are right
to be concerned about the latest developments around the world.
I would suggest that the situation is actually worst and
considerably more dangerous than you currently think, and let
me explain that briefly if I can. My view of the global economy
in the short term is not very different from what appears to be
coming out of the international official organizations that
will release their full revised forecasts in April.
I think that globally output will decline as the World Bank
said in its March 8 statement for 2009. I am much more worried
about 2010 and what happens after that, because I think we are
entering not only into a V-shaped recovery, or even a U-shaped
slow recovery, but much of an L-shaped situation, where the
world economy goes down, and then it stays down for quite a
long time.
And I think that is because at the global level again, we
face very similar problems to those faced by Japan during the
1990s, the so-called balance sheet recession.
When consumers, firms, and governments around the world
have taken on a lot of debt, and when you have the kind of
shock to our financial systems that we witnessed over the past
2 years, particularly over the past 6 months, you have problems
with consumer confidence almost everywhere.
You have firms that are trying to pay down their debt and
save cash, and be very cautious almost everywhere, and you have
governments that unfortunately, and quite inappropriate for the
moment, find themselves pressed toward austerity rather than
being in the position of what we would wish, and what we would
try to impress on them, which would be to do some sort of
stimulus like in the United States, and I will come back to
some specific places in a moment.
I do think in this context the relatively good news is that
the United States can recover quicker than most other parts of
the world. I think that we have a depth of technology creation
and commercialization that will fill the gap left by the
decline of financial services.
And I think we also have a financial system, which while it
has very deep problems, particularly in and around large banks,
and I don't think those can be resolved anytime soon, we also
have a variety of sources of finance, and a much broader and
deeper system of intermediation than most other countries.
So I think the United States can pull out of this within 3
to 5 years. The rest of the world I think is really going to
struggle, and by struggling, I mean the kinds of pressures that
I think you were flagging in some of your opening statements.
In the best case, and where you have alternatives, you see
increasing pressures toward protectionism, but certainly we see
this in Europe, and we will start to see it more and more in
emerging markets.
I think we will see instability of governments, and of
regimes, and I think what Ms. Watson said about people being
pushed down into poverty is absolutely right, and I would
emphasize how hard it is to predict the consequences of that.
Mr. Poe raised the questions of what will happen to a
number of countries. I think most of these countries will get
weaker and be hurt by the economic situation, but exactly how
that plays out politically I think is incredibly hard to
predict.
The problems particularly that I would stress right now
that are evident around Eastern Europe, and East Central
Europe, and I will comment on that in just a moment, and I
would emphasize the importance obviously of Russia in that
dynamic as an incredible wild card.
Let me close by linking this view of the world to the
statement issued by Mr. Geithner yesterday in the United States
strategy toward the G-20. I will only say three things about
that, regulation on Europe and about the fiscal issue.
On regulation, I am sympathetic to the United States
administration's position. These are longer term issues that
need to be dealt with, but I would also stress that there are
bombs in our global financial systems that need to be defused.
I don't think our European partners are focused on that,
and I think we need to push them much harder, and that leads
into my second point, which is what we are facing now is--some
politicians like to say it is a global problem and it needs
global solutions, but it is not actually that much of a global
problem.
Right now it is a problem in the United States financial
system and in Europe, throughout the Europe, and the inability
of Western Europe in particular to take care of its weaker
members, and weaker members of the Euro zone, and in that
context, I support the moves toward greater resources for the
IMF, and I will be happy to elaborate on that later.
It is a very serious, dangerous situation in the emerging
markets and in the industrial countries of Europe, and this a
tsunami of new problems heading our way.
Finally, on the fiscal point, I support the calls for
greater fiscal stimulus where appropriate around the world, but
I would emphasize that with these kinds of problems mounting,
there is very limited room for this, and we should be pushing
much harder toward monetary expansion, particularly on the part
of the European Central Bank. Thank you.
[The prepared statement of Mr. Johnson
follows:]Simon Johnson deg.
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Mr. Sherman. I thank the witness. We enjoyed hearing him
here, and we will enjoy watching him on the Colbert Report
tonight. That will be interesting, and because it is relevant
to Dr. Johnson's statement, I will ask unanimous consent to put
in the record my op ed for the Christian Science Monitor that
urges much larger stimulus now in the United States, but also
statutorily required austerity to go into effect when the
unemployment rate comes down. With that, let us move on to Lori
Wallach, our next witness.
STATEMENT OF LORI WALLACH, ESQ., DIRECTOR, GLOBAL TRADE WATCH,
PUBLIC CITIZEN
Ms. Wallach. On behalf of Public Citizens 100,000 members,
I would like to thank the chairman and the committee members
for the opportunity to testify. Unlike my co-panelist
economists, I am a lawyer, an author of books on the WTO and
the global trade regime.
The devastation being caused by the global economic crisis
to the lives and livelihoods of millions of people around the
world is not merely the result of bad practices by a handful of
mega financial service firms, but the foreseeable outcome of
one particular system of global governance, or perhaps more
accurately anti-governance.
Over the last decade the United States foreign economic
policy has been systematically the implementation worldwide of
a package of deregulation, liberalization and privatization,
and new limits on government policy space often dubbed the
Washington consensus, or the neoliberal agenda.
Trade agreements, such as those enforced by the World Trade
Organization, and international agencies, such as the IMF and
the World Bank, have been the delivery mechanism for this
global experiment.
I am no fan of tariffs, but I am a fan of power space. The
issue here is not trade rules, but rather the other rules to
regulate finance and other elements of our economies.
The current regime of deregulation was put into place with
intentionality, and now the evidence is pretty clear that this
system is a failure and that it needs to be replaced.
Thus, for instance, while the United States has a
responsibility to help those countries that are not responsible
for the crisis get out of it, more funds for the IMF must be,
for instance, conditioned on changes in that agency's rules.
The right for other countries to be able to stimulate their
economies, versus the IMF's typical budget austerity. The
ability to do currency controls to avoid raids on currency. The
ability, for instance, to regulate foreign investors.
Congress is increasingly becoming aware of the overreach of
so-called trade agreements, such as the WTO, when you are being
told that auto industry rescues, by America conditions and
stimulus packages, the TARP system, unless it is made available
also to foreign banks, are all violations of trade agreements.
Some of this is true, and some of it is exaggerated. In the
body of my testimony, which I request be put into the record, I
go into detail about one little known aspect of the current
sale of economic governance system.
That is the radical financial services deregulation program
of the WTO's financial service agreement. That aspect of the
WTO, which has gotten very little attention, but is at the core
of the problem, exports worldwide, the extreme financial
service deregulation that triggered this crisis.
And more urgently it imposes barriers on the re-regulation
of financial services domestically and globally that many agree
is key to remedy the crisis. Agreeing to review and renegotiate
these WTO financial service deregulation terms must be a key
element of the G-20 process, and in addressing the crisis.
Simply putting more stimulus money into operation under the
current rules is not the solution. But even as Congress and the
G-20, and other international configuration, are struggling to
figure out how to re-regulate finance, many of the same people
in governments are currently pushing for expansion of the WTO
financial service deregulation regime.
For instance, the G-20 summit in Washington, DC, in
November of last year was supposedly convened to lay out a
coordinated response and re-regulation. Instead, the communique
called for completion of the WTO's Doha Round.
Yes, the Doha Round has one of its three pillars further
financial service deregulation. Let me repeat. The current Doha
Round agenda has as one of its three main elements more
financial service deregulation. Calling for completion of that
agenda has no place in the G-20 agenda.
Again, I am not discussing passing tariffs. I am not
discussing trade, but rather undoing a system that limits
Congress's and other legislature's policy space to put into
place the array of policies needed.
This is a practical matter. Not an ideological assertion.
In addition to these financial service issues, we have the
limits that the chairman discussed on Buy America, made more
egregious by the fact that the United States, in scheduling its
trade commitments, has frequently focused on etiology and not
the national interests.
As a result, we have taken on more responsibilities under
the current model than other countries. So, the EU and Canada
wisely chose to exclude some of their procurement. It has
nothing to do with trade, but rather how governments can spend
their tax dollars to stimulate their economies.
To conclude, for a few years a few brave economists
reviewed the massive persistent United States trade deficit the
chairman mentioned as it began to exceed 5 percent of GDP, and
they warned that such imbalances were not sustainable, and they
called for an array of urgent policy responses so as to avoid a
devastating and painful market correction, and massive
contraction in trade.
The absence of the policy responses has resulted in the
undesirable outcome. Remedying the current prices and avoiding
future such crisis, and achieving economic stability at home
and abroad, will require a new system of global economic
governance that harnesses the benefits of trade, while removing
the many non-trade policy constraints that are now obstacles to
ensuring markets operate in a stable and productive manner.
Thank you.
[The prepared statement of Ms. Wallach
follows:]Lori Wallach deg.
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Mr. Sherman. Thank you. Now we will move on to Philip Levy.
STATEMENT OF PHILIP I. LEVY, PH.D., RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE (FORMER SENIOR ECONOMIST FOR TRADE ON THE
PRESIDENT'S COUNCIL OF ECONOMIC ADVISORS)
Mr. Levy. Chairman Sherman, and members of the
subcommittee, thank you very much for the opportunity to
testify today on the international economic policy challenges
facing the United States in this time of global crisis.
You are to be applauded for holding this hearing, and
recognizing that in this time of domestic distress our foreign
economic policies will have important and long lasting
ramifications.
Mr. Chairman, with your permission, I would like to offer
just a brief summary of some of the key elements in my
testimony, particularly with a focus on international trade,
and submit the extended version of the testimony for the
record.
I also hope to say a word about some of the important
points that you have raised on the trade deficit. The first
point that I would like to make is that the trading system is
less sturdy than it appears, and it is heavily dependent on
United States leadership. It may not survive a sledge hammer.
The propensity to turn inwards at the time of economic
crisis is not new. One of the perpetual challenges for trade
liberalization is that the benefits tend to be diffuse, lower
prices for consumers, market access for exporters; while the
costs of import competition tend to be concentrated.
These costs are felt even more acutely in times of economic
distress. As you have already mentioned, the misguided attempts
to protect domestic producers by raising trade barriers in the
1930s were a major problem, and then served as the motivation
for the creation of the post-war trading system.
Despite the creation of the World Trade Organization in the
last completed trade round, the global trading system is more
feeble than it appears. The WTO has no real enforcement power.
Contrary to some of the testimony today, the WTO does not
force anyone to do anything. It cannot. Instead, dispute
settlement panels determine whether a member country has
reneged on a commitment.
The trading system largely relies upon the willingness of
its major members to honor the letter and spirit of agreements.
If they do not, there is little to hold the system together.
The United States plays a special role at the WTO. It has
pushed for liberalization and it has led by example. Even if
the United States continues its vigorous support of
liberalization of the WTO, the system faces tremendous
challenges.
Without such support, progress is hard to imagine, and the
prospect of decay is very real. Even before the recent economic
shocks hit, the WTO was suffering a crisis of its own. It
repeatedly failed to conclude the last round of talks began in
2001 in Doha.
Which leads me to my next point, which is that litigation
without negotiation will do great harm to the global trading
system.
A failure of the trade talks threatens to drive members to
enforcement actions in lieu of bargaining just at the moment
when the willingness to honor past agreements may be at a low
ebb.
To the extent the United States forsakes constructive
engagement of the WTO in favor of enforcement action, it will
be adding strains that the system is ill-equipped to bear.
The leading governments of the world seem to have
recognized the twin perils of faltering negotiations and
protectionist temptation. At the G-20 meeting in Washington in
November, leaders warned against protectionism and called for
progress in the trade talks. That progress never came.
My third point: The United States' move toward
protectionism, even if they honor existing obligation, can have
a devastating impact. You chided critics for being silent on
Buy American and so I will follow your lead.
It was against this backdrop that the Buy American
provision of the recent American Recovery and Reinvestment Act
was so ill-received. I understand that there are any number of
arguments that have been made in defense of this provision.
It addresses spending, not trade barriers. There are
similar provisions in United States law. It was amended so as
to honor United States obligations under international
agreements.
Yet the signal that it sent to the world was that the
United States was turning toward protectionism. Even in the
early days of a much heralded new administration, this
provision drew strong complaints from major trading allies,
such as Europe and Canada as you mentioned, but also Japan and
Australia.
The intent of the provision to divert demand away from
foreign producers and protect domestic producers from
competition was an old and familiar one. The sentiment is by no
means unique to the United States as you note, but by
succumbing to it, we seem to be abdicating our long-held
position of global leadership in international trade.
If I may also then take a moment. I would applaud your
remarks about the trade deficit, and your focus on the trade
deficit, the multilateral trade deficit, and in particular I
would note the very interesting developments that we have had
in recent months, where we have seen major movements in trade
balances and current account balances around the world.
Those movements are very, very difficult to explain if we
have the hypothesis that it is trade policy that is the primary
driver of trade balances. They make much more sense under the
widely accepted economic approaches which link trade balances
to macroeconomic factors, such as nations' spending and
investment.
In that light, I would say that your suggestion that you
mentioned about after the crisis turning toward fiscal
responsibility and national savings is exactly on point, and I
would applaud you for it.
I think that this is the appropriate means to address
current account deficits, which as you rightly note are
unsustainable.
And as my last point, please let me state that there is no
conflict between playing a global leadership role on trade, and
helping average Americans. Public concerns about growing
inequality are perfectly legitimate.
Economic studies have shown though that the primary drivers
of inequality and wage stagnation are different returns to
education and the changes brought by new technology.
We do the country a disservice if we ignore the economic
evidence and falsely attribute all of these ills to
international trade. If the United States leads the way toward
open markets and goods and services through its words and its
actions, it will help restore confidence in the global economy,
and it will help create future prosperity at home. Thank you
again for the opportunity to speak. I look forward to answering
questions.
[The prepared statement of Mr. Levy
follows:]Philip Levy deg.
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Mr. Sherman. Thank you, Mr. Levy. In order to lead by
example, when you have a $700-billion trade deficit, it is hard
to know how many would follow you, except the country of Lenin,
and with the exception of that one country, I don't know of any
others that want to follow our trade results. With that, let us
go to C. Fred Bergsten.
STATEMENT OF C. FRED BERGSTEN, PH.D., DIRECTOR, PETERSON
INSTITUTE FOR INTERNATIONAL ECONOMICS (FORMER ASSISTANT
SECRETARY FOR INTERNATIONAL AFFAIRS OF THE U.S. TREASURY)
Mr. Bergsten. Let me start by congratulating you, Mr.
Chairman. You are absolutely correct that at the start the
administration obviously did lay out its foreign economic
policy to preempt your hearing today, and/or to give us
something to talk about, and I appreciate the opportunity to do
that.
I want to make one conceptual point, which is essential to
this debate, and then talk about three operational issues
surrounding the upcoming G-20 summit in London in early April.
The conceptual point is to argue that this is a global
economic crisis. Virtually every country is being affected by
it, some to a greater or lesser degree, but everybody has been
hit.
That being the case, we have to conceptualize our response
as a global economic strategy. So when we talk about getting
others to join the fiscal stimulus program, or avoiding
restrictions on trade, or adding trade finance, or helping
finance developing countries through the IMF, that is all part
of the global macroeconomic strategy.
Only if we think of it in that context will we come to
correct answers in terms of individual policy responses. It is
not just the United States operating within its own national
boundaries. We have to see ourselves as part of a global
strategy. I want to stress that at the outset, because it is
very important for all the specifics we talk about.
Let me talk about three specifics. First, on fiscal
stimulus. There has been a consensus--it has not been agreed to
by the countries but has been pushed by the IMF and others--
that all the major countries should undertake fiscal stimulus
programs equal to about 2 percent of their GDP for each of the
next 2 years.
Again, Mr. Chairman, I am with you. That is not enough.
That goal was set several months ago, and as my colleague Dr.
Johnson laid out, the global outlook is much worse than we
thought at that time.
If a 2-percent stimulus was right 3 to 6 months ago, we
clearly need more now. My proposal is that the G-20 countries
at London in 2 weeks commit to adopting a fiscal stimulus
program equal to about 3 percent of each of their GDPs for each
of the next 2 years.
There obviously has to be national variance on that theme.
Some maybe can't afford it because of their budget situations,
but on the whole that should be the strategy. It would require
additional stimulus measures even here in the United States and
in China, which have so far taken the lead.
It would require lots more in Europe and some of the other
key emerging markets, but I think without that, we are not
going to get anything like the need of recovery, and we may be
in Dr. Johnson's L-shaped problem for a long time.
Second, on trade policy, and the discussion of Buy American
and others that you have led, and I won't get into its detail,
but I want to make one broad point. I think there is an
important distinction between countries legal obligations and
proper policy in the face of a global recession or worse.
Lori Wallach, you, and others are correct. There is lots of
scope for government procurement preferences within the current
rules, but I think to increase our use of those buy national
provisions is a policy mistake because it can lead to emulation
and retaliation by other countries.
I think the last thing we want to do within my concept of a
global recovery strategy is to encourage others to raise
barriers to trade, even though lots of other countries can also
do it within their legal rights within the WTO.
All of the big emerging markets can double their tariffs
from where they are now within the WTO rules, and we don't want
to encourage that. It would dampen our exports and hurt our
recovery strategy.
On the trade deficit, I am also with you, but I want to
make an important point just to make sure that you and your
colleagues are aware of it. The United States trade deficit
this year will be less than half what it was at its peak in
2006.
A lot of that is the reduction in the world oil price,
cutting our oil import costs, but a lot of it is the strong
improvement in the United States competitive position. The
exchange rate of the dollar came down 25 percent over the last
6 years.
Our exports grew over the year 2008 as Mr. Royce said. It
was the main driver of our economic growth, and you are
absolutely right. We don't want to let that deficit go back up,
but keep in mind that it is now a lot lower than it was even 2
or 3 years ago. We certainly want to keep it there, but it is
not the big boogie that it was in the recent past. In order to
help keep it there, we do want to expand our export finance
capability. We want to expand and straighten the programs of
the Export-Import Bank in order to support in any way we can
our export opportunity.
Finally, on the IMF. I am delighted that Secretary Geithner
adopted my proposal in my testimony to you of seeking expansion
of $500 billion for IMF programs.
I think they need to do that in his way through the new
arrangements to borrow. They also need to create special
drawing rights and they also need to increase their quotas. The
point that I want to flag for you is, and you are probably
aware of it, that you will face legislation on that this year.
The Treasury has now indicated that it will be submitting
legislation to the Congress to authorize increased United
States participation in these various IMF programs.
One is obviously going to have to look at the details. You
will have to study that carefully. But I think the broad
strategic point is that these IMF programs help deal with one-
half of the world economy, which is now emerging and developing
countries, and have to be viewed as part of the global recovery
strategy.
It is critically important for our own economy. It is
critically important for this global recovery approach. The
international institutions surely are not perfect. I have
criticized them lots myself, but they do play an absolutely
vital role, and I will hope when you get to that hearing we can
talk about that in more detail.
[The prepared statement of Mr. Bergsten
follows:]C. Fred Bergsten deg.
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Mr. Sherman. Thank you for your testimony. Without
objection, the full opening statements of all witnesses will be
put into the record, and the full opening statements of members
who submit them for the record will be included in the record
of the hearing.
We will now go on to our last, but certainly not least
witness, Peter Morici.
STATEMENT OF PETER MORICI, PH.D., PROFESSOR OF LOGISTICS,
BUSINESS AND PUBLIC POLICY, ROBERT H. SMITH SCHOOL OF BUSINESS,
UNIVERSITY OF MARYLAND (FORMER DIRECTOR OF ECONOMICS AT THE
U.S. INTERNATIONAL TRADE COMMISSION)
Mr. Morici. Well, thank you, Mr. Chairman, and to the
members of the committee for the opportunity to be with you
today. In my mind the global economic crisis has two origins.
One is imbalances in production and consumption, which you
heard about.
Mr. Sherman. Do you want to turn on our mike? Do you see a
green light?
Mr. Morici. Can I start again?
Mr. Sherman. Yes.
Mr. Morici. Okay. I thank you for the opportunity to be
with you today, and in any case, in my view the global economic
crisis has two sets of origins.
One is the imbalance in trade, or in production and
consumption between China and other countries in Asia and
western nations, and also the oil nations, and the banks, which
have to do with changes that took place in our banking system
over the last several decades, beginning with the end of
Regulation Q, and ending with the end of Glass-Steagall, which
gave rise to lots of interesting opportunities for creative
financial engineers.
In the United States the current trading situation gives
rise to a very huge trade deficit when our economy is operating
at anywhere near full employment. I don't view the recent
reduction in our trade deficit as particularly comforting.
That gives rise to huge capital flows into the United
States, which somehow or other have to be accommodated, and
they have been accommodated by frankly less than prudent
borrowing and lending decisions.
They distort capital markets, and they gave rise to a
consumption led expansion that caused us to increase our debt
to the rest of the world rather dramatically. There really is
no solution to this mess short of fixing those structural
problems.
A stimulus package is helpful, and it is nice, but we are
going to need ever larger stimulus packages to keep our economy
going, because if you stimulate the economy with 2, or 3, or 11
percent, or whatever Fred wants--I mean, you can mortgage the
whole universe if you like.
Once you stop spending the money, you will come back down,
but while you are spending, your trade deficit will go all the
way up again.
Mr. Sherman. Would you repeat that last phrase?
Mr. Morici. Your trade deficit will go all the way up
again.
Mr. Bergsten. Not if others are spending.
Mr. Morici. I don't agree with you, Fred. You had your
turn. Let me have mine. [Laughter.]
Now in order to fix the problem, we are going to have to
fix our domestic energy policy and our trade policy. Domestic
oil imports net and our trade with China are 90 to 95 percent
of the trade deficit. So you don't have to look far for the
problem.
We can and should dramatically reduce our imports of oil by
dramatically changing the cars that we drive. We have that
within our grasp and have chosen not to do it, and we should.
With regard to trade, we already are in a trade war,
gentlemen, and ladies. China's manipulation of its currency,
its export subsidiaries--you realize that it has frozen its
currency more or less since last July in response to the
recession, and it is increasing its exports subsidiaries.
All of us that have studied economics, and those of us who
have only been spending time with economists over recent years
would know that an export subsidiary is as protectionist as a
tariff.
You are in the middle of a trade war, and China is
undertaking Smoot-Hawley already, and with the advocates of no
protectionism, please, no trade policy, please, are telling you
is unilateral disarmament so the Chinese can export their
recession to the rest of the world.
If you stimulate the global economy, China's exports will
grow unless something fundamental is happening inside of China
right now that we are not aware of.
To resolve the problem with China, I simply think we should
recognize we are not dealing with a market economy as we know
it, and we should basically tell the Chinese you fix your trade
surplus so we can fix our trade deficit. If you don't fix it,
we will fix it for you.
The current imbalance of trade with China and on oil has
created such destabilization in global financial markets as so
to eradicate the benefits of free trade. If we are going to go
to 10, 11, or 12 percent unemployment, it is hard to imagine
that free trade is doing us much good.
However, I don't believe we should repeal 100 years of
neoclassical economics if we can get the Chinese trading
reasonably, and allow them or to have them adjust their
currency so they are not engaged in continuous one-way
intervention in times of full employment, then I believe that a
program of open trades and competition best serves us, and it
would give rise to the most efficient allocation of resources.
With regard to the banks, I will just leave it to you to
look at that in my written submission. Essentially, we do need
some major restructuring. We don't need a return to the days of
Glass-Steagall, but we need something, and I think I have
outlined it adequately there, and I will quit at that point
with 13 seconds remaining.
[The prepared statement of Peter Morici
follows:]Peter morici deg.
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Mr. Sherman. Amazing. Let us see if I can be equally brief
in my questions. First is kind of a question for the whole
panel. I would like you to--and it is a simple yes/no question.
I will ask you to raise your hands.
China has an economic stimulus package of close to $600
billion in progress now. Raise your hands if you think that the
United States workers will get 1 percent of that money.
Mr. Bergsten. 1 percent?
Mr. Sherman. 1 percent.
Mr. Bergsten. $6 billion?
Mr. Sherman. $6 billion.
Mr. Bergsten. Over 2 years?
Mr. Sherman. Yes. Now I am not talking about United States
firms, and I see Dr. Levy as well. So you think that--and I am
not talking about the secondary economic impact. I am saying
the government buys--well, apples and oranges.
You could have a 100-percent Buy America stimulus, and say
not 1 penny could be spent on anything built abroad, no matter
what it is, and the foreign countries would still benefit
because my sister would get a job, and she would buy a flat-
screen TV.
But we are going to spend $800 billion, and some of it will
go abroad and some of it stays here. The Chinese Government is
going to spend $600 billion. In terms of contracts to be
performed by American workers of that $600 billion, and not
multiplier effect, does anybody think we are going to get 1
percent?
Mr. Bergsten. I honestly don't know because--I honestly
don't know and no one can, because they have not announced how
they are going to spend the money. But I really think----
Mr. Sherman. Come on. China is not going to give us--if
they give us a penny, it will be a mistake. Every billion
people are entitled to one or two mistakes, but clearly the
Chinese stimulus package is designed to go exclusively to
Chinese workers and not to go to American workers.
Mr. Bergsten. The important point, Mr. Chairman, is your
premise. They are trying to stimulate their overall growth rate
by 2 to 4 percentage points per year.
It is up to 5 or 6 percent, and they want to get it back to
at least 8 percent, and they might do better. Out of that
increased Chinese growth, we will clearly get much more than $6
billion of exports.
Mr. Sherman. Doctor, I am trying to compare apples to
apples. You didn't have the European Union Ambassador praising
the American stimulus package on the theory that it would
increase our growth rate, and thereby benefit the entire world.
Instead, we had Dr. Levy particularly attacking the Buy
America provisions. My question is to illustrate that if you
compare apples to apples, they have got a Buy China 100 percent
stimulus package. We have some Buy America provisions. Let me
go to Dr. Morici.
Mr. Morici. I want to encourage you not to take Canadian
Ambassadors too seriously. Having been the director of Canadian
Studies at the University of Maine in my prior life, and before
that the director of the Canadian-American Committee, and
having written accounts on foreign relations book on the
Canada-United States Free Trade Agreement, I have some
credentials.
And I would say to you that the Canadians read the same
book of economics that the French do, and that is that the
Americans cause all of the economic problems, and forgive me
for saying this to you, but when the Republicans are in, then
they cause nothing but problems.
So right now you have only caused 80 percent of the
problems of the world. So I really wouldn't take that very
seriously. It is quite disingenuous for them to say things like
that, and I think you have raised a valid point.
I would not have phrased the question as 1 percent. We
probably or we might get 1 percent, but who cares. The point of
the matter is that we are not going to get very much out of
their stimulus package, and it is absolutely absurd in a world
where the Chinese are so manipulating trade and causing so many
disruptions in the world financially to not pursue a policy
that requires them to give us some measure of reciprocity.
Mr. Sherman. I am going to go on to one more question. That
is that Warren Buffett has suggested a cap and trade system.
That is to say if you want to import $1 dollar's worth of
goods, you need a voucher from somebody who has exported $1
dollar's worth of goods.
That would be a result oriented free trade system. Instead,
we have a process oriented system, where we negotiate with
other countries as to what they put in their written
regulations on the basis that anybody in China feels that the
sole influence on decision makers is what is in the written
regulations.
And we spend endless discussions about what is or is not in
the written regulations and laws of a country that is not a
rule of law society. Dr. Morici, what do you think of the
idea--and I am going to apply it just to China--that we can
reach if we choose to, and we want to phase this in, a balanced
trade relationship, a nonmalignant trade relationship with
China, with a cap and trade system?
Mr. Morici. I don't believe that we can. I think it is
ludicrous for the United States either to have cap and trade or
a CO2 tax in the absence of----
Mr. Sherman. No, no, this is cap--I am talking cap and
trade for exports. This has nothing to do with carbon.
Mr. Morici. I think it is--wait, I am sorry. When you say
cap and trade----
Mr. Sherman. What I mean by cap and trade is a voucher
system where if you want to import $1 million worth of tennis
shoes from China, you have to go to somebody who exported $1
million worth of goods to China, get their vouchers, and then,
and only then, you are allowed to bring in the goods.
Mr. Morici. I would prefer an alternative approach to China
which is equally radical, and that is that if the Chinese don't
want to find a way to balance the trade on their own because of
its highly managed economy, then we put a tax on their exports
equal to the value of their currency market, intervention,
divided by the value of their exports, and we see how that
works out for a while.
And if they want to reduce their intervention, then we will
reduce the tax.
Mr. Sherman. I think your approach is slightly less
radical, but perhaps better than Warren Buffett's. It is
interesting to see at least two radical ideas out there.
Mr. Morici. Well, the thing about it is that if you think
about it, if we were to do that--you know, you have stimulus,
and you get the economy going, and then you spend 11 percent of
GDP, or whatever it takes, to get yourself there.
And your deficit goes up and the Chinese are intervening,
then by us taxing that intervention the benefit of higher
prices on Chinese exports to the United States, or our imports
would go to the United States Treasury.
Whereas, if they stopped their intervention, then the
benefits of a higher price for Chinese exports would go to
their businesses. So they would have a strong incentive to
capture that rent.
So my feeling is while that might violate half-a-dozen
laws--and I don't know that it would, but people argue that it
does, and have called me a protectionist for recommending that,
I think it might help China reconsider its regime and move in a
direction that was more oriented toward free trade.
Mr. Sherman. I have gone a little bit over, but I do want
to hear from Ms. Wallach.
Ms. Wallach. I think that one benefit of that Warren
Buffett proposal, which would create a secondary market for
those permits, is it lets the market decide, versus picking out
winners and losers, and what is worth importing and what value
in that secondary market is worth obtaining that certificate.
And the way he does it is to phase it in over 5-10 years so
that it is not an abrupt disaster in supply chains, but rather
that it forces a balance, and also creates incentives for
exporting, while simultaneously creating a balance.
Mr. Sherman. I think my time has expired. We will go on to
our ranking member, Mr. Royce. It is my intention to do a
second round, and I know that a number of the other witnesses
are anxious to make theirs.
Mr. Royce. Thank you, Mr. Chairman. Ms. Wallach, I would
ask you, you strongly reject the ``CAFTA model.'' Some might
say that it has shown itself to be a pretty good deal for the
American worker in the sense that since its implementation in
2005, I think then the United States trade deficit, where the
region was over 1.2 billion.
Since its implementation the United States has swung to a
surplus, and it has grown every year, and I would just add that
an analysis by the USITC says passing the three pending FTAs
would spur at least 12 billion in new exports.
Let me ask you another question here in concert with that.
You severely criticized the World Bank and the IMF, which have
distributed trillions of dollars made over the years.
If these institutions can't be reformed as you recommended
should they be closed? And because if your answer to that is
yes, then you might have an ally here, in terms of what I have
seen in a lot of that spending.
I assume that you oppose the plan announced yesterday by
the Obama administration to funnel some $.5 trillion through
the IMF, and the United States contribution to that would be
another $100 billion. Let me ask you about that proposal.
Ms. Wallach. I will try to answer all three questions. On
the CAFTA issue, the matter that I find most concerning is when
you look across all of our FTAs and look at export growth--and
the balance I will get to, but the export growth issue, if you
look across all of our FTAs, which are premised largely on the
same model of NAFTA and CAFTA, our export growth with our FTA
partners is 6 percent.
But export growth with our non-FTA trade partners is 14.4
percent. There is something deeply wrong----
Mr. Royce. That is China, I guess, principally.
Ms. Wallach. Not exclusively.
Mr. Royce. Our non-FTA partner.
Ms. Wallach. To everyone else.
Mr. Royce. Yes, and that is the weighted balance.
Ms. Wallach. It is all 153 WTO partners.
Mr. Royce. Right.
Ms. Wallach. Minus the 14 FTA countries.
Mr. Royce. Right, the lion's share of it though, in terms
of the weight of it.
Ms. Wallach. No, export wise actually, we have larger
exports obviously to other parts of the world. So if you do a
weighted share, it is our exports to countries such as the
European Union countries, et cetera.
Our export growth is doing better to countries we haven't
made special FTA arrangements with, than with the countries
with whom we have, which is a serious indictment of the
underlying model.
Now the fact that we have gone from a $1.2-billion deficit
with all the CAFTA countries to a $3-billion surplus is more or
less a rounding area in the trade deficit that we have.
Though it is a trend in the right direction, our export
growth to those countries still lags behind the countries with
whom we don't have FTAs. So it will be interesting to see over
time what happens with the CAFTA balances, but the trend of
export growth, and then when you look at the larger FTAs, such
as NAFTA, or if you look at our trade balancing with Israel, we
have enormous deficits with all of our large FTA trade
partners.
So that overall the entire body of the 14 FTAs, we have
about a $60-billion deficit net with the whole package of them,
not exactly in the right direction.
Mr. Royce. And let us go to the issue of the World Bank and
IMF, and your thoughts on that that I asked.
Ms. Wallach. My expertise is in the structures and
operations of the WTO from the scholars who I have read
regarding the IMF and World Bank reform. My support is with
various scholars who have noted that absent major reforms those
organizations should be shut down.
But I think where we might differ is that other
institutions to play similar functions in global governance are
needed, and that the rules of the current regime of IMF and
World Bank are so off that that is the issue, and not the
existence of global economic governance.
Mr. Sherman. Let me ask you. You reject trade agreements
with allied countries of Colombia, South Korea. How will this
impact other areas in which we might want international
cooperation should we reject----
Ms. Wallach. Well, I think there are a lot of different
ways to cooperate with countries. For instance, I am a
supporter of the Indian Trade Preference Drug Eradication Act.
So to the extent that we want to actually have
relationships with some of the countries that we are having
troubled relationships with in the region, including Bolivia
and Ecuador, I think that is an interesting piece of leverage
and partnership to offer them.
The free trade agreements were set up as sort of foreign
investor rights that allow the right of new privileges and
rights by companies operating in those countries, so that the
model of those agreements is extremely problematic and needs to
be altered.
It is the same model question that I was discussing vis-a-
vis the WTO.
Mr. Royce. Colombians though want the agreement, and let me
ask you can trade have national security implications? You
know, for example, further opening United States textile
markets with respect to Pakistan to fight an economic collapse
in that country, which is rather critical.
I mean, there are ties between trade liberalization where
it occurs, and the economic growth that is a consequence of
that in stabilizing some of these countries. Colombia comes to
mind.
Ms. Wallach. I think trade agreements can have economic
security implications, and so I was extremely worried by the
report by the Department of Agriculture of Colombia that
described the Colombia free trade agreement agriculture
provision as destablizing the rural society by displacing so
many farmers, and thus resulting in three options, and only
three options.
The theme, growth of paramilitary, more undocumented
immigration to the United States. You will note that after
NAFTA immigration from Mexico has increased 60 percent because
of this displacement.
And, three, more cultivation of illegal crops, i.e.,
narcotics. So, yes, having a free trade agreement like the one
posed with Colombia can be extremely hazardous to our national
security.
Mr. Royce. And trade liberalization with Pakistan, which is
rather critical in terms of some of our concerns on the
committee right now, allowing textile imports, and creating
more employment, let us say, as a result of the synergy between
trade between the United States and Pakistan?
Ms. Wallach. I think the model there, for instance, the
Cambodia-United States Textile Agreement, is a very promising
one. That was an agreement that set out various democratic
governance requirements, and helped set up labor unions, and
had a role for the International Labor Organization to make
sure that the benefits actually went broadly to the people,
which is the goal in this case, to bill people who have some
wealth and security in a democratic market system.
And so that kind of a model for other countries, including
Pakistan, I think is a promising one.
Mr. Royce. Let me ask Dr. Morici a question. You testified
that 96 percent of the trade deficit is oil imports and
imbalanced trade with China, which you find very problematic,
as we do.
Does this observation suggest that you find our trading
relationship with other countries than China and oil producers
generally satisfactory?
Mr. Morici. That is the sort of thing that you view on a
continuum from one to----
Mr. Royce. Well, yes, but you said 96 percent.
Mr. Morici. No, no, I understand, but whether our trading
relationship with Canada is satisfactory, or with Europe is
satisfactory, or with Uruguay, or Panama, or whatever, just
because we don't have a trade surplus--well, we have trade
surpluses and deficits around the world.
That doesn't mean that our trading relationships are
satisfactory or unsatisfactory. Our trade problem with oil is
largely something we have done to ourselves. We have pursued a
flawed energy policy.
With regard to China, that is something that China has done
to us. We have opened our markets to them, and they have not
done the same in reverse, and we have this problem on our
hands.
With regard to other countries in the world, I think that
by and large, we can work those problems through
through deg.the normal processes that we have. Not
all, but many. I don't know that we can work them through, for
example, with India through normal processes, but I think we
can with the Canadians as much as they blame even their cold
weather on us. I think that we can always work with----
Mr. Sherman. I think the time of the gentleman has expired.
We will move on to our vice chairman, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman. I would like for us to
focus for a moment if we may on this issue of Buy American, and
it is especially timely because next month the President will
attend a G-20 summit.
It will be his first global opportunity on the world stage
to set the vision for the United States position as well, and
there has been some thought that the Buy America and Buy
American provisions fall out of the normal scope of our
international trade, and there has been some thoughts that it
could trigger a trade war.
And I would like to get each of your thoughts on that right
quick, please. Yes, Mr. Bergsten.
Mr. Bergsten. There is a distinction between our legal
obligations and what I would think is correct policy. In terms
of legal obligations, there is a government procurement
agreement as part of the World Trade Organization.
That is not adhered to by all members of the World Trade
Organization. Only about 40 member countries have participated.
So we as a signatory, and in fact the proponent of it, have
obligations in our Government procurement policies only toward
other countries that are a part of that agreement.
China is not part of that agreement. India is not. We have
no legal obligation under our Government procurement rules to a
China, India, or other countries that are not members of that
agreement. I repeat, no obligation.
Likewise, and that is what the chairman said, they have no
legal obligations to us. China does not have to give us a penny
of procurement under its government procurement rules because
it is not a signatory to that agreement.
The only add-on to what I just said is where we have
particular trade agreements with countries, like NAFTA, where
then our obligations, and theirs to us, go beyond the general
procurement agreements in the WTO.
So that is the legality of it. We can do anything that we
want to China and India. We are constrained to some extent with
Canada, Mexico, and other trade agreement partners.
But even where there are those agreements, there are lots
of exceptions. Somebody mentioned earlier that China has
exempted all sorts of things, and Europe has exempted. The
United States has exempted lots of sectors of our own
Government, including lots of State and local government
spending, that are not subject to those legal requirements.
So there are lots of areas where we can prefer American
producers. That is the legality of it. If you want to do that,
you can do it. My argument, if you just add one sentence, is
that for us to increase our buy national preferences at this
point in time would be a policy mistake, because it would for
sure encourage others to do the same thing.
Not only incidentally under their government procurement
apples to apples, but in their trade policies more broadly,
where there is lots of pressure to move that direction, and I
think it would be a mistake to encourage global movement in
that direction at this time.
But under the law of the land and the law of the universe,
there is lots you can do.
Mr. Scott. Okay. Let me just follow up that with do you
feel that Congress should require that no additional
procurement commitments be offered in future trade
negotiations?
Mr. Bergsten. No, our interests are in maximizing the
commitments we can get from other countries in those kinds of
negotiations. We should do it on a fully reciprocal basis. We
should offer to open up additional parts of United States
procurement only where we can get them to open up under theirs.
But if we could get back to what the chairman said, if we
could get China to commit to open to us under its $600-billion
procurement program, I assure you that we would gain lots more
that we would lose to them by opening up to them.
Mr. Scott. Yes, Mr. Morici.
Mr. Morici. I am sorry, I didn't want to interrupt your
train of thought at this time.
Mr. Scott. You may.
Mr. Sherman. Microphone, please.
Mr. Morici. All right. The procurement codes list those
entities for which there will be national treatment, and not
the exceptions, would be correct; and second, is given the
current tenor of international trade, I don't see a particular
problem with the Buy America provisions that were included in
the stimulus package.
If we expect to ever obtain reciprocity from the bad actors
in the system, unilateral free trade has been shown by
practical experience doesn't work. So my feeling is that I
guess while I support free trade as much as Fred does, in the
present context of policy, we have to deal with the world as we
find it, and not what we think it should be on our blackboards.
Mr. Bergsten. Just to be clear, a factual point. We now
give Buy American preferences under all of our Government
procurement programs. There is nothing new. And as Peter said,
we commit under the WTO agreement only to components of
government procurement that we explicitly specify.
We have exempted mass transit and a lot of other things. So
there is nothing new about this. The policy question is whether
you increase protection in the teeth of a global recession
headed toward a depression, which can encourage others to go
down the route and spiral the whole thing downward.
Mr. Morici. I take exception. It is not increasing
protection. It is whether you liberalize further without an
adequate response from your trading partners. I am perfectly
happy to increase our commitments under the procurement code as
soon as China signs up and actually lives with those
commitments.
But I am not willing to give them access to our procurement
as long as they behave as they do. Fred, you are not talking
about increasing protection. You are talking about liberalizing
further.
We are already in a trade war. Do you now deny that China's
mercantilism policies are a source of disruption in the global
trading system? And one of the reasons that we are seeing the
reactions that we are having----
Mr. Bergsten. Mr. Chairman----
Mr. Sherman. Usually the question and answer--you know, you
have got to work hard to get elected to Congress to be allowed
to ask questions to panelists here.
Mr. Morici. But could I say one thing here?
Mr. Sherman. But I will let the gentleman from Georgia
allocate as he will the next 40 seconds, and then we will move
on to the next gentleman.
Mr. Scott. All right. I will give 20 to you and 20 to you.
[Laughter.]
Mr. Bergsten. I was one of the first people in 2003 to call
attention to China's currency manipulation as the substantial
undervaluation of its currency, and the need to react strongly
to it, and I continue to take that view. I am delighted that
Secretary Geithner did so in his confirmation hearing.
Mr. Scott. All right. Ms. Wallach.
Ms. Wallach. Congressman, in regards to your question about
the procurement provisions being in future agreements, and also
relating back to what you said about isolationism and the
United States relationship with countries. Most of the world's
governments do not consider procurement to be an appropriate
topic in a trade agreement.
So originally the Doha round had procurement in it, and the
developing countries--but also some of the developed countries
walked away from that provision, and that was one of the main
causes of the breakup of the entire round in Cancun. It got
chucked off the wagon. It is so objectionable.
It is also procurement being in the free trade agreement is
the reason that South Africa and Malaysia explicitly walked
away from our free trade negotiations. We said basically it is
either the NAFTA-CAFTA model or nothing, and they said if it
has the procurement rules, forget it, because those governments
see procurement as a matter of government appropriations
policy, a government stimulus policy totally separate from
trade.
Mr. Scott. Thank you very much.
Mr. Sherman. Thank you. We will now move on to the
gentleman from Virginia, and I promise you, Dr. Johnson, if my
colleagues don't ask you questions, we haven't forgotten that
you are here. If they don't, I will.
Mr. Connolly. Well, you took the words right out of my
mouth, Mr. Chairman. I have a limited amount of time, so I am
going to ask a question and ask you each to try to be concise,
and I am putting two questions to the entire panel.
The first one is as Mr. Scott indicated, this is in a sense
President Obama's first stepping out on to the international
stage in a major way in attending the G-20 meeting. What is a
success for him? What do we come out of G-20 with? Dr. Johnson.
Mr. Johnson. I think he needs, and I think he is aiming to,
re-establish American leadership in terms of fighting the
recession. Immediate policy responses, and I think Secretary
Geithner wants to pursue a fiscal stimulus.
I would suggest that also be framed in terms of the
Europeans putting together a stabilization fund for their
weaker members. That is really very important. And as a backup
to that, I think Mr. Geithner is outlining $500 billion to the
IMF.
That is a huge amount of money if you think the IMF is only
going to lend to emerging markets. If you think the IMF is
going to have to step in to lend to weaker European countries,
because the Europeans are going to drop the ball, then $500
billion makes a lot of sense.
So I think that both of these measures, particularly the
$500 billion, and certainly the administration is taking this
very seriously, and they are going to, I think, shake up the
Europeans, and tell them that they have to really act to deal
with their own problems.
And if they don't, then it will fall to the IMF, and that
is not a good outcome for anyone. I don't advise any country
ever go to the IMF if they have an option.
Mr. Connolly. Ms. Wallach, what is a success for the United
States coming out of the G-20 meeting?
Ms. Wallach. To have a commitment amongst the countries to
review and repair the existing WTO and other international
economic governance rules so that we, for instance, have the
policy space to be able to re-regulate financial services.
That the WTO is not promoting further financial service
deregulation given there are 105 countries now signed up to an
agreement that requires that, and then finally to figure out
what structural changes are needed in an institution such as
the IMF and the World Bank to allow for those policy
flexibilities.
That we are able to re-establish domestically, but also
internationally, global governance rules that actually promote
productive investment and stability, as compared to promote
this casino economy that we are living with.
Mr. Connolly. Dr. Levy.
Mr. Levy. Congressman, I think a success would be for the
United States to persuade the rest of the world that we are
committed to taking our traditional leadership role, and that
we are committed to fixing our financial sector, and working
with others to do the same, and to preserving open markets.
If I may beg your indulgence for one point, and this is on
the repeated attacks on the financial services agreement. Let
me just note that the WTO financial services agreement has an
unusually strong carve-out for prudential regulation.
Now this can be done for all manner of excuses, including
to ensure the integrity and stability of the financial system,
regardless of any other provisions of the GATS, and that is the
General Agreement on Trade and Services, and I am citing
paragraph two there.
And so I know that time is short, and I won't beg further,
but I wanted to put that on the record.
Mr. Connolly. Thank you. Dr. Bergsten.
Mr. Bergsten. It is a pleasure to see you again here today,
and in your previous incarnations, as well as your----
Mr. Connolly. And, Fred, it is good to see you again,
because if you remember, over 30 years ago, I was on the other
side of the capital, and it was great to see you again here
today.
Mr. Bergsten. Absolutely. I think the big win for President
Obama will be if he can get the rest of the G-20 to get with
his program, which is stimulating an economic recovery and
creating jobs--getting that done in a way that will inspire
confidence in markets around the world rather than undermine
it.
It is unfortunate that central banks are independent and
are not participating in this meeting. So you can't really do
much in terms of monetary policy or increasing their support
for financial restructuring in this context.
That being the case, fiscal stimulus is it. I suggest in my
statement upping the ante, seeking countries to commit to stand
by a 3-percent of their respective GDPs each year.
That would require additional stimulus here. I think we are
going to need it. I think if we can get the rest of the world
to join, we could get a compelling and confidence-inspiring
global recovery strategy, without which this situation may
continue to spiral.
Mr. Connolly. Dr. Morici.
Mr. Morici. Well, I am hoping that we can get----
Mr. Connolly. Can you press your button?
Mr. Morici. I did. I am sorry, there we go. I am hoping
that we get something on stimulus. I think that Fred is correct
that we need more of that. We need the Europeans to pull along,
and I think we can get that.
However, that is really a big Band-Aid. I would like to see
recognition of the fact that the imbalances in production and
consumption between the Asian nations and the oil nations,
versus the west, are a source of instability and must be
corrected if we are going to permanently pull out.
And I would like to see more reasonable expectations about
the notion of global financial regulation. I think those
solutions still lie predominantly in domestic solutions with
cooperation.
And the Europeans continue to obfuscates deg.
issues in that matter. We are not going to regulate our banks
through some sort of international entity.
Mr. Connolly. Thank you. Mr. Chairman, my time is up, but I
just want to note that what struck me about the answers here is
that there is a real opportunity for the United States at the
G-20 to reinstill some confidence in the global system, and I
hope that we will take advantage of it. Thank you, Mr.
Chairman.
Mr. Sherman. I thank you, and I thank you for your
excellent questions, and for sticking to the time limit as a
few of us have not. And I now recognize the gentlewoman from
California.
Ms. Watson. Thank you so much, Mr. Chairman, and this is a
question for all of you. While the first world countries have
been hit hard by the crises, poor countries and poor people are
suffering as much or more.
And according to the IMF's most recent forecast, low income
country growth in 2009 is projected at just over 4 percent,
more than 2 percentage points lower than expected a year ago,
with high risk that the situation could get worse.
In per capita terms, this means that many of the world's
poorest countries will at best see income stagnate this year,
and possibly even contract, and this is of critical importance
to us here in America.
The National Intelligence Director, Admiral Blair, has told
Congress that the primary near-term security concern of the
United States is the global economic crisis, and its
geopolitical implications.
Yet, we are stuck confronting this 21st century poverty
challenge with a foreign assistance apparatus that was designed
for the Cold War. So to all of you, what do you think are some
of the key challenges to the United States Government being
able to address how this crisis impacts the poorest countries,
and people around the world? And let us start over with Dr.
Johnson.
Mr. Johnson. Thank you, Ms. Watson. I think you are putting
your finger on an incredibly important and difficult issue. I
absolutely agree that this is going to impact the poorest
people in a terrible way, and I think you are right that our
mechanisms for dealing with this are outmoded and probably far
too small in scale.
But first and foremost, I think we have to get the global
economy back on some reasonable trajectory, and so that is why
that should be the emphasis, the right emphasis of the G-20
meeting, and I think, and I believe that President Obama and
Secretary Geithner are going to focus on that, and that has big
effects everywhere else.
In terms of additional assistance for the poorest people,
as you know that is a complicated question. It is not an easy
thing to provide additional financing in a way that is
effective, and that it really reaches poor people. Too much of
it can get siphoned off one way or another.
But I think that is something that is worth a considerable
amount of attention, and hopefully further resources from rich
countries to the extent that it is possible in this difficult
environment, because it will come back to haunt us one way or
another if we neglect these people.
Ms. Watson. Ms. Wallach.
Ms. Wallach. Thank you for your question. The crisis is
exacerbating what are already very troubling trends, in that
the countries in the developing world who most closely followed
the package of policies of the IMF World Bank and World Trade
Organization have actually seen their growth rates declining.
And the countries who haven't, like for instance, China and
Vietnam, have seen their growth rates expand much more quickly.
So in a variety of regions, you have seen since the adoption of
the current global economic governance regime drops in per
capita income growth in sub-Saharan in Africa, also with other
issues, such as the AIDS epidemic.
You have actually seen literally net declines, versus in
Latin America, slowdowns in growth rates relative to the period
before these policies were adopted. So now with the crisis
exacerbating that, the policy states having been removed for
those countries to respond, part of the overall remedy is to
fix the underlying rules.
The majority of the developing countries were against the
Doha round agenda. It was cynically dubbed the development
agenda by then USTR Wallach. Actually, the developing countries
had a different agenda. It was called the Implementation
Agenda, and it was a review and repair agenda for the existing
WTO rules.
And that is where I am arguing is also part of the response
that is needed and appropriate in this crisis, and I apologize
for having no expertise in foreign aid issues.
Ms. Watson. Dr. Levy.
Mr. Levy. Thank you, Congresswoman. I would agree with Dr.
Johnson that first and foremost it is going to be very
difficult for these countries to prosper in a world economy
that is having the kind of difficulties that it is. So there
are those measures.
I think we can do far better than we do with foreign
assistance. This is an issue that I spent 1\1/2\ years working
on when I was at the State Department. I think it is important
to work through multilateral organizations, despite some of
their failings.
But I think we can also be much more focused and effective
in our foreign assistance policy by trying to set goals and be
very clear in what we are doing, and try to get better
management implementation from the executive branch.
Mr. Bergsten. Let me give you a slightly dissonant answer.
You mentioned the developing countries are looking at 4 percent
growth this year. In today's global economy, 4 percent growth
looks very good. There is no industrial country, and I repeat,
no industrial country that is expecting positive growth of any
number this year.
We have done an analysis in my institute that looks at each
of the G-20 countries to see what is their relative decline,
and it may surprise you that the smallest relative declines by
far are in the developing countries in the G-20: Brazil, China,
and India.
They have all suffered substantial reductions in growth in
absolute terms, but relative to where they started, it is not
so bad. This is important for your question, because remember
the largest cohorts of poor people in the world are still in
China, India, Brazil, and Mexico--big developing countries that
we think of as advancing, and indeed they are.
They are in the G-20 but still house by far the biggest
cohorts of poor people, and since they are doing less badly,
their situation relatively speaking is not so dire.
Having said that, I fully agree with my colleague that poor
people in those countries are going to be hurt badly by the
global downturn. The answer is to get global economic growth
back up and keep global trade open, as a couple of your
colleagues on the panel have said, because it is still true
that no country has achieved sustained economic development
without integrating into the world economy.
Ms. Watson. Thank you. Dr. Morici.
Mr. Morici. I would like to build on and align myself with
what Fred has just said. Most of the poor people are in
countries that are doing relatively well, and they don't
require any particular special assistance from us.
That said, I think it is important for us to remember that
many of the poorest people are in very small countries, who are
really swept up by the events of the heavyweights, and I think
we need to be cautious about how we deal with those very small
countries, who are caught in the great sea of combat between
the United States and China, and the intellectual combat
between the United States and the EU, and all the rest of that
stuff.
So I do believe that if we could find some way to assist
them that would be appropriate, but I am skeptical of how you
get that done without just getting the engine going again.
Ms. Watson. Thank you.
Mr. Sherman. Thank you. The time of the gentlelady from
California has expired, and we will now recognize the
gentlelady from Texas.
Ms. Jackson Lee. Mr. Chairman, thank you very much for this
hearing, and particularly I am delighted to be on a committee
that gets it, terrorism, nonproliferation, and trade, and I
think there was some mindset that understood that these are all
interrelated.
It seems that I am following this track today. I started
out with a border security hearing on the crisis of drug
cartels at the southern border, and the enormity, and the
fearlessness of what I think really has slipped the minds of
Members of Congress.
And obviously we are just beginning in the new leadership,
but it is a wakeup call, and the reason why I mention that, of
course, is that we are in the question of trade, but also the
falling economy lends itself to the crisis in the social
fabric.
And so my questions will be along those lines, and I want
to go to Dr. Bergsten and Dr. Morici. Those huge numbers of
impoverished, and I have just come back from Pakistan and
India, are there.
I think the question that we have to ask is are they doing
anything about it, even though they have certainly a much
sizeable poverty in India, even though they may have the
resources.
So I want us to continue to believe that it is important to
fight against world poverty, and to even in this economic
crisis be part of the warriors to extinguish some of the huge
depths of poverty that really fuel terrorism and dissent. So
that should not be off the table for the G-20.
But what I would like to ask both is as we move to the G-
20, I think Dr. Morici has mentioned, and forgive me for not
hearing all of your testimony, but the awkwardness of our
relationship with China, I would like you to comment on that
further.
But, Dr. Bergsten, I would like you to tell us how pushy
our President should be at the G-20. My understanding is that
we are making our own sacrifices and our heads are getting
battered on the stimulus.
All the talk shows that build up their credits on bashing
Washington is all about how much money we are wasting. Maybe
the G-20 is listening to Rush Limbaugh, and has indicated that
they don't want us to go any stimulus. So where does that put
us?
So if I could ask the question to Dr. Bergsten, and I am
glad that Ms. Wallach is here. I just want her to be satisfied
that what her organization has spoken about maybe years ago,
deregulation is now falling on top of our heads, and we are
smothered up, and she might just want to comment on how we get
out of that, if you will, debris of deregulation. So let me go
to Dr. Bergsten.
Mr. Bergsten. President Obama should be very aggressive at
the London summit. I think he comes with a strong hand, because
you and the Congress have voted for a major stimulus program.
I hope that nobody is listening to Rush Limbaugh's
appraisal of it. There sure are flaws. You all know it. But it
has put the United States out front in leading the concerted
policy effort to get the world economy back on track.
We may need another stimulus. I think we probably will have
to do more, but right now we are out front. Now it may shock
you when I tell you the other country that I think is out front
and that we should join arms with in leading the effort at
London is China, because China has also taken a huge stimulus
program.
The chairman and I had a little debate about how you count
it, in terms of United States effects. I think it is going to
help the United States, as well as help the world economy. I
think the United States and China on that front, the fiscal
stimulus, the macroeconomic impulse, lead the league.
And President Obama should certainly be aggressive in
pushing particularly the Europeans, but also some of the other
emerging markets who have not yet gotten with the program. The
Germans and the French, for all their talk, have done very
little. They in fact have tried to deflect the agenda. They say
we should worry about financial regulation. It is very
important, but at a time when we are trying to get the banks to
lend more money and unfreeze the financial system, it is
unhelpful, to put it mildly, to talk about increased financial
regulation.
It confuses the public and the banks, and it is a bad idea.
The focus has to be on avoiding a global depression, and on
that the President needs to be quite aggressive and is in a
strong position to assert leadership.
Ms. Jackson Lee. Dr. Morici, Dr. Bergsten has just put my
hair on fire. He has some good points, but he has talked about
China----
Mr. Sherman. If he put your hair on fire, you may end up
looking like me. [Laughter.]
Ms. Jackson Lee. Chairman, I am going to ask for your
indulgence. I would ask for unanimous consent for a minute so
that Ms. Wallach could finish her answer, and Dr. Morici, on
his response on the China issue.
But I would also say that if our President is not
aggressive, it impacts trade. Americans are not interested in a
sort of trading situation if they can't get their pocketbooks
back together. Dr. Morici, what about China and what about some
of the ills and problems that they have?
Mr. Morici. Well, I think there is a tendency with regard
to China for policymakers to view it as a tactical problem. You
know, if we get them to reform their financial markets, then
everything will be fine.
In reality, this is an issue of systemic competition. We
offer the world the notion that democracy and markets best
serve the progress of mankind, and best can help people fulfill
their dreams.
The Chinese offer the world a very different model, and are
pursuing tactics which abuse the international trading system
and their opportunities within it to make us look foolish.
It is very difficult for us to tell the world that they
should adopt our prescriptions. Rather, they offer people order
and stability with an autocratic government. So I think we need
to start to see China for what it is, and to start to craft our
trade policy in an appropriate way, rather than one that views
them with as sympathetic an eye as we have.
That doesn't mean at the G-20 that we can't pursue what
Fred just described. We want to get the Europeans to stimulate
their economies, but I think at some point, we are going to
have to reckon with what China really means for the west, and I
don't believe that this administration or the last
administration has been ready for that question, except when
they are trying to get confirmed in the Senate, or running for
President in Ohio.
Once those goals are accomplished, they seem to fall back.
Vice President Biden quickly said right after Mr. Geithner was
confirmed, that we need to determine whether China is
manipulating its currency.
I don't want to say in this chamber what I thought of that
statement, but I will say it on the Lou Dobbs Show tonight if I
am given the opportunity. If Lou----
Ms. Jackson Lee. But you will say that we are all
interested in working through your issues, and we are, too,
concerned.
Mr. Sherman. The time of the gentlelady from Texas has
expired.
Ms. Jackson Lee. Does Ms. Wallach have a simple answer?
Mr. Sherman. If she has a simple answer, out of respect for
her, we will give her some time.
Ms. Jackson Lee. And, Mr. Chairman, thank you, and I will
yield back as Ms. Wallach answers the questions. Thank you,
witnesses, very much for your answers.
Ms. Wallach. Thank you, Congresswoman. The short term
answer is regarding the G-20 communique next month, one, it
should not include a commitment to push for the completion of
the current WTO Doha round agenda, because that explicitly
contains as one of its three main pillars financial service
deregulation.
Number two, it should contain a commitment for the G-20
countries to review the existing constraints imposed worldwide
through the WTO on an array of different regulatory and non-
trade policies that undermine the policy space that Congress
and other legislatures, and different world configurations need
to create the policies of global governance to restabilize our
economy.
And given the WTO is strongly enforced, and given that
there have been 150 cases, in 90 percent of the cases the
domestic laws have been ruled against, and every single one has
been changed but for one, where Europe is paying $100 million
in sanctions a year. We need to strongly enforce global
governance of a balanced sort, and not the current system.
Thank you.
Ms. Jackson Lee. Thank you.
Mr. Sherman. At this point, I will start the second round.
I will have to leave for a few minutes after my questioning,
and our vice chair will take over. I will try to return before
the end of the hearing.
Dr. Bergsten, you are correct to point out that even if not
one penny of China's stimulus money goes to a United States
contractor, that Americans will benefit to some degree by the
general acceleration of the Chinese economy.
Just as I would point out that if we had provided that not
one penny of our stimulus package had gone to China, that they
would get an enormous benefit because the goal here is to get
people back in the malls, and whose products are sold in those
malls.
The fact though is that China will get both the direct and
the indirect benefit of our stimulus package because a lot of
the money that we spend on manufactured goods as part of that
will come from China.
I think that we have made the case that most of you agree
with that we need more stimulus worldwide, and the President
goes to London leading by example, leading by force of
personality, leading with great oratorical skill.
What can he do other than encourage? What can he do in
terms of bargaining, in terms of demanding, in terms of saying
we are not going to do this unless you do that, top encourage
other countries to have a stimulus package hopefully above, but
at least at a 2-percent level? Dr. Johnson, our forgotten, but
very eloquent, witness.
Mr. Johnson. This is a problem, the fiscal stimulus. It
encourages free riding. If you do a bigger fiscal stimulus,
maybe I will just sit back and you build the roads, and I will
sell you the BMWs, and the construction equipment to build
those roads.
Honestly, this is the problem. The main answer, in terms of
global policy coordination, is to push harder with easy
monetary policy, which of course is limited in terms of cutting
interest rates.
But moving toward quantitative easing and expressing
support for the kinds of policies now being used by the Bank of
England, for example, which is trying to expand the money
supply in a way that Mr. Bernanke has talked about in the past,
but hasn't actually gotten to.
That will focus the Europeans attention, because if they
have the prospect before them, with the dollar potentially
depreciating, and therefore you can't sell BMWs to the United
States because the Euro is appreciating, they will be much more
likely to take the cause of the fiscal stimulus seriously.
Mr. Sherman. So we should seek stimulus measures that
coincidentally bring the dollar down in value, versus other
currencies. I know that is an anathema to many Americans, of
course.
Can you name a single country in the world that doesn't--a
major industrialized country in the world that doesn't try
often to have a lower currency so that it can compete?
I mean, we live in this world where testosterone and the
strong dollar are our pride, and I know that we run up the
biggest trade deficit. What do other countries think of having
a strong versus weak currency?
Mr. Johnson. Well, every country has the same sort of
testosterone issues that you are discussing. No one else goes
quite as far as the United States, and it is interesting right
now in Europe, in the Euro zone, where the interest rate and
the monetary policies are controlled by the European Central
Bank, they are rather turning toward a tighter monetary policy
than many people would suggest is appropriate given the
economic circumstances.
And that would tend to push the Euro toward appreciating.
So you are right. Most other industrial countries, many
industrial countries, for example, the United Kingdom, and for
example, the Canadians, for example, the Australians, have a
tendency to depreciate----
Mr. Sherman. And the Asian giants, Japan and China, I think
work very explicitly to lower their currencies don't they?
Mr. Johnson. Well, as has already been discussed, China
manages its exchange rate and that is a particular issue, and
that absolutely needs to be addressed. I couldn't agree more
with that topic.
Japan's exchange rate obviously has been undervalued for a
considerable period of time, and there it is a little bit more
complex with the aftermath of their--the fact that they had
this massive bubble burst 20 years ago, and they never properly
dealt with it, has caused all kinds of other pathologies.
Mr. Sherman. One last question, and I don't know who will
indicate an interest to answer it. In October 2008, we helped
the Swiss with a relatively routine currency swap. Now we find
out that the Swiss are hiding 50,000 American tax evaders.
What can we do to make the Swiss uncomfortable enough that
they tell us who these 50,000 tax evaders are? Does anybody
have a strategy? Dr. Bergsten.
Mr. Bergsten. What makes the Swiss uncomfortable would be
the threat of abrogating the bilateral tax treaty between the
United States and Switzerland.
Mr. Sherman. So that would be interesting, having a policy
toward our tax treaties that was relevant to collecting tax
revenue. Good idea. Finally, Ms. Wallach, we have had this idea
that we will lead by example, that our markets will be open,
more open than any other countries.
And more importantly perhaps that we will be a rule of law
society so that the degree to which our markets are open or
closed can be read in the statute books that we won't have
Commissars call business people and tell them to buy domestic
goods.
How is that working out for us, and have other countries
looked at the results of our trading policy and said, by god,
we want to do it just like Uncle Sam?
Ms. Wallach. Well, I think you have answered your own
question. It is rather evident that in fact the countries that
are doing well under the current regime are not following the
current rules, and in fact are baffled probably by why we have
so unilaterally signed up by example on an ideological basis,
versus maybe negotiations on the basis of national interests.
And I think that in the procurement area is one of the most
stark examples, and I know that it is an issue of special
interest to the chairman, and in fact there are not many carve
outs that the United States has.
There are now of the U.S. States, 12 States that haven't
signed on to the agreement, but otherwise the United States has
signed on its entire service sector, and all goods, but for
some of which are taken for exceptions, such as iron and steel
in transit projects.
We didn't carve out all transit projects. So, for instance,
right now while the rest of the world, and not just Europe and
the EU, but all of the countries of the WTO, but for the 39 who
signed on to that extremely controversial agreement that most
countries wanted nothing to do with, have the right to set
their procurement policies and their stimulus policies
according to their best needs.
The United States, for instance, we just put $20 billion
into the electronic medical records deg.keeping
business. Almost all of that certainly is going to go offshore.
We are not allowed to have contracts on services that have Buy
America because of our crazed, expansive, no one else did it
like this, and the WTOs lack of exception for services.
That is a service contract, and it is the transcription of
medical records. We can't say that work must be done by United
States workers.
Mr. Sherman. I thank you for your answer.
Mr. Morici. May I give a fact?
Mr. Sherman. My time has expired, and when facts don't fit
our theory, by god, we have got to change the facts. My time is
so expired that I am going to see whether one of my colleagues
allows you to bring up your fact. We will now yield to our
ranking member, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I want to go to Dr.
Johnson. You commented about the Japanese troubles and probably
half of that equation or more is not dealing with those toxic
assets.
But part of it might be the eight separate stimulus bills
passed, which doubled the GDP here, or doubled that to GDP in
the country over that lost decade. Also, you warned of the
danger of the European push to re-regulate, suggesting that it
could lead to potentially dangerous procyclical policies that
can exacerbate the downturn and prolong the recovery.
I would just like your commentary on that, and would you
elaborate on your observation that governments have only a
limited ability to offset increased private demand through a
fiscal stimulus. I think that is what we are hearing from the
Europeans, and I would like your view on that as well.
Mr. Johnson. I am happy to take those points in order. I
think on the experience, my reading of experience from Japan is
that you need--and not that fiscal stimulus is irrelevant or
unhelpful, and not that the fiscal stimulus is the entire
story, but you need to address both problems together.
And if you have as the root of the issue is in housing, as
it was for them in commercial real estate and housing obviously
here, then you need to have some direct measures to take that
on.
And to my way of looking at it, if you just pursue fiscal
stimulus, or if you overweight the strategy toward physical
stimulus, you will end up running up more debt, and it will
take you longer to get out of it.
Mr. Royce. Until you get rid of the toxic assets.
Mr. Johnson. Well, you have to address the problems of the
financial system, which involve a strategy for
recapitalization, and that enables you to keep the financial
sector private, and I would say privatize it given the extent
of state control you now have over United States banks.
And also clean up the balance sheets one way or another. It
is an inexpensive proposition. It is not politically popular,
and major bankers, powerful bankers in Japan, opposed it. They
have opposed it in every single country where these kinds of
issues have come up.
They always want a way of dealing with it that is better
for them, and much more expensive for the taxpayer, and perhaps
it is no surprise that the United States finds itself in a
remarkably similar position.
On the of deg.procylicality of regulation, I do
think this is an important point which has been lost in the
broader discussion. If you go to banks, or you go to
regulators, and you say you have really got to tighten up on
credit standards, you will get a great depression.
You will further have contractions in credit. This is a
very tough problem. We want banks to be careful in their
lending. We have to recognize that it was excessive credit, and
so some deleveraging or reduction in credit around the world
should be expected.
And also many creditworthy people, both individuals,
families, and firms, don't particularly want to borrow right
now because it is too darn scary. We should save cash, and we
should hunger down, and spend less, and see what happens, and
that is happening globally. That is happening in a very
synchronized way.
So I don't think piling on in terms of the kinds of
regulations that Europeans have in mind is particularly
helpful. I do think defusing the bombs in the financial
systems, which is the point about the toxic assets and the lack
of capital, that is absolutely and critically important.
And I do think down the road to forestall the next bubble,
we have to think hard about a proper regulated structure, and
in particular I would emphasize any big bank that is too big to
fail, is too big to exist.
We have a problem in the United States with banks that are
10 or 20 percent of GDP. In Europe, they have banks that are
two times GDP, in terms of bank assets to GDP.
That is an automatic bigger problem than we have here, and
if we don't fix our problems, we are going to be looking at the
kinds of issues that Europe is going to grapple with this year,
which are absolutely terrible and terrifying.
Some of their banks are too big to rescue, let alone left
to fail. So it becomes a fiscal issue of the first order.
Mr. Royce. And governments have only limited ability to
offset decreased private demand.
Mr. Johnson. And this is the problem of limited debt
capacity, even though in the United States, we are relatively
in a good position compared to other industrialized countries.
We start the whole crisis with debt and GDP around 40
percent, and you have to expect given the experiences between
other countries that the total increase in debt GDP, privately
held debt and GDP, will be at least 30 percentage points, and
could well be 50 percentage points.
So we will end up with 70-80 percentage points, and that is
with the kind of limited fiscal stimulus that you have already
implemented and that is assuming that there is a couple of more
tries in that same way.
That is a high level of debt. You can go further. You can
go as far as Japan. You can go to 150 percent of GDP, or 180
percent. That is not a good idea. That becomes very expensive,
and if you start to undermine the credibility of the United
States Government, and if people around the world start to
worry about the creditworthiness of the United States
Government, which I would emphasize is not the current
situation, and I don't see that in the immediate future, but if
you get there, then it is a whole different kind of global
economy we are looking at, where we no longer issue reserve
currency, and we no longer have the kind of position with
regard to power around the world.
Mr. Royce. The last question to Dr. Levy. You made the
point that the WTO is more feeble than it appears, lacking any
enforcement powers. Ms. Wallach's view is that it is all
powerful, and would you just care to comment on that, Dr. Levy.
Mr. Levy. Yes, sir. I think what has often been very useful
for governments around the world when they have abrogated an
agreement or have acted inconsistently with an agreement, is to
point to the WTO and say--and we could say this here, it is
like our Supreme Court. They made us to do it. They issued an
edict.
But there is no Federal Marshal Service for the WTO in the
same way, and we have seen countries--and what happens is that
you have two countries that reach an agreement, but every time
a dispute settlement panel simply renders a judgment that says
you have either acted in accord with your agreements or you
haven't.
After that a country can retaliate or not retaliate. If it
does, it is essentially an unwinding of the agreement. There is
no Marshal Service that forces you to act.
Mr. Scott. Thank you. Thank you very much. Let me just
shift for a second, because this G-20 economic summit presents
our country with an extraordinary opportunity, and we talked
about having this happen as our President is being placed at
least in a relative position of strength given the fact that we
passed the economic stimulus and providing leadership.
But there is some sobering things out here as well that we
need to examine, and particularly as it relates to three
problematic areas that I think are certainly problems. One is
China, and the other, Russia, and of course the situation in
Pakistan which certainly would involve taking another look at
our trade issues.
And if we undergird all of this with the fact that that
economic stimulus money is based upon money we are borrowing
from China, from Russia, from these very same countries that we
are having a problem with, grappling with.
Secondly, of the 15 major manufacturing nations that
account for 80 percent of the world's manufacturing, the United
States ranks the lowest for the proportion of production goods
that are exported.
And I think I would like to get your response from these
two basic phenomenons. We are leveraged beyond our debt. What
strength of position are we in to bow up to China to tell them
what they should and should not do when they are holding over
$1 trillion of our debt, and I think that puts us in a very
vernal position. Dr. Levy, and Dr. Bergsten.
Mr. Levy. Thank you, and you raise an excellent question,
and I guess I don't think the concern that sometimes is
expressed that China has got this stock, and they are going to
use this as a cudgel to beat us with is our concern, but I do
think that we have to think very carefully about attacking
China over issues, such as trade balances, because it is
fundamentally inconsistent with trying to borrow a great deal
from them.
If we were to borrow a great deal, to slip into jargon,
current account surplus and capital accounts deficits are
related. You simply cannot be borrowing a great deal from the
rest of the world and say we also want to run a current account
surplus, or even balanced trade.
So this will--we saw this with Secretary Clinton's trip to
China most recently. We can say, Thou shalt not manipulate your
currency, but we cannot at the same time say, And also please
buy lots and lots of Treasury bonds.
Mr. Scott. Dr. Bergsten, and then Dr. Morici.
Mr. Bergsten. Well, no, actually I slightly disagree with
that. We can and should take a much tougher line toward China
on currency manipulation, and we are probably within our rights
to do that.
They are violating the most fundamental rules of the
international economic system. The IMF has very clear
strictures against competitive undervaluation. We are perfectly
within our rights to hit them.
Even if we succeed beyond our wildest dreams and get them
to let the currency go up 20 or 30 percent, which I think it
still needs to do, they will still be running trade surpluses.
They will still be adding to their reserves and for their
own reasons will continue to put most of that into dollar
assets. So I really don't worry about that too much. They are
not going to dump the dollar.
However, there is a more fundamental reason if your concern
is correct. China is the second largest economy in the world.
It is now the biggest exporter in the world. It has 1.3 billion
people.
We are not going to order China around, and it is much more
fundamental than whether they hold Treasury bills. So we have
to get used to the fact. I have published two books on this
topic in the last 3 years and have studied it very carefully.
We have to find new ways to work with China: Hitting them
hard where they are violating the rules of the game, like on
currency, but working with them where they are with the
program, like on fiscal stimulus.
Can I say one word on Pakistan? It has come up two or three
times. As I think Mr. Royce said at the outset, the best thing
we can do for Pakistan is to reduce barriers to their exports
to the United States, particularly of textile products.
We did a study at my institute of a possible free trade
agreement between the United States and Pakistan. We showed how
it would actually support the United States economy and not
hurt it. But just as a marker, if you want to do something
serious on Pakistan, we have done a very comprehensive analysis
of how that could be done through the trade instrument.
Mr. Scott. So you agree then, because while you are on
Pakistan, I wanted to get to that, and then I will get to you,
Dr. Morici. But right now all of our trade basically with
Pakistan is military; military equipment, military procurement.
Are you saying that our trade should be more balanced by
decreasing the military end and increasing economic----
Mr. Bergsten. No, increasing the civilian, economic end.
Mr. Scott. Increasing economic?
Mr. Bergsten. Yes. You and several of the other members
have asked about how to stabilize Pakistan.
Mr. Scott. Yes.
Mr. Bergsten. An essential part of that has got to be to
create jobs in Pakistan so people aren't out on the streets and
becoming Jihadists.
Mr. Scott. Right.
Mr. Bergsten. Again, no country has ever been able to
achieve sustainable development without integrating with the
world economy and expanding their trade. We have it within our
power to support Pakistan moving in that direction, and we
should take a very hard look at that.
Mr. Scott. Now let me ask you, number one, you definitely
feel they are keeping their currency artificially low?
Mr. Bergsten. Absolutely.
Mr. Scott. And do you also agree that they are depressing
their domestic consumption?
Mr. Bergsten. Yes, through a bunch of policy errors. I
don't think it is quite as devious as Dr. Morici does. I think
they would actually like to get their consumption up, but they
have moved painfully slowly to do so. I am very critical of
that too.
Mr. Scott. And do you believe that this is a consciously
concerted effort for them to grow their economy by exploiting,
exporting to targeted markets in the United States and Europe?
Mr. Bergsten. That is part of their development strategy,
but remember that 80-90 percent of their growth over this 30-
year period, including the last 5 years, has come from the
domestic economy.
Ninety percent of their investment is domestic. Ninety
percent of the growth and demand in the economy is domestic
demand. It should be 110 percent, because their trade surplus
should go down.
So it is not the bulk of their economic success story but
it is an element that disrupts internationally, and yes, we
have to worry about it very, very greatly.
Mr. Scott. Right. Thank you. I am going to go to Dr.
Watson. I think you wanted to comment on this?
Mr. Morici. Yes. It is important to recognize that we have
two distinct sets of problems; the problems with the banks,
which we could discuss how to fix, and a deficit in aggregate
demand, a structural deficit.
If we reinflate the economy with a stimulus package, we
will get back to the point, and because we have a large trade
deficit, we have a deficit in aggregate demand, and unless we
encourage people to borrow out against their homes, we could
have another bubble, or the Federal Government keeps having
more and more stimulus packages.
The only way this can be addressed is by changing the trade
deficit so that you are not spending 5 percent of what you earn
abroad, and the only way in the end that can be changed is
through oil, and through trade with China.
With regard to China, while we cannot bully them and
determine what they will do if they don't do what we suggest,
just as it is a sovereign nation, it can set its exchange rate
wherever it wants.
And since it is doing so in a way that violates
international law, then the thing is that we can't reset the
exchange rate, because we are the reserve currency. But we can
tax dollar on conversion to the point to provide the same
relative prices within the economy that an equilibrium exchange
rate as thought about by international economists would be.
So we have that, and if we keep going down the path that we
are going, and instead we keeping borrowing, then the problem
that you worried about gets worse and worse. From the rest of
the world, we have borrowed about $7 trillion as near as I can
figure, or sold off stock. You know, securities.
And that is about what this all publicly traded stock in
the United States is worth right now. So we have gotten
ourselves to the point where we could get bought up.
Mr. Scott. That is right.
Mr. Morici. It is not very smart.
Mr. Scott. Thank you. Dr. Watson.
Ms. Watson. Let me see if we can come to some agreement.
When our President goes to the G-20, and they have been
discussing this creation of a new framework for regulating, and
several of you have mentioned regulating the international
financial system so that we can present and anticipate a crisis
like this from reoccurring, what would a new super, super,
international institution or framework be like to stop, or to
shorten a future global recession?
What would you suggest? And anyone that wants to take a
bite of that apple, please do. Dr. Johnson.
Mr. Johnson. I think pursuing such an international
structure is an illusion. I think it is a distraction put
forward by politicians who want to hide the fact that their
domestic regulatory structure has failed completely.
And I think they failed for a very simple reason. Their
banks became too big and too powerful. I think that is true in
the United States regrettably, and it is much more true in
other countries as I mentioned before.
In Europe, the banks are much larger relative to the size
of the economy, and they are actually more powerful if you can
believe that than in the States, and I think unless and until
you address that issue, the power of the big banks, your
infrastructure is always going to be overwhelmed.
Maybe it will look good for a while, but the next time the
bubble or the boom comes along, you will have repetition of
these same problems in a slightly different format. I think
that certainly the key issue is breaking up of the big banks.
Banks that are too big to fail, and some of them are too big to
rescue, are too big.
Ms. Watson. Are creating the failure, right?
Mr. Johnson. Absolutely. Look, they are holding the entire
world economy hostage right now. They are saying if you take
measures that are contrary to our interests, and we are the
only ones who know what could go wrong because we are the only
ones who understand the complexity of our banks--and I think by
the way that they don't understand it, and that is how we got
into this mess.
But leaving that to one side, they are saying that unless
you do what we say, and unless you hand over a large amount of
taxpayer money, that we will be a major problem for the
financial system, and for the global economy.
And I think they are right, unfortunately. I think we have
gotten ourselves into a situation where they are right, and we
can't allow that to continue into the future. I think you have
to consider ways to break up these banks, and so you have to
consider size restrictions on them, which is a very crude way
to do it, but I can't think of any other way to prevent this
problem from reoccurring, perhaps in an even worse and more
spectacular fashion.
Ms. Watson. Dr. Bergsten.
Mr. Bergsten. I want to put one caveat on the question you
raised about the role of international participation in
financial regulation. It is clear that serious regulation has
to occur at the national level. I fully agree with Dr. Johnson
on that.
But I think there is a role for international cooperation--
that is in trying to set consistent internationally agreed
standards against which to benchmark national financial
regulation.
This was done with great success after the Asian crisis 10
years ago, one root cause of which was weak banking systems
throughout those emerging markets. Out of the crisis came
agreement on an international banking standard that was worked
out by regulators of national governments together.
It was then embodied in IMF surveillance of national
systems. So what you got was an international agreement on best
practices template. National governments then tried to
approximate that as best they could, and then the international
system monitored and pushed and prodded to get the standards up
to snuff.
It has been a big success over the last 10 years. One
reason the Asians have not been hurt more by the current crisis
is that their banking systems are enormously better than they
were 10 years ago.
It is tougher now for the United States, who thought its
financial regulation was the gold standard, which turned out
not to be the case, we have to be subjected to that now.
But trying to get international agreement on the objectives
of financial regulation, and then as national governments
implement that monitoring internationally and try to bring
everybody up to speed, is a useful part of the process, but
regulation still takes place almost totally at the national
level.
Ms. Watson. Dr. Morici.
Mr. Morici. To begin again, I agree largely with what has
been said about international regulation. The Europeans for
cultural reasons are inclined to always recommend an
international body, and I think it should be accepted as for
what it is.
The real problem lies in domestic regulation. We need to
revisit some of the things that we have done. For example,
permitting large financial supermarkets to emerge and for
commercial banks to be part of investment banks, has created a
lot of cultural compensation and incentive problems.
There are things constructively that we could do in the
derivatives market without creating the nightmare of over
regulating the systems, and simply providing that derivatives
have adequate posted collateral by the ultimate party that is
going to have to pay out when the value of the asset goes down,
and that requiring that if those guarantees are provided by
international entities that their central banking authorities
guarantee that those writers of the swaps can put out just as
well as ours can. Things of that nature.
There are other things that we should look at, but it is
largely a problem of domestic regulation and the fact that
frankly the bankers view regulation the way that most of us
view the tax code.
And they are very good at it, and so we are going to have
to start to consider whether there needs to be changes enforced
in the way that the bankers view lobbying and regulatory
structures, and things of that nature.
Ms. Wallach. Regarding what structure, I have no expertise,
but as regards the actual rules that need to be in such a
system of regulation, on the point of the importance of having
domestic rules correct, and having banks broken up, part of the
issue for the G-20 again is to review the existing WTO rules
regarding financial services, because, for instance, the market
access obligations now in those agreements will limit the
standstill in new regulations, for instance, make clear
obstacles to those kind of domestic policy goals.
And just to make it very concrete, for instance, in the
United States commitment to this particular agreement, one of
the things that we agreed to do to meet these obligations was
to get rid of Glass-Steagall.
It is actually in the footnote of the United States GATS
commitment, because the market access rules don't allow you to
have firewalls between the different kinds of businesses within
the bank.
You are not allowed to limit the size of a bank quite
explicitly in the Article 16 GATS market access rules. So these
are very concrete changes that need to be put into place, and
the carve out that Dr. Levy mentioned doesn't really fix the
problem, because the carve out says that you can only--shall
not be used as a means of avoiding the members' commitments or
obligations under the agreement, which is to say you can only
use the exception as long as the exception doesn't apply to
things that violate the agreement, which is the only reason
that you would need the exception.
Mr. Sherman. I thank the gentlelady from California. Since
the discussion of waterboarding, President Obama announced that
America does not torture. He was wrong. We are going to do a
third round of questioning. [Laughter.]
There may be only one person doing the torturing, and I
know, Dr. Johnson, that you have to catch a train pretty soon.
Now, one quick comment about Glass-Steagall, and that is the
big investment houses--Bear Stearns, Lehman Brothers, Merrill-
Lynch, and Goldman-Sachs--did not engage in commercial banking
until very recently.
And their nonregulation is much a part of the problem.
Merrill-Lynch, the fact that we had repealed Glass-Steagall is
the only reason why we were able to walk away from Merrill-
Lynch without a huge amount of taxpayer money.
So speaking as a member of the Financial Services
Committee, it is not the fact that we reduced some of the 1930s
regulation. The problem is that we failed to create any new
regulation for the new financial instruments.
It is as if somebody said there was a spike in automobile
accidents and it is because we abolished some of the 1910 buggy
whip rules. It is not whether you kept the buggy whip rules or
repealed them. If you don't have a vehicle code for
automobiles, you cannot run a transportation system based on
them.
Dr. Johnson, you intrigued me a bit on how we could
stimulate our economy without a freeloader problem. Were you
basically talking about the TALF program, where the Fed goes
out and buys various debt instruments, or perhaps you could
just add to your ideas on how we could accomplish that goal?
Mr. Johnson. Certainly. Well, the TALF program is of course
designed to support the credit market, and the problem as you
know very well is the breakdown of securitization distribution,
and the Fed is essentially stepping in and becoming part of the
commercial funding for that market.
I think that is regrettable, but probably unavoidable under
these circumstances, and I support it. But it is not enough, or
it is not the complete part of what I was talking about, which
is quantitative easing.
Quantitative easing is when central banks actually go out,
and for example, in the case of the Bank of England right now,
they buy long treasuries. So instead of limiting their
operations to short term government obligations, which is their
bread and butter, they actually try and operate further down
the yield curve.
And basically they don't like to use this term, but in the
vernacular they are printing money. They are issuing money, and
they are trying to fight off deflation. They are trying to push
inflation back up toward 2 percent, which is informally what
they were aiming for before.
And this kind of action and demonstrating this would tend
to cause the United States dollar to depreciate, just like the
British pound has depreciated by 20-30 percent since these
kinds of policies were put into place, and that concentrates
the minds of your trading partners considerably.
Mr. Sherman. Now why is it printing money to issue currency
to buy long term treasuries if it is not also printing money to
issue currency to buy short term treasuries? Why is one
``printing money''--and I guess a third way to go--I mean, the
Fed can do three things.
You can print money for long term treasuries. You could
print money in return for short term treasuries, or you could
just print money, and go buy whatever you want to buy with it.
Now that is really printing money, and is not being
seriously discussed, except by crazy bald Members of Congress.
Now, why is it considered more printing money to buy the long
term treasuries?
Mr. Johnson. Well, that is a mechanism of policy, but you
are absolutely right. They could print money to buy things in
your basement that you no longer want for example.
Mr. Sherman. Because as I understand the TALF program, they
are going to use cash to buy these various debt instruments,
but they are going to get the cash by selling treasuries. So
the private market is getting all the cash that the Federal
Government or the Fed is spending on the student loan paper,
and the Small Business Administration paper, the credit card
paper.
But the private sector is giving the Fed a bunch of
greenbacks for the Treasuries that it is selling. Instead of
doing that, they could just do half of it. That is to say, buy
the paper by printing paper money, and not selling any of their
treasuries.
Mr. Johnson. Yes.
Mr. Sherman. But going back to my question, why is it
considered more printing money for the Fed to sell treasuring,
or rather buy long term treasuries versus short term
treasuries? Why is one thought to be more inflationary than the
other?
Mr. Johnson. Well, I don't think we actually know enough
about quantitative easing to make that determination since this
is a relatively new program, and a relatively new idea.
Ben Bernanke actually flagged it as a possibility back in
2002 in a speech, and he was regarded and earned the reputation
of the name of Helicopter Ben. His nickname was Helicopter Ben
after that speech for having even floated this possibility.
Mr. Sherman. Helicopter meaning an illusion to the idea of
dropping currency from a helicopter?
Mr. Johnson. No, he said that ultimately what you might
need to do is tax cuts that are financed by printing money.
Mr. Sherman. Tax cuts what?
Mr. Johnson. Tax cuts that are financed by printing money,
and so basically help people with taxes, and you send everybody
a check, and that check is--obviously you are drawing on the
Federal Reserve, and that is an issue of money.
Now that is a fairly drastic step to take, and this is the
kind of program that the Bank of England has right now, is a
step in that direction. But the central banks I think are
rightly--don't want to go crazy with the printing of money
because you don't want inflation expectations.
You don't want people to suddenly start expecting 20 or 30
percent inflation next year. You want them to go back to
expecting 2 percent inflation next year, which is what they
were expecting more or less for a long time, and now those
inflation expectations have come down.
Mr. Sherman. I would rather them anticipate 4 percent
inflation than anticipate 4 percent deflation.
Mr. Johnson. Well, l think that is also my position, and I
think that is where the central banks of course would never say
that in public, but I think that is increasingly where they are
learning with this, too.
But it is to error on the side of a little bit too much
inflation, and then deal with those consequences, than to have
4 percent, or even a 1-percent deflation, which would be
absolutely devastating given the debt levels and the structure
of debt in this country.
Mr. Sherman. Yes.
Mr. Morici. I would point out to you that there is a
parallel issue with regard to whether you buy short term paper
versus long, and that is by buying long term paper, you can--or
selling it, or whatever, you can reassert your sovereignty over
your monetary policy.
We have lost the ability of the Fed to influence long term
rates because of China's investing in our capital markets and
so forth, which we have had decoupling, and if the Fed had an
active policy of not just targeting the Federal funds rate, but
with targeting the 10-year Treasury rate, and the 20-year
Treasury rate, that sort of thing, that would give it an
ability to determine the slope of the yield curve in a very
nice way, which would be very useful for regulating the
economy.
Mr. Sherman. Because right now long term treasuries are
yielding 50 times the interest rate of short term treasuries
because----
Mr. Morici. Well, it is not hard. I mean, if we take it to
zero, we can get infinity, okay?
Mr. Sherman. Right.
Mr. Morici. But the point is that if we raise them back up
again the long rates aren't going to change very much. We have
established that, because we essentially have a fixed rate of
exchange rate system with China, and it buys and it fixes the
exchange rate.
Mr. Sherman. And also if we buy long term treasuries, the
Fed gets a better yield, and turns that money back over to us.
Mr. Morici. Yes.
Mr. Sherman. When you can borrow short term at zero,
borrowing long term doesn't seem like such a good deal. Then of
course you get the quantitative yield. So the slightly radical
approach is buy long term treasuries.
The truly radical approach is just print money, and do
something with it that the Federal Government wants to do with
it.
Mr. Morici. Well, where would you like to create your jobs?
If you just print money and give it to the Federal Government,
you will create your jobs in very different places than if you
buy long term bonds, because that will put money into the
capital market where it might actually get used to build houses
and things of that nature.
So the money will go to different places, and it is
important to recognize who gets the first round of money, just
like whether or not we have Buy America or not, and where the
benefits go.
Mr. Sherman. Yes, I mean, you can buy that commercial
paper, which we are being told is worth 100 cents on the
dollar, and you can buy the long term. You really can't buy the
short term treasuries in effect much because the interest rate
is already at zero.
Mr. Morici. Right.
Mr. Sherman. Let us see. You know, I could keep you guys
here for a long time. I am not going to run out of questions,
but I think we have run out of time, and the President is
right. There is a limit to the amount of torture that America
will engage in. Thank you very much for coming.
[Whereupon, at 1:10 p.m., the subcommittee was adjourned.]
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