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MUNK DEBATE ON THE NORTH AMERICAN ECONOMY
Rudyard Griffiths: Ladies and gentlemen, welcome to Toronto, Canada, to Roy Thomson Hall for the Munk Debate on the North American economy. My name is Rudyard Griffiths, I’m the co-organizer of this debate series with my colleague Patrick Luciani. It is my privilege to once again be your moderator.
I want to start your evening off by welcoming the over 4000 people who’ve logged onto the internet right now to watch this debate live on BNN.ca and the Globe and Mail.com. Hello also to the North American- wide audience that’s tuning in to the debate in Canada on the Business News Network, on CBC-Radio’s Ideas, and on CPAC and throughout
the continental United States on C-SPAN.
Finally, I’d like to say hello to the 2700 people that have filled Roy Thomson Hall to capacity, for the third time in a row, for a Munk Debate. Those of us responsible for organizing the series would like to claim credit for coming up with the topics and s*electing the presenters that sold out this hall in a little under 72 hours. But don’t worry, we know better.
Let’s face it everybody, we’re here for one simple reason, one simple fact. We’re worried. We’re worried about the impact of the European debt crisis on our own economic recovery; we’re concerned about the slow pace of our recovery, the slow pace of job creation and economic growth, fully three years after the financial crisis.
I’ll bet some of you in this audience are starting to worry at a more fundamental level: have we seen the prosperity that we’ve enjoyed in North America, incredible prosperity for going on five decades, have we seen this come to an end? Are this continent’s best days now behind it instead of ahead of it?
As vexing as these economic concerns are, they need to be set against one simple fact: we are all North Americans. We live and work in one
of the most open, prosperous and technologically advanced regions of the world. You know, each of us has the ability to live in a society that
enjoys an incredibly resilient workforce, an incredible capacity for innovation, and as a result we have an economy that is envied by
developed and developing nations alike.
Ladies and gentlemen, for your organizers, this is the crux of tonight’s debate. Can the longstanding and considerable strengths of our economy adapt to the new challenges it faces both internally and internationally, thereby powering a new era of growth and prosperity? Or, are the economic anxieties that we are feeling today somehow predictive of the future, thereby making this evening’s motion – we’ll have that on the screen now – Be it resolved that North America faces a Japan-style era of high unemployment and slow growth, an accurate forecast of our common economic future?
In a moment I’m going to introduce the roster of world-class presenters that we’ve assembled for you to weigh in on this all- important debate. But let me first recognize the two people who alone are responsible for staging these debates. It’s really thanks to their generosity and their public-spiritedness that we are able to bring to Toronto some of the brightest thinkers, some of the sharpest minds to weigh in on the big questions, the big problems facing Canada and the world. So please join me in a round of appreciation and applause for our hosts tonight, Peter and Melanie Munk. Bravo, you two.
Now the moment you’ve all been waiting for. We’ve got our resolution before us; let’s get our debaters out onto centre-stage. Please join me in a big round of applause for the two debaters arguing for tonight’s motion, Nobel laureate Paul Krugman and David Rosenberg. And now let’s get their opponents out onto the stage, arguing against the motion; ladies and gentlemen, please welcome Ian Bremmer and Lawrence Summers.
Let me briefly introduce our debaters to this audience. Paul Krugman
is the 2008 Nobel laureate for Economic Sciences. His highly influential New York Times column is a must-read for anyone interested in U.S. politics and economics. In addition to his massive body of scholarly
work – 20 books and 200 papers, but who’s counting – he is the
author of numerous best-selling books, including The Return of Depression Economics and the Crisis of 2008. Equally important to us tonight, Dr. Krugman has a longstanding interest and policy engagement with the causes and consequences of Japan’s lost decades. Ladies and gentlemen, Paul Krugman.
Canadian David Rosenberg definitely has the hometown advantage coming into tonight’s debate. He is the ubiquitous chief economist and strategist of the Toronto-based wealth management firm, Gluskin Sheff and Associates. Prior to joining Gluskin Sheff, David was the chief North American economist at Bank of North America, and since
David is too modest to say it, I will: he is one of only a handful of economists to predict both the anaemic pace of the post-crisis recovery and the economic reversal in stock valuations. Ladies and gentlemen, David Rosenberg.
Now, let me introduce our con debaters. Ian Bremmer is an acclaimed author and the founder and head of the Eurasia Group, the world’s leading global risk research and consulting firm. Two of his internationally best-selling books are especially important to tonight’s debate: the J Curve: A new way to Understand why Nations Rise and Fall, and The End of the Free Market: Who wins the War between
States and Corporations? Ian writes a regular column on geopolitics for the Financial Times of London and the influential “The Call” blog for Foreign Affairs. Ladies and gentlemen, Ian Bremmer.
Our final debater tonight was hailed by the Globe and Mail this weekend as being to the economics profession what previous Munk debater Henry Kissinger is to the practice of international diplomacy. He is one of North America’s most respected economists, having published widely in the areas of public finance and macro-economics. His public service career spans a variety of posts, as Chief Economist to the World Bank, U.S. Treasury Secretary under Bill Clinton, the President of Harvard – yes, we saw that movie together – and most recently, the head of Obama’s influential National Economic Council. Ladies and gentlemen, Lawrence Summers.
For the benefit of our debaters and first-time attendees and all of you watching online, let me briefly run down how the next hour and a half is going to unfold. Each debater has been given six minutes for opening statements to make their case for and against the motion before this house. And speaking of timing, I’m going to need the help of this group, this audience, to make sure that our debaters stay on time. So when you see the clock on the screen count down to zero,
please join me in a loud round of applause and that will ensure that we move through this evening quickly.
After opening statements, we’re going to have our debaters challenge each other’s key arguments and tackle pointed questions from some notable people in the audience. Our debate will conclude with short closing statements from each debater – this time only three minutes each – and a second audience vote on the motion.
Speaking of votes, let’s find out now for the first time how this audience of 2700 people voted on the motion going into this evening’s
debate, Be it resolved North America faces a Japan-style era of high unemployment and slow growth. We can see those numbers up on the screen: pro-55%, a somewhat pessimistic group, con-25% and undecided is at 20%. The second question we asked you this evening was depending on what you hear during the debate are you open to changing your vote? How much could opinion in this room shift over the next hour and a half. Wow – 95%! This is an indecisive audience. Ninety-five percent of you could change your vote. Only 5% of you are committed.
Ladies and gentlemen, we officially have a debate on our hands. We’ve agreed on the order of speakers with our debaters, and Mr. Krugman, I’m going to start with you. You have six minutes, sir.
Paul Krugman: I hope you’ll let me start with a judgment. If 95% of the audience says they are open-minded, at least 50% are lying. Also, I’ve been asked if this is about North America. It’s all going to be
about the United States. I apologize for that. Canada doesn’t really fit in for two reasons. One, it’s small and second, it has not messed up
enough to be interesting, so this is going to be a U.S.-centred
discussion.
With that, let me say I actually find it quite strange, at this point, that people are still wondering whether things can go as badly in the United States as they have in Japan; because the fact is that things in the United States have already gotten much, much worse than they ever did in Japan. It’s actually quite startling to look back on what Japan’s troubles are, and they’re real, but Japan never had the kind of drastic slump in employment that has afflicted the United States. It never had a decline in real GDP comparable to what the United States is experiencing until the world as a whole went into crisis in 2008.
So the U.S. has had a bad start already, much worse than anything Japan has had. Will the United States quickly recover from this shock? It’s too late for that. It’s already been four years since the great recession began and are we feeling prosperous yet? There’s not even a hint with what’s going on in the U.S. right now that a V-shaped recovery, the kind of thing that people kind of hoped would happen, is even in the offing, even on the horizon. For the past two and a half years the United States has basically been in a holding pattern; growing, but not fast enough to make any significant dent in unemployment, which remains very high.
It’s not a collapsing economy, but a sour economy. That’s what a lost decade looks like. That’s what Japan has looked like for all of this period except that the United States is sourer and more lost than
Japan ever was. Why would we think that looking forward things would get any better? Some people say that in the U.S. assets have never fallen as much and our stock market has never plunged as greatly as that of the Japanese. Let me offer a couple of answers. One is that Japan took a long time to get as bad as it is right now. The Nikkei, if you go back to the 1990s, was above 15,000 for almost all of that decade.
Give us time, but also you can say that America was a lot more vulnerable to a falling asset crisis because our households never saved much in the first place. But ultimately you have to judge these things on a PPE basis. That’s “proof of the pudding is in the eating” and everything you see says that the United States had a bigger shock to its economy than Japan did when its bubble burst. Another point is
that for the first fifteen years of its lost decade – Japan’s lost decade is now in its nineteenth year -- Japan had the great advantage of being
pretty much unique in its economic woes so that it could, to some
extent, pull itself out by exporting to a more prosperous rest of the world.
As far as I can tell, with every financial crisis since World War II the countries in question have recovered by having an export boom, by moving into a large trade surplus against a rest of the world that was doing ok. This time around there is no one to whom we can sell. We’re all in this, so the United States can’t pull itself out by running a trade surplus unless we can find another planet we can sell to.
So what is it about the American situation that would make you think that we’re going to do any better and that we’re not going to have a lost decade? There is the claim that America is a more dynamic and creative society than Japan, which is arguably true, but that was also true of America in the 1930s. We were very dynamic and very creative and it still took the war to actually end the Depression. Mainly though, what I hear is the claim that American policy has been or will be better than Japanese policy. My answer to that is: say what?
Yes, the Fed, my former department head, Ben Bernanke, was quicker on the draw than his predecessors and his counterparts at the Bank of Japan, but he dropped interest rates to zero quickly and obviously that wasn’t enough. That happened three years ago. Arguably, America’s done a better job at not perpetuating zombie-banks, but if you were
serious at analyzing Japan, you knew that the issue was greatly overrated in the first place.
Where fiscal policy -- which is arguably what can be most effective -- we criticize Japan a lot for having stop-go, for having stimulus programs that were inadequate and then pulling them back before the economy was really on the road to recovery. We’ve done the same thing. U.S. fiscal policy has turned strongly contrarian at this point, with the Obama stimulus fading out and state and local governments continuing to contract.
So if you want to believe that America is going to do better you have to believe that we are going to reach a consensus on stronger, more effective policy. You have to believe that the American political system is heading towards that kind of effective consensus. And I guess the question is, looking at American politics, what would make you think that it’s headed towards a consensus for effective action? What would even make you think it’s headed towards sanity? In this morning’s polls, Newt Gingrich has pulled into the lead for the Republican nomination. So I see absolutely no reason to believe that America will do better than Japan.
RG: Well done, Mr. Krugman, exactly on time. Larry Summers, we’ll see if you can follow that example.
Lawrence Summers: Paul, I would buy, not sell. You’re right the United
States has a serious demand deficiency. You’re right that not enough is being done to contain that demand deficiency. You’re right that we will suffer needless unemployment and stagnation until more is done to address that demand deficiency. You’re right in what you have written and this is an analogy that you and I have shared, quoting Keynes.
Keynes famously described Britain’s problems as a “magneto” problem. That was British-speak, circa 1931, for a problem with the electrical system of your car. His point was that if your car wouldn’t go and you fixed the electrical system, then it would, and you didn’t have to engage in a fundamental and far-reaching critique of your car. You just had to fix what was wrong. When an economy like that of the United States is demand short, you just have to fix what is wrong and move to strengthen demand.
My thesis is that as serious as that problem is, it is dimensionally much less than the problems that Japan faced in four respects. Japan’s
problems were different in magnitude, different in the depth of their structural roots, different in the relative perspective they had -- relative to the rest of the world -- and different in the degree of resilience their system had for adapting to them.
Let’s get the magnitude straight. In Japan, house prices fell to a level not two-thirds of previous levels but to a level 15% of previous levels. The stock market may get there, but to get where it got in Japan you have to be talking about Dow 2600 and I don’t think that is in prospect. Paul, you forecast in 1994 -- and it was very close to the kinds of estimates the Clinton administration had -- that Japanese potential GDP growth would be 3% or a bit more. By that standard, Japan is now producing half of the potential output that people were forecasting when its lost decade began. That’s a problem of a different magnitude than a U.S. gap, serious though it is, at 6 or 7%.
There is little wonder that Japan’s slow-down is so profound given the magnitude of the structural problems that hold Japan back: the most rapidly aging society in the industrialized world resulting in slow
labour-force growth; epic insularity and inability to accept immigration; in the face of distress a massive retrenchment by its
companies to their home markets; an utter lack of capacity for
entrepreneurial innovation in the era of the social network. The United States remains, witness my colleague here, the only country in the world where you can raise your first 100 million dollars before you buy your first suit and tie.
Let’s look at relative perspective. When Japan went wrong in the
1990s, the world was working. The United States was flourishing and growing. Europe was flourishing and growing. It was Japan that was having a substantial reduction in its share of the GDP of the industrialized world. It’s very different now. The United States’ problems are the problems of every industrial democracy. And the U.S. share of the industrial world is steadily increasing.
There’s plenty that is wrong with the U.S. political system, but if you look at eight prime ministers in as many years in Japan, if you look at what passes for governance in Europe in recent years, I would suggest that our problems do not loom large relative to either the economics or to the politics in the rest of the world. We remain totally unlike Japan. We remain the place where everyone in the world wants to come and the place where everyone in the world wants to put their money.
Finally, we are a uniquely resilient society and we have seen this before. John Kennedy died believing that Russia would surpass the United States by the early 1980s. Every issue of the Harvard Business Review in 1991 proclaimed that the Cold War was over and that Japan and Germany had won, and that was before the best decade in U.S. economic history.
It will take time. There are steps that need to be taken but we are a society that works. We are a society whose principle problems -- we all up here agree -- can be addressed by a change in the printing of money and the creation of infrastructure. That is not the kind of fundamental problem Japan has.
RG: Lawrence, I see your time at the MIT debating club has paid off – you landed perfectly on the six-minute mark. David, will you make it a trifecta for us? David Rosenberg, ladies and gentlemen.
David Rosenberg: Thank you. My colleague and partner Paul Krugman said that the proof of the pudding was in the eating, and that certainly resonates because the proof is this: We have had three years of unprecedented and radical stimulus in the economy. We’ve had policy rates in the U.S. at zero -- zero percent policy rates for three years. Who was calling for that four, five, six, seven years ago? We have had the Fed take its balance sheet into the stratosphere. Once an 800 billion dollar stable balance sheet is now sitting at two and a half trillion dollars. We’ve had, at the same time, three years of government deficits in the U.S. at the federal level of over 10% of GDP. FDR never ran the deficit above 6% for one year in the New
Deal.
We’ve had three years of unprecedented fiscal stimulus. Yet what did we get out of it? What did we squeeze out of the lemon? What we got was real GDP growth of barely more than 2% at an average annual rate. Take a look at what is normal historically. What is normal in the context of a post-World War II, post-recession recovery, nine quarters in, where we are today? What is normal is 5.5%.
We’ve averaged barely more than 2%, despite the most radical government incursion into the economy that we’ve ever seen. It brings to mind the Billy Joel lyric: is that all you get for your money? If this were a normal garden-variety business cycle, with that degree of stimulus, we’d actually have GDP growth running at an 8.5% annual rate and we’d be talking about hyper-inflation. This is what makes this
similar, though it’s not exactly the same as, the Japanese experience. No two cycles are exactly the same.
What this is telling you, despite all these policy tail-winds and the lack of above potential GDP growth that has left the unemployment rate around 9% for 30 months now, is that our policy makers are bumping against the severe head-winds otherwise known as the debt de- leveraging cycle. We still have a depression in housing four years after the initial detonation. And we have consumer debt de-leveraging in the United States of unprecedented proportions. We had what was a forty year secular credit expansion that went absolutely parabolic in 2002, because we had a government that believed that as an antidote to burst dot.com bubble we could actually save the system by
engineering a financial and housing bubble.
The basic problem that we have on our hands is that the largest component of the U.S. economy, called the U.S. household sector --
70% of GDP -- is trying desperately to get out of debt. How do you get out of debt? Well, you either pay it down, which comes at the expense
of other spending, or you default.
What does a credit de-leveraging cycle mean? We have not had, by the way, this situation at any other time in the post World War II period. You have to go back almost to the previous century. It means the paying down of debt. It means rising savings rates. It means re- orienting the family budget from luxury goods and services towards necessities. It means a weak economic backdrop and it is fundamentally deflationary.
What did Japan go through? Japan went through an asset bubble that burst. I’m not going to try and get into the parameters of what was bigger and what was smaller. But Japan went through a massive credit de-leveraging that is ongoing. That’s exactly what is happening in the United States and that’s what has held back the economy despite the stimulus. So far the household sector has paid down or walked away from de-leveraging roughly one trillion dollars.
If we’re talking about the concept of mean reversion -- and mean reversion is very important in this business -- then we’re talking about taking debt to asset and debt to income ratios back to their pre-bubble norms. I believe this is going to happen but you’re talking about at least another three trillion dollars of de-leveraging. The question is going to be whether the fiscal policy outlook and the monetary policy
outlook are going to survive long enough to act as antidotes to this de- leveraging cycle. How long to de-leveraging cycles last?
Well, I have this old saying: when in doubt, rely on somebody else’s work. The Mackenzie group did this work two years ago where they found that you can have the assumption of a plain, vanilla, garden- variety business cycle, in which case we’d be off to the races by now, which we are not. Or you can have a credit and asset shock – home prices went down 35% this cycle, more than they did in the 1930s – and working through these asset and credit cycles takes roughly seven years. So we have finished two already. I’m going to be optimistic and say only five more to go.
RG: Ian Bremmer of the Eurasia Group, you are up next for the final opening statement.
Ian Bremmer: So 95% of you say you’re willing to change your mind. Paul said he doesn’t believe half of you. That’s because he thinks he’s still in the States. Last I read the proposition was on North America. Some of us think it’s the 51st state up here, but I do want to mention Canada. I’ll save it for the end: best for last.
Let me say to start that I understand why there’s negativity here. As Rudyard said, we’re very concerned. We’re concerned about the world. The architecture isn’t working the way it used to and that architecture was created after World War II by the United States. I know we call it the World Bank to sound global; we call it the World Series too. There is a Canadian team, but we know the truth.
There is creative destruction happening in the global environment today and we don’t like that. If we had a choice as Americans to go back to when all that architecture was functioning well -- 10 years ago, 20 years ago, 30 years ago -- I’d say that would be a more comfortable world. But that is not what we are debating. What we are debating is about whether or not the world that we are in now is one about which we can feel good.
Where are we going to invest, where are we going to live? Where do we want to give our kids a chance to make their mark? That’s a
relative game, and Larry and I bet firmly on North America and we bet firmly on the States. Why do we do that? Where else are you going?
I look at Europe and there are 17 nations in the Eurozone and they talk about fiscal unity. That’s not the problem in Europe. The problem
in Europe is that there is no kids’ table. There are seventeen countries and there is no kids’ table. When I was a kid you did not give me
sharp utensils because the family pet would have been damaged, right? That’s changed recently. In Europe you’ve got Greece and
you’ve got Italy. You’ve got 17 countries and they all have breakable
glassware – that doesn’t make sense. That is going to take years to sort out.
Paul Krugman just came out and said, “It’s ending not with a *** but with ‘Bunga, Bunga’.” I read that piece and I thought, wow, he wouldn’t go to Europe. How about Japan? Seventeen prime ministers
in 22 years. That is a modern-day Asian record if you don’t include military coups in Thailand, which I am not wont to do.
For 50 years they had a single-party system, the LDP. Suddenly it’s gone. But they don’t have public policy schools. The Democratic Party of Japan doesn’t know how to govern. That’s why they’re going through so many prime ministers right now. They don’t have connections with the bureaucrats that actually understand policy nor do they have connections with Japanese industrialists. So you’re not betting on Japan.
How about China? You know what? You guys did that debate already. I saw it and I know how you voted. You‘re not betting on a Chinese century and you’re not betting on a Chinese era. Why? You’re not betting on it because China is massively volatile. They’ve got to move from a state capitalist system to a consumption-based system. They have to not only change their economic system. they have to adapt their political system. Maybe they can do it but with one point three billion people? This has never been done before. I’d put 5% of my portfolio on it. I wouldn’t invest the nest egg. That would be crazy.
Now, the United States has problems. Larry and I are not standing here saying that we don’t have problems. There are deficit issues, unemployment issues, governance issues. We’re not happy with where Congress is right now but there’s a difference between that and fear- mongering. You look at the United States right now and in terms of governance we all went crazy, “Oh, the debt limit! It’s going to explode!” Then, of course, at the last minute they pull out a deal.
We’re saying the same thing right now. Nine days down the road we’re going to have the super-committee, it’s going to explode. We’ll get our
1.2 trillion. It’s going to be ugly. It’s not a great way to govern. But it’s better than what we see in Japan, Europe or China.
There’s an easy way to look at this. It’s called the dollar. Where do people go in all of this time of concern? They go to the dollar or they go to gold. And you know what? The last time I checked, gold isn’t a country.
I said I wanted to spend a little time on Canada. I woke up this morning. I got the Globe and Mail delivered to my hotel room. On the front it says that the Prime Minister stands by Obama but looks to Asia. Smart thing to do – he’s in Honolulu. Canada can hedge. Canada’s got the United States but it has also got British Columbia, as of May, selling more timber to China than to the United States.
Energy goes everywhere. You don’t do Keystone right now, but you build on infrastructure. Last time I was in Calgary the Chinese were doing everything possible to get in and buy, buy, buy. Anybody here really believe Canada is entering a lost era? I don’t buy it.
RG: Ian, thank you, a strong finish to our opening statements, and I think we can sense the tension between the two sides. So what we’re going to do now is take a few questions, get these debaters jousting with each other and to get us going. I want to have both teams react to a quote we’re going to have up on the screen about the threat the Eurozone crisis presents to global economic recovery. If we can have that up now: “The economy around the world runs the risk of a downward spiral of uncertainty, financial instability and potential collapse of global demand. We run the risk of what some are calling the ‘lost decade’.” These words were spoken just last week by none other than Christine Lagarde, the head of the International Monetary Fund.
Larry,let me ask: why is Lagarde wrong to invoke the spectre of a lost decade when it comes to interpreting the potential impact of the Eurozone crisis on North America?
LS: She’s not. There is the spectre of serious problems and that could continue for some time. But a European crisis that hurts Europe primarily, that also hurts the United States, is a very different thing than an era of stagnation, which is what your resolution adopted. Maybe it would be helpful if those arguing the pessimistic side of the resolution could clarify whether it is their view that all is lost, that we’ve done vast amounts of policy and it’s hopeless in the face of de- leveraging as Mr. Rosenberg suggested, or whether our problems are
eminently solvable, but we’re just unwilling to solve them, as Mr. Krugman suggests.
Those are rather different positions. My position, which is the same as Ms. Lagarde’s position and I think also Mr. Krugman’s, is that these problems are solvable. Ms. Lagarde said what she said in the spirit of urging that these problems be solved. And while I’m sure the solution will be imperfect I think that warnings of this kind are very salutary precisely because they prove to be self-denying prophecies and call forth action.
PK: I do agree that these are very solvable problems given the understanding and the will. That’s my problem. We don’t have those things. It’s a little bit harder than Larry says. It’s not just printing money. It’s actually promising to keep that money out there after the economy has recovered. It’s a trickier proposition than it might have seemed but yes, a commitment to sustain monetary expansion might do it. The trouble is I see no prospect of it.
I think that Ian Bremmer has got this thing by exactly the wrong end of the beast, has got it exactly upside down. We should not rejoice or feel optimistic about America because the rest of the world is doing even worse. That’s not the way this thing works. The prospects for a lost decade in the United States are made more likely by the fact that so much of the rest of the world is doing badly. The European experience does hurt us. It doesn’t help us. That’s part of the point I was trying to make. Japan at least had the advantage of having a generally prosperous world to sell to; we do not.
And Larry, you’re not quite right. It’s true that a shock, a financial shock, by itself from Europe does not mean a lost decade but it does tend to tip us further into that zone where you have a self-reinforcing downward spiral that keeps us trapped.
RG: Let’s go to Ian, and then I’m going to get David to weigh in and then Larry, back to you. Ian, Paul says it’s not about the world, it’s not relative. It’s about America.
IB: There’s no question that the world in a horrible environment is going to have an impact on the United States. But the relative gain matters in terms of where you are going to put your money. Does it matter that millionaires in China, over 50% of them, want to live in the United States – not just send their kids over there, but actually
live there? Yes, it does. Does that attraction of entrepreneurship and talent make a difference to the United States? Of course it does.
I only had six minutes. We didn’t talk about the fact that the single largest technological game-changer in the world, in my view, over the last few years is unconventional oil and gas, developed by American and Canadian entrepreneurs, American and Canadian multinational corporations. And now the U.S. is in vastly better shape in terms of
the big energy game-changer. That’s an enormous shift and if you ask me where the next big thing is going to come from, I might bet a little
less on the U.S. than I would have five years ago but I’m still making
the U.S. bet. Those are things that we can’t just slough aside.
PK: When the world loves the U.S. dollar that is not helping us. We want a weak dollar. We want to export. The fact that people are piling up the U.S. dollar, the fact that people want to park their money in the United States is not a positive in this situation. These are things that actually hurt us.
RG: David, come in on the European debt crisis because some commentators have said, “We have a lower debt to GDP ratio here in North America; less of our economy is made up of public expenditures. In other words, we’re not going to have to spend a decade here going through the painful debates, political and economic, that Europe’s
going to have to face. And that may be to our advantage.”
DR: It depends what debt you’re looking at. If you’re looking at total level of debt – and that’s not where the problem is – if you add up corporate, household and government debt in the United States, it’s
350% of GDP. Does that make you feel comfortable? The OACD as a whole is up 375% so the U.S. is really that materially below.
In answer to your question before, there is actually a solution to a credit collapse. There is a solution. Meanwhile Europe’s been working on one for 20 months. The U.S. has been working on one for basically three years and the view somehow is that we’re going to give more *** to the drunken sailor. We are not going to solve an existing credit crisis by creating more debt.
What happened in the United States is that by late ‘07 early ‘08, the U.S. consumer hit a wall. What happened amongst several European governments is that they hit a wall. So I guess if we’re willing to agree, we can agree that the problem, globally, is one of excessive
indebtedness. Then I’d like someone to enlighten me. What is the policy prescription?
One person’s liability is somebody else’s asset. Your liability is an asset at some financial institution, so explain to me how we’re going to embark on this process of destroying debt because debt has to be destroyed. We finally hit the wall. When I ran around with Merrill
Lynch for all those years and I had all my debt to GDP charts all I ever heard was, “But it’s not doing anything. You’re just the boy who cried wolf.” To which I replied, “Well remember, the wolf shows up at the end of the story.” The wolf has shown up and I’m hearing that there’s actually an easy solution. We’ve had quite a long time to deal with the solution.
The problem is the law of unintended consequences; by destroying the debt you’re creating winners and you’re creating losers. If you’re going to destroy the debt you’re going to have to somehow nationalize banks or have the government help them recapitalize. Either that or you will have to inflate your way out of it by printing money.
RG: Nationalizing banks, Larry, that sounds a little extreme.
LS: No, no. Look, we can comeback to that if you want but I just want to get some clarity on what we’ve been discussing. We’ve got a bit of a problem of in that we’ve got two teams here but there’s a little dissention within the teams. Paul and I agree that…
PK: We do, we…
LS: Paul and I agree that…
PK: We do, which is why I’m so fascinated by your optimism. LS: I’m sorry?
PK: Since we agree so much on the fundamentals I’m a little bit baffled by your underlying position.
LS: The central problem that is holding back the American economy and the North American economy is lack of demand. That is a problem that is very much made by man and can very much be solved by man. The central issues that go into solving it involve the proper use of
fiscal policy, the proper use of monetary policy -- both in the present
and committed for the future and with the proper reference to promote exports.
Paul and I might have some technical differences as to just how that might be done but that is the centre of the problem and we have no disagreement there. The question is whether those relatively technical, incredibly important but relatively technical, steps can be carried out in relatively short order. Principally, these steps have to do with
monetary policy and they are what make it appropriate to compare the
United States’ situation to what Japan’s situation was at the beginning of the 1990s.
But I believe Japan faced a much more profound difficulty, a much larger bubble, and a huge set of deep structural problems around demography, insularity, and a lack of competition, all of which slowed it down in a way that has basically become permanent. There is no evidence that something like that is happening to the United States; that makes the historical nature of the situation in Japan moving from a position of being the next super-state into decline, quite different from the situation of the United States suffering a severe demand and
financial problem to a lesser extent than the rest of the troubled world. Those are very different situations.
To recognize their difference is not to deny in any way the seriousness of the U.S. situation, only to suggest that it is not the kind of U-turn in history from ascent to descent that took place in Japan after 1989.
IB: When you talk about Japan and you talk about an era, you talk about something that’s become very fashionable in Washington circles these days – decline. Declinism, declinist. You can’t take a one-year, a two-year, a granular policy perspective, saying what will or what won’t Congress do on the deficit today. You have to look in the longer term at the United States in the world. Is China becoming number one, is that something we bet on? It’s not a question of whether China is
going to hurt or not hurt the United States tomorrow.
It’s a question of who is going to be number one? Where are we going? American demographics are fundamentally strong. The population is growing, immigration is reasonably healthy. It is a fairly creative country, right? You compare that with Japan – give me a break. You compare it with Europe – going nowhere on this front. You compare it with China -- becoming vastly more problematic.
You’ve got a world that’s industrializing with hundreds and hundreds and hundreds of millions coming into the middle class. They need food. Who’s got it? The United States. They’re net exporters of calories. They’re the world’s largest in things like corn and grain. You talk in the long term. When you talk eras, we’re not talking about hedge-funds anymore. We’re talking about where you and your kids are going to
be. And it seems to me that is just a no-brainer. I’m as stunned as
Paul is that these guys are not on our side. I don’t’ see where else you go.
PK: Yeah, I…
RG: Paul, sorry, we’ve got to turn our attention to our screens. These are the only slides in the show, I promise. We’ve got three slides on Japan to give the audience a sense of what an era of decline looks like. So there’s Japanese GDP going back to 1995, the big spike-down obviously is the financial crisis, but then it’s back down to zero. We go on to the next slide, interest rates, again for a long period of time here bumping along close to zero and then our final graphic represents public indebtedness. Tell us why you think that the Japanese experience is more analogous than less, to what we face. That seems
to be the core of this debate so far.
PK: So far, the U.S. looks like the beginning of that series of slides, except kind of more compressed in time; kind of Japan’s lost decade on internet time, if you will.
I think there’s fundamental confusion going on. There are two different issues. One is an issue of long-term secular growth, creativity, whatever, and of course demographics. Sure, the U.S. has advantages on that. But if the United States ten years from now looks exactly comparable to Japan except higher GDP entirely accounted for by higher population growth, if our per capita GDP does what Japan’s
does would we consider that we had escaped Japan’s fate? I don’t
think so. We would say that we had experienced a lost decade just like theirs. That’s not the issue, nor is our place in the world the question.
The question is, are we going to be stuck in a state of depressed
demand of the kind that Larry has talked about.
Larry and I agree that that is what has been happening, I think David as well. We agree that a lot of these things that we’ve talked about -- creativity, dynamism -- are all wonderful. Do they solve our problems? There are stories by which they might, but I always look back to the
1930s when the United States was, even more than it is now, the
cutting-edge technological country. It was more dynamic than any other country and yet we were stuck in the Great Depression. It was only a very large public works program otherwise known as World War II that took us out.
Politically, you want to look at the long term. I come from the perspective that the U.S. political system has changed fundamentally. We are not the country we were. The days when you could get together 20 senators from both parties, evenly divided, who would
agree out of their goodwill on a set of reasonable, moderate measures. Those are long since gone. We’re a deeply polarized country, we have
a dysfunctional political system in a way that it never was. We didn’t used to be a country where nothing could be passed without 60
senators. Now we are. And because neither party is likely to have 60 senators anytime in the foreseeable future, nothing can be done.
So sure, I think Larry and I agree almost entirely on the economics, on what needs to be done; but I have now got a deep pessimism about
the state of the United States as a political entity. I don’t see anything that makes me hopeful for the next few years, at least.
LS: Churchill famously said that the United States always does the right thing but only after exhausting the alternatives.
This theory of universal gridlock is tricky. Certainly there is much that I would have strongly preferred, starting with more fiscal stimulus, that the Congress was unwilling to give in the last two years. This continues, judging by the current political debate. But those who say that the United States is now hopelessly gridlocked do need to remember this fact: every political scientist and historian who has looked at the question of how much consequential legislation was passed in 2009 and 2010 versus any other period has concluded that there is a good debate to be had about 2009 and 2010 versus 1965,
1966. There is no comparable period of productivity and legislation in
40 years and there are many who think you have to go back to 1933,
1934 to find a period when an equal amount of consequential legislation passed.
So yes, is there gridlock with respect to some issues that I think are hugely important right now? Yes, there is. Does that mean that the system is fundamentally blocked for the long term? I think you have to look for the magnitude of what has happened. I think you also have to look to differences in private sector initiatives. As you were introducing the Munks, who brought us this forum, what came into my head was
that this kind of spur to public debate to solve problems is a North American strength and is not an important feature of life in other parts of the world. As we assess our prospects we do need to look to all the strengths of societies.
RG: Let’s change up gears before we go to questions from the floor. Ian, I want to start with you. Let’s talk about the Occupy Wall Street movement. It’s here in Canada, too, and one of its major grievances is the inequality of wealth that we see on this continent. And I think that’s a grievance that’s shared by a lot of people on both sides of the political spectrum. So why isn’t that really an Achilles’ heel for North America?
IB: Why wasn’t Katrina an Achilles’ heel? I went to Tulane undergrad, down in New Orleans. It is horrifying what happened there. We said “never again” and we keep saying it. The fact is that the United States is an extraordinarily, exceptionally resilient country. Why didn’t the elections in 2000, which 50% of the population believed were fraudulent, why didn’t they cause chaos in the streets? If that had happened in Indonesia or Ukraine – it did happen in Ukraine, actually, and there were very different responses.
It’s because the United States has extraordinary depths of political resilience and stability. In that regard we’re no doubt similar to Japan
– no question. Look at Fukushima: the resilience is there. But unlike
Japan, the U.S. also has the potential to actually grow and create and all the rest.
So Occupy Wall Street is an embarrassment for the United States,
there is no question. But the fact that we are debating as vigorously as we are and that these movements are happening across the country and that they’re mattering, is a great thing. One reason the 5$ a
month charge for ATM cards -- which was not exactly good timing on
the part of the banks -- got pulled apart was because you had folks on the streets saying, “We’re not going to take this sort of thing anymore.” And the banks said, “Wow, this is maybe bad for us.”
I think that is a real strength of the United States. I don’t think it’s a weakness. But clearly it needs to be addressed.
RG: Paul, you’ve written extensively about this.
PK: I have to say it is possible to have full employment producing luxury goods. But I think the inequality plays an indirect role in a lot of
our political polarization. A lot of the pulling apart of our political system appears to be related to inequality. Political scientists have shown that those two track each other pretty closely. I also think a lot of the way we got into this mess was through reckless deregulation, through a failure to rein in the financial sector -- a sort of determined forgetting of the lessons of the 1930s which never at any point worked very well.
We never actually had a particularly successful economy. Yet there
was this impression in Washington and in New York among people who had influence that it was working just great when actually it was only working great for them. The thirty years following the big change in America, the big shift to the right, were actually not a good time for
the American middle class family but they were great for the top
0.1%. I think inequality has in fact warped the perspective of our policy elites and continues to do so.
I don’t think inequality is crucial, though. I think the U.S. and Japan are similar and our macro-economic experiences are actually alarmingly similar, though the Japanese managed to do it without all this inequality. So yes, we don’t have their weaknesses but we have weaknesses of our own and inequality is one of them.
RG: David, what’s your take on this? Does inequality lead to the potential for political crisis in North America similar to what we are seeing in Europe? Could we ever see people in the streets like we do in Greece or Rome?
DR: Well, I don’t want to go that far but it does lead to social instability. I mean Larry Summers mentioned about the deficiency of aggregate demand. Our opponents haven’t mentioned the word de- leveraging, haven’t mentioned how housing fits in and what the root cause of the demand deficiency has been. If we don’t agree on the root cause then we’re not going to come to a solution.
What has happened is that partly because of the fact that we have about 20 million Americans that are upside down on their mortgages, if they get a job offer in Boston they can’t leave San Francisco unless they write their lender a cheque. So we’ve had just one example among a myriad of how housing and credit have played into unemployment.
When you have a situation where almost half of the unemployed have been searching fruitlessly for work for at least six months, you know
what is going to happen with these people. When you have a youth unemployment rate in the United States of 24%, adult male unemployment rate of 8.5% -- and if you don’t have a college education it’s 14% -- you know what is going to happen with these people. Everything, ultimately, will come right down to unemployment so you have a lot of disenfranchised individuals with a lot of idle time and perhaps not a lot of prospects. We’re past the peak of the stimulus cycle whether it pertains to federal fiscal policy or monetary policy.
I think Larry might agree with me, I mean, we’re just basically writing different chapters of this book on the age of de-leveraging and I don’t want to sound alarmist, talking about riots in the streets, but the longer you have a serious unemployment problem in the U.S. the more you risk social instability.
Keep in mind that we’re not even in a technical recession. We’re supposedly in the third year of a statistical recovery. And it’s not just a
9% unemployment rate when you count in all the underemployment -- because you have so many people working part-time that used to
work full-time. The real unemployment rate, as you well know, is over
16%. The longer that lingers the more the risk of some sort of social instability can possibly ensue.
I’ll just say, by the way, on this Occupy whatever Street, I don’t know if there is really a consistent message but I’ll tell you that there is one thing that resonates through the group: I think it’s a backlash against excessive CEO pay in the United States. The fact that you have people running banks who are forced out by the board and they get this enormous pay package at a time when over 40 miillion people are receiving food stamps, well, that sort of leaves a bad taste in people’s mouths. So I think it comes down more to the golden parachutes. As far as I’m concerned, if there’s a common thread that is really what it is.
RG: Larry, go ahead and then Paul.
LS: The trend towards more inequality is a highly problematic thing. Too much of it has to do with people who have successfully managed to get the government to directly or indirectly give them resources. There’s much that needs to be done starting with more progressive taxation and a variety of regulatory changes.
On the other hand, let’s remember there is another aspect to this which is not by any means the whole story. It may not be half the
story, but it is worth keeping in mind. Suppose the United States had thirty more people like Steve Jobs. Would that be good or would that be bad? I think it would be good but the level of inequality in the United States would be significantly higher. So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship and that is surely something we want to encourage.
Too much of the inequality comes from other things but let’s not forget that some of the great fortunes have been made doing things that
have had very substantial benefits for large numbers of North
Americans and people around the world.
PK: I think that this is correct but almost none of your top 1% is like that. They’re very important, the people who are, but there are very few of them. I just want to say, in case it wasn’t clear, I think Occupy Wall Street has been an entirely positive development. It’s been entirely salutary. People ask, “Where does it go from here?” It has already changed the discussion and it has changed the discussion in a favourable way. We’ve stopped talking about inflicting pain and started talking more about creating jobs. Occupy Wall Street has actually moved me marginally towards Larry’s position, giving me some hope that maybe, maybe there are resources in the American psyche that will get us out of this. But then I turn on the TV and watch another
GOP debate and I change my mind.
RG: We have some interesting people in the audience tonight who
have a lot of experience with these issues and I’m going to go to some of their questions. The first questioner I want to call on is someone
who lives and breathes the cross-border economy every day. He’s the
president and CEO of the sixth largest bank in North America, he’s Ed
Clark.
Ed Clark: I’m not sure now whether we’ve got two teams or four individuals so I’m going to try and tease that out of you. Assuming you’re in the 95% and you’re willing to change your mind, if you came to the view of your opponents, what policy prescription would you do differently?
RG: Ian, I’m going to ask you to kick us off.
IB: Well, I suppose it would become a little more urgent. I don’t suppose it’s that the policies change but that the willingness to kick
the can down the road changes. I mean the Americans, the Europeans,
the Chinese, the Japanese -- everyone is kicking a can down the road. Number one you need to hit the can, number two you need to have road. So our perspective is one the U.S. is consistently actually kicking as opposed to the Europeans who came very close to missing the can the last couple of weeks.
Secondly you’ve got a lot of road and actually you’ve got folks out there that have a brick wall in front of them and they’re not drilling. I think if I were more convinced by their position I’d be more concerned about the urgency of things like massive infrastructure spending, change and improvement in educational policy -- especially at the younger levels because that’s a generational issue and you’ve got to work on that right away.
I still support the policy, but how urgent is it? Is it ok that we are waiting till 2013? I understand that Paul gets upset whenever he sees the GOP. That’s actually not a constructive position in the sense that the GOP does reflect half of the American population. I don’t get upset when I see political parties. I want to see governance. One thing that is interesting when we look at 2012 is that we’re much more likely to see more governance.
It seems to me looking at the trends that the House is going to go Republican, the Senate is going to go more Republican and the presidential race is actually swaying a little more Obama than Romney at this point, but it could go the other way. Either of those two outcomes from my perspective indicates that you are likely to get more governance, though Paul may not like the governance in question, and more policy than you have over the last few years. Especially since it would be a second Obama term and he needs legacy. He has to compromise; there’s only one way to do it.
So the question is can we wait till 2013 to really move that ball or do we have to have to get started now?
LS: Here’s what I think. In a democracy, often fear does the work of reason. I think the kind of concerns that are expressed here are actually very constructive because they call forth the kinds of policy responses that we need, which I believe sooner or later will be forthcoming. And that means that this will be remembered as having been a hugely significant and painful cyclical episode in American history but not the equivalent of the decline of Britain; not the equivalent of the historical change in Japan’s role in the world.
If I really believed that they were right I would think that the United States needed to profoundly reassess its approach to global leadership in the context of being able to afford much less. I don’t believe that
the United States needs to do that and I believe it would be enormously dangerous if the United States were to do that, both for American interests, for global peace, and for freedom around the world.
So I believe that it is appropriate to worry terribly about the various concerns that we have discussed, but to write off the American future by declaring that we are in an era – not a decade – of stagnation seems to me to risk a self-fulfilling prophecy of a most dangerous sort. But that is the direction in which I believe the United States would
have to move if these views were accepted.
PK: I’m not sure the question quite makes sense, given my perspective. Because the perspective is that the reason that we face this prospect of a decade or more – I don’t know how long an era is but a long stretch -- of very bad times is precisely because we are unlikely to get the right policies. I’m very much of the view that we could end this quite quickly.
I don’t know if people have heard my line that if we discovered an external threat, if we were told the space aliens were getting ready to invade and we needed to prepare for it by spending a lot of money, we’d be out of this thing in 18 months. And then if we discovered the aliens didn’t really exist, fine, we would have solved the problem. But that’s not going to happen. What I advise for policy is almost exactly what Larry advises for policy: radical monetary and fiscal stimulus until we’re out of this but I see nothing in the political spectrum that is making me think it’s going to happen.
Let me say one other thing. We talk about the history of the United States, the history of the world and nobody has ever actually done what we need to do. No country has ever successfully responded to the aftermath of a major financial crisis with a really effective monetary and stimulus package that got it out. The countries that have got out of financial crises since World War II have done so with export-led recoveries. They have all been the kinds of recoveries that are not available to us.
The United States did not do it in the 1930s. There are a lot of favourable comparisons between Obama and FDR in terms of stuff accomplished in their first two years, but FDR did not get us out of the
Depression. It was Tojo who got us out. So we’re not actually demanding just optimism, we’re demanding that you believe that America is going to find a way to do something that nobody has ever done before.
RG: David?
DR: It might be time to take off the gloves, which isn’t my style, but Larry said in April 2010 that the economy achieved escape velocity. Since that time the Federal Reserve has actually cut their macro- forecast five times. So this is a totally unpredictable and extremely volatile economic backdrop. We’re already in an era of extraordinarily weak economic growth. The question is whether the era is going to persist. U.S. employment is the same level today that it was in June of
2000. There’s been no change in 11 years. The S&P 500 is at the same level it was in January, 1999. Home prices are at the same level they were in 2003. We have got real personal income at the same level it
was in 2005.
So I don’t know what you want to call era, or long-term, or secular, but we have had the same statistics for somewhere between six and twelve years.
I’m glad Ian brought up Canada. Canada went through a fiscal crisis of its own in the 1990s and we brought in a goods and services tax and we brought in a sales tax and the government that got elected in 1993 campaigned that it would do away with the goods and services tax.
And here we are today and it still raises about 35 billion dollars into government coffers. If the American public were to grab onto the fact
that you have all these loopholes and write-offs that create
misallocation of resources, well, there’s a trillion dollars right there that could have gone into federal revenues.
There are other things. For example, Ian brought up natural gas. Now, you can’t turn back the clock but what about how Eisenhower wrapped a whole job creation machine around hundreds of thousands of miles
of highway infrastructure? Look what that did to labour mobility rates in the United States, to long-term rates of return on the capital that
was invested, to productivity growth. Here we have a president who
got elected talking about the need for a coherent energy policy. Well, where is it? Look at the abundance of cheap natural gas. I don’t want to get into an environmental debate but a coherent energy policy would be great.
Those are the things I would do in terms of the tax system, and in terms of energy policy tying into job creation -- because it is very labour intensive -- and then thirdly I’d come back to what I talked about before. This is about a de-leveraging cycle. How does the government ease the process when you have almost 20 million Americans upside down on their homes? That is inherently unstable from a social standpoint, from an economic standpoint.
We have to find a way to give these people equity back in their homes. How do you do that? Equity back in their homes means a write-off for the banking system and while I’m not saying we should nationalize the banks, maybe they’ll have to go through another period of recapitalization. Maybe they’ll need the assistance of the public sector.
I don’t think that we’re going to get the ball moving in this economy until we get housing improving. And when I say housing I’m not talking just about housing starts. I’m talking about putting a floor to home prices and without talking about moral hazard – because we swept that under the carpet three years ago – we have to find a way to give equity back in these people’s hands and their homes.
RG: Let’s go to another audience question. It’s my pleasure to call on my former Business News Network colleague and anchor Kim Parlee for her question.
Kim Parlee: Selfishly, I’d like to turn the conversation to Canada if I could. What should Canada do today, given events in the United States and Europe, to either protect itself or take advantage of some growth that might be happening?
RG: I’ll ask each of you for your big, Canadian idea. I’ll start with you
Ian.
IB: I’d build up the polar north, number one, I mean, I’d bet on climate change, no one is going to fix that. I’d go short Panama, long Canada on that one. You guys have ice-breakers. America doesn’t do that.
You know, I go to Calgary a fair amount and the question I always get there is, “When is the United States going to start getting freaked out about the Chinese coming in and investing equity stakes and all the rest?” And the answer is, “Soon.” So be proactive. You’ve got
Keystone that just got pushed back but it will come back after the elections. This is a great opportunity for Canadians to make sure that
they’re diversified and can take advantage of the other countries out there that are growing and want access to their commodities.
But don’t get too in bed with them. The Brazilians understand this on land. There are strings. There is conditionality that comes with China just like there is conditionality that comes with the United States. You’re not going to like that conditionality, either. You’re not Australia, which is all China all the time. But take advantage of that hedge and get out there in front.
RG: Larry?
LS: You’re part of a world that is slower, which means you’re going to have to create more demand. That goes to your monetary policies. That goes to fiscal policies. That goes to financial policies. Recognize that you are going to need to sustain demand and that there are risks in terms of what the global economy can bring in terms of demand.
RG: Our interest rates are not quite at zero yet so we’ve got a little bit of room.
PK: That plays into what I was going to say – hang onto your independent currency. What a great thing it is…
RG: No to the Amero.
PK: That’s right, no to the Amero. Keep your own dollar. What a great thing it is to keep your flexibility. The two stand-out economies in the advanced world in terms of getting through this relatively unscathed are those of Canada and Sweden. Both of them have the interesting feature of being countries that are on the edge of a large currency union but have kept their own currency, which has given them crucial flexibility.
RG: David, as the Canadian on the panel, you’re going to have to deliver here.
DR: What’s the old real estate saying? Location, location, location. We have a great location right next to the U.S. So what we can do to limit any potential economic damage is to make sure there is substantial room on the federal fiscal side to stimulate if need be. If this turns into a global recession everyone is going to be affected. What I think is interesting is that I often hear that we haven’t diversified enough from the U.S. but in some ways I think we have, especially when it comes
to our capital markets. Half of the stock market in this country is hitched to commodities and that has more to do with Asia and China, because the United States is not the marginal buyer of commodities and hasn’t been for decades. It’s the marginal buyer of services.
We’re not totally detached from the U.S. but again the proof of the pudding is in the eating. The U.S. had a recession in 2001 and Canada did not have a recession in 2001 or 2002. What is interesting is that the U.S. recession started in December, 2007, and very quickly the U.S. stock market went down 20%, but our market went up 20% to a new high. We didn’t start a recession till about seven, eight months
later. And it was really only when it became a global recession, when it stopped being a U.S. recession, that it affected us. China went down
for the count and it really opened up the trap door.
But it is interesting that we have made great strides towards weaning ourselves off the full effects of the U.S. recession.
RG: Our next question comes from a very well-known Canadian, the author of several books, a professor at the University of Toronto and a former leader of the Liberal Party of Canada, Michael Ignatieff.
MI: I wanted to focus discussion on one issue that has recurred throughout tonight’s debate and that is political gridlock in
Washington. There seems to be some disagreement about how serious it is, how serious an impediment to growth and recovery it is. What
would be the advice of the panel to an incoming U.S. president, November 2012, whoever it is, to make the political system work more
effectively?
RG: Great segue from the big idea for Canada to the big idea for the
United States. Paul, let’s start with you.
PK: A lot of it depends on which party the president is from. If it is a Republican I think he will have no trouble pushing through a lot of really, really destructive ideas. If President Obama is re-elected he’s going to have to really use every parliamentary, every administrative trick available. If the Democrats actually do regain control of the House and retain a majority of the Senate -- which is within the realm of the possible -- then he is going to have to use whatever tools are available to find a way to break that 60-vote rule.
If the Democrats fail to control one or both houses of Congress he’s going to have to do whatever he does in ways that essentially use the
powers of the president to bypass Congress. There is only so much you can do. The gridlock in the U.S. system is not something that’s small. It’s not something that’s petty. We’ve got a deep philosophical difference between the two parties. They fundamentally disagree on not only how things work but on morality, on what is right and wrong. The idea that somehow you can finesse those differences and that if you say the right words they will go away, is naive.
So the next president -- or the continuation of the current president -- is going to have to find a way to get stuff done despite that, which is going to be very, very hard.
IB: It’s a big question. Let me try to give you a big picture on it. The United States as a power has never been considered the same way other countries have, either by itself or by others. It’s the indispensable nation, the exceptional nation. And I think whether it’s Romney or Obama they need to understand both sides of that coin. That’s the way they can lead. Fundamentally all of this amounts to leadership. You need a president that is seen as a leader, by his colleagues, by his opposition. When Clinton was president, people felt
that whether or not they agreed with him or liked him he was a leader.
I think Obama has done a great job of understanding how the United States has eroded a lot of credibility on things – whether it’s human rights or rule of law or free markets or accounting firms or gold standards. He’s done a great job on that. But he’s done a really bad job of understanding American exceptionalism.
Romney, on the other hand -- and let’s face it, it’s going to be Romney, there’s not much choice – has, in his foreign policy speeches and his big-think speeches, focused on American indispensability, the Reagan era, exceptionalism. But he has paid absolutely no attention to everything that has happened in the past ten years that has eroded that exceptionalism.
They have to meet on this. Anyone that wants to be the President of the quote unquote free world – we don’t hear that term very much anymore – has to actually find a way to bridge those two things. He has to know not just how to make America great again, but make politicians around the world understand that America is great again. We have to get that right.
RG: David, you lived and worked in the United States and it’s a big part of your business now. What is your answer for the U.S.?
DR: If Hank Paulson can go down on one knee and beg Nancy Pelosi to pass TARP for the second time I imagine anything must be possible. That is my reason for hope. My concern is that it is hard to believe that what happened back then is you had a Republican president that was actually a lame duck president that actually ended up working effectively with Congress to get something done. Unfortunately, it took a crisis to push them into considerable action. And maybe we have to live through a crisis again to really get these people in Washington moving in the right direction.
RG: Larry, last word to you.
LS: It obviously makes a difference whether it’s a Republican president or a Democratic president – the re-election of President Obama. Obviously, I have a very strong view about which would be better for America. But forced to answer the question in general terms, I’d answer it this way: I think our employment, our output and our
macro-economic problems are of a magnitude that everyone has to move beyond. It’s what I call “now more than ever-ism.” There is a strong tendency for both parties to have agendas and to apply that agenda to the context of the moment.
Certain members of the Republican Party always think it’s time to cut capital gains taxes. Sometimes it’s because we’re having a recession and we need more demand, sometimes it’s because we have a boom and we need more supply, but the policy recommendation is constant. There are others who have other agendas: whether it’s heavy involvement of the government in green energy or other areas that they regard as necessary when there is a recession, or as necessary antidote policy when there’s a boom.
I think the prospects of coming together on effective solutions are enhanced if we can define the central problem not as “finding everything America needs” but as responding to the seriousness of the current recession. My guess is that Keynes actually had this right. Keynes said that it was very important to raise demand along the lines of the fiscal and monetary policies of which we spoke. He also spoke of the importance of pursuing policies that would enhance business confidence because that would increase investment.
If we can borrow those two ideas I think the next presidential term can be one of significant improvement for the American economy.
RG: From your lips to you-know-who’s ears. Well, its now time for the closing statements, the final time the speakers have to sway the 95% of you who said you were open to changing your minds. We’ll go in the opposite order of the opening remarks, so Ian Bremmer, you’re up first.
IB: Thank you very much. This has been fun and instructive. I think I want to say first that I didn’t hear anyone responding negatively to the notion that Canada is in very good shape here. We are talking about North America. I would bear that in mind as you vote. Secondly, Larry and I have put a lot of issues on the table, talking about American capacity over the long term. And while I’ve heard a lot of concerns about American gridlock -- concerns I feel we’ve rebutted -- I didn’t hear much response on some of these big issues that drive American growth in the long term.
Philanthropy matters. You go to sub-Saharan Africa, the Gates Foundation is all over there and they’re planting what look like American flags for the local Africans. This is very different from the way they perceive China in sub-Saharan Africa. Does that make any difference in the long term? Absolutely. Who else is doing this? Broadly speaking, we’re not seeing that from the emerging markets that are doing so much of the marginal driving.
We talked about the importance of demographics. We haven’t mentioned women, but you look at women graduating from university in the United States and they represent 51% of the workforce. They’ve got opportunities in the U.S. they don’t have in a lot of other places. I go to Japan; I have forty meetings and they serve me tea, but they’re not playing a productive role in the Japanese economy. They’re not playing as productive a role in the European economy. That’s an issue where the United States has an advantage and it’s going to develop a larger advantage.
I talked about energy. I talked about food. But I think the big thing to focus on is the next new thing. We don’t know what it is yet. We get surprised a lot by new things. Over the course of the last 100 years, look at the innovation and look at where the innovation has come from. Look at how it has changed the way we think about the world. Not just Steve Jobs. Look at the Arab Spring, look at the impact that might have on China over time.
But the big new things are coming from the U.S. and the reason they are coming from the U.S. is not just because it’s the world’s largest
market -- though that matters. It’s not just because we have a lot of capital and smart people -- though that matters. It’s because when Americans are educated they’re taught to question things and ask
why. That’s the reason you have a lot of people who finish college who didn’t do so well or who even drop out but end up starting up major multinational corporations that end changing the future of the world. That’s not happening in Europe or Japan or China.
I feel great about Sweden. I was there recently and the weather was nice. I had a great time. I feel good about Singapore. I like a lot of Scandinavia. I like Canada. But of anything of size out there, if you have to make bets and all of us here do, the U.S. is where you go.
RG: Nicely timed, Ian. David, you’re up next.
DR: It’s been a fun evening and entertaining. I have great respect for my opponents and frankly I don’t care because I just want to win this debate.
I have this dual role at Gluskin Sheff. I am the chief economist and the chief strategist. So people ask the strategist, “Where’s the market going?” I tell them where the market is going. And they ask the economist, “Where’s the economy going?” But the economist, when he makes his call on the economy, he has to heed the message that the market is giving him or her.
So one of the charts that was up here before was on interest rates. What does it mean to me, an economist, or to anyone in the room for that matter -- my opponents, Paul Krugman -- when the three-month Treasury bill is one basis point above zero? What does it mean when the yield on the five-year Treasury note is below 1%? What does that mean? What does it mean when the yield on the ten-year Treasury
note is a two? This is exactly the same yield-curve that Japan had circa
1999, a full decade after their initial detonation.
What were the money market and the bond market telling you as to what the outlook on the economy was? And the answer is two words: fundamentally weak.
There’s another aspect to the Treasury curve. If you haven’t heard of it, it’s called the TIPS market or Treasury Inflation Protected
Securities. It is a proxy for real interest rates and real interest rates in turn are a proxy for real economic growth. Today and pretty well for
every single day in November the yield on the five-year TIPS which is
a real rate has been negative 1%. So I will let the market do the talking. Do you know that exactly ten years ago that yield on the TIPS was sitting at just below 2%? At that point the ten-year average growth rate was 3.5% and the ten-year TIP was telling you 1.7%. That’s exactly what GDP growth has been for the last ten years. Mr. Bond, thank you very much.
RG: Lawrence Summers, your concluding remarks, please.
LS: David, you referenced where we were ten years ago. I was just stepping down as Treasury Secretary. And the United States of America was paying the down debt on a record scale and its economy had created jobs more rapidly than in any other decade. Your economics on interest rates was very surprising to me. The European
Central Bank, motivated by exactly what you described, raised interest rates six months ago. That is a significant part of why Europe has such a crisis now. The best news we could get about the global economy in
the next six months would come from interest rates falling to American
levels.
I want to make two points. The first is this. If you look at a broad range of human experience you rarely go wrong with the maxim that things are not as bad as you think they are when you think they are bad, and they are not as good as you think they are when you think they are good. That is the mistake people made in perpetuating the bubble and that is the mistake they are making now.
Think how inconceivable it would have seemed five years ago, ten years ago, that the United States would elect an African-American president. Think about how inconceivable it would have seemed during the Cold War that that war would end peaceably. Think about how inconceivable it would have seemed that the United States, which was being written off as a global competitor, would succeed as it did over the decade of the 1990s.
Paul and I at least agree that these problems are solvable. I can’t tell you exactly when it will happen but no one who has watched political life can deny that the transition from inconceivable to inevitable can be very rapid. I believe these problems will be solved.
Second thing I would say is that if you adopt this resolution -- a resolution writing off the prospects of the United States -- that is part of contributing to a pessimism that as a self-fulfilling prophecy can be,
and I believe will be, catastrophic not just for North America but for the world. These problems can be solved and they will be solved.
RG: A masterly finish, Mr. Summers. But Paul Krugman you have the final word.
PK: Larry actually started his remarks tonight by using one of my favourite quotes, John Maynard Keynes in 1931 saying that we have magneto problems. That is one of my favourite quotes and I’ve never entirely forgiven X-Men for corrupting it and polluting it.
What he meant, of course, was that this is a problem that doesn’t require that you change everything, that there is only a small part of the system that has gone wrong and so it is fixable. Larry and I certainly believe that what we have is fixable. We have magneto problems. We have trouble with a fundamentally technical issue.
But there is another way to take that quote, and that is if you don’t fix your magneto problem, if you don’t fix what has gone wrong, nothing else that is good about the car is going to make any difference or can make it go. It can have the most powerful engine, the most wonderful styling and still, if you don’t fix those magneto problems this car is not going to go anywhere.
What I heard a lot from the con side of this debate was about how wonderful a country America is. And it is. It is a wonderful country. I’m supposed to believe that but I actually do. I think it is the world’s greatest country. I think it has so many things, including creativity, flexibility and innovation. All of those things are wonderful but none of them solve the magneto problems. None of that solves the problem of inadequate demand.
So the question has to be, do you see a route through which we are actually going to get this car going? I have not heard anything that tells me that there is any realistic prospect; certainly not next year or the year after and not until there is a fundamental shift in our whole political climate, our whole political alignment, that says we are actually going to do those things that need to be done.
Larry’s final remarks are kind of interesting. Should one not say something pessimistic, even if you possibly believe it, because it might come true? That is a fairly real issue that comes up in my current second job. I get quite a lot – mostly from the Europeans but also
from Americans – of people saying, you know, even if you are
pessimistic you really shouldn’t be saying these things because people read you and it’s going to frighten people and so forth.
You can’t live that way. That is wrong. You have to tell the truth and the truth is that we have a fixable problem but a political system and a political alignment that shows absolutely no willingness to fix that problem for quite a few years to come.
RG: Terrific closing statements. I’d like to reiterate something Peter Munk often says, and that is that it is one thing to get up and give a prepared speech, but it’s quite different to get up and joust and spar with your peers in front of such a broad audience, including 4000 viewers online. I have to say that if only the political class could rise to the level of debate we’ve seen tonight, we’d all be in a better place.