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Speeches and Papers

The United States in the World Economy

by C. Fred Bergsten, Peterson Institute for International Economics

Speech delivered at the Chautauqua Lecture Series, "The US Economy: Beyond a Quick Fix"
August 12, 2011

The Globalization of the United States

  • Photo: Megan Tan/The Chautauquan Daily
  • Photo: Megan Tan/The Chautauquan Daily

The United States has integrated dramatically into the world economy over the past half century. The share of international transactions in our national economy has more than tripled.  It now exceeds 30 percent of total output. We are more dependent on external economic developments than the European Union as a group or Japan, the other large high-income parts of the world, which have traditionally been regarded as much more engaged in global competition than the United States.

Over half of our oil, the world’s most important single product, is imported. Almost half the revenues of the top 500 companies based in the United States derive from their international operations. About half of publicly held US government debt is owned by foreign investors.  Foreign capital finances much of the domestic investment required to maintain decent economic growth.

The United States has thus joined the world, in two critical senses. We are highly dependent on global developments for our own prosperity and stability. And we are now much more like other countries, for virtually all of whom such international engagement has been a given throughout their histories.

The United States has gained enormously from this globalization. Our country is more than $1 trillion per year richer as a result of its trade integration. This equates to over 10 percent of our entire national income and more than $10,000 per household. Additional benefits accrue from the financial globalization that has accompanied increased trade flows. 

The trade gains occur through three distinct channels. Increased imports hold down prices and thus help limit inflation and provide a greater variety of attractive products to consumers and industrial users. Increased exports enable us to do more of what we do best and enhance wages by 15 to 20 percent for workers in those industries. Increased international competition stimulates productivity improvement in our own economy and thus helps provide the foundation for higher incomes.

Like any dynamic economic change, globalization generates costs as well as benefits.  About half a million workers (of a total labor force of 150 million) lose jobs annually, most for temporary periods, as a result of increased imports. Some have to accept lower paying jobs for the longer run, suffering lifetime earnings losses. These effects total about $50 billion per year, a substantial amount in absolute terms but only one-twentieth of the annual payoff from globalization.

Hence the United States has on balance gained enormously from our integration with the world economy. Substantial additional benefits, perhaps expanding the present totals by another 50 percent (half a trillion dollars annually), are available from further opening of global markets.

As already noted, however, this means that we have become heavily dependent on external developments for our own prosperity and stability. Unfortunately, we have failed to recognize that dependence and have behaved in ways that exacerbate our vulnerability. We have run large trade deficits for 30 years. As a result, we have become by far the world’s largest debtor country. Our gross foreign debt totals about $23 trillion, and our net foreign debt, even after taking account of our very large (mainly privately held) assets abroad, is about $2.5 trillion. The ongoing debate about our national debt and deficits must therefore proceed with a wary eye on the fact that much of it is owed to investors in other countries, some of the largest of which are institutions owned by governments (e.g., China, Russia, and several Middle Eastern oil exporters) that may not always be our best friends.

We have let down our guard in a number of ways. Our primary and secondary education system is no longer qualifying our people to succeed in a highly competitive global economy.  We do not save enough as a nation to finance adequate levels of investment, and we therefore borrow about $500 billion annually from the rest of the world. Our infrastructure is falling behind world-class standards and, in many cases, is literally crumbling. Our governmental support for technological innovation, which has been critically important for some of the most important advances of the past half century, is lagging. Our tax system encourages footloose multinational firms, based both here and abroad, to invest in countries other than the United States and rewards consumption (including of energy and pollutants) instead of saving. We have let the exchange rate of the dollar, by far the single most important determinant of our international competitiveness in the short run, remain substantially overvalued for prolonged periods. The latest debt deal fails miserably to resolve our budget deficits and once again reveals our proclivity, in the absence of a real crisis, to kick the can down the road; Standard & Poor’s was correct to downgrade our long-term credit rating.

The problems created for the United States by our increasing external dependence and the failures of our national policies to enable us to compete effectively are compounded by the sharp decline in our ability to influence (let alone dictate) the outcomes of international economic policy events and negotiations. Our share of global output has dropped from 50 percent at the end of the Second World War to 20 percent today. Our share of world trade is even less; both China and Germany export more than we, though their overall economies are much smaller. China alone could become a dominant global economic player over the next decade or two. The dollar remains the world’s key currency, but the euro provides its first real rival in almost a century and the Chinese renminbi could represent another in the near future.

Hence the United States is caught in a classic scissors dilemma. On the one hand, our dependence on the world economy has risen enormously and will continue to do so. On the other hand, our ability to determine global economic conditions has declined sharply. The dilemma is sharply exacerbated by the inadequacies of our own policies in response to these profound historical trends.

The Global Economic Setting in the 21st Century

How do these new structural considerations affect the prospects for today’s troubled US economy? What do they mean for our efforts to restore decent growth and create enough jobs to cut unemployment to acceptable levels? What are their implications for our strategies to rein in our national debt and deficits?

To answer these questions, we must first recognize that the world economy of the 21st century is very different than the world economy of the 20th century. The locus of globalized economic power and vitality has shifted drastically. Virtually all of the rich industrialized countries that have been the past drivers of the world economy—the United States itself, Western Europe, and Japan—are strugglingVirtually all of the emerging market economies—especially China but also India, the rest of Asia, Latin America, and even Africa and the Middle East prior to its recent disruptions—are booming.  We live in a bifurcated rather than synchronized world economy. (China and India regard themselves as re-emerging economies since they dominated world output for a long while until at least some time into the 18th century.)

Our chief traditional foreign partners, which are still the largest parts of the global economy outside the United States, are doing worse than we are. The European Union is now the world’s largest economic entity, about 20 percent bigger than the United States, but it is mired in slow growth and, of course, contemporary crisis.

Europe succeeded brilliantly in creating the euro, the first currency to rival the dollar in almost a century, over a decade ago. But its Economic and Monetary Union, as the project was formally called, was an unstable halfway house from its inception. The monetary side was complete with a common currency and area-wide European Central Bank. But there was no economic union: no central fiscal policy or authority, no coordination (let alone fusion) of structural policies with respect to key issues like labor markets and financial regulation, and limited economic governance institutions.

The euro area was able to finesse this glaring discrepancy for a decade, abetted by the global boom of 2003-07. But the financial crisis and succeeding Great Recession of 2008-09 laid bare its problems and, as a result, posed both an existential threat to European integration itself and major risks to the entire world economy.  

The crisis, of course, hit the weakest components of the euro area hardest: initially Greece, Ireland, and Portugal—and now also Spain and Italy. The rich and successful European economies, most notably by far, Germany, had to bail them out on an ad hoc basis because of the lack of fiscal transfer mechanisms (and, for the medium to longer run, high labor mobility) like we have in the United States. The lenders, of course, seek to extract commitments from the borrowers that they will get their houses in order, mainly by trimming huge budget deficits and reforming unstable banking systems, which inevitably leads to sharp tensions both between the countries and within them (as German taxpayers are "asked to pay Greek pensioners" and poor Greek workers are "asked to accept 20 percent pay cuts to satisfy rich Germans").

Europe has taken a number of far-reaching steps to remedy its structural shortcomings and resolve its problems. It is moving toward an inevitable fiscal union and creating a de facto European Monetary Fund to rescue and discipline the weak performers of the day, which will increasingly replicate the characteristics of the true economic union of the United States. I believe that a much stronger Europe and euro will emerge from the crisis. Getting there, however, will almost certainly require more debt restructuring (which the media and the ratings agencies will call "defaults") and condemn Europe to very modest growth for a while as even its stronger economies tighten their belts to restore stability. The United States, and the world economy as a whole, will not get much help from Europe for at least a few more years.

Japan, which remains the second largest national economy (with exchange rates calculated at market levels), is even worse. The country inspired both worldwide admiration and fear as a result of its unprecedented economic growth and surge in international competitiveness through the 1980s, which brought it to per capita income levels above the United States. Japan became the world’s largest creditor country.

But Japan imploded in the early 1990s. Its financial bubble burst and, exacerbated by several huge policy mistakes, ushered in two lost decades of stagnation and indeed deflation—the only example of such performance since the Great Depression of the 1930s—from which it has not yet recovered. It faces the worst demographic profile of any country in the world, aging so rapidly that it will have barely one worker per retiree by the middle of this century. So the United States and world economies will not get much help from Japan either, and we indeed now fear its weakness much more than we ever feared its strength. 

Fortunately, as already noted, most of the emerging market economies are booming.  These developing countries now account for half the world economy (using purchasing power parity exchange rates). They have provided three quarters of all global growth over the past decade. They are growing three times as fast as the traditional leaders: about 6 percent versus 2 percent. Hence their global share is rising substantially every year and will reach at least two- thirds over the next decade. They, especially China, will play increasingly decisive world economic roles.

Moreover, their superior performance is likely to accelerate in the period ahead. They experienced some declines in growth during the recent Great Recession but their lead over the rich countries actually grew, indicating their ability to decouple from the West to a substantial extent. Their fiscal positions are much stronger than ours: Projections to 2035 show their debt-to-GDP ratios will rise to only 50 percent, well within the danger thresholds of 60 to 100 percent, while the rich countries as a group are currently on (totally unsustainable) trajectories toward 200 percent. Having suffered their own debt crises in previous decades, the emerging markets thoroughly reformed their banking systems and totally avoided the financial meltdown experienced by almost all rich countries over the past few years. South-South trade and investment among these countries is exploding, further enabling them to avoid negative spillovers from the lagging rich nations.

Eight of these countries have now joined the "trillion dollar club" with national economic output exceeding that level: China, India, Russia, Brazil, Korea, Mexico, and shortly Turkey and Indonesia. China alone accounts for 10 percent of all global output and is growing by 10 percent, providing one quarter of the world’s overall economic growth of 4 percent.

Perhaps most dramatic of all, the still poor South is largely financing the rich North. China has become the world’s second largest creditor country, as the United States has become its largest debtor. But numerous other emerging markets have also piled up massive levels of foreign currency, much of which they then lend back to us: Russia, Saudi Arabia, Brazil, Korea, India, Hong Kong, Singapore, Thailand, Algeria, Mexico, and Malaysia all fall solidly into this category with reserves exceeding $100 billion. The world of finance has turned topsy-turvy on the back of the role reversal in global growth.

These emerging and developing countries are in fact now growing so rapidly, despite the continuing sluggishness of the three rich economic zones, that their immediate policy priorities are virtually opposite to ours. We desperately seek ways to accelerate growth and create employment while our excessive deficits and debt force us to pursue restrictive policies instead.  By sharp contrast, they increasingly need to restrain their expansions to prevent excessive inflation and the risk of new financial bubbles—but enjoy strong fiscal and monetary positions that will enable them to again step on the accelerators if need be.

In fact, a third risk to the current global economic outlook—in addition to the debt and deficit overhangs in the United States and Europe—is that these emerging markets will step on the brakes too hard to remain drivers of world growth. China, by far the most important of the group, has been tightening its monetary policy for over a year and is sharply curtailing credit to its soaring property sector. India is unusual among developing countries in that it faces large budget deficits, and its efforts to trim them could pare its rapid growth. I believe that most of these countries will be able to dial back their expansions without throwing themselves into recession, or even moderating their booms very sharply, but their newly dominant positions require us to watch them as closely as we have traditionally watched our allies and main partners across the North Atlantic and North Pacific. This is particularly true because, as we will shortly see, some of their growth derives from policies that adversely affect our own interests and dampen our growth prospects.

The institutional implications of these fundamental changes in international economic power positions have already been recognized to an important extent. The steering committee of the World Trade Organization (WTO), and thus the multilateral trading system, has been expanded to include Brazil, China, and India, as well as traditional leaders: America, Europe, Japan, and Australia (with Canada pushed aside). The International Monetary Fund (IMF) has twice (though still inadequately) raised the quotas and thus voting power of the emerging countries. Most importantly, the traditional G-7—comprised solely of high-income industrialized countries—has been supplanted by the G-20, half of which are developing countries, as the chief global steering committee. Within that broader construct, the United States and China are evolving into an informal and de facto G-2, modestly institutionalized in their bilateral Strategic and Economic Dialogue, because very little global economic progress can now be made unless these two superpowers can at least agree to disagree.

The Implications for the US Economy

What does all this mean for the United States? The United States faces a genuine dilemma fashioning an effective response to its current economic woes. On the one hand, growth is sluggish and unemployment is unacceptably high. This would traditionally call for larger doses of expansionary fiscal and monetary policy.

On the other hand, US budget deficits and national debt have risen rapidly and are on clearly unsustainable paths. Prior to the new debt deal just passed by Congress, which may or may not change things very much, our annual deficits were on track to exceed $1 trillion annually for the next decade. The debt of the federal government has doubled over the past four years and, at about 80 percent of GDP, is fast approaching the danger threshold. The usual prescription is fiscal tightening

It is not surprising that we face such an acute policy dilemma after experiencing the deepest economic crisis since the Great Depression, especially one that was triggered by a profound financial crisis. Careful studies of past financial crises show that the deleveraging required to restore normalcy takes seven to ten years; that public debt-to-GDP ratios tend to double over such a period, as revenues lag badly due to subdued growth (or worse), and additional spending is required to escape the downturn; and that growth can be expected to slow by a percentage point or more (i.e., one-third or more of a previous 2 to 3 percent norm) when debt ratios approach 100 percent. Those typical patterns describe quite well what the United States is now going through, but they do not of course obviate the need to make every possible effort to improve the situation. 

There are two standard ways to resolve the dilemma. One relates to the policy mix: tighten the budget to limit the debt buildup but maintain easy monetary policy to spur growth.  The other addresses the timing of corrective actions: adopt corrective fiscal measures now to restore market confidence, but implement them over time to avoid weakening the economy even further. (Some of the most promising budget measures, such as an energy or gasoline tax and increasing the retirement age for Social Security and Medicare, should be phased in gradually in any event to cushion their impact on those Americans most directly affected.) Both strategies will be part of any definitive restoration of robust US growth.

But this macroeconomic dilemma facing the United States is compounded by a series of structural problems that antedated the financial crisis, in some cases by a decade or more.  Average wages have been stagnant for a generation. Income distribution has become highly skewed with the lion’s share of our growth proceeds accruing to a very small share of the population. Globalization is undoubtedly a factor in these developments, although most studies conclude that it is only a minor cause thereof.

Whatever measures are adopted in the short run, a fundamental rebalancing of the composition of the US economy will be required. We simply cannot expect to resume buoyant and job-creating growth on the basis of the same four elements that drove the economy over the past decade or so: debt-financed consumer demand and housing, government deficits, and easy money. None of these, let alone the four in combination, offer a sustainable path forward. We must rebalance the US economy to achieve such a path.

This brings us squarely back to the world economy and the opportunities that it offers for the United States. A resumption of substantial US growth, even to the modest level of 3 percent or so annually that is needed to restore and maintain full employment over several years, will require a major expansion of US exports to the rest of the world and a sizable reduction of our trade deficits. This in turn calls for substantial private investment in the United States, to strengthen our competitive position and provide the capacity to service foreign markets (as a second major component of the new US growth model.)  The United States must achieve export-led growth for at least the next decade.

President Obama has announced a National Export Initiative to double US exports over the next five years. However, his Administration has done very little to realize that goal.  Moreover, the target is far too modest. By any reasonable metric, the United States trades far less than it should. We need to aim to double the share of exports in our total economy from about 10 percent in 2010 to at least 20 percent in 2020: "from 10 in ’10 to 20 in ’20." We should simultaneously aim to eliminate our trade and current account deficits over the same period, which would boost our real growth by about half a percentage point per year and create 3 million to 4 million good US jobs when fully achieved—half the total needed to restore full employment (on the most widely used measure thereof).

My earlier description of the world economy of the  21st century clearly indicates where those US trade efforts must focus. We of course cannot forget Japan and especially Europe, as well as Canada, which is our largest export market and a partner (along with Mexico) in the North American Free Trade Area. But our major target must be the half of the world that is growing rapidly, is flush with cash, and is widely running large trade surpluses. This last point is particularly important: Most countries, both high-income and emerging, want export-led growth, but those that are already running huge surpluses must accept reductions in their imbalances to permit countries with huge deficits (like the United States) to adjust and thus permit global expansion to proceed.

There is another key reason to focus our efforts on the developing countries: Many of them make it exceedingly difficult for us to penetrate their markets. China is by far the most egregious case. It is not a closed economy in economic terms: The share of trade in its GDP is double ours and triple Japan’s, and its tariffs and other traditional barriers to imports are very low compared with other emerging markets. China in fact made a conscious decision to integrate deeply with the world economy as a central part of its development strategy, liberalizing dramatically to enable it to join the World Trade Organization and then using the rules of that organization to promote more internal reforms. This was a brilliant choice that has paid huge dividends for China over the past three decades. 

But China and some other emerging markets, especially in its immediate neighborhood, are also violating some of the most fundamental rules of the international economic system, to the great detriment of the United States and many other countries. A cardinal goal of the International Monetary Fund, which was created to avoid replication of the beggar-thy-neighbor policies that deepened the Great Depression, is to prevent competitive currency devaluations through which countries keep their currencies cheap to provide large price advantages for their exporters and their firms that compete with imports. Yet China has intervened massively in the foreign exchange markets for at least five years, buying at least $1 billion every day to keep the dollar strong and its own renminbi weak. The result is an undervaluation of the renminbi of at least 20 percent, which is the equivalent of a subsidy of 20 percent on all China’s exports and an additional tariff of 20 percent on all China’s imports. This is by far the largest protectionist measure adopted by any country since the Second World War—and probably in all of history.

China has thus run huge trade and current account surpluses, which reached an unprecedented 10 percent of GDP at their peak. It has piled up a hoard of foreign exchange reserves that now exceeds $3 trillion, three times as much as runner-up Japan and six times greater than anybody else. It is clearly exporting its own unemployment problem to the rest of the world.

The current overvaluation of the dollar, of 10 to 20 percent, is primarily due to this undervaluation of the Chinese renminbi and several other Asian currencies closely aligned to it.  Elimination of this misalignment would improve the US international economic position by $200 billion to $250 billion annually and produce at least a million good jobs, mainly in manufacturing but also in some price-sensitive services sectors such as tourism. This would represent a major step toward the needed rebalancing of our economy. China and other huge surplus countries indeed must reduce their own imbalances if the United States is to cut its deficits substantially. They simply must stop manipulating their currencies to perpetuate their huge surpluses. And it is doubly egregious for them to fight inflation by restraining the growth of domestic demand, which adds to global as well as national growth, while maintaining large trade surpluses that instead redistribute global growth away from deficit countries like the United States. Yet China’s growing international clout has been sufficient to prevent the United States, the IMF, or even the growing coalition of countries that opposes its practices to deter continuation of these policies.

A second area of international commercial conflict is protection of intellectual property rights (IPR). The United States and some other high-income countries compete primarily at the high-tech end of the product spectrum and rely on being paid for the innovations (like Microsoft Windows, iPads, wonder drugs, and Oscar-winning movies) that are the results of their corporate investments and employees’ unique skills. But many developing countries steal these secrets and thus deny their producers much of the fruits of their work. China is again by far the largest though by no means the only culprit; the US government has estimated that it robs US firms of $50 billion to $100 billion annually through this route. The global loss to the US economy is probably at least twice as large.

There are many other areas as well where other countries, largely emerging markets that are doing so well, violate the international rules of the game that the United States has labored so hard to erect since the Second World War. We take a tiny fraction of those cases to the World Trade Organization, whose efficient dispute settlement mechanism frequently renders judgments in our favor. (We are also occasionally on the losing end of such cases because we do not always play fully by the rules either.) But achievement of truly free global trade would generate very sizable additional benefits for the US economy. This is especially true with respect to international trade in services. The United States is highly competitive in a wide array of services, especially business services ranging from engineering and architecture to lawyers and accountants. We run a very large (about $150 billion) and growing surplus in this sector, and it can contribute substantially to the required rebalancing.

Many people express surprise at this view. Some believe that a revival of manufacturing must be key to any lasting US recovery. Thinking of haircuts and home nursing, others accept the traditional view that most services cannot be traded across borders. Many think that the services sector generates only low-paying, dead-end jobs ("hamburger flippers"). 

All these views, common as they are, are incorrect. Manufacturing accounts for only 10 percent of US employment and has been declining for 50 years, due mainly to rapid productivity growth, just as agriculture declined from 50 percent of our economy a century ago to 1 percent today.  By contrast, business services alone provide 25 percent of US jobs and have grown by 30 percent over the past three decades, while manufacturing has fallen by another 20 percent. More than half these business services are widely traded within the United States and thus are quite tradable internationally, in amounts considerably larger than the entire manufacturing sector. Average wages are at least 10 percent higher in services than in manufacturing. Manufacturing remains important to the United States, and the required rebalancing toward global markets will help stabilize it, but services already dominate our own economy (and those of all other high-income, high-wage countries) and must therefore become a focus of our international efforts as well.

Another major thrust of US economic strategy must therefore be to open foreign markets to our services exports (notably including intellectual property as already discussed). This strategy must focus on the rapidly growing emerging markets, who are still in fairly early stages of the development cycle and have still to experience the burgeoning of the services sector that accompanies the normal evolution to high-income or even middle-income status. The extreme outlier is again China, where services represent only about 40 percent of the entire economy (compared with 80 percent in the United States). Moreover, most of these economies maintain very high impediments to imports of services from the United States and other foreign suppliers. 

The emerging markets thus offer a triple opportunity for a US initiative on services. They are growing very rapidly. Their own economies are rebalancing sharply in the direction of services.  They retain substantial barriers to foreign penetration of their services sector.

To carry forward its own rebalancing strategy, the United States should thus mount a major campaign to negotiate new trade agreements that will open emerging markets to US services exports (and investments, which are often essential to facilitate these exports).  It can do so through bilateral arrangements, such as the Korea–United States Free Trade Agreement that will shortly be sent to Congress and breaks new ground in several services sectors such as insurance and pharmaceuticals. It can do so through plurilateral agreements, such as the Trans-Pacific Partnership that aims to create "a 21st century trade agreement" with eight Pacific Rim countries and eventually expand into a Free Trade Area of the Asia Pacific. It could do so most effectively through a global agreement in the World Trade Organization, as a successor to (or revival of) the Doha Round that has fallen into repose after a decade of negotiating effort.

Inexplicably, the United States has not yet adopted such an approach. Its failure to boost services into a prominent role in the Doha talks in fact explains much of their inability to attract political support within this country and hence their demise in Geneva.

Part of the reason is the innate difficulty of liberalizing foreign access to services markets in other countries. Unlike manufacturing industries, which have been protected largely by tariffs and import quotas and other border barriers, the myriad of services industries are mainly shielded by a complex array of behind-the-border measures: industrial and technology standards, preferential patent and trademark regimes, lax competition (antitrust) policies, discriminatory government procurement practices, and the like. It will take a substantial intellectual effort to identify these impediments and devise strategies to address them, and then a major political effort to persuade other countries to begin liberalizing (and, hopefully, eventually abandon) them. But a number of modern trade agreements are beginning to encompass these dimensions, and a successful future for the US economy demands no less.

It is thus clear that the United States, in order to resuscitate its economy on a successful and sustainable basis, must reorient toward the global economy within which it operates and on which it has become so dependent. It is equally clear that there is a feasible strategy for doing so.  Such a strategy begins with, and rests primarily upon, our getting our own house in order and substantially beefing up our international competitiveness. But it also encompasses a trio of directly international policy approaches: restoring and maintaining a competitive exchange rate for the dollar, demanding and achieving full protection for the intellectual property rights of American firms and workers, and opening (especially emerging) markets abroad to the wide array of services sectors in which the United States is highly competitive. 

How to Do It?

Implementing such a strategy in a world of almost 200 sovereign nations, at least two dozen of which (even counting the European Union as one) are important for the world economy, would never be easy. It is especially difficult as we enter the 21st century, however, because as noted above the United States has become both more dependent on external events and less able to influence (let alone steer) them. Hence we will need to be exceedingly clever in fashioning an effective game plan.

As noted, we will first have to put our own house in order. We must place our budget deficits on a credible path to substantial correction. We must get serious about our international competitive position. We must implement trade agreements negotiated years ago rather than letting them languish in yet another battle between the Administration and Congress.  

On the budget, the legislation recently passed by Congress includes no explicit spending cuts but relies wholly on procedures and tangible decisions in the future. We need instead a program that trims at least $4 trillion to $6 trillion off the prospective deficits over the next decade and meets three basic criteria. It must include specific, tangible measures (rather than deferred processes) to be credible to the markets. These measures must be phased in over time to avoid further weakening of today’s very fragile economy. They must address long-term structural needs that will have to be addressed at some point anyway. Examples are increases in the retirement age for Social Security and/or Medicare and, on the revenue side, phasing in a $1 per gallon gasoline tax over ten years or a 5 percent value-added tax (or national retail sales tax) at the rate of 1 percent per year. For all the polarization in Washington, the ability of the Bowles-Simpson Commission and "Gang of Six" in the Senate to fashion sizable and balanced budget packages shows that bipartisan political agreement is possible.

On the international front, we will want to create alliances to the maximum extent possible. China has become more responsive to external pressure to let its exchange rate strengthen as Europeans, and especially a number of its fellow emerging market and Asian economies, have joined the chorus of criticism. We will want to use the international economic institutions, especially the WTO and the IMF, whenever possible to mobilize such "coalitions of the willing" to effectively implement the current international rules and to write new rules where none now exist.  

We will also have to offer concessions of our own. We can only induce other countries to enhance our access to their services markets if we relax our own remaining impediments, such as agricultural subsidies (which should be dismantled for budget reasons anyway), high tariffs on some textile products, and tight visa policies that limit entry to the United States for many foreign nationals (even when they would strengthen our own economy).

We will also have to get much tougher with some of our foreign partners. The Treasury Department, for example, has never been willing to label China a "currency manipulator" despite its blatant manipulation and the law of the land that directs Treasury to do so and then launch negotiations to remedy the situation. We could take China to the WTO for violating that organization’s proscription (like that of the IMF) of competitive undervaluation and sharply limit its access to our market if the case prevailed. We could initiate "countervailing currency intervention," buying Chinese renminbi to offset the effect on our exchange rate of their massive purchases of dollars. 

The combination of carrots and sticks will be particularly important with respect to China. On the one side, China wants the United States to recognize it as a "market economy" (rather than a centrally planned economy), to protect it from some of our trade safeguard measures, and assurances that the United States will permit its companies to invest here without running afoul of national security blockages. On the other side, we will have to place higher priority on our economic interests with China than on seeking its cooperation vis-à-vis North Korea, Iran, or other security issues (where it has not been very helpful anyway). In any event, we will almost certainly have to strengthen the informal de facto "G-2" between our countries because very few international issues can be resolved successfully in the 21st century without extensive understanding—even when that amounts simply to agreeing to disagree—between China and the United States.

We may also want to review some long-standing US international economic policies.  Virtually all Americans, and foreigners even more so, believe that the international role of the dollar is good for the United States because it helps us finance our large external (and thus internal) deficits. But is it really desirable that China and other mercantilist countries can perpetuate their surpluses by piling up dollar balances, thus lending to us rather than reducing their imbalances, that they enable these huge inflows of foreign capital that enable us to put off the inevitable restoration of fiscal discipline when the pain will be much greater the longer we delay—especially when we have already seen that those inflows helped create the loose monetary conditions, and consequent over-borrowing and over-lending, that brought on the recent financial crisis and Great Recession? Is it really desirable to let other countries set the exchange rate of our currency, as the Chinese and others do by intervening in the dollar market while we sit by passively?

However one answers these questions, it is clear that international economic issues will have to play a much larger role in both the economic policy and overall foreign policy of the United States. The current Administration recognizes both realities. In a series of summits of the G-20, the new steering committee for the world economy, half of whose membership is emerging markets, President Obama has stressed the imperative of a rebalancing of the world economy including a rebalancing of the United States but emphasizing correctly that others—notably the huge surplus countries of China, Germany, and Japan—must rebalance in the opposite directions if the process is to succeed. Secretary of State Hillary Clinton has begun a series of speeches stressing the growing centrality of economic issues in US foreign policy and calling on other countries to cooperate much more fully in that context.  

One of the enduring legacies of the second half of the 20th century was the onset of the second wave of globalization. The first wave of globalization, in the 19th century, ended disastrously with world wars and global depression. The rising powers of the day, Germany and Japan, were not assimilated into the international power structure and the results were cataclysmic. Today the world must adjust a new set of rising powers, most importantly China, but with India and several others not far behind. This poses particularly acute challenges for the United States, the traditional leader of the global economic system, as it struggles to restore its own economic vitality and thus its global role. As the title of this lecture series suggests, there is no "quick fix" and these issues will be at the forefront of our concerns for many years, and probably decades, to come.


Paper: Flirting with Default: Issues Raised by Debt Confrontations in the United States February 2014

Policy Brief 13-21: Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail? September 2013

Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013

Op-ed: After Bernanke, Make Unconventional Policy the Norm July 15, 2013

Testimony: The Fed at 100: Can Monetary Policy Close the Growth Gap and Promote a Sound Dollar? April 18, 2013

Op-ed: How the IMF Can Help Cut US Joblessness February 4, 2013

Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012

Policy Brief 12-15: Restoring Fiscal Equilibrium in the United States June 2012

Book: The Global Outlook for Government Debt over the Next 25 Years: Implications for the Economy and Public Policy June 2011

Book: The Long-Term International Economic Position of the United States April 2009

Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009

Speech: Rescuing and Rebuilding the US Economy: A Progress Report July 17, 2009

Book: US Pension Reform: Lessons from Other Countries February 2009

Testimony: The Dollar and the US Economy July 24, 2008

Testimony: Why Deficits Matter: The International Dimension January 23, 2007

Book: Accountability and Oversight of US Exchange Rate Policy June 2008

Op-ed: Bubbles Are Getting Blown Out of All Proportion September 8, 2004

Book: The United States as a Debtor Nation September 2005