America and the Global Economy

Good morning, I would like my name is Eric Motley, I am I work here at the Aspen Institute; and would like to take this opportunity to welcome you to this morning session, "America and the Global Economy a briefing for the next President". Before I introduce our moderator, I would like to bring to your attention, when you leave the sessions, especially this session this morning, your idea logs that are being passed out to you, they are very important as a reflect revisions to the schedule for today, book signings and other activities that you should be mindful of. I would like to take this opportunity to introduce our moderator, Robert Hormats, I don't think he really needs an introduction, he has a very distinguish career in public service. He is currently the Vice Chairman of Goldman Sachs but has worked both at the State Department in senior positions, Advisors to Kissinger and National Security Office at the White House, even served as our Ambassador and Deputy Representative to the United States Trade Representative, a great commentator on the State of Foreign affairs. This should be a very provocative discussion. Thank you Robert for doing this and we hope you enjoy this session. Well, thank you very much and welcome to all of you. We I think we are going to have a very interesting and stimulating discussion about some very provocative issues and some very timely ones. I won't take a lot of time to introduce our panelists since you probably know them and you have a little blurb in your books that introduces each of them. Steve Friedman is an old friend and an old colleague from Goldman Sachs. He has held senior positions in advising President Bush. He has been actively involved in the Business and Financial World; he is actively involved in the National Intelligence Council and a great many other things, and one of the very thoughtful people in our country on International Economic Issues and particularly, International Financial Issues. Gene B. Sperling is another very old friend; we have worked together for a number of years on a variety of economic and and others issues. Gene has served as a Senior Advisor on Economic Issues to President Clinton. But his issues and his concerns go well beyond that, he has been actively involved in Educational Issues, he writes very frequently and very elegantly on a variety of trade and and other issues, all of you I think can follow what he writes, its very thoughtful and very much cutting edge about the kind of domestic and international issues, we as a country are facing today. So, what we thought we would do this morning, excuse me, is to try put together a few thoughts for the next President not so much in terms of specific recommendations, but some general ideas about the challenges the President will face in addressing global economic issues. And in doing that and saying global economic issues, I am not only referring to the more traditional global economic issues but what we can do with in our own country to strengthen our competitiveness, to strengthen our ability to deal with global economic challenges, to enable more and more Americans middle and lower income Americans, many of whom feel that they were not participating in the benefits of globalization or the benefits of change in terms of new technologies and new ideas, many feel they are left behind. How do we bring them along so that they feel that globalization and and the global technical change benefits them as well. So, what I though I would do initially is ask each of our two panelists to comment very briefly on the challenges they see for the next President in addressing these global economic issues and related domestic issues. And some of the thoughts they would convey the next President as to how to deal with those challenges then we will become more specific as we go along and towards the very end, we'll open a sub to questions or comments from the audience. So, let me start with Steve and then turn to Gene and then we'll enter into discussion amongst us on these matters. Steve. Thanks Bob. If I were to be briefing the next President Elect, it would be not only about the challenges; but about the interconnection of the politics of dealing with the various challenges. And I would I would do it with great difference because whoever it is you are briefing, knows a heck of a lot more about politics than you do, that's how they got be they got to be President Elect. But, these are not issues that are going to get results by purist economic solutions. They are going to get result, in my view, only when only when the fear of the future exceeds the pain of change and by rough political compromises. But all was not gloomy and before I got to the challenges, I would tell the President Elect that, right now the US and the world economy are doing very well. As a matter of fact, we are living in unprecedented period; people have called that the third industrial revolution. Think about it. Give or take the third of the world's population just in China and India are coming dramatically into the market economy. Hundreds of millions of people are being lifted out of poverty into into much much happier living circumstances. With that goes the the fact that the the equilibrium point in the world economy is starting to move eastward. Economists have predicted that the period of 2003 to 2008, may be greatest global economic growth since any kind of credible data have been has been collected. Within the US itself, if you looked at the principle items that should be on the President Elect's economic dashboard, one of them would be; what's the unemployment level? Well, it's give or take, four and half percent right now. What's the inflation rate? Well, if they had to worry about this and worry about that, but its give or take in and around two percent. It's it's contained. You all I think this audience mostly is old enough to remember the same as misery index where you combine those two. Well the misery index is looking awful well awfully good. Now, I have to add a third item to the dashboard, which is crucial it's the rate of growth. It's been a little bit sluggish recently but the consensus forecast is for it to get back close to the close to the speed limit for the economy, the speed limit being the rate at which the economy can grow without triggering inflation. Stock market to the extent its predictor is doing fine. So I would say, - I would say that your your economy is is doing well at this point, but and you all know that you really want to pay a lot of attention to the part of the sentence that comes after the "but". And the part that comes after the but is that Sir or Madam, there are some major, major challenges that you are going to be facing during your administration. And some of these challenges are ones that are longer term, some of them are ones that are imminent to right here right now, some of them are challenges that they are challenges but in some ways I am more worried about the political queries that will be attempted than I am about the malady itself. Without any prioritization in trying to be complete about them I would list these, the US the Unites States Oil dependency, which which is one, which a major spike in oil prices for whatever reason dramatic incident in the Straits of Hormuz could throw our economy into a tailspin. We are really in many ways hostage to some of the least dependable parts of the World. Threats to trade liberalization, a huge amounts of wealth has been generated for American Citizens by the by the free trade surge throughout the world in recent decades. It is clear that in the U.S. and elsewhere, this is under under threats. Not only popular threats in the United States, but threats in China of all places beneficiary that they are to if you read in today's paper, "Threats to Foreign Direct Investment" there. Its it's an interesting thing. In times of war, countries try to block their adversary's trade. That's a crippling a crippling weapon in a in a military situation. Here you have nations because of their own internal political stresses threatening to block their free trade themselves. I mean it's a it makes me think of that scene in Blazing Saddles where the guy points the gun his head and says, stop or I will shoot, I mean we are risking great danger to ourselves. Another challenge I tell Mister or Madam President Elect is the demographic time bomb. This is one that's certain, it's actuarial. As the population grows older the baby boomers grow older, we have done something quite immoral, we have over promised we promised benefits, retirement benefits and health benefits that we can't pay without either dramatic increases in taxes, dramatic borrowing or we are going to have to cut them and we haven't really made that clear to the public and to some extent the public doesn't want to hear it. The dollar and the the dollar the risk to the dollar from the twin deficits, the budget deficit and the trade deficit. Will we have a soft landing or will we have some thing precipitous, that's some thing that I think any president has to be thinking about, if not daily, every week through out his or her term. Risks in terms of over regulation you know, I talked about how our economy is now doing very well, it is a golden goose. There is no other economy major economy in the world that you would trade US economy for with all our wards. We do have the capacity to inflict harm on ourselves and to kill that golden goose. Environmental issues and how they are dealt with, risks to financial stability in a world that has priced risk at a extremely optimistic basis. Wealth disparities, which is growing attention I might point out that this is an issue that been going on, the disparity and wealth between our richest and our poorest are even in the upper deciles have been going on for decades and it's not just a US issue. In some ways this is one where I am more worried about some of the potential cures than the disease and I would say the wild card for any economist, a coterie of which I am not one, is the unpredictability of terrorist incidents or pandemics. And last, I would say to the President, the challenge is to maintain the optimistic, entrepreneurial, risk taking flavor which has made the US economy so strong. And that's where I would say he or she has got to take the Hippocratic Oath. Bob. Thank you Steve. Gene. Thank you. The first thing I would tell the next President of the United States is that the issue of whether expanded globalization and expanded use of information technology is going to be seen as strengthening or hollowing out the middle class, is going to be the number one economic paradigm which will shape economic policy over the next decade. And I think that the goal for that next President and this will be difficult, is to have an equal focus on having a rising tide and ensuring that it's lifting all boats. And it will be difficult because as Steve was somewhat suggesting but I have a different somewhat different tune, is that neither side of the political debate really I think wants to hear both messages enough. So what Steve was mentioning is often the message I think, our side Democratic Progressive Side doesn't hear enough, which is that the things that Steve said about not killing the golden goose, globalization is inevitable. It cannot be slowed down or shut down and you have to deal with it, America has to engage and what we do know is that when it comes to innovation, entrepreneurship, not insulating ourselves from competition, being flexible in terms of dealing with economic change, these are the things that leads to America being the most productive country and I think still the envy of the world economically. And many of the threats we see from globalization will become opportunities in longer periods of time. If India keeps growing at eight percent a year, their per capita income will quadruple by 2025. There will be unquestionably in the next 15-20 years, hundreds and hundreds of million of new middle class consumers around the world. If you ask who is going to be in the best positioned to meet those needs, to benefit from that, keeping America open, flexible, innovative, entrepreneurial is incredibly important to right to allowing us to have that rising tide that grows, that allows us to have more room to come in. Now there is a lot of people on the progressive side who don't necessarily want to hear that message. But I will say there is too many people who don't want to hear the other side as well. And the other side is you cannot assume, right now, in the global economy that a rising tide is automatically going to lift all boats. And I think those who make that assumption, who decide that you can just look at your GDP and your corporate profit level and say whether the economy is working with typical people, for typical Americans or around the world are going to be misguided. We are not for growth for the sake of growth; we are not for growth because our founders wanted us to have high GDP. We were a country that was based on the idea that we could have a growing and inclusive middle class. We don't care about growth if it all goes to a royal family or to one percent. The measure of growth in our economy, the measure of growth for our values is is the type of growth that is leading to a broader and more inclusive middle class. And let me say that if you look at the last 10 or 11 years there are reasons to be concerned. You know the yes, some of the good news coincided with when we and President Clinton were there. But I will be the first to say, these issues are broader than any particular President. But what you saw in the end the last six, seven years of the 90s, was you saw productivity growth up 15-16 percent and real medium wages for families also grow up 15 or 16 percent. That was an extremely pretty picture for those of us who just want who just wanted to believe that a stronger, more open global economy would necessarily work for every one. That has turned around in the last five years and we cannot we cannot deny that, nor we can say it's just you know who has the best tax or fiscal policy. The fact is that productivity growth has actually been a bit stronger over the last five or six years, up may be 16 percent and yet real medium family income is actually down 2 percent. And the inequality that we are seeing is a bit of different type of inequality. It's not so much the inequality between the top and the bottom. It is increasingly the inequality between the very top and the middle. And that is what people referred to as a polarization or the fears of hollowing out. And you know lets just be honest, it makes a bit of economic logic. The gains from globalization and technology highly reward many of the people sitting here, who are at the top of the skill level the very top. And you know what, it doesn't hurt as much some of the people who do stuff that's not affected by globalization. But the people more in the middle are increasingly seeing their are increasingly finding the increased globalization technology, instead of being rewarded leads to greater labor market competition from around the world. It is good news that we have some of the highest corporate profit shares in our history in the last few years. But 50 percent of that was because of historically low wage growth. And we have to kind of acknowledge that if we want an economy that works this President has to not kill the golden goose but focus on the fact that the Americans who are feeling a bit of anxiety, who are worried they are taking fears of falling are not mislead or misguided or somehow responding to demagoguery, they have real life legitimate concerns that we that the next President needs to focus on. Now let me give three or four specific kind of broader areas that I think the next president has to focus on. Number one, a broader, more universal safety net is necessary but not a sufficient condition. You know, yes, we do less to help people in between jobs than any country in the world. We spent one sixth per GDP what most European countries do. We spend half of what even the UK does. Now we don't to make the mistakes they have made, we don't want to do things that locked people in. But we could have that you know, any American can pretty much plop in any city in the United States right now and know how to rent a movie, how to order a pizza, where to go in an all night browser. But if somebody with a high school degree loses their job and fears for their family security, I bet there is not 2000 people who know exactly what benefits are available to them, where they would go, what departments, if you are going to do something about that anxiety you need to have a broader, simpler, universal system. Benefits shouldn't tied how you lose your jobs. So things like wage insurance, health insurance, these type of things having a broader safety net are extremely important. Now the problem is just that a lot of people would like to end the discussion there. They would like to say, great, economy is working great, we just do a little more for the so called losers and you know we are done. But you know, I got to tell you and I wouldn't Steve said I wouldn't have to tell the next President there, they would know this. That can't be your sole message. That is I will tell you what the workers call that message; they call it burial insurance. We are going to give you better burial insurance. I like to say that adjustment policy is the pre-nub of public policy. It's what we are going to do after something bad happens to your life. Well, you know what, if someone one comes to me and says Gene, great news, you know your employer is offering you a wonderful counseling package once your wife leaves you for your best friend, I don't go gee that's great, I go, well but how do I keep my wife from leaving me for my best friend. So when you come in the politician, the Presidents says "I have got great news, I got ways of helping you, after you lose the job you care so deeply about" that's not a particularly satisfactory message. Now here is were Steve's concerned about the Hippocratic Oath becomes very important, because the thing that I find the public most wants is they would like the leaders to tell them either how they are going to protect their current job or where the new middle class jobs are coming from. And the unfortunate thing is what people I think most want is probably what government is the worst at. Protection does not work in the long run and industrial policy picking winners, you know we all know the story in The Graduate, where you know the guy comes up and goes, "plastics." You know in 1993, the Bureau of Labor Statistics projected being a travel agent would be one of the top ten growing jobs in the United States, because they were looking at the larger number of higher wealth retirees which made a lot of sense. They just missed that little thing oh yeah, the internet. And so you know, travel agents by the way have gone down 43 percent, not a growth industry at the moment. So we are not great at kind of picking the winners. But here is the question, if the next President has nothing to say, if they have no good answers on where the new middle class jobs are coming from, then I fear it will get filled in with the bad solution, the industrial policy, the new deal jobs, the protectionism. We need to focus little more on were we can do more on jobs that's smart. Radical investment in energy innovation across this country would be good for the thing Steve was talking to; it would be pro-jobs. The fact that we haven't had a dollar in real increases, in NIH funding, when we were competing in the last three years, when we were competing like crazy for the research jobs of the future, makes no sense. So to the President, they need a broad safety net, but they need to have a story on jobs. Second thing I would tell them is universal healthcare that brings down cost is not just a good idea, it's not just a two for, it's a three for a four for. Number one, a lot of the anxiety that people feel about losing the jobs is the fact that in our country losing your job means losing your healthcare. That means an enormous number of Americans are one job lost and are one illness away from financial devastation. Universal healthcare would deal a lot with some of the globalization issues. Second, we spend about you know the story the line that gets out there now is that a lot of company says, we spend more on the healthcare for our worker than we spend for the salary for somebody in India or China. The high cost, the 80 percent increase in premiums for workers is unquestionably becoming a disincentive to permanent job location. So universal healthcare that brought down healthcare would also be a two for in that it would also help, I think encourage job creation. Third on fiscal policy, the notion that you are somehow going to have a commission is going to somehow lower Medicare and Medicaid cost which are the big growth without dealing with over a healthcare class is unrealistic. We are not going to have something where healthcare cost go up like this and then you have Medicare and Medicaid become second rate, poor peoples healthcare. If we are going to do something about those programs we got to bring the cost down. So that's at least a three for. For four for it's just it's a national disgrace that we are 45 million people who go to bed every night without healthcare. And then my last message would be on education. And here I think the next President that has to talk straight with the American people. And here is my straight talk message which is a difficult one for a politician to say, we are entering a period where education has simultaneously never been less of a sure thing and never been more important. It is less of a sure thing, because you cannot say honestly that if your kid graduates from a decent 4 year Public School that they are somehow protected that much from the global economy. You have to look at the software engineers, the radiologists; the competition we are going to face is strong. And that shakes up a lot of people who organize their whole life around the idea of their kid going to college or them going to college. Now a lot of people want to hear that and say, aha, you see education doesn't protect you that much. But the other message is it is less of a sure thing but it still increases your odds, the most that you will successfully survive or do well in the global economy. Those jobs, those service jobs that compete with India and China are still going be higher paying job. You still want to be in those sectors. So yes, education has never been more important and it's never been less of a sure thing and we all know that with our own kids, we know its less of a sure thing, but we want our kids to do as well as possible and the truth is we are going to get to a phase where a Post Graduate degree is going to be the new college degree in terms of what you have to do. And that creates a lots of anxiety. My last thing to come back on that is, I spent a lot of my life working on education in developing countries. That's the project I do at the Council on Foreign Relations. And I want to say, what an incredibly important thing it would be at the United States led a global effort to give every child, every girl, every boy, universal basic education. And a lot of the message you hear from political leaders is we should do that, so that they don't go into dangerous madrassas, the fundamentalist madrassas that will lead to bombing us. And that is one reason to do universal education. But let me tell you something, you don't win hearts and minds by telling people that you only care about their kid to the degree that they don't grow up and bomb your kid. You win hearts and minds by the United States showing people that we care about all children because we are all God's children and that we care about how globalization operates in their country, that we have that our morals and values want them to have both a rising tide that lifts all boats as well. Thank you. All right, Steve. Let me just build on something Gene said about education. First let me go back to the disparity in incomes. Its an undeniably a fact, its undeniably a problem, its widespread, as I said earlier, it's not just in United States, its broader, its now perceived as a problem in of all places, China. One of the tricky things about it is economists really aren't sure of all the causes at this point. It's probably, its its very clear that or they are not sure of calibrating how much of the various candidates causes have led to the result. They are pretty clear that what Gene talked about the globalization as a factor, but the things I read say that its probably a minority part of the factor. You know in the United States trade is not that huge part of our GDP, what seems to be a much, much bigger factor is the increasing the increasing technological the information revolution that more and more calls for for a rarified skill sets, and more and more builds in discrimination based on people's education levels. We have inflicted great rules on our selves in the education area. At the college level our colleges is a by and large considered the leaders in the world. But we we have this dramatic paucity, somehow there has been a market failure and that we have not attracted enough kids into science and to engineering. We are enormously dependent on emigrants for that, and by the way if we can't get them in here and we can't get the visas for them or we can't get them to stay, we are short changing ourselves on the on the upper end of the technology things which will create those good jobs. But that's not even our biggest problem. Overwhelmingly our biggest problem in the educational front is K through 12. These countries other countries in the world that we may be talking about universal education will, frankly- an awful lot of them are kicking our butts in terms of the quality of education they are giving our kids. In the minority committee something like 50 percent of the African-American kids that are in the ninth grade are not going to graduate, I don't think the I don't think the the graduation levels are a lot higher for Hispanic kids. And the education levels are just are just disappointing. We just we just do badly on these objective international tests. One of the reasons for this, Well, Gene has lived in this area and I am I am just a newspaper reader. But the thing that I find remarkable is that America's parents are not outraged by this. I mean if you look at your kids and they are wherever they are, you know 23rd in the world in math skills, behind Latvia and you know your kid is going to be competing with kids in other countries. I know American parents would be outraged if if the football team at their kids high school practices for as few minutes a day as their kids are actually doing in their in their homework assignments. The kid in Korea goes to school, packs two lunches, one of them for the lunch-lunch and the other for late afternoon when he is doing the special the special sessions. And this is this is something that, if I were advising the President, I would I would say that you know you are not going to get major change until you have in this area until you have a a wave of public indignation about the fact that we are we are tying one arm behind our back. That point you can start to talk about the fixes, whether it's a more school choice or competition or paper performance etc, things that I don't pretend any expertise on. But we do have a problem and we do have a remarkable short fall in the public ire about this problem. And just on on the education let me just add a a couple of things. It was at the Aspen Institute that David Elwood, who is now the Dean of the Kennedy School, Harvard; first produced the study that talked about the fact of how little labor growth we would have. But then within that labor growth, the composition of that labor market would be become more African-American and more Hispanic. So we are at a point right now where, I believe our values of wanting an inclusive society, where we are reaching out to the youngest and most disadvantage minority, young people and our economic common sense are merging together. I don't you know listen, I totally understand the argument and then I support it that we should be allowing the top scientists and engineers around the world to be here and I don't necessarily think that's a great long term strategy though. I mean I think our long term strategy should be to have more of the young people form minority and Hispanic communities aspiring to fill those spots and seeing those wage gains go to leading to a more equitable society and more of the returns coming here. But to do that there is one point I have say. Kids drop out of college in fifth grade. They drop out of college in fifth or sixth grade. And we can't focus everything we do on just the hours of work of studying or the standards. What affects most of the people here was that you had role models, you had inspiration, you had aspirational goals. We've got to reach out to people at younger ages in ways that go beyond just what happens in the classroom. But through the other things they do, through the mentors, through the connecting them with colleges at early ages, and getting people to aspire really. High school reform is incredibly important. But high school is often too late. That's one thing. The second thing I want to say is that we have focused quite a bit on getting to college as we all know more, completing college is another issue. And again, you need a lot of intensity, for particularly disadvantaged kids as they enter college and in their first year. That will affect a lot whether we get the college completion rates which will affect a lot who goes on to graduate school and who actually does well on the global economy. And the third thing is the area where we don't spend as much time and so, let me throw this one as a an issue for for the next year, which is what type of education? I have one expression in life that Tom Friedman quotes, so it's clearly the smartest thing I have ever said; since he is the best he is the best phraser I've ever seen. But what it is was it was saying, when you are trying to ask what your kid needs rights now, you are little bit like somebody training for the Olympics; but you don't know what sports you are going to be in. So if you are training for the Olympics and you don't know what sports you are going to be in, you've got to kind of figure out a kind of a range, of kind of athletic skills that will be generally applicable to the unknown. And we've got to try to figure out what are the kind of skills, learning to learn skills as Tom says, and other skills that allow people to do well. Is it going to be I think it may be the ability to kind of work in international teams, while having a specialization. We don't spend enough time asking ourselves, "What type of education do we need in a world where we don't actually know what's going to be most pressing for our fifth graders when they are 25?' Well thanks, I think we have had some very thoughtful points made about, particularly the underlying issues that have to be addressed in this country in order to strengthen our competitiveness and strengthen our role and the role enable us to be more resilient in the face of these global challenges. Let me just throw out a few specific questions now. First, the issue of trade. This is an issue both of you have commented on, there seems to be not only in the United Sates but also in another countries a sort of a populist quasi nationalist reaction to globalization and we have seen it in part in the failure of the current round of trade negotiations and in part in this country in very severe reactions to some of the potential trade agreements of the United States has signed or is contemplating signing although two agreements did go through very recently through the house. But generally there is almost that anti globalization push back and yet the new President is going to be faced with the need to address global trade issues, bilateral, regional, multilateral. What kind and of course the President now does not have what's called fast track authority or trade promotion authority. Let's suppose the President comes to you Gene and says, all right what should I do about global trade negotiations? Should I wait until we have been able to address some of these domestic issues and done better on them? Should I take some initiatives? How do I deal for instance with the growing comparative challenge of China which is an issue in itself as well as a major problem of the global economy. What two or three points would you convey to the President as to how to deal with that issue because he or she is going to have faced that very early? Right, and a lot of people are dealing it right now. There is no question that trade has first of all, let me just be honest. Seattle, the trade protest that happened in Seattle, they happened in 1999. 1999 was probably one of the best economic years of the century. I mean it was booming jobs, booming wages etc. So this is just to say that this anxiety has been out there for a while. It is growing and it is becoming more difficult and unfortunately it's happening for more political people is that for more, particularly Democrats but increasingly for Republicans from trade impacted areas, is that politically this has virtually no upsides for them. It's a way to get a good editorial in New York Times or Washington Post but it is not particularly good at home. I think what the thing I argue against is that some people wanted to say let's do a strategic pause. And the reason I think that it's a very bad idea is because I think the signal that sends the worlds is America is on the sidelines. And I think if progressives do that it will exacerbate you know, I think President Bush has sent a lot of bad signals on kind of working in multilateral ways and if progressives then come in and kind of become anti WTO then they kind of add to that by taking the one area where President Bush has been very multilateral, on the WTO and moving against it. So I think we shouldn't look like we are on the sidelines. That said so I you know, I would tell the next President you know, try to work together, try to forge those consensus together that I think you started to see in the Panama and Peru. And that really is going to mean bringing besides the table, making you know, people do things they don't always support or not to the preference, labor standards for some, being for the trade agreements. But try to build that consensus. I wouldn't do a strategic pause I wouldn't do a pause but I do think you have to rebuild confidence. You can't just add a few thousand training adjustment assistance. If I had a priority for the next President I would say and I will be honest saying this particularly to a progressive President who would have to so much take on their own constituents so often to get this done as President Clinton had to do. I would focus my energy on the Doha round because economies most people understand, that multilateral trade agreements is the best thing for global economic growth. And so we have got to use a limited amount of political capital, do it on the thing that has the best global ramifications and then at the same time show through universal education, show through trying to help prevent the worst labor abuses around the world that you and so what you do at home, that you do care about not just a rising tide but whether it's lifting boats. Steve if you could comment on it and particularly you made a very interesting point in your earlier presentation, about this reaction or negative reaction to certain kinds of foreign investment and we are seeing that we have seen a little bit of this with respect to the attempted Chinese purchase of an American oil company with respect to the Dubai ports issue. But now we are seeing more and more countries with more and more privately held wealth and more and more governmentally held wealth. Some of most establishing these sovereign wealth funds, taking foreign exchange out of their foreign exchange reserves and putting into funds that are going to buy various kinds of equities and other properties. Already we have seen that with Blackstone. And yet we are beginning to see a reaction in this country to the fact there might be these potentially large foreign takeovers with all the money that they have accumulated, not just bonds but investment and strategic equity or not such strategic equity. How would you address that kind of issue and the broader issue of what kind of recommendations you would give the President on how to move forward on trade? Yeah well, you know I would say about trade for almost last 200 years if there was one topic that virtually all mainstream economists, whether they were liberal or conservative, one topic that they agreed upon, it is the overwhelming value of free trade for an economy and for the people in the economy. And I would say that there is one thing that economics profession has failed on miserably over the last 200 years, it has been educating workers and business people of the virtues of that precept. They just they just can't seem to get it through most of most of the populaces value system. Adam Smith said, I think it was in 1775 that it was unlikely that you got, I can't quote him, his prose is marvelous, but paraphrasing him - it's unlikely to get two businessmen together or a group of them that they would not try to conspire against the public good. In other words they would start thinking of how they could bar imports which would threaten their own production, their own monopoly systems. I look on an awful lot of the discussion about yeah, I am for free trade, but it's got to be fair trade and I look on that as disguised forms of protectionism. I really do not believe that a lot of there is a definite anxiousness, a real underlined reasons for anxiety, but I think an awful lot of it is people whether its business or labor looking for for to really protect their own their own particular turf and there is a real reason for that. The real reason is that even the economists who are most devoutly for free trade have to acknowledge that yes it has these benefits to the economy as a whole and to the populace as a whole but it is very, very it can be very, very injurious to particular sectors that are in the losing end of things, just as technology is. The Luddites, they were Luddites, but they weren't wrong. If you were an artist in 19th century England and technology was going to come in with spinning machines and things that were going to yes, it was going to do you out if you are your high quality job. But smashing the machines wasn't necessarily good for the whole economy. I think when you when you this down to the human level and you if you walk through the through a Walmart and you see families there that are typically living pay check to pay check, they in many cases do not have bank accounts. They have never heard of 401Ks, their money is keep in an envelope and by the way at the end of month when that envelope is thinner there are less likely to purchase more. Well if that family's pay check is going is buying 12 percent more goods because of free trade that's a very, very real human benefit. Now I think that I think that the issues Bob talked about the Dubai ports and Chinese wanting to buy control one of our oil companies, I take the national security aspects very seriously. We have a process called CFIUS where the different agencies of the US Government including the national security ones and the economic ones vet these acquisitions very carefully. We really don't want certain countries to have access here which could threaten security. Having said that I thought two issues Bob talked about were national embarrassments. I looked at the French, and when the French when Jacques Chirac who I rarely quote favorably, decided that it was a matter of strategic importance to the French government to protect this particular yogurt company from a foreign takeover, I thought that was the height of ludicrousness and I hated to see the United States compete with him in that kind of internal demagoguery. But it is it is in evidence of the sensitivity of the times and I would urge President to be to be very, very careful on the issues that have bona fide your national security issues but really to try very hard to keep this foreign direct investment flow going. We are winners in that area; once again as the Blazing Saddles moment, the United States has enormous advantages over other countries in terms of the flexibility of our capital, in terms of our ability to extract good returns from investments. In the services sector, the sectors that we most cut off, if you have de-facto embargos on foreign direct investments, are ones where we are enormously successful. So I think that would be a dreadful a dreadful predicament to for us to get into. I would say one more thing about the Chinese. To me the right place to focus on putting pressure on the Chinese is not were the Schumer and Lindsay Graham Bill is, the notion of putting this giant tariff on them. We are in a relatively precarious situation with respect to our dollar. We have this enormous, enormous trade deficit, we have the papered the world with dollars, happily as long as our economy is working very well and the golden goose is turning out those eggs, people want to reinvest here. Over the long term, it seems to me as just one observer that as Herbert Stein said years ago, that which is unsustainable tends not to be sustained, a trade deficit as high as we have will have to be have to be changed and that will happen by the dollar going down. That will be okay, if that is a gradual thing. It will be a bloody disaster if it' a downward sharp spike. We really, really don't need to trade war. Every week, every any President of the United States should be thinking how do I avoid that. Having said that, there are areas were bona fide should be putting intense pressure on the Chinese because some of their trade practices are very, very unfair. Well, why don't we focus on their theft of intellectual property which is totally indefensible totally indefensible? If we have a society which basically thinks knocking off US intellectual property is a terrific way for entrepreneurs to make a living, that's something where we are totally within our WTO rights and we are protecting a wealth spring of US prosperity which is intellectual property. If the Chinese decide to knock off the Wrigley chewing gum and they have same gum with a reverse-engineered, then the same wrapper, then to add insult to injury is delivered in a truck with the same logo, somehow we ought to be able to find a way to make an acceptable WTO case out of things like that. I will ask one more question, then I will turn it over to the audience. Steve, the point one of the points you mentioned in your initial presentation focused on the energy issue, the strategic elements of the energy issue. One of the concerns I think many of us have is we look out over the next Presidency to the next four years or eight years is that so many imbalances are being built up. There are going to have to be worked down or at least managed. You mentioned one of them yourself which was this trying to counter balance and growing dependence in terms of foreign capital. You have you have that, you have the energy imbalance, Carter, when President Carter talked about reducing oil dependence being the moral equivalent of war, we were 30 percent dependent on foreign oil. Now we are 60 percent dependent. That dependences is building up. The over promising, with respect to social security and Medicare, were these imbalances are going to be enormous in the decade ahead. A lot of needs of the military which we have or homeland security, we spent a lot on the war, a lot of these things that we should be spending money on at home simply have been short drift, as a result of Iraqi war spending. There are whole number of these things and energy seems to me to be one of the most important, because if that dependence builds up first of all it affects, adversely affects our current economic balance. Second it affects us as big build up of foreign debt. Third it is an enormous strategic problem if in fact there were to be a cut off of oil what ever reason, problems in the Straits of Hormuz terrorism in Nigeria, terrorism against the Saudi oil facility or any number of other things. You have dealt with this in advising the President, what two or three points you make, first of all to the President, second mobilize American opinion, it's very difficult in this country to get a coherent policy because one group wants one thing, doesn't want what the other group wants and there is an ability to block, but not a real ability to move forward. How will you address these kinds of issues? Well, first of all, every thing you say is it is it is a frightening issue. Our economy is dependent on on this commodity which and we are to a tremendous extent, this come from some of the most dangerous, most inhospitable to US interest parts of the world. I mean if you look at the oil supplies in Iraq, Iran, and Venezuela, you know you have to worry about other places in the Mid East which subject to terrorism risks, and you know this gets to something not to wax too philosophical, I I have great skepticism about the American public's willingness to support painful tradeoffs until until that the headlights of the train are perceived as coming right through the tunnel, right at them. I just I would ask anyone in this audience to play a mental a mental mind game and think of trying to think of two or three times in the last in this centaury or last half of the last one, where we have anticipated a problem and and acted on ourselves tough tradeoffs before it was absolutely unavoidable that we do it. Well, the US public loves to loves to keep keep thoughts in their heads in a bifurcated way. I am very, very anxious to crack down on China, because somehow I don't like them, by the way I have a god given right to go to Walmarts or Targets and buy stuff really, really inexpensively. Well we have we really, really want to economize on on oil and deal with global warming. But there is a god given right to have relatively cheap gasoline at the at the pump, and the fact is we gone have to do some things where we we are going to have to either face some difficult trade offs now or we are going to have to run the risk of of a major, major crisis at some point. And I think for the next President, if I am right that the public has a limited wiliness to deal with tough tradeoffs and the public is by and large trained its political leaders that getting out there and showing "leadership" doesn't pay off if the leadership is asking them to deal with typical sacrifices. I think you have to pick your spots very carefully, you are going to have to mobilize public opinion and on on energy I think it's to me at least it's a no brainier that we need to be doing more in nuclear. Even I think many of the greens are coming around to that. I think we we have to do we have to do more to increase the efficiency our oil and gas use. You can't talk to economists about this issue without the notion of attacks on on gas coming up, you can't talk to a politician without him saying absolute it's it's not on the table. So we are going to have to look at other things to be be doing there. One of them for instance, if we have a if we have a protectionist attacks on on the raw materials for ethanol being imported into the country, well we ought to get rid of that. I mean are we trying to conserve energy or are we trying to just you know push largesse towards Iowa farmers. And I think we have to be looking seriously at supply of energy from sources outside the Persian Gulf, for instance the US tar sands and we have to be spending more, we are spending more, we are spending a lot more on alternative sources of of energy. For instance some of the battery and related techniques. Thanks. Gene, make a short comment and then I want to ask the audience for their question. Well. Since we are going to advise the President - but I want to comment a little bit on was; "Is this issue of the fact that you come to these kind of conferences and there is a certain number of things that you are going to think?" You know, Stephen Friedman he was President Bush's National Economic Advisor and Bill Clinton I was I mean I was President Clinton's National Economic Advisor. It feels like we could kind of agree on a certain number of things. You know, what's the matter with Washington? And I think it's worth kind of asking you know how you actually lead the things getting done. When I was at the NSC, I always used to there is a certain type of memo that that some day somebody want me to give to the President. It was one where they said you know, we ought to be just for free trade, its great for this or we ought to just raise you know dollar gas tax because it will be good for energy. We ought to just you know do this on social security and I always used to call them good luck memos. They they were like, Mr. President; here is a really huge issue and good luck sir good luck. And and I think that you know, I mean, I say this whenever I talk to youger people going into policy, the two easiest things in the world are to figure out what is the purely best political thing to do, and what is the purely pure right policy thing to do. What's actually difficult is to figure out what's the most viable good thing you can do that's viable and how and how to do it without you know doing more harm thing good. And I and I think that, what we don't talk about enough or figure out enough is how we provide the political cover for our leaders to do the right thing. I mean, - you know, it easy to say now, Why don't people show leadership? But a lot of times when people say, Why don't you show leadership what they mean is why don't you commit political suicide, get a really great in New York Times and Washington post editorial, get praised at the Aspen Ideas Conference and you know, have the end of your political career. So for example, I mean somebody right now, a candidate who announced that I am for dollar gas tax, I am for you know, do this on social security, I mean I I don't think they would do particularly well. And then the question is and then here is hard part. If people see that person try to do something courageous and it fails and hurts them politically, it tends to set it back. I mean it's you know 13-14 years now before we are getting back to Universal Healthcare. So I think that, when you I think a lot of things are possible but they are really about I think it was Dick Dortmund who phrased the made the phrase, "How you figure out that people can hold hands and jump together?" And I I think to do difficult things. Our leaders have to be better at kind of reaching out to the other side and creating that political cover. I'll give you three examples where it was done. Ronald Reagan and Tip O'Neil in the 1983 Social Security Bill. My God, the things they did. Raised the retirement age, cut benefits; Ronald Reagan supported the first tax ever on Social Security Benefits, Ronald Reagan. I mean, but the point was that Tip O'Neil and and Ronal Reagan were going to get together and do things that literally made them each want to throw up. But but they knew that, that sacrifice was the only way to give the other side the wind to get something done. 1990, older President Bush and and speaker Foley. 1997, significant Medicare savings that would have been impossible for either side to do. Bill Clinton and Newt Gingrich, they couldn't have more nemesis than that. So what we have to find I think, you know, what I my fantasy, not as in my own in a political person way, but just as you know I'd love to see a moment where you could have like a McCain and Hillary Clinton or something where they actually agree on some issue I think in their hearts on fiscal responsibility or capital trade for climate change or that kind of pledge. Who ever looses will actually work with the other on getting some of those things done. But when our people do things like make pledges, I will never cut a penny of social security benefits. I will there must be 150 members of the Republican House who pledge, "I will never raise a penny of taxes." Those things take off the table the ability to bring people of good faith together and have that political cover so that when somebody comes out with something difficult, they can take that tough vote because they can say, Ronald Reagan and Speaker O'Neil are for it, how could anybody be against it? Thanks, Gene, just make one comment and then go to the audience and then and that was one one of the problems that you just pointed out Gene I think it's pretty quite important. That is during the campaign period, there are a number of people in order to get the nomination of their party who tend to paint themselves in the corner and box themselves and so that they will be less able or in fact unable to make the kind of compromises that you rightfully suggest. The second is that it wasn't always thus. If you go back and then two days after 4th July there was very interesting thing on the History Channel and perhaps some of you saw it about the revolution and the the founding fathers, they all blocked their arms together and decide they are going to jump over the cliff by signing the Declaration of Independence. If they if the revolution had failed, they all would have been hanged. They all understood this and the third point is that that a lot of the early emphasis of the American politicians was as was put by the founding fathers, "[them]selves and their posterity." The problem is no one today speaks for the next generation and the next. What these people do is focus on the current generation and their ability to do well on the polls or their ability to get votes in the next election there is very little attention to the generation and the next and you can see why because they are moving they are taking the candidate down the road on oil, on social security Medicare, these are problems that if not addressed now are going to be huge burdens, huge risk for the next generation. So some how taking this rather chronic short term approach that the United States political system tends to generate and encouraging people to take a longer term points of view even though there may be some short term pain, seems to me as an enormous challenge to this process, sure. In business we - there is a particular type of bad chief financial officer that you would see some times. That was some one who recognize problems and really thought he could kick the can down the road till comfortably past his retirement. And if you look at politicians it's endemic, I mean we have you know there is a two year time frame for people in the House six years in the Senate so on an average people in the House are one year away from the next election, people in the Senate three years away. And one of the things government really does not do very well at all or barely tries is to think about what Bob was talking about these longer term issues until they become totally pressing. The political courage that Ronald Reagan and Tip O'Neil showed 83', my recollection was that people were saying we are not being able to send the social security checks out pretty soon. So the head lights were coming right at them. There was a very interesting section at the Aspen Institute a couple of years ago. Two politicians were on the podium, Joe Liebermann and John McCain, two politicians that I personally respect, a lot people here have their own views, Bob Woodward asked them a kind of a surprise question from the audience. He said can you think of any instances of political courage that stand out in your mind. He didn't define political courage. I would define it as a politician doing some thing that seriously threaten his or her basic regard for them, reelection prospects decision, the here were these two, I think out standing Americans, it took them quite a while to start coming up with some answers. There weren't a lot of instances. Well, I would say ironically, at least in my mind ironically, recently you have seen several episodes that one by Liebermann, whether you agree or disagree is not the issue. But his stance on the Iraq war was violently unpopular with parts of his party and he paid a price. McCain, whether you agree with him or disagree with him, his stands on immigration, the Iraq war and electoral funding was violently unpopular with some parts of this party and he is paying a price, typically it's with the more extreme wings of both parties. George W Bush, whether you agree or disagree with his proposal said, social security is an issue we should deal with. He said I would touch the third rail. He didn't have a lot of takers joining him. So I think to an enormous extent the politicians to me are they do what politicians do. You know what they have been doing since if you are historian, they would probably be doing the same thing since the Greek city states, since the Roman republic, they kind of pay a lot of attention to where the crowd is moving so that they can get ahead of it. The American public is I think trained our politicians that it doesn't pay very well to get out ahead and show leadership. I think what happens is what Gene said, you get a good editorial in the New York Times and you have probably crippled your career. So there is something very endemic to it and I think for the next President to deal with it, I don't think he can think that I think he is going to have to concentrate on a limited number of issues and spend a lot of time trying to build consensus or a wave of support so that people will do good with your metaphorical phrase join hands and some thing of that sort seems to be happening now in climate change.