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In an Uncertain World: Tough Choices from Wall Street to Washington

Authors: Peter G. Peterson, Chairman, Peter G. Peterson Foundation, and Robert E. Rubin, Co-Chairman; Former Secretary of the U.S. Treasury
November 18, 2003
Council on Foreign Relations


Speaker: Robert E. Rubin, Director, Chairman of the Executive Committee, Citigroup
Presider: Peter G. Peterson, Chairman, The Blackstone Group

New York, New York
November 18, 2003

PETER G. PETERSON: Good evening, all. This is an on the record session. And because Bob Rubin believes in the market, his books are for sale out there, (laughter) I want everybody to understand that.

ROBERT E. RUBIN: Just for clarity, there's a little room off the ... how do you describe that room? (laughter) Oh, off the main area.

PETERSON: The reading room.

RUBIN: The reading room. (laughter)

PETERSON: And to avoid conflict of interest, we've established a market rate rent for that area for the evening. (laughter) This is a world of increased transparency, and I have a few disclosures that I would like to make. First, I'm an unambiguous fan of Bob Rubin's. Secondly, I share the view he was the best Secretary of Commerce since Alexander Hamilton. (laughter) I'm getting older now, I didn't know Alex too well, (laughter) but I'm prepared to say he's better than Alexander Hamilton. I should also disclose that Bob and I have been close colleagues on the Concord Coalition Effort. I don't think I have to disclose that the Bush Administration enthusiasm for our suggestions has been, shall we say, restrained. (laughter)

Now, prior to joining the Clinton Administration, Bob was, of course, the co-Senior Partner and Chairman of Goldman Sachs. Immediately upon joining the Clinton Administration as the President's Senior Economic Advisor, he became of course Secretary of the Treasury. Today Bob chairs the Executive Committee of the Citigroup, he also chairs the Local Initiatives Support Corporation, the nation's leading community development effort. And finally, I think we'd all agree his transcendent achievement was becoming Vice Chairman of the Council on Foreign Relations. (laughter)

Now, with all this, Bob, permit me to begin what I suspect will be a series of softball questions. On your very important ... and I read it on the way back from London today - and a very good book indeed. Bob, like a number of us whose government service was more or less unblemished by any success, (laughter) your record is filled with successes, fiscal policy, balanced budgets, trade initiatives, handling of major crises in Asia, Mexico and elsewhere, and on and on. There must have been one or two areas where you now say to yourself, "You know, we really blew it on that one," or "God, I wish we had done something more about that, and this is what we should have done." Are there any such cases?

RUBIN: I'm thinking. (laughter)

PETERSON: I'm thinking, I'm thinking.

RUBIN: No, I think in fairness, if you reflect back on six and a half years of experience, I was two years in the White House and four and a half in the Treasury, yes, there were things that I think I would like to have done differently. And one of the advantages of writing a book, I think it gives you a chance to reflect back on that experience. I guess one that comes to mind, Pete, is that Madeline Albright came to me one day and said that ... this was early in the second term, and we were having terrible difficulty getting funding for the UN and getting funding for the World Bank, and we were facing the prospect getting funding for the IMF ... and she came to me and said, "Look, the American people really do not understand our global interdependence, they don't understand how much we're affected by all of these things that happen away and around the world in the international institution. Why don't you and I spend part of the next four years together going around the country doing town meetings and the like to try to give the American people a better understanding of these issues so that we can develop political support?" I thought it was a terrific idea. Unfortunately, we never followed up on it. And I don't know how much of an effect it would have had, but it surely is the case that there is an enormous paucity of understanding of the things that this institution understands so extremely well, and I think unfortunately it makes it very, very difficult politically to do a lot of what we need to do in this area.

PETERSON: Okay. You had a very good review in USA Today. The Glenn Hubbard column in The Financial Times was a little less enthusiastic. As a former Chairman of the Bush administration Council of Economic Advisors, I'd have been shocked if it had been anything less than that. (laughter) Much of what he said, I didn't understand, (laughter) and the rest of it didn't particularly resonate with me. But he did say one thing, he said, "Mr. Rubin seems to suggest that entitlement reform is the key to long term fiscal responsibility, but he didn't have very much to say about exactly what he'd do about it." So why don't you try to answer that question in this very politically incorrect season. What would you do about the entitlements if you agreed that it's essential we reform them?

RUBIN: Well, I do think that we are inevitably going to have to ...and this is a subject Pete knows multiples more about than I do, and, as you all know, has written a book that never quite became a television series, but nevertheless ... (laughter) ... I am told though, Pete, somebody read the book, (laughter) at least part of it. (laughter)

PETERSON: You know what Jordan Whitehead said about my book? He said, "It's the only book I know where you learn more from reading the blurbs than you do reading the book." (laughter)

RUBIN: Now, look, we have created a horrendous fiscal mess for ourselves. I think that it is exceedingly likely that there's going to be a day of reckoning out there. I think the American people unfortunately have very little understanding of this, and I think it is a very serious threat to our long term economic well being. We are going to have to increase revenues, we're going to have to have expense discipline. And as Pete correctly says, we're going to have to reform the entitlements. Let me give you one example of something Pete has ... and I think it's a little hard to respond to it specifically.

In early 1998 we met first in the Chief of Staff's office, and then we all went to the Oval Office with President Clinton. And we were thinking of a relatively minor adjustment to the CPI, which, as you know, overstates inflation, and that had ramifications, especially to Social Security, and we thought this would be a good time to correct that, at least at the beginning of a stab towards Social Security reform. We also considered a number of other possible measures, that we were thinking of doing ...And then we invited down one important Senator to be with us. (Chuckles.) The next day there was an op-ed by that Senator opposing what we were thinking of doing, and we were descended upon by AARP, by a whole range of other institutions, and the idea was dead on arrival. And what President Clinton said was, "Look, we can continue to pursue this if you all think that's what we should do. But my instinct ... " This was President Clinton speaking ... "My instinct is that if we now pursue what we've proposed, we're just going to make it harder to do, because politicians are going to see that this is a pathway to perdition. We're better off pulling back from it, and then if there's an opportune moment, trying to do it."

Pete, I think these issues are so laden with that kind of problem, that I think ... maybe I'm wrong ... but I think it's only going to happen when you get a President who sets up a true bipartisan process of some sort with both houses of Congress, and then joins hands to make decisions that are just extraordinarily difficult. And I kind of have a feeling that, given the way our system operates, there's at least some chance that that may not happen until the severity of the problem we face becomes much clearer to people. Second comment. In Social Security there are a lot of issues ... I at least think there are a lot of things you can do, the question is having the political will to do them. I think in Medicare it's actually more difficult, even substantively ...

PETERSON: Much more.

RUBIN: ... to know exactly what to do.

PETERSON: I assume you'd agree that the optimum time is probably the first year in a four year term. Or what do you think? Of a second term.

RUBIN: The optimum time ...

PETERSON: (Laughs.) I don't want you to think about the ...

RUBIN: ... would be in the first year of a second term if you have a President who has truly internalized the difficulties that we face, understands the complexities and uncertainties involved, and is deeply committed to getting back on the right fiscal path. No, that's correct. (Laughter.) I agree with what I just said. (Laughter.)

PETERSON: It would be hard to disagree with it, wouldn't it, yes. You know, your book is all about probabilistic decision making. You had about four variables there. I don't know what the odds are of all those things happening.

RUBIN: Well, one would like to hope that they were reasonably high, but I'd like to hope that I was seven foot six and could play Center for the Knicks. (Laughter.) And I think that the odds on either one of those is not probably so terrific.

PETERSON: Bob, you and I had lunch a few weeks ago, and I posited some realities. I said we have the twin deficits coming back in spades. You and I appeared at a Concord Coalition press conference where four different organizations said that the deficit over the next ten years is not the number that we've been hearing, but probably at least $5 trillion. So during a decade when we ought to be saving for the boomers, we're squandering our resources. The element that the public doesn't understand nearly as much about, but at the New York Fed where I'm involved is occupying a lot of our attention, is the so called current account deficit, which is a measure of the amount of foreign capital we need. The previous record was in the Reagan years, as you know, where it was about 3.5 to 4 percent of the GDP, the dollar fell by a third, interest rates fortunately didn't go up too much because oil prices had dropped. But now it's 5.1 percent. It's never been anywhere near this level. We have to import about $550 billion. So we are confronted now with twin problems, each of them formidable. The combination is really formidable, and I think you and I agreed on that. Do you think these twin deficits are sustainable at this level?

RUBIN: I don't. I don't, Pete. What I think is as follows. I think we certainly have the possibility, and I think probably the likelihood that through say the middle of next year or something like that, because of the enormous amount of stimulus in the system, that we'll continue to have good economic conditions. And then either it will be self sustaining, or we'll go back into a sluggish economy. I don't know which it will be at that point, and I don't think you can put odds on it. But I don't think, without regard to what happens after the stimulus peters out, say the second quarter of next year, I think we have some enormous risks overhanging our economy. And if we deal with them, I think we have the opportunity for very strong economic conditions over the long run. And if we don't deal with them, I think we could have real difficulty. And I think two of these issues are precisely the issues you just mentioned, the enormously difficult fiscal situation created, and the very large current account deficit. And while it is true that we have a very large economy and we can absorb a large current account deficit for some considerable period of time, I think it's almost inevitable that one of two things will happen unless we repair this. One, that we'll have a slow adjustment of the currency, which is something that presumably we ...

PETERSON: We hope for.

RUBIN: Yes, and you can work your way through in some reasonable fashion. Or, much more troublingly, that the combination of the really quite horrendous long term fiscal situation is created, plus the very difficult current account situation will undermine confidence in our currency, and instead of having the gradual adjustment, what we'll have is a sharp decline in the currency, as happened for example to President Carter at the end of his term. And that could have serious adverse consequences for our economy. And it's one more reason, it seems to me, why it's absolutely critical, or critically important, that we get back on track fiscally. And as you well know, Pete, if we get back on track fiscally, that not only takes care of that problem, but it also helps with the current account deficit.

PETERSON: Right. We all know what a soft landing is, you know, with a gradual reduction of the dollar, and everything works out smoothly. Just so everybody can have fun tonight, why don't you describe what a crash landing looks like, and what its implications would be.

RUBIN: Well, you know, I don't know, I mean, there are various forms I guess. Crash landing is a ...(laughs) ...

PETERSON: A hard landing, excuse me ... the day of reckoning seemed a little soft. (Laughter.)

RUBIN: All right, let's say a sharp decline. (Laughs.) Okay, whatever may be. Look, it could take many different forms. You could run into a situation where you had a sharp decline in the currency. That had a significant adverse impact on interest rates. And if at the same time there was a strong private demand for capital that had collided with the government's demand for capital to fund the deficit, if that also was having an adverse impact on interest rates, between the two of them, you could have a really very substantial adverse impact on interest rates, and that could result in very substantially undermining growth, and undermining investment, and undermining future productivity, undermining consumer and business confidence, and creating what I would call a general economic morass. Now, that's certainly one form it could take.

Another possibility, I suppose, you start to get into the mode that I just described, and you have a government and an administration that, even though it would be much better if it was done today, at that point actually deals with the problems. And so at that point gets together and does something very substantial to increase revenues, to the extent possible, controls expenses, gets us back on track. But in either case you could have a considerable period during which the economic conditions were much more difficult. And if you go to the former route, it seems to me that it has a potential for feeding on itself and getting worse and worse, until eventually you're just forced to face it.

Now, hopefully, the probability of all that is relatively low. But unfortunately, realities are what they are, and you can't deny or wish away serious problems. And I think we have now created for ourselves two potentially serious problems, both of which are susceptible to fixing through sound policy decisions, but you've got to make sound policy decisions.

PETERSON: Okay. I assume the stock market would be relatively restrained in their enthusiasm for such a scenario, is that right?

RUBIN: I think under those conditions, the stock market could react adversely. (Laughter). I actually get paid a lot of money for making comments like that ... not here ... (Laughter) ... but, in other parts of my life, if I look serious enough and say something like that, a client thinks he's ... well, I don't want to go into that, but ... (Laughter) ... but actually you can work out really well for yourselves that way. (Laughter).

PETERSON: I don't know which is the better, Alan Greenspan or Bob Rubin, at constructive ambiguity, you know? Okay, now let's assume that President Howard Dean, or President Richard Gephardt - the reason I use those names is I don't think George Bush is likely to ask for your advice, frankly.

RUBIN: One never knows. (Laughter).

PETERSON: Calls you in on January 2005 ...

RUBIN: If he sees me here with you, he's surely not going to ask for my advice ... (Laughter). I didn't mean to interrupt you, go ahead. (Laughter).

PETERSON: Some of us consider that a compliment, that's fine. (Laughter). Okay, so it's January 2005, and he says "Mr. Rubin, I understand that you believe we're on an unsustainable path, and that the consequences are serious, and that I, as President of the United States have got to do something." What do you propose that that President would do beginning January of 2005?

RUBIN: I'm going to give you a process answer, Pete, because I don't know specific ... I will give you a process answer. I think what I would say to him is that anything that you propose, Mr. President, is going to be so difficult politically ... by the way, you assume you still have a divided Congress, which probably ... yeah ... anything that you propose is going to be so difficult politically, and you're facing a divided Congress, that I think you're going to have a terribly difficult time enacting whatever it is you propose. I think the only way you're going to get this done is if you can, by working out some kind of ... as I think I said before ... some kind of a bipartisan process, across both Houses, where there is a real commitment, and everybody commits to sharing these difficult decisions so that nobody can have them used against them politically. I just don't think, Pete, that there's another way to ... I think it's going to be very hard to get this thing solved in any other way.

Now, in 1993, to be sure, President Clinton proposed, and then Congress put in place, a very serious deficit reduction program, but as you may remember, you all undoubtedly do remember, the politics of that were brutally hard. You won in the House by two votes, and you had no Republican votes, and in the Senate it was a tie, and you have no Republican votes, and there were some people who think that since that deficit reduction program included income tax increase in the top 1.2 percent and a minute, minute energy tax, some people think that played a role in the loss of the Congress in 1994, and I think that it just has reinforced the notion of how difficult these kinds of things are to do politically. Fortunately, he was committed to doing it and did it, but I think, under today's circumstances, you have to…as I described.

PETERSON: You know, as one tries to even imagine what a painful package that would be, see if you agree with me or not, you Democrats are pretty enthused about the entitlement programs. You rarely met one you didn't like, I think it's fair to say (laughter). The Republicans currently have never met a tax cut they didn't like, so you've got this wonderful conspiracy going on at the moment. I assume that if this was going to be a package, there probably has to be some reduction in benefits, obviously, and probably - let's just hypothesize a cancellation of the extension of the tax cuts, or some of the tax cuts, or something. Are those the likely elements that Republicans give on the tax cut, or absence of tax cuts, and you people give on the benefit side, or what?

RUBIN: I think the following, Pete. I think a package should be - whatever the specifics may be - a package should be revenues, expenses and entitlements. I kind of think, and I'm not sure I'm right about this, but I kind of think that if I were back there, which I have no interest in doing, let me be clear, but if I were back there, and were in that role with the President, what I would say is, "Mr. President, these entitlement problems are enormously serious longer term, but the immediately problem of getting back on some kind of reasonable track fiscally, we can probably deal with revenues and expenses, and while I think entitlements are extremely important, I think that maybe you're just trying to do too much at one." You know, I remember Lloyd Bentsen's - I don't know if it's in the book or not, I forgot - but Lloyd Bentsen said to President Clinton - I was there when he said it, it was in the Oval Office - he said, "Mr. President, you're trying to do this deficit reduction program, and you're trying to do Health Care reform, and the system simply cannot take two such large loads. Why don't you do one, and then do the other sequentially, which was not, of course, the President decided to do, but I think, at the time that struck me as a sensible comment, and in retrospect, it obviously was right.

PETERSON: Okay. As is evident by the work you're doing locally, you're a very compassionate person who's very concerned about the plight of the poor, not only in the United States, but in the developing world. In your book, you write very movingly about this, it seems to me. But you speak about the need for what you call "a parallel agenda". On the one hand, the developed countries have to offer more aid, they have to open up their markets, because trade is terribly important, but the melancholy fact is that…the other day, we and the French, of all people, combined to block agricultural imports, which is all the developing countries really have to sell, so it isn't a very happy situation at the moment. But, in any event, we, the developed countries, would do some combination of aid in opening up our markets and so forth. But you also say that the developing countries have to have their own internal parallel agenda. Reform, by which I assume you mean rule of law and corruption and training and all kinds of things. What was less clear to me from the book, frankly, was how do you get these developing countries to do that? What is the scenario by which this package gets worked out?

RUBIN: I think, Pete, it is really in some sense - this is my view, and I'm not sure others would agree with this, but in my view, at least - it is the single more difficult, and I think largely unanswered question in development economics. I think if you sit with serious people, they can give you a pretty good sense of an awful lot of the kind of things a country should do, and you can have some disagreements, but I think you could put together a reasonable package that there would be a lot of agreement about. I think the problem is, precisely what you said - and it gets even worse or complicated than what you just said - but what can you do from the outside to try to induce countries to adopt good policies? Now, the U.N.D.P., The U.N. Development Program, I guess is what the "P" stands for - under Mark Malloch Brown - has done a kind of interesting thing. They've developed a set of standards - I've forgotten what they call them, Millennium Development Goals, I think - and assume under that is their set of standards, I may not have this exactly right, but it's roughly right - and they have, in quite a number of countries now, made those standards politically resonant. I remember Mark told me once that in Brazil, politicians actually would talk about how they're going to meet those standards. So that's a constructive thing to do, and maybe that does have some affect on policy.

The problem becomes particularly severe when you have, as unfortunately you do have, some reasonable number of countries with authoritarian governments, whose leaders are not particularly focused on the well-being of their people, who in many cases are corrupt, and who, therefore, really are not interested in the whole issue of reform. Now, you could say, "Well, if they're not going to be interested in the issue of reform, we won't provide aid." The trouble is, you're then saying, for some numbers of hundreds of millions of people, that you're simply going to abandon them. It's an immense humanitarian problem. It's also a very big practical problem, because countries like that have the potential for becoming havens for terrorists and all kinds of other problems. And I don't, frankly, know what you do with that. I tried to discuss that a little bit in the book, but I didn't have any particularly great ideas. The NGO's are thought by some to be a good answer to that, but sometimes the NGO's, maybe because of their multiplicity, or maybe other reasons, have become part of the problem and not part of the answer. So I think it's a very difficult problem to which there is no really great answer right now.

PETERSON: Okay. You spend in your book a good deal of time, understandably ...

RUBIN: I think the one answer that isn't good, though, the one that seems to me is absolutely wrong, is to therefore not to remain deeply engaged with this problem, and to try to continue to improve how we deal with it. I'm sorry.

PETERSON: You spend a good deal of time, understandably, on discussing Mexico, the Asian Crisis and Russia, and everybody but Glen Hubbard would probably give you very high marks for that, (laughter), for what you did. But every once in awhile, Bob, I hear a critique about an individual country. We goofed in Thailand, we goofed in Indonesia or somewhere. As you look back on your experience, is there one of those two countries, with the benefit of hindsight, you would have handled differently, and what would you have done.

RUBIN: I think the hardest part of this is not devising the packages. Working with the IMF, with which there is enormous expertise on these issues, I think we - "we" being the international community - put together sensible programs, and I think, on balance, with great success in the context of a very messy reality - and I'll get to your point in a moment. You know, it's very nice to have armchair concepts of what to do, but when you get involved, having to respond quickly to a crisis with the complex realities that you face in Mexico or Thailand or whatever, these armchair concepts don't always work so terribly well. I think the problem is, how do you deal ... but these things only work if the countries take ownership of reforms, so then you're to the question of, how do you deal with the politics within these countries? And there, I think, we did very well with different situations, and it really goes back to something I know you've focused on here at the Council on Foreign Relations. What you need is people who understand both economics and foreign policy, and you've now set up your Geoeconomics Center here, and I think you're exactly right. You need that combined possibility. In Korea, we were blessed. The new ambassador, Steve Bosworth, not only was he terrifically versed in everything relating to Korea, but he also was very deeply versus in economics, and I think, Pete, it really made a tremendous difference.

In Indonesia, we had enormous difficulty with Suharto, and I'm not sure we could have done any better, and I think probably what we did saved Indonesia from being even worse, but clearly, had we been able to more effectively engage in dealing politically with Suharto, we might have gotten better result. But I think that combination of foreign policy and economic expertise is something we need a great deal more of in the government to deal with these kinds of situations in the future.

PETERSON: I assume the situation in Russia was a daunting situation vis-a-vis the politics and the ...

RUBIN: Yeah, that's an interesting one, and some people here ... I know Stan Fischer, Managing or Deputy Managing Director of the IMF at the time, and former Chairman of the Economic for…MIT is here today. Maybe Stan would have a different view of this, but I'm not sure there's anything too different we could have done in Russia. In Russia, we provided aid, "we" being the IMF ... and we supported a strong IMF program, even though we knew that there was a pretty good chance that the Duma wasn't going to go along with reform, but given the nuclear weapons that Russia had, all the importance of supporting one thing or another, we decided…given the tremendous consequences of a collapse in Russia, it was worth doing - even knowing that the odds weren't that good that we'd have success, but then, when it finally became absolutely clear that the Duma was not going to go along, we stopped, because we felt 1) the aid probably wouldn't have any effect, and 2) it would totally undermine the credibility of the IMF and these kinds of efforts.

I may be wrong, but I don't think that all the expertise in the world about...(unintelligible)…because we did have some people who really knew Russia well, I think. I don't think all the expertise in the world of the Russian political system would have enabled us to deal with that more effectively in those circumstances at that time. I could be wrong. That's my view.

PETERSON: You have a few sentences in your book about the root cause, or at least the root solution of many of our problems, just to save more, to increase our national savings more. And there are obviously two ways you can do that. You can cut the dissavings, or negative savings with a budget deficit, or you can increase the personal savings, or both. I'm not sure about this, but I had to convene once on the behalf of a President Commission Capital Formation Panel of some of the best economists in the United States on savings. Democrats, Independents, Republicans. They were not overly optimistic about how much we can increase savings by the general tax incentives. That is, if you consider the cost versus whatever the gains are, and at least we've had a number and our savings are still lousy. The general conclusion, surprisingly, Republicans, Independents and Democrats, with a country like ours, it has a great talent and appetite for consumption. In the here and now, you probably need to think about something that's hard in this country, which is mandatory savings, which is what Singapore has done, it's what Chile has done, it's what Australia has done. Do you find that one hard to swallow, or not?

RUBIN: Well, we had in our Administration an economist, who I think was considered highly expert ... well, at least he said he was considered highly expert in ... (Laughter) ... in savings, which was Larry Summers, who is now President of Harvard. (Laughs). And I know it was Larry's view that if you look back over the various kinds of tax incentives people have tried to use, that they really have not, just as you said, had very much effect. What we did, what we suggested ... well, in the first place, as you say, the readiest path is to reestablish fiscal responsibility ... but we suggested, or we actually proposed, as a matter of fact, it wasn't so much a tax incentive as it was a credit, that was so substantial relative to that which you had to put up yourself, that it looked to us like that really might be a successful way ... it wasn't a tax incentive so much as it was a credit substantial enough relative to the rest of what you had to put up, that that, we thought, might have worked, but it wasn't successful politically.

One of the great problems of all of these incentives is an awful lot of it tends to go to people who would have saved otherwise, so it gets wasted in terms of net savings, and meanwhile, you're undermining your fiscal responsibility. Mandatory savings is sort of a tax, but you keep the proceeds. Look, I don't have a view so much, Pete. I guess it bothers me a little bit as ... what I just said, it's really a tax, except you keep the savings. But I thought our proposal, which was headed in that direction, but didn't go that far, might have been a somewhat better way to do it.

PETERSON: Okay, one final question. Coming back from London today, I was reading some studies or stories on the situation vis a vis trade deficits, which are now kind of moving towards $500 billion, and the credit deficit in particular with China, which next year might hit $120 billion, and you look at that situation and you know we've lost 2.8 million jobs, or whatever it is - a lot of them are in the "red" states, which the Bush people have won. An engineer in China costs $1,000, I guess. The tooling costs, which are very important in new products, are a fortieth of ours, labor costs are a fiftieth of ours, they're very well educated - what do you think are the odds that we're heading into a serious bout of protectionism. I mean, you have at least one candidate that's explicit about that. What you think - give me the outlook on that?

RUBIN: When you say "you have one candidate...". I mean, I ... (Laughter) ...

PETERSON: For the purposes of this discussion, you're a Democrat, okay?

RUBIN: Oh, I am a Democrat, okay. I'll tell you what I think, Pete. I think that you are going to see ... I think the probability is that you're going to see an escalation of the rhetoric about trade for precisely the reason you said, which is that trade not only affects manufacturing jobs now, but trade pressures affect, as well as we all know this, that all these various service areas of five yours ago weren't subject to...

PETERSON: India, in particular, yeah.

RUBIN: Yeah, India and China both, because the real time communications and the vast numbers of well-educated people - hundreds or millions now, if you take the two countries together - have an ability to do an awful lot of what used to have to be done here, and as a consequence, many, many more people feel threatened by trade pressures. One of the candidates told me recently - and this is a person who is very sympathetic to trade liberalization - that as you travel across much of the middle of America - it's not just the people who have lost the manufacturing jobs, and not even just the people in the white collar world who are being threatened - but he said you go to this medium-sized towns, it's the people in the restaurants, and people in the department stores, and it's all of the components of the economies of those towns, because they are threatened by the, in effect, off-product or the bi-product of this loss of jobs. Having said all that ... and so I think you probably will have a large escalation of rhetoric. Look what's happened in just the last little bit. The Dow Jones failed. President Clinton resisted the efforts to get steel tariffs put in place. They were put in place in this administration ... this is not a criticism of anybody, both sides are playing to this ... to put in place steel tariffs. I have great regard personally for Secretary Snow - I've known him for years. But when he went to China and lectured publicly the Chinese leadership about fixed-rate exchanges, that isn't the best way to get them to deal with it, but clearly, that is a way to play back to the domestic political audience. I have no idea what he had in mind, but you couldn't help but have a feeling that maybe it fit into that picture. So I think there's going to be enormous rhetoric - if you had asked me that two months ago, I would have said it seemed to me the probability of that rhetoric actually affecting anything was going to happen was very slight, I have become more concerned about this. I think the American people have very little understanding about the enormous benefits that are open markets that trade liberalization brought to this country in the 90s. I don't think there's any question it's the right way to go forward even though the adjustments now are going to become more difficult. I think that we really are into a new era in terms of the politics of trade, and I think it does have the potential in various ways. Whether it'll happen during an election year or afterwards, I don't know, but I think there's more threat that this will have an affect than I would have thought two or three months ago.

PETERSON: Your comment about John ...

RUBIN: Oh, the other thing I'd say about the policies ... whatever you may think about the job loss, whatever you may think about how long it may take for our economy to adjust and develop this 'new jobs' one thing or another, it seems to me, at least in my opinion, absolutely clear - that nothing is certain is life - absolutely clear that protectionism has to be the wrong policy for a lot of reasons. One, we'll lose the benefits of cheaper imports, inflation, interest rates, all the rest, but secondly, our competitor nations will get the inputs to their production processes more cheaply than we if we keep them out. And other nations will retaliate.

PETERSON: I'm surprised that someone as sophisticated as you didn't know the background of Mr. Snow's - a dear friend of mine too - reasoning. You didn't know that Karl Rove was a leading expert on foreign currency? (Laughter). Okay. We now have questions. Keep them brief, please, and tell us who you are.

BENN STEIL: Benn Steil, Council on Foreign Relations. Pete, I'll take the prod on foreign currency here. Bob, over your tenure in Washington, you spent a lot of time putting out currency crises. Now, there may still be a lot we don't know about - what causes currency crises, but we do know that countries that don't have their own currencies and use the dollar instead don't suffer currency crises. Now, given the currency crises, particularly in Latin America, have, at the very least, damaged our foreign policy interests by promoting instability, do you think perhaps it's time for the U.S. Treasury to send more clear and positive signals, particularly to Latin America, that if governments in the region did wish to consider dollarization, that we would actively assist them and facilitate them, perhaps by volunteering to rebate seniorage profit?

RUBIN: Well, maybe the Treasury should do that. I personally would be opposed to it, so I would be writing op-eds saying "don't do it!" No, I think I knew where you were going. The dollarization issue raised is a very interesting issue. There are some very deeply serious and thoughtful people, including yourself, who think that's exactly what we should do. I kind of think that if you have a whole bunch of countries who adopt the dollar, and are then subject to our monetary policy, and they've lost, in effect, both monetary policy and their currency as policy levers and as ways of adjusting to the uncertainties of their own economy relative to our economy, I think that could create very serious problems and I think it will ill-fit them, but that's my view, and there's certainly enough people who hold the contrary view. That issue, by the way, I don't think is getting a lot of currency now. There was a ... (Laughter) ... I didn't mean it that way, but ... no, but there was a period when that had a lot of profile. Now it seems to have diminished for a bit.

PETERSON: Let's turn to the right here. Yes sir, back there.


PETERSON: Oh my! Joe, how are you?

MCLAUGHLIN: Someone once said a number of years ago, there was nothing wrong with this country that a 50-cent tax on gasoline wouldn't cure. What do you think about the pros and cons of Federal consumption taxes?

RUBIN: Federal ... you mean, in lieu of?

MCLAUGHLIN: Well, either a tax on gasoline, or Federal sales tax?

RUBIN: I think ... Joe and I have not seen each other for awhile, but we worked together for a long time, and I kind of remember where you are in the spectrum, (Laughter), as I ...

MCLAUGHLIN: Nothing's changed.

RUBIN: Nothing's changed! Okay. (Laughter). Then our views might differ some on this. I actually believe in a progressive income tax, and I think it is ... at least it would be my preferable way, as long as you could make it work and collect, and so forth, for funding the needs of government, and therefore, I would not have a Federal consumption tax. However, energy maybe, for all the reasons that we all know, a special situation. There are serious problems about its long-term availability - at least in the form of gas. Petroleum long-term availability, there are all kinds of environmental issues, and it does seem to me there's a lot to be said. I think at least in a pure policy sense, there's a lot to be said for inducing conservation measures by having higher Federal gas tax, but having said that, I think the political probability of that happening is somewhere in the neighborhood of zero. When we put in place a gas tax in 1993 as part of our program, my recollection is that that came out to about $36 for an average family of four, the minimum...

PETERSON: There were just a few cents, for a gallon?

RUBIN: Oh yeah, it was 4.2 cents a gallon, $36 for an average family of four, and it became an immense political issue, and I think the lesson people learned from that is, unfortunately, this is not something that's political attractive to do.

PETERSON: All right, a question on this side - back there please. Yes sir?

DAVID MALPASS: Hi, David Malpass - Mr. Secretary, thanks for speaking tonight. Could you comment on the strong dollar policy, either under your Administration or under the current one. Are they different? (Laughter). And I'll make it harder. I think, as the dollar strengthened, it pushed prices down, and so it led to some of the deflation problems that we had, so, on reflection, are you happy with the way the strong dollar policy worked, and what do you think should be done now on that score?

PETERSON: You know, in the old days, we used to say, there is nothing as disingenuous as a Finance Minister on the evening of a devaluation. So I'm going to be interested in what his answer to this question is. (Laughter).

RUBIN: Well, on the point that Pete just made: when the Yen got to roughly 147 - don't hold me to the exact number - 147 to the dollar, and it was our view that ... well, kind of reasoning, the dollar simply had gotten too strong, and we did intervene, and we intervened - I think intervention can very seldom have any meaningful impact for any period of time on the dollar. But…our circumstance existed ... I know this is a subject you know quite a bit about - existed, that would enable us to do it. So we did it - we put out a release saying, "We believe a strong dollar is in the nation's interest, and we're intervening today to weaken the dollar ..." (laughter), and I think a Finance Minister always has to be in favor of a strong dollar. Yeah, I actually do think the strong dollar serves us very well. I don't think we had deflation, but what we did have was a rate of ... I mean, you can argue about that, I understand that ... but we had a much lower rate of inflation, and I think the lower rate of inflation fed confidence, enabled us to have a lower interest rate regime, and I think contributed very substantially to our economic well-being. I also think that the influx of imports played a real role in the pressure on American industry to be productive and to be competitive, so I think our trade regime and our strong dollar policy worked very well for us. It's just there come times when things go to such an excess that you need, if you can, to try and do something about it. And you can't always do something about it. There are serious people who would have a different view.

MALPASS: And now?

RUBIN: And now? Now what?

MALPASS: What is their policy?

RUBIN: Oh, what is their policy? I think it's hard for me to speculate ... I mean, you know as much about their policy ... their policy is what they say it is. (Laughter). And beyond that, I can tell you what I think. It's hard for me to tell you what they think other than what they say, and what they say is in the press, and ... every week. (Laughter).

PETERSON: I think Alan Greenspan could learn a bit from you... (Laughter).

RUBIN: Well no, I mean, I ...(Laughter). No, let me just say, Pete. I'm not speaking for anybody else. I do read the newspapers ... (Laughter) ... No. I'm just saying I read the newspapers. (Laughter).

PETERSON: There we are.

RUBIN: And if you do, then you'll know what their policies are. I find it a useful thing to do.

ROLAND PAUL: Mr. Secretary, my name is Roland Paul. I'm with Ivey, Barnum and O'Mara. This might be a very easy question. You bailed out Mexico, but it was decided not to bail out Argentina. What was the difference?

RUBIN: Well, actually, we did have a support program for Mexico. We don't think it was a bailout, but I'm prepared to accept ... (Laughter) ... that's a semantic issue.

PETERSON: What was your euphemism, incidentally? (Laughter).

RUBIN: What euphemism!? We had a Peso Support Program! (Laughter)

PETERSON: I see! That's a good one. (Laughter)

RUBIN: And that's what we had.


RUBIN: We never faced the Argentina problem when I was there. I think ... and here I do have sympathy for the current administration with the problem that they faced. I think Argentina had about as poor a set of economic policies - and I'm no expert in any of this, but somebody who I have enormous respect for, and who's deeply steeped in this sort of thing, said he thought Argentina's policies perhaps were as poor as any country that he had seen in his experience. And yet, the Bush Administration was faced with the very difficult problem that if, in fact, Argentina was allowed to collapse, that could have all kinds of other ramifications, and they made a decision to support an Argentine reform program, with conditions that ultimately weren't satisfied, and I think they kind of did the right thing, myself, but we never faced the situation where the government that acted as poorly as Argentina did respect to economic policy.

PETERSON: All right, on this side, please. The young lady on the aisle, please.

RUBIN: Hello, Ricky. Described as a young lady, you should be very…

AUDIENCE: I loved it! I thanked him! (Laughs).

RUBIN: Ricky was in our Administration, by the way, also ...

PETERSON: Bob, as you have more experience here at the Council - every lady is young ... (Laughter) ... Thank you.

AUDIENCE: My only other experience was when Paul Volcker asked me if I was a term member, but that was a few years ago. (Laughter). Bob, you talked about the progressive taxation, income tax system. Do you think the Democrats' effort to pinpoint the tax cut in the Bush Administration, as advantaging the top one percent in the country, and therefore, to a certain extent, undermining the progressive income tax, do you think that is having any affect with the American public, and if it isn't, does the American public really understand the progressive income tax system, and can it be more effectively explained?

RUBIN: You know, I don't exactly know the answer, Ricky. My impression - I remember 1998, when we began to have surpluses, and the question was, okay, can we hold off on a tax cut, because President Clinton felt we should try to save that and get our debt down, and I remember President Clinton, with all his enormous skills, and I happen to think the world of President Clinton - I have a tremendous regard for him - but whatever your views may be about him - his policies, and President Clinton, and all the rest - I think he's probably as skilled politically as anybody that we're going to see in our lifetimes. And with all of his skills - I remember we were talking about all this - not just he and I, but a group - and he was talking about the extraordinary difficulty of trying to get people to understand these questions around fiscal rectitude, distribution of tax burdens and matters of that sort. I have an impression, Ricky, but I may be wrong, that if you look at polls, and things like that, which I'm sure you do some of them - I do too, occasionally, actually - in one sense, people sort of understand it, but in another sense, they haven't really internalized what is being done, and how substantially these tax cuts have benefited a very small number of people, and so, in effect, what's really happened is, we've had this terrible affect on our long-term fiscal situation, and the benefits in the short term are very heavily oriented towards... the most affluent ... I don't think people really relate to it and understand it, unfortunately.

PETERSON: Okay, on this side, please. Yes sir.

RICHARD GARDNER: Richard Gardner, Columbia University. Bob, when you were Secretary of the Treasury, there was a lot of talk about reforming the international financial architecture, and study was done here at the Council. That talk has sort of petered out. Is there an agenda out there that's doable for improving the work of the IMF, the G7, and so on, that you would recommend to us?

PETERSON: Richard, as you know, was an Ambassador, and a very distinguished one, in our Administration. I think, unfortunately, what's happened - this is my impression, and others might have a better sense of it than I - we were deeply serious about the International institutions, the IMF, the World Bank and the U.N., and if you were deeply serious about ... and we felt that it was enormously in our country's interest, to have robust institutions through which we could work with other countries and so forth, I think - and in that context, yes, we had a lot of thoughts about reforms we thought should take place - I think unfortunately what's happened now is a view that these institutions, in fact, annual report not institutions about which we care very much. To some extent maybe even at times a feeling that it is not in our interests to have these institutions be robust, and in that context, really, a lot of the energy is going out of thinking about reform. If you deeply value the institutions, which we did, then we were deeply focused on reform. If you don't deeply value them, then I think you're less focused on reform.

PETERSON: All right, on this side.

KHALID AZIM: Hi, I'm Khalid Azim with Morgan Stanley. Sir, my question is: how should we effectively engage the Chinese in regard to their currency policy, or even more basic, should we engage the Chinese in regard to their currency policy?

RUBIN: Well, I think the second question is not an uninteresting question. As Pete said, the trade deficit with the United States is $120 billion or something like that. I think it's actually even a bit higher than that, Pete. And a tremendous amount of that, as you know, is China importing from the rest of Asia, and then re-exporting to the United States after something has happened, or whatever it is they've imported. China's trade surplus with the world - their global surplus, including ours, if I remember correctly, is something around $25 billion. The Wall Street Journal Editorial page, which I wouldn't really cite for things on economics - but nonetheless ... (Laughter) ... but the Wall Street Editorial page said a few weeks ago that they might even have a trade deficit next year.

Well if that's right or not right, I don't know, but I think that it is probably true that they'll have an even smaller trade surplus next year, so it's not that they have a large trade surplus globally, it's that they have a very large trade surplus for us, with the reasons I just described. And while I do believe in a flexible exchange rates, I think it would be good for everybody, including China, to have a flexible exchange rate, I think it is their view that, moving toward that gradually, given all of the circumstances of China, works better for them, and they well be right in that regard. I don't think the essential problem in our trade situation is China's exchange rate. I think the essential problem lies with us, and I think we've got to address issues like our enormous fiscal deficits, improving productivity, although we've had good productivity growth, but improving productivity matters of that sort, and I think the answer to our trade deficit lies within ourselves, not in China's exchange rate.

PETERSON: All right. Yes, please.

CONSUELO MACK: Mr. Secretary, Consuelo Mack from CNBC. As far as the recent spate of scandals on Wall Street, and in the Mutual Fund Industry, number one: how surprised are you by them, and the extent of them, and what, if any, further reforms do you think we need to rectify the situation?

RUBIN: Well, Consuelo, I don't profess to be an expert on what's happened with respect to the Mutual Funds. Obviously, Mutual Funds are a very important part of our financial system. I personally think that most people probably are not adequately equipped... I think if you're going to invest successfully you've got to understand valuation, you've got to understand how to think about valuation - I'm talking about Equity Securities - you've got to be able to apply that thinking with great discipline, and I think that an awful lot of people who invest, just because it isn't what they do for their livings, are probably in those respects not as well-equipped to invest as they should be. Therefore it seems to me, having professional investment available through Mutual Funds, is a very important part of our system. I don't know of anybody who knew of these problems before they erupted, and I think that it is absolutely imperative that they be addressed quickly and fully, which seems to me what's going on. And I do think it is very important that the Mutual Fund Industry remain an industry in which the American people have confidence for the reasons I said a moment ago. You know, more generally, Consuelo, periodically in our society, in our financial system, there have been problems, and you go back over the many decades, and I don't think you can construct an airtight system except with constraints so tight that nothing will happen. But what I think you can do is have regulatory and legal structures so that when there are problems, the system responds quickly and effectively so that those problems get repaired and hopefully have a system that anticipates problems as best as possible, and that would be perfect.

PETERSON: Okay, the one on the left, the young lady back there.

ANDREA WALTHER: Hello. Thank you Mr. Rubin for being here. My name is Andrea Walther, and I would like to go back into the year of 1999 if you allow. So, in 1999, I was writing my last chapters on my Ph. D. dissertation on the Clinton Administration, with some chapters on how to organize economic advice to the President, so I was writing the conclude back in the end of 1999. So I was always wondering when you left office in 1999 at the Treasury Department, what would be your long-term goal, what you would have done with the surplus. So, would you rather go like getting rid of the whole debt of the country, or building more and better infrastructure, or fighting the poor in the inner cities, or what would have been your big goal - what you're going to do with that money?

RUBIN: When the Congressional Budget Office projected a surplus in January of 2001 of $5.6 trillion, if you looked into those numbers, I think you would have concluded that that was an overstatement of what was likely to happen. And I think that ... well, there was no question in my mind at least what would have served the country best, which would have been to reduce the Federal debt ... that would have best positioned us to deal with the entitlement problems that Pete was talking about a bit ago. It would have best served us in terms of keeping us low on interest rate regime as possible, and maintaining an environment that was conducive to investment and to growth, and I think that's exactly what we should have done, especially in a country that is as deficient of savings as we are. It also would have reduced our dependence on inflows of foreign capital, and as Pete said, we have a very large current account deficit, and the fact that we are so dependent on inflows creates a vulnerability which we could have reduced. So I think for all those reasons that's exactly what I would have done. You know, there was concern expressed at the time that you'll retire all the Federal debt, and then what are you going to do with the surplus after that? I think that is one high-class problem that's we'd have to face when we get there. (Laughter).

PETERSON: Okay, on this side, please.

MAHESH KOTECHA: Thank you. Mahesh Kotecha. Mr. Secretary, what is your view of Fannie May/Freddy Mack, the GSE's, and the likelihood of systemic problems arising from their financial over-engineering, if you will. There was an announcement made just a few days ago that European Union has a proposal from a number of banks to create a European Fannie May. So what lessons would we have for them and the rest of the world?

RUBIN: No, I think Fannie May and Freddy Mack serve their very useful purpose in terms of improving provision of mortgage finance in this country. I think the problem is that they do have a number of real benefits, including the implicit - not explicit, but implicit - guarantee of the Federal Government. And as long as they stayed within that charter, which is what Congress set them up to do, it seemed to me that they were serving a very useful purpose, and I think had served our economy well. I think the two sets of issues, one is that it is a subsidized capital, to some extent, and once they get outside of that area into which they were chartered to operate, for the purpose of which they were designed to serve, the question you have is do you want to create that sort of a distortion in your capital. I think the distortion was well-advised for the purpose of improving the extension of mortgage credit. That's my view, arguing both sides, I suppose. Once you get outside of that, you have to decide what purpose is that serving? And as you know, quite a number of thoughtful people have testified on that in one respect or another, including, as I recollected, Chairman Greenspan. On the question of whether it was a real risk to our system from the financial conditions of Fanny May and Freddy Mack, I don't profess expertise, but it seems to me that that is an issue that is manageable.

PETERSON: I think, Bob, that's a particularly urgent question, isn't it, if you're not in the mortgage business, you're in another aspect of financial services, being insurance. The question you've raised, essentially, is, why should we subsidize you and not subsidize me? That could be an issue here.

RUBIN: Oh yeah, no, I think, look ... look, the argument that the various people have made is that we've served ... I think that's exactly right, Pete ... that our capital markets allocate capital pretty efficiently, and we should have a little subsidy in those market systems as possible every once in awhile, and maybe for a good public purpose, but at least keep the institutions that do that within that purpose, and not out beyond that purpose.

PETERSON: Mr. Secretary, if you keep saying "You're absolutely right, Pete," you're going to do very well here, I want you to know that. (Laughter)

RUBIN: Well, Richard Haass told me that that's what I have to do if I want to remain a member. (Laughter).

PETERSON: Okay, we have one final question, on the left, sir.

AUDIENCE: One brief comment, if I may.

PETERSON: Please sir, and then ...

STEVEN MUKAMAL: Mr. Secretary, you mentioned ... my name is Steven Mukamal with Barston Mukamal. Mr. Secretary, you mentioned the issue of the loss of jobs to both China and India. In various areas of software, manufacturing and recently in reading all kinds of medical forms and stuff like that, where do you see the new jobs being created?

RUBIN: Ahhh - you should never ask for the last question. Um, (Laughter) ... no, I think it's a very important question. Starting about two or three months ago, I developed this sort of intellectual focus on this issue, and I've discussed this with quite a number of people I think are deeply thoughtful, both in the academic world and the policy world, and I think it is fair to say that every single one of them had the view that historically, there have been a number of major events that have created a serious dislocations in our country, and we've always adapted, and that this is one more in that series, and the trade liberalization has served us extremely well, and that we will adapt once again, and we will create jobs in areas in which we have our comparative advantage and all the theory that you know so well. I've asked each one of them: "Okay, point to me specifically where you think those jobs will come from." And their answer has always been that it is very rare that you can see where they'll come from, but history tells us that they will come. And that's not a totally satisfactory answer, (Laughter), but I actually do believe that. I think we would be horrendously disserved if we start to go down a protectionist route. But I do think we may have - and I hope I'm wrong about this - but I think we may have a longer adjustment period this time, because the range of goods and services that are subject to trade pressure has broadened so widely because of the factors that you've raised. But I still think there's no question that staying on the path of trade liberalization serves us best, and protectionism would be very damaging to us.

Could I make one comment, Pete?

PETERSON: Absolutely.

RUBIN: This has been terrific. Pete said to me today when we were talking, he said there's no group like the Council on Foreign Relations in terms of the types of questions you're going to get and all the rest, and so for me, it has been terrific being here. I would not have been here tonight except for one person I'd like to acknowledge, Jacob Weisberg, who's here some place. Jacob, where are you? There he goes. Jacob's the Editor-in-Chief of Slate ... (Applause) ... Jacob's the Editor-in-Chief of Slate magazine. When I left Treasury, I had actually thought something about writing a book, and decided I wasn't going to write one. And Jacob came to me and said, "Why don't we write a book?" And I said I had thought about it, I gave him all my reasons not to, and he, "You know, if you do, it'll really be an opportunity to rethink your experiences, you'll learn from it, and it'll give you a way to express your views to others," and he eventually persuaded me to do it, and so, because of Jacob, we're here this evening. So, I wanted to acknowledge Jacob. Thank you all. (Applause).

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