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NANCY ROMAN: I’m Nancy Roman, director of the Washington Program here at the Council on Foreign Relations [CFR], and welcome to all of you. These briefings are the brainchild of Lisa Shields at the end of our table, our director of communications who, I think quite intelligently, you know, recognizes the press as a critical part of discussion of foreign policy issues critical to the Council. And we really are trying to be more of a source and resource to all people—universities, you know, the press certainly, and policy-makers in this town. We are a nonpartisan not-for-profit, so we don’t lobby on any of these issues or really even take a position. We have a terribly idealistic belief, which I share, that is, if you elevate the debate and have deeper, more frequent, intelligent discussion, that you ultimately will end up with better policy.

I’d also like to introduce Anya Schmemann at the end of the table, who is our new communications director here in Washington, DC. Hopefully in time, you’ll associate her face and her name with the Council, and she’s the point of contact for the Council as far as getting information and experts to you if you need them.

OK, I have got about five minutes to touch on three very big subjects. One is Social Security reform, one is the budget, and then I’ll touch very briefly on the G-7 finance ministers’ meeting this weekend. But I will be brief because we’ve got lots to talk about and we also have, of course, Gene Sperling and Dr. Bhagwati here as well on trade and immigration. So it’s a lot of subjects, and the first two on my plate you might ordinarily think of as domestic issues, but in a global economy in which the United States has an $11 trillion stake, certainly these fiscal issues bear on foreign policy, and we’re trying to think that way more frequently here in the program.

I could talk about Social Security for the whole hour, so I’ll just try to limit to a very few points. You know, we all know the president is making a big push on this, and for political junkies like myself, it is [a] fascinating debate to watch. I think it’s a critical discussion, and I think the president did a pretty good job in framing things last night [in the State of the Union address]. And it’s going to be very important to watch the political process. I’ll be interested to see the polls that come out in about 10 days from now to see how the public responds not only to his speech, but to his, you know, tour around the country.

I think both sides, both Democrats and Republicans, had some cause for grievance last night. You heard some hoots and hollers coming from Democrats when Bush suggested that the system would be bankrupt in 2042, and I think that’s fair. I mean, unless we abolish the Social Security program, there will always be workers and employers paying FICA [Federal Insurance Contributions Act] taxes, so there will be some revenue to pay some benefits to beneficiaries. But I also think Republicans are correct to suggest that the real point of problem—let’s forget the word crisis—the point of problem comes long before 2042; it comes in 2018, when outlays exceed incoming revenue. And that’s because, of course, there is no trust fund.

And I mean, I hate to bog down in these semantic games that are associated with the parties, because it’s not about that. It should be just about the facts, and the facts are that if—and hopefully, you know, Gene will pipe up if he disagrees—but you know, in 2018, if changes are not made, yes there’s an obligation to current beneficiaries, but to meet the obligation you have rather unpleasant choices. You, at that point, cut benefits; you borrow money; or you cannibalize other government programs, you know. And I think Republicans need to do a much better job of explaining that without a sky-is-falling thing that the system is going bankrupt; just explaining the real fiscal constraints on the system. And I feel Gene wanting to jump in, but I’m almost through. [Laughter]

And then, you know, I would just say, finally, Republicans are going to have to be honest about the costs associated with private personal retirement accounts. You know, so far the message we hear is that, you know, look at the package in total and, of course, a lot of the savings will come in changes that are made to benefits. But there is a serious cost associated with the personal retirement accounts. It’s impossible to get very specific about what the costs are until the details are out about age of eligibility, size of accounts, and so on, but I think it’s fair to use the number in the Social Security Commission’s Plan 2, which pegged it at about 1 percent of GDP [gross domestic product], which would put it at more than a trillion [dollars] over 10 years. And I think Republicans, if they want to have any success here, are going to have [to] speak candidly about, you know, the cost associated with Social Security reform.

Last thing on Social Security: I think one of the hybrid solutions where Democrats might meet Republicans is a plan that would have a worker bring, say, one dollar to the table, and the government matching that one dollar out of the FICA tax, for a personal account, because a big part of the fight is going to be, is this a carve-out or is this an add-on? And that sort of splits the baby on that question. So it would increase national savings, and it wouldn’t be as expensive as the full 4 percent coming out of a FICA tax.

On the budget, all I’ll say about that—I think we all know now that the president plans to come out with a budget that holds spending to about less—you know, below the rate of inflation. In Washington terms, that is very lean and very mean, and so there’s some credit for that. But I don’t think it certainly goes very far toward cutting the deficit in half over the next few years. That is a very heavy lift. And I also think it’s challenging to grow your way out of that hole.

You know, I could go on about why, but you know, post-9/11, a lot of the spending was wormed into the baseline. It’s very difficult to get that out. And if you look at the potential shocks going forward, either a shock in oil prices that could slow growth or another terrorist attack, it would certainly, I think, kick off another wave of fiscal spending. I think there are many, many, many more risks to missing that golden [inaudible] than there are potential upside surprises that would help us achieve it.

And finally, on the G-7 finance ministers’ meeting this weekend, you know, the official agenda is debt relief and development. And I think, because [Britain’s Chancellor of the Exchequer] Gordon Brown is chairing it, it will be even more development-focused than usual. You know, as you all know, the sexy stuff, currencies, is always on the sideline rather than on the official agenda, and I think it will be this time, too, because the Chinese will be there and [U.S. Secretary of the Treasury John W.] Snow will be meeting with the Chinese.

QUESTIONER: He’s not going.

QUESTIONER: No.

ROMAN: Pardon?

QUESTIONER: He’s not going.

ROMAN: He said—

QUESTIONER: He’s got a cold.

QUESTIONER: He has a cold.

ROMAN: You’re kidding.

QUESTIONER: Yeah—

QUESTIONER: I think a nasty cold. [Inaudible] Yeah, he’s [inaudible].

QUESTIONER: [Inaudible] the cold. [Laughter]

ROMAN: Well, scrap that. But I will say that one line that I heard that I found very useful, from a senior Treasury official on—in guidance about all this chatter about will the China—will the Chinese revalue, you know, won’t the Chinese revalue, timetables and all of that, is the Treasury official going at the time said, “Nancy, when you think—when you hear discussions about the Chinese revaluing, remember this: the markets are thinking three months, the Treasury Department’s thinking three years, and the Chinese are thinking 30 years.” And I think that is sort of a useful [inaudible] guideline. And with that, I will turn it to Gene.

GENE SPERLING: Well, I was ready to talk more Internet economics, as opposed to Social Security, which I spent a lot of time talking on. But let me actually connect them a little. I was at [the World Economic Forum in] Davos, and so I had a chance to kind of survey much of the thinking. And I think—and [inaudible] you see if you agree or disagree—I think that considering the rate of growth in the world, there was quite a lot of agreement that global imbalances pose rather [inaudible] risk to the global economy, and most of the focus was on the United States, the combination of the current account deficit and the related rising budget deficit and low national savings rate, and what the prospects were for a hard landing. [Harvard President and former Treasury Secretary] Larry Summers was there at one point, always very good with phrases, says it’s a little bit like when you’re waiting for a bus at 4:00, and it gets to be 4:15 and it’s still not there. One explanation is it’ll be there any minute. [Laughter] The other explanation [is] there’s something you just don’t understand has gone—has happened. [Laughter] And I think there’s a lot of people who are concerned that perhaps the bus was still coming around the corner at some point.

There was much scuttlebutt about [Microsoft Chairman] Bill Gates saying at Davos that he was now betting against the U.S. dollar. If you were somebody who is critical of George Bush’s fiscal policy, I would say being at Davos was great for reinforcing your sanity. It was very difficult to find anyone in the international community who disagreed with you on the lack of wisdom or sanity in their fiscal policies. And I think the administration at times suggested that, well, a very high current account deficit or very high trade deficit can be a sign of confidence and growth. And while I think that that can be the case, and of course I argued if I said something different, you could Nexis [search] quickly and know that I said that about the trade deficit when I was in the White House. But I do think it’s worth looking at the composition of the current account deficit. Foreign direct investment [FDI] in 2000 was $321 billion. That was the highest ever. If you wanted to make a case that the current account deficit reflected a strong willingness to invest in the U.S., a long-term confidence, that high level of foreign direct investment, whether that represented a part of the excesses of 2000, perhaps, but you would expect—the fact that foreign direct investment went down to $167 billion in 2001, you might have expected in a recession year, yet it’s now down, in 2003, to just over $39 billion. That isn’t even half of where it was in 1996.

So when you look at the composition of the current account deficit, it does not reflect this great, long-term confidence in the U.S. economy; it reflects central banks often holding U.S. bonds to help particularly China and Japan keep their currencies from devaluing. So I don’t think that many people look at this as a sign—I don’t think there were many people who saw this as a sign of great—of confidence in the U.S. economy. And I think that there was a real hope that there was a new seriousness, somehow, in the Bush administration.

ROMAN: A new seriousness about what?

SPERLING: A new seriousness on fiscal discipline in the Bush administration; that a lot of people seemed to be hanging on these words that maybe they were going to do something serious to cut the deficit in half. And I think they will be woefully disappointed.

Now on Social Security, I went there thinking—related to this issue of the U.S. national savings rate—I went there thinking that perhaps, like in the U.S., you would have some discussion about the notion of borrowing for current—to put money in accounts. Here, you see the leaders of the Bush economic team stressing that, well, you’re just exchanging explicit liabilities for implicit liabilities; it’s a wash because you’re taking down net—you’re taking down government savings, but you’re adding the equivalent amount on private savings. So here, you seem to be forced, because this is what the administration says, to have this discussion. You did not have to have this discussion with anybody at Davos. There was nobody who did not think the notion of running up your national debt as part of your Social Security solution made any sense at all. Of course it doesn’t, when you remember that over the last few years our national savings rate has gone to its lowest level since 1934, when the U.S. actually had a negative savings rate.

Really, the full reason for that has been the deterioration in the fiscal situation. Between ’92 and 2000, our net national savings rate went from 3.1 [percent] to 5.9 [percent], nearly double, on the improvement in government savings to the point of surpluses in paying down debt. So when one is looking, I think when other people are looking at, and I feel like when we are looking at our net national savings rate, to suggest that you’ve taken these huge steps backwards, caused significantly by U.S. fiscal policy and specific legislative choices on the tax cut, so that you’re now at the lowest net national savings rate you’ve been since 1934, I think most people do not consider it a gold standard. That you might be able to make a plausible argument that you’re simply not making it any worse.

You know, one thing [former Treasury] Secretary [Robert] Rubin used to always say, and I found this to be true all eight years and since then, is in the global economy, people do tend to look at Europe in terms of structural adjustment, China and Japan in terms of what they’re doing in terms of restructuring their banking and financial institutions, and the U.S. in terms of its fiscal discipline. And how one is doing in that area does tend to say a lot about the power that country has in demanding changes from other countries and the respect they’re seeing. And the notion that the plan for saving Social Security was to run up trillions in additional national debt, I have to say I could not find a person to engage on the discussion. I could not find a single person who I had to say 20 seconds to, who did not agree that that made no sense at all under the conditions.

Now, I do think there was still this bit of hope that—but, you know, he’s re-elected, he’s said he’s going to cut the deficit in half. Well, you know, I’ve been on the [Capitol] Hill and I’ve been telling the fable, which I call the Hummer and the peanut butter. And it’s the parents—two parents in a family, they’re not in [a] particularly good financial situation, but the father goes out and leases a $125,000 Hummer, a new Porsche Cayenne, and a Mercedes FA-320, and he has an $8,500-a-month—$8,500-a-month lease, now, for his three luxury cars. When he realizes that they’re in a bit of financial trouble in the family, he calls the family together and he holds up a jar of Whole Foods crunchy peanut butter, which sells for $4.49, and he says, “This is what we’re buying. We could be buying Skippy Peanut Butter for $2.45. We could be saving two dollars and four cents.” And, of course, his teenage son says, “Yeah like, Dad, man, but like you just spent like $8,000 on leasing a car.” And the father said, “Hey! Hey! Don’t change the subject, we’re talking about peanut butter.” [Laughter]

I can’t watch President Bush with a straight face talk about you should get rid of all the different accounting, you shouldn’t even worry about whether the U.S. has an I.O.U., which we’ve never defaulted on in—since our history, and are unlikely to default on to our own seniors. But even if you want to take that position, that fungibility has to make you realize that you just, in perpetuity have increased the deficit by about 2 percent of GDP. The tax cut is about 2 percent of GDP in perpetuity. So to now talk about the peanut butter here misses the larger issue.

If we as a country are concerned about our demographic challenge, as most countries are, the goal is for this generation to consume less and save more. That’s what makes sense for us. It’s also what makes sense for reducing the global imbalances in the economy right now. So I do think there is a relation. And I think it’s very—and I think people are internationally—are perplexed, as I am, by the president’s Social Security policy. This is not like the [Senator Daniel Patrick] Moynihan [D-N.Y.] plan, this is not like the Kolbe-Stenholm plans, which did not borrow, but made tough choices to fund individual accounts, and were actually increasing national savings in the short and medium term, not just in the long term.

Now, on the budget, again, I think people are hoping that they’re going to hear the president do some bold things, but let’s just be honest about it. If you take the amount of the budget that is discretionary and not related to security, it is at most $390 billion—at most. If that’s all you have on the table for cutting—$390 billion—now, let’s just remember; let’s just do the numbers here. You have a tax cut that’s probably adding 250-ish billion dollars a year, up to $300 billion a year, and the amount that you’re thinking about cutting, the pool is only $390 billion. Even if you were to cut it 5 percent in real terms, you’re talking about amounts that don’t even compare. You can cut a whole lot of peanut butter before you get near the savings you get from getting rid of one of the luxury cars that you’ve leased.

So I think when the world really takes a look at what—this cutting the deficit in half, when they see Goldman Sachs and others adding the costs of the AMT [alternative minimum tax], adding the cost of the—I mean, imagine what President Bush said last night. He said we’re going to cut spending, make the—in the same sentence—cut spending, eliminate programs, and make the tax cut permanent. Now, not to do Sesame Street, but which one of these isn’t like the other? Which one of these doesn’t belong? Making the tax cut permanent is $1.6 trillion addition. This was in his sentence on fiscal responsibility. So I think it’s going to be very difficult. And I do think that this is very interesting—I’ve gone on, so I’m just going to just touch two issues just so—in case you want to come back to them.

One is, I agree completely with Nancy. I was in London before. I got a chance to talk to Chancellor Brown, I got a chance to talk to his staff. There is no question, both [British Prime Minister Tony] Blair and Brown are heavily focused on their Africa Commission and their Africa report [due in Spring 2005]. They are very, very focused on—they are both very focused on doing something major at the G-7, G-8 on Africa specific, which I think is very positive, because I think Africa is once again becoming the forgotten continent with the focus on the Mideast, terrorism, [and the] tsunami. I think it’s a tremendous thing they’re doing for the world by keeping the focus on where we do have the greatest degree of AIDS, the greatest lack of basic education, and the greatest degree of poverty still in the world.

Now, what did happen at Davos, which was significant, which was to the surprise of everybody, [German Chancellor Gerhard] Schroeder came out in favor of Brown’s International Finance Facility [IFF]. I think that is a critical moment. That, I think, created the critical mass that something major will happen at the G-7/G-8 this year on Africa.

Now what’s going—the interesting question is going to be, even if you have Germany and the U.K., and Italy and France in an IFF, what will countries who don’t believe they can be part of that facility do? Will the U.S. try to do something major with the Millennium Challenge Account? Will Canada find ways? But I think that was very, very significant.

The other issues that were just up there was obviously oil and then China’s currency. And you know, somebody said to me, he said, “You know, what’s great about China at Davos is that every single—half of everybody you meet says they just talked to a Chinese official off the record, and then they divide evenly in what the Chinese official told them.” [Laughter] I was in one meeting where a low-level Chinese official got rather a little too blunt when somebody kind of repeated back what he said. He literally begged the room to not repeat with his name what he had said. So just to say, I’m happy to talk about that more. And on oil, the only point I’d make is—

ROMAN: What did he say? What did he say? [Laughter]

SPERLING: Well, he was—this was a lower-level official who was much more making the case that they were distressed that their measures—that measures they thought would have an easing effect on demand had not been particularly effective, that there was more worry about inflation and speculation. So he was making comments that would have made you think that there was some form of adjustment coming. But as I said, it wasn’t—you know, as you know in our own government, sometimes that lower-level person is speaking the truth, what everybody else is thinking, and he’s just being more candid because he hasn’t been trained, or sometimes it just means he’s out of the loop. [Laughter] And so I don’t know.

And all I’d say on oil, just to close, is just that the people from OPEC [Organization of Petroleum Exporting Countries] there were repeatedly taking great comfort in the fact that—over and over you heard the line, “Well, we’ve had nearly $50 of growth, and everybody here is saying we had one of the—$50 barrel of oil—and everybody’s saying that we’re having,” you know, “We’ve had excellent growth in the world economy this year.” So I don’t think that’s the lesson that the world wanted OPEC to draw from this, but I can promise you, from what they were saying not just privately but publicly, that is what they are stating over and over again. Wanted OPEC to use those comments to make the case that the world can tolerate $50 and over oil per barrel.

QUESTIONER: Per year?

SPERLING: I’m just telling [you] what they—they were saying, that it was at $50 and that this was a very good year. And there was a bit of, you know, kind of quoting other people who were saying this. So—

QUESTIONER: The Russians were saying it, too, naturally. [Laughter]

SPERLING: Yeah. So, oil producers are noting this tension and clearly raising it to try to make their case that they are not threatening the global economy with such high oil prices. Again, I don’t think anybody wanted them to draw that, but they were not being shy in pointing that out repeatedly.

JAGDISH BHAGWATI: All right. Well, I’ll just deal with three issues very quickly: trade, aid, and immigration, since aid came up. I have a slightly different cut on it from Gene has, on the G-7 and so on, and just something to add to the pot. But I think on trade, it’s fairly straightforward in the sense the [World Trade Organization’s (WTO)] Doha Round is clearly going to be the top priority. I think the Democratic Party, at least if I can go by what [former Secretary of Commerce and U.S. Trade Representative] Mickey Kantor was telling me once, was in fact getting less enamored of all these bilaterals [trade agreements], and that’s something which has really come up in a very big way around the world. And our WTO report [“The Future of the WTO], which came out about two weeks ago, I mean, that was a point that got picked up in a big way; whether, in fact, the administration will hold back from pursuing these little things here and there, anybody—I mean, it’s—

SPERLING: They didn’t mention Doha last night, though, did they, at all?

BHAGWATI: No, they didn’t.

ROMAN: No.

BHAGWATI: But I think the administration is committed to it, but I think a lot will depend on how dynamic the new USTR [U.S. Trade Representative] is, because it’s a matter of personal skills and so on.

But I think there’s one thing which I think the U.S. seems to have turned around on, which is on agricultural subsidies, which don’t affect us as much as the Europeans. But I think the Europeans remain a big problem. Like at Davos, [French President Jacques] Chirac comes up and says, you know, on the screen that he’s going to do $10 billion worth of aid as an international pact, and then he says he’s going to—meaning everybody has to sign on to it, obviously, it’s not just a French contribution—and then he attaches to that the Tobin tax [on all trade of currency across borders], which obviously nobody is going to sign on to, so it’s dead on arrival. And if he says it’s going to be done by the French, [inaudible] will cut his throat. And so it’s just a very cynical ploy. Then he said he might, you know, tax aviation fuel. I guess he’s got his Air Force One and doesn’t know what kind of problems airlines are having right now. It’s, again, a very wild and, you know, totally cynical thought.

There is—he said nothing about trade. I mean, that was the missing thing, [laughter] because the French are the ones who oppose basically doing anything. So how much—I mean, I think, ultimately, it’s going to be very important for us to be able to get the Europeans on board, no matter what [European Union Trade Commissioner] Pascal Lamy was saying and [European Commissioner for Agriculture, Rural Development, and Fisheries Franz] Fischler, and so on. So that is something really right in our laps.

The—I think the American—the administration seems to have taken the decision, at least under [former U.S. Secretary of Agriculture] Ann Veneman and [U.S. Trade Representative and Deputy Secretary of State-designate Robert] Zoellick, that we will move. Whether they can move, because we can’t play just by ourselves—there’s no way we can cut subsidies on our own. First, if you cut production subsidies, I mean, that’s for everybody. And therefore, if—they can’t do it in bilaterals. You have to do it multilaterally, obviously.

Two, when it comes to export subsidies, we have a few, nothing on the scale of the Europeans. If you’d remove subsidies, in some—in a bilateral market, say in Brazil, and the Europeans haven’t done that, then you know, your constituents aren’t going to be exactly happy, because you’re really hurting yourself. So it’s—you know, the logic of trade diversion gets turned upside down, because that relates to trade barriers. We create markets for ourselves preferentially when we reduce trade barriers preferentially from bilaterals. But with subsidies, it’s the other way around. So this is why we have to—in the end, if we mean business, we have to go to Doha, to a multilateral system. And this is the biggest challenge. I mean, getting agriculture moving—if we really want to, you know, both—we have comparative advantage and we think it’s good for us. It’s good for parts of Africa, not all of them, and it’s good for the Cairns Group [of 17 agricultural exporting] countries, many of whom are, you know, allies and friends, and are—so I think it is a—it’s something we—that’s got to be the main focus, and I only hope that the new president comes in and doesn’t fritter away his energies in all—doing all these little bilaterals. I think whatever we want to get out of bilaterals by establishing templates—you know, for labor standards, on environmental standards, on capital controls not being allowed, on all sorts of things—have already been accomplished, you know, through little bilaterals, like Chile, Singapore, et cetera.

QUESTIONER: Jagdish, what is your evidence that the administration is more interested in multilateral—

BHAGWATI: No, I—there’s none—

QUESTIONER: You say there is no evidence?

BHAGWATI: None now.

QUESTIONER: Oh. Oh, wishful thinking.

BHAGWATI: I mean, this is [inaudible].

QUESTIONER: Yeah.

BHAGWATI: You know, it wants to walk on two legs.

QUESTIONER: Right.

BHAGWATI: But whether in fact—you know, I mean, at this stage, the top priority has to be this. But the business groups are driving for—I mean, they’re completely indiscriminate between all these different approaches. So I have no—I mean, I’m not saying that they won’t do it. But it’s still baffling. And the basic objective of doing it on the part of several lobbies have been accomplished, because we’ve established templates on a variety of these things. They didn’t get Australia to sign on to additional patent obligations and so on and then abolishing their national service, in effect. But I mean, that was too much to hope for on the part of the lobby.

But I think that is—in the end, Doha is where we will need to go. And I think the president—my interpretation of him is that he, having done a lot of unilateralism and so on, I mean, he can do with a few multilateral triumphs also. And this is an easy one, in a way. And he’s identified with the Doha Round, because Zoellick and Lamy both have—but without Zoellick, it would never have been launched in Doha. And he has sort of nursed it. That’s a good side of Zoellick. So I think it is something where they’re pretty close to getting somewhere, and they’ll be—have to be crazy not to pursue that. So this is what—I think that’s what they’re going to push for.

I think, apropos of Gene’s article [“How to Be a Free Trade Democrate” in Foreign Policy], which has been distributed, I think the main problem we have with keeping our markets open, generally, is precisely having to strengthen our safety net. And I think this comes up both in relation to outsourcing and China. So let me put it this—one is a brown peril. The other is a yellow peril. And you know, people are petrified by both.

Let me take China first. China—there is macroeconomic aspects, also. There are some people, like [Chair of international affairs at Lewis and Clark College] Bob Mandel, who is the deepest on the subject in terms of—you know, being very profound—he thinks the exchange rate is right. You ought to talk to him. You know, I heard him in China. I think he practically convinced everybody on the site that that’s not the route we want to go.

But if you look at the trade balance, for example, world trade balance, it is—imports and exports are more or less [inaudible]. And whatever foreign investment is coming—and it’s going straight into the reserves—so there are some people, like [Council Fellow] Peter Kenen, who argues that in fact if we have excess of savings over investment, and we are investing [inaudible] and through direct foreign investment, the fact that they’re holding these monies is actually not a deflation. I mean, it’s just actually—you know, helps us prevent a deflationary impact.

But that’s—I mean, you know—I would just sort of put it out—it’s not my field. But looking at the trade balance and so on being practically negligible, I think that the—it sort of reminds [me] of Japan in the ’80s, in the sense that it’s a problem of what I call Gulliver in a Lilliputian world. Japan in the ’30s and then in the ’80s was growing so rapidly, and it’s a highly open economy, at least in terms of—Japan was on the export side in a very big way. So you were creating tsunamis for specific sectors. We just could not absorb that without being petrified, like Detroit was worried about Japanese car competition, and so on. We had one-dollar blouses and all sorts of labor-intensive products in the ’30s, which is when the VERs [voluntary export restrictions] actually began. We tried to stop it, you know, directly by telling the Japanese not to export at that point beyond certain amounts.

So what is happening is not—I mean, any time you export something from China, you’re taking away markets for other people. But when you import, you’re creating new markets. But these are not the same markets. And so, when the system is growing very rapidly in the world economy, for specific sectors you get enormous problems. And that feeds into our adjustment thing. It is not a deflation problem. It’s an adjustment problem. And I think what is happening, therefore, is that [the] economy of China and the world economy, where we are growing about 3-1/2 percent, 4 percent, or something, and they’re growing double-digits, very fast, over two decades—that is hard to account—particularly with the high ratio of trade to GNP [gross national product]. So I think that was a problem with Japan, also, in my view.

And then even on the import side, you get the effects, because they used up a lot of materials. And that raises the prices of raw materials. So we have been hearing complaints about people using those materials. So—but I think the net effect is not to worry about China in macroeconomic terms but in sectoral terms exactly along the trade lines and see how do we handle that.

And the same thing with outsourcing with India. It’s not—I mean, India isn’t growing, you know, anywhere as rapidly as China is. But it is locally focused on outsourcing. And I think there—I think we again have an adjustment problem, and I think it’s particularly acute because of an aging society, because there are people being laid off from skilled jobs, not highly skilled—I mean, this is still at the lower levels, answering phone calls and reading radiological charts and so on, in Bangalore as in Boston. There is some R and D [research and development] now beginning and so on, labs being put up in India and so on, but it’s still nowhere on the scale that you think about. So we have a few relatively semi-skilled and unskilled jobs going out.

But if you’re going to look at specific sectors—like I was in Tampa, Florida, the other day, and 10,000 people, they said, have been laid off from answering calls—now that’s a little adjustment problem again. We can’t just say, “Well, everything is dandy otherwise,” because everything is dandy in the sense that, you know, when you look at outsourcing, we’re earning much more, and we’re getting a lot of skilled jobs. I mean, you know, one of my sociologist friends said—[Columbia University’s] Herb Gans—that was a very distinguished professor—he said, “Wait till, you know, somebody starts teaching Economics 101 from Delhi, and you become his TA [teaching assistant] at Columbia.” So first, I teased him back, and I said, “Look, don’t worry. Even as a TA in economics, I’ll earn more money than you as a professor of sociology.” [Laughter] But I said, “Jokes aside,” I said, “your facts are wrong, because they want to hear us from here online, and that’s going on in a massive way. Nobody here wants to hear anybody from there.” And you know—and so it’s really the—we are the ones who opened up the outsourcing market at the GATT [General Agreement on Tariffs and Trade]—in the GATTs and so on.

Every service, we have got high-value jobs happening. We’re earning huge amounts. And for [John] Kerry to have gone down that road was really a major mistake. And after that, he couldn’t talk about trade, because he’s—you know, having talked about [American Revolutionary War military leader] Benedict Arnold—not having been brought up in this country, I thought it must be an obscure English poet, a distant cousin of [Victorian poet] Matthew Arnold, and you know, since Bush hadn’t cut his classes at Yale, he probably had sat in on an English lit class. Then I discovered he was, you know, a neighbor of mine in Lexington, Mass., 200 years ago [laughter] and a big traitor.

But I think the—again, the problem is one of being able to pull these guys in the service sector into our adjustment assistance programs. So everything—I think there are skilled jobs coming up for people who are actually losing skilled jobs. True, they’ll go from 60 [thousand dollars], 70,000 [dollars], to bagging groceries in Wal-Mart, you know, or stocking shelves at 15,000 [dollars]. But there are other jobs available and coming up continuously in the skills sector. So—but the point is, how do you get them to train for the new skilled jobs? A radiologist loses his job, he can go into intensive radiology; that is possible. But that may get outsourced, right?—due to technology. Then you can go into obesity, right? There’s going to be plenty of that around—all sorts of things—diabetes and all sorts—there’s a variety of new jobs opening up for doctors, you know, including cosmetic surgery, and so on, so forth. You know, the population is aging. But the down side of aging is how do you get people who are trained in specific skills which are going out to train for something else? Like if I was—somebody tells me, “Look, you’ve lost your job as an economist, but I have a job for theoretical physicist,” that will only deepen my anguish, right? [Laughter] I mean, it doesn’t help me at all.

So I think we’ve got to work on this problem, because just saying we need adjustment assistance is not going to do it. I mean, we have to bring in the professional bodies, like radiologists [who] are losing their jobs, you know, what is the next closest to it? Right? How do we work with professional societies to be able to work out this thing, and so on. So, we’ve got to get those guys who are bumped down to be able to bump up again, and that’s not going to happen very easily in an aging society. So we have to really think about that in a very serious way. So anyway, that’s on the trade side.

On the aid side, I just want to put in a couple of thoughts, because it’s impossible to argue against bigger numbers of aid without appearing ghoulish, right? And so when people say, look, I’m going to put so much in, and somebody else is going to put even more—I mean, you know, you saw this in [the] tsunami, which probably can be assured, I’m not so sure. But, you know, it ballooned up to $6 billion pledges.

Now Gordon Brown and Blair are fighting it out, each one wanting to do more than the other. And now Schroeder has joined. And we have the Millennium thing we are doubling aid. Now, the thing about Africa, just focusing on Africa—and I think this is where I think the administration will have to take a view, and I think all of us, which is that can this be absorbed? Supposing we were to double the aid flows, right? And that is supposed to be .7 percent of GNP, and one thing I wonder about is that—I mean, in a way, .7 percent is—I mean, if you really think you want to increase aid flows, why settle for .7? Because the original target was 1 percent? And if you go back to the Catholic Church, [the] tithe is 10 percent, right? We got 1 percent because [British development economist Sir] Arthur Lewis put in at the end of the war for [inaudible] and the Labour Party platform. And I won’t tell you the story about it. But by that standard, if you say, “Look at some commitment on my part to be altruistic and I don’t care about absorption capacity, efficiency, et cetera, et cetera,” then why not 1 percent, the original target?

So actually, these targets are extremely, you know, under-ambitious and under-achieving. And actually, you can attack them from the other side, saying you should raise them if you just want to make pledges and if you want to say, “Look, I’m going to do something for the rest of the world. So in a way, .7 itself is a bit of a letdown, and that came in a little bit later down the road in the history of aid-giving simply because people start counting foreign investment, et cetera, into it. And so they said .7 percent would be aid flows, and then, you know, the rest of the 1 percent would [be] foreign investment. But it is actually already cutting it down.

And so I think my view is that every Africanist I’ve talked to—because I’m now on a advisory group to [U.N. Secretary General] Kofi Annan on Africa, so that means looking at this, among other things. No Africanist really believes it can be absorbed, you know, this doubling. And that in fact, you see, my worry is that now that we’ve really gotten into this game—and I’m delighted that we’ve gotten into this game where everybody wants it to work, at least in principle, whether that’s [inaudible] or not, I don’t know. We’re likely to be wasting it if we spend it in Africa, I mean if we start spending huge sums right away. So if you build up to it, this is something else—this is [an] absorptive-capacity problem.

But what we can spend for Africa here is much greater. Like you can go in for, you know, subsidizing vaccines. I have a proposal with Kofi Annan’s group that we should have maybe a “gray” Peace Corps, because lots of people, again, are retiring, and so on, and they are altruistic; you’ll see them working on environment and all sorts of things. Why not give them two years, you know, in Zambia or wherever, you know, in Africa, because they lack every conceivable skill at the moment. The whole problem with skills is a huge one. And, you know—so I—but here we can spend literally billions right away, if we want to, doing a number of things for Africa.

So I think we need to distinguish between—first look at these enormous numbers and say, look, I mean, let’s be sensible, because just sort of increasing aid flows is not really a very sensible thing, and maybe [the] Bush administration might be right after all. I mean, it’s wrong on many things, but here maybe building up might be a good idea. And two, to spend monies here for Africa in all sorts of ways—there are a variety of things one can think of which can absorb large sums of money, but the absorption capacities there might be [inaudible].

Finally, on immigration, and I’ll just—I think that is going to come up, I think. Bush is quite determined in many areas in the wrong way [laughter], and one wishes he wasn’t, but here I think he is quite committed and he has really, you know, come up with it repeatedly. And I think he—his basic approach, to me, is very sensible, which is to say in the last act—was it ’86 or ’88, since I do both trade and immigration [laughter] and there are so many legislations I keep forgetting—I think it’s ’86, the last IRCA [Immigration Reform and Control Act]—and there we dealt with the problem of illegal immigration. And at that time, the unions and everybody thought that adding draconian methods would cut off the inflow, and so the unions would—naturally didn’t want competition from the illegals, and mainly because also they’re underground, right? So they had a twofold approach. One was to say amnesty that takes care of the stock of illegals, and then if you are very draconian at the border, in internal enforcement and employer sanctions, the trinity of enforcement measures, we could just stop the inflow, so—the flow annually. So we get rid of illegals and, you know, then we just have legal immigration.

Well, that hasn’t worked for a variety of reasons. [Laughter] So finally, even the unions have decided, not just President Bush [laughter] that this is not the way to—that we have to accept the fact that people will keep coming in. There’s no way you’re going to be able to stop them. I mean, that’s the background to it.

So how do we do it, actually make it—I mean, you know, make it really real? And the idea is to have much more legal immigration, which will then hopefully cut into the number of people trying to, you know, come in illegally. And that itself needs to be probed; it’s not automatic. And that is—and so the unions are now supporters of—you know, of both amnesty, again, and of having a substantial legal program. The problem with that, and then you know, that is tied into giving them some attempt at getting citizenship also down the road, which creates problems which are unique to [the] United States.

Like Spain just legalized 800,000 people, but that’s peanuts. I mean, you know, we are dealing with millions and millions, and we are also a country of immigration where we’ve got legal people coming in who are queued up for it. So then the problem of horizontal equity arises: how come somebody who’s gotten in illegally, why should he be able to get into our queue, no matter where, at all, you know, except at the back of 10 million people who are already waiting?

Ours are complex problems, but at least Bush is trying to address them. [Laughter] And I think here I’m afraid—I don’t know what the full Democratic position on this is, but I think it has to be much more with it. But whether the Republicans will—you know, there are many Republicans who are opposed to all this also, to the Bush proposals.

ROMAN: Oh, yeah. Most.

BHAGWATI: And there are some—you know, some of the traditional opponents of such programs like the unions on the Democratic side who have come around. So I don’t know exactly how the politics will work out, but it’s definitely going to be there, and I think it’s a very important thing for us to address, because this is a country of immigrants and I think we’ve got to be able to—this is a very big issue. So I see that as having a role to play in the next four years, and this is what, I mean, you know, some of us are working on at the CFR also on this immigration area. Thank you.

SPERLING: I have to say, first of all, obviously on what you’re saying about the need for a new compact, obviously, is—I’ve written in a few places and I have a book coming out on. I think we do need a new consensus on globalization, the increasing dislocation impacts, and that’s something I am working on and writing on. But I have to, I guess, strenuously object to some of the things that you just said.

I really think it is very irresponsible to make blanket assumptions or blanket assertions about absorption capacity in Africa when you are dealing with hundreds of thousands, maybe millions of people’s lives on the line. I think it is important to be quite precise and to look. Now at this moment, the fear that the world is going to spend too much on Africa or just throwing money in, let’s have that problem for a while. Right now we have a tiny percentage getting AIDS treatment. The amount—I run the Center for Universal Education here. The amount of money that goes to Africa for education is pathetically little. And let me tell you exactly how it works. I think the right way to think of this is not—is that what the world needs to do is make a clear, contingent commitment to Africa. Now that’s—what this means is one needs to create the certainty that if there are the right reforms and the right room, there is a certainty of money available.

Let me tell you how it works in education. Let me tell you exactly what’s happening right now. Everybody says we ought to get rid of fees, we ought to get universal education. Let me just tell you how bad it is. In Africa right now, more than half of girls never graduate from primary school. In rural parts, maybe 70 percent of girls do not even graduate from primary schools. Our country was beside itself seeing the Taliban prevent girls in Afghanistan from going to school. Very few people ever mention that they weren’t really going to school in Afghanistan before the Taliban either, but the fact is this is a silent crisis in the developing world. It’s a silent crisis because you don’t ever see people dying from lack of education, but they do die from lack of education all the time when you look at what the evidence shows.

Now, what happens when a country tries to do the right thing? What happens when a country tries to do the right thing—let’s say Tanzania, Uganda, I think perhaps Ethiopia now—what happens is that when they get rid of fees—let’s look at Kenya right now. When they eliminate fees and commit to universal education, what we’ve seen now is that African children and African parents, like most other people, respond to the cost-benefit analysis. When the costs go down, they flow in. In Tanzania, Uganda, and Kenya, over a million children in each country came into school overnight when fees were removed. But what happens then? Quality goes down, class sizes go way up. Now what happens is the donors then say, oh, it’s really interesting what you’re doing, but of course everybody says unless you get more teachers, there is no way that you can deal with quality or class size.

So you get dedicated education ministers and you get dedicated education reformers and you get some donors who provide a little money, and what happens? The finance ministers say, “If I’m going to hire 10,000 new teachers, that is a recurrent long-term cost. I am not going to hire 10,000“—this is what happened in Kenya. The World Bank gives them $50 million over three years, but they can’t start hiring new teachers. Why? Because the finance minister, understandably, knows what any of us who have done budgets knows; you don’t use what’s called a “one-off” to pay for a recurrent stream. So what happens is they never move forward. It is all about money for recurrent costs in teacher salaries that is preventing Africa from reaching universal basic education.

Now right now we all look at Pakistan and we say, “Geez, why didn’t we do more to help them with public education before some of these more fundamentalist madrassas came up?” Right now we have that kind of choice in Kenya. Kenya can go towards democracy, towards universal education, or it can continue to be on the al Qaeda watch list—as it’s been, from the State Department. These are choices we make now.

Now I’m totally in the hard-head/soft-heart notion on this. I think if a country cannot ensure that they’ve got transparency, decentralization, accountability, if they’re not taking the steps to get rid of ghost teachers, we shouldn’t give them the funds. But the important thing to understand is, without the certainty that if they do things right there will be support, nobody ever goes forward. And while we talk abstractly about absorption capacity, hundreds and hundreds of thousands of African rural girls and boys do not go to school, and therefore will have less income, less hope, less empowerment, more infant mortality, more maternal mortality, more AIDS contagion.

So I have to say that I would love to get to the point where we could talk about this. Right now there’s very, very little. The United States spends on education around the world what we spend on building about 15 high schools in the United States. The Millennium Challenge Account has still not had a penny go out. And Gordon Brown and Tony Blair and [Canadian Prime Minister] Paul Martin, they all have to still come up with hard dollars, hard euros, hard pounds that are given to Africa. That is still difficult. So we’ve got a long way to go, I think, and I think there is so much that can be done on Malaria, on AIDS and education, on things that people know that work there that we should be looking very strongly at what we can do, and I think be very cautious about making blanket statements that would deter more fund to a part of the world where there is the greatest degree of poverty and I think enormous potential as well.

BHAGWATI: I must disagree with that. I mean, I didn’t make any blanket statements. I’ve studied development for 40 years before he turned to it. [Laughter] I mean, it’s just nonsense. I mean, we are looking in the committee at all the details, you see. So it’s just whether you can absorb doubling of aid. And it seems to me that this renaissance in aid which we are getting could easily turn into a disaster, into something counterproductive, if money goes away—look, give to Nigeria, which is supposedly the most, you know, corrupt system in the world today—

SPERLING: I’m not arguing.

BHAGWATI: —and that could wind up in Miami in the sun—

SPERLING: I’m not arguing. I said I think you should make—

ROMAN: You know what? Why don’t we see if we can—

BHAGWATI: No. I think, you know, there’s no disagreement.

ROMAN: I think we need to cut this debate because—if the questions want to delve back into this—we can take the whole rest of what, you know, now 30 minutes we have left for questions, but let’s see where we want the questions to go.

QUESTIONER: Mark Drajem from Bloomberg. Just two questions. One is on trade adjustment. That TAA [trade adjustment assistance], I think most lawmakers and most people in the U.S. say, hasn’t lived up to its promise. In fact, most people aren’t even tapping it. Both of you have mentioned that you need to do more on adjustment side, and yet you have this program out there for adjustment and it’s not even being utilized to what it could be. How do you make that work? How do you make those changes? And then on China and its currency, the thing I don’t understand is, if China is accumulating reserves, how can its trade be in balance? Are those two in contrast? I mean, you said China’s exports and imports are balanced, and yet it’s accumulating billions and billions of reserves.

BHAGWATI: Well, that’s direct investment flows, which are—

QUESTIONER: Outside of trade.

BHAGWATI: That’s what it is. I mean, that’s balanced against it. So if that’s autonomous, and then the accommodating transaction is building up balances—you know, their assets.

And on the adjustment thing, I mean, the fact that it’s not utilized may mean that people don’t want to use it, but on the other hand, there’s a great deal of fear in the system of international trade and openness, and I think you have to worry about it. I mean, this is one country where—I think it’s a lack of an adequate safety net, which makes everybody worried like mad. In a way, what is astonishing is, I mean, we are a hyperpower, and we talk about free trade, but every time we go and trade with poorer countries, we just become terrified and we want to sort of close the thing down.

And I think my worry—I mean, again, Gene might get mad at me, but, I mean, whereas Tony Blair has managed to get around this problem as far as the unions are concerned, and of course they’ve got a welfare system which really takes care, at least as of now, in a much better way, of people who might be displaced. I mean, at our end, the unions have steadily gotten more and more influential in the Democratic Party, so the Democratic Party is itself being captured in a very big way by people who are fearful of trade. And I think the only way to get around that fear is to respond to it, is to build up a safety net, because without that, you know, I don’t see how this party will ever get anywhere as far as trade is concerned, because it becomes steadily more protectionist. I mean, not that Kerry wants—is a protectionist, but he’ll be left with no option, and he was left with no option.

SPERLING: Let me just say on the adjustment, I think there’s the incremental steps and then there’s where I think we need to go eventually, which is a much bolder re-haul. On the incremental steps, you can move more toward secondary workers and services. You can look more towards a trade adjustment assistance model as opposed to dislocated workers.

But here’s what gets me about our whole system. Our whole system is that, when you see a community going down, we have two policy tools: devastation and protectionism. We cannot—as the pace of globalization changes, as the increase in number of jobs become contestable, there’s no question to me that there will be greater dislocation as part of more normal American life. And I think what will happen is you will start to see a greater constituency being built because people now know that it’s not just the textile workers or steelworkers, but a large amount of Americans will be vulnerable to dislocation. And I think that it’s going to mean thinking broader. When I walk down the halls of Congress and have to meet a 15-year veteran of the United States Congress and explain to them the difference between trade adjustment assistance and dislocated worker training—I’m not making fun of them—I bet there’s not 150 people in Washington who know what the difference is.

Now you’re talking about somebody who’s watching their entire life threatened, who now is seeing their town spiraling down. I think we need more preemptive strategies. I think that it is true that we cannot pick winners in our economy. We do not know what the next great industry is going to be, where the next new jobs are. It is not true that we have no idea who’s going to be hurt over the next 10, 15 years. We need to have more policies that give communities and people chances to adjust before the devastation comes, because if you don’t give that choice, then you look across and have to ask, if you’re the—you know, you can kind of mock the union leader or the congressman from that district, but you know what? They’re the ones who have to go to that town hall meeting and tell people their jobs are lost. And not a lot of us would like to have to go there and discuss the theory of comparative advantage to a community that’s cycling down.

Now, I do not believe protection is the answer. I think protection will make things worse for us, worse for jobs. But I think we do need to build a framework where dislocation, particularly for communities concentrated by job loss, is not as devastating as it is now. And I think you need a vision where it is a much simpler, easier, more reliable mechanism, where services are more coordinated and they’re broader. And so in other words, I believe the new consensus that you need in American public life is you need progressives more accepting of open markets and globalization and the pace of change, and conservatives more accepting that you’re going to need a stronger government role in helping people invest in themselves, get new opportunities and adjust, if there’s going to be acceptance and we’re going to truly embrace the economy we face.

QUESTIONER: Hey, Gene, I wonder—

ROMAN: Wait. We had a question right here, and then we’ll go down to the end of the table.

QUESTIONER: I just wanted to just go back to aid, since it’s going to be a big feature of the weekend meetings. On aid and absorptive capacity, is part of the issue that there are other parts of the world which could absorb aid flows more readily than Africa? Secondly, just on the consequences of potentially trying to channel more aid to the African region that might easily be absorbed, how you would see the consequences, what the problem would be in, as Gene said, making the effort to increase those flows?

BHAGWATI: Well, I mean, Africa is a central priority for development because countries like India, China, Brazil, I mean, they can take care of themselves, in my opinion, and they should not be a top priority for development assistance, and so on. If they’re not doing well, it’s their own fault. I mean, they have resources, they have people, they can go and borrow in the international market. So I’m en