JOYCE CHANG: Well, good morning, everyone. If I could get your attention, please -- good morning. It's a pleasure to be here.
I'm Joyce Chang, and I run J.P. Morgan's global emerging markets and global credit research teams. Welcome to today's Council on Foreign Relations meeting on "How Should the United States Address its Chinese Trade Imbalance?" This meeting is part of the McKinsey Executive Roundtable Series in International Economics.
A couple of ground rules. Please turn off, not just put on vibrate, your cell phones, BlackBerries and all wireless devices to avoid interference with the sound system. I'd like to remind everybody today that the meetings are on the record.
And it's my pleasure and honor to introduce three of the leading academics and industry experts covering China today: Eswar Prasad, who is the Nandlal Tolani senior professor of trade policy at Cornell University and former head of the China Division at the International Monetary Fund; Shang-Jin Wei, who is the N.T. Wang professor of Chinese business and economy at Columbia University and former head of the Trade and Investment Division of the International Monetary Fund; and Peter Schiff, who is the president and chief global strategist for the -- Euro Pacific Capital.
And so China's role in the global economy continues to increase, and its strong performance through the global financial crisis has become one of the primary drivers of global growth. China accounts for only 10 percent of global GDP, but its contribution to global growth last year was about 30 percent, compared to only 24 percent from the United States and 13 percent from the euro area. China's now the second-largest economy in the world, the second-largest consumer of oil.
The policy risks, though, in 2011, is more of a concern. China's leaders are intent on achieving a soft landing after a period of extraordinary fiscal stimulus, which we estimate was a total of 7 percent of GDP and credit expansion. And in a recently released five- year plan, the target is to bring real GDP growth down to an average of 7 percent, you know, well below the average of 10 percent that has occurred over the last few years, and shift the growth engine towards domestic demand.
Worries about inflation have surfaced recently, which have damaged market sentiment more broadly in emerging markets. And we see the policy mixture of hiked rates; they've increased reserve requirements.
So we have a lot to talk about in today's panel. And the first question I'd like to throw out to our panelists is, U.S. policymakers have argued that China's currency is substantially undervalued and that the pace of currency flexibility must be accelerated. You know, how undervalued is the Chinese currency? You know, will the Chinese decide to use their currency as a policy tool to address the concerns about rising inflation and over-saving?
I'd like to start with you, Eswar, and get your views on this topic.
ESWAR PRASAD: It's an interesting question to start with, and actually, I think it's the wrong question to think about whether the currency is underlying it, because ultimately what one cares about is how effectively monetary policy works. And this is where currency policy becomes very important, because, of course, if you are trying to manage your exchange rate in nominal terms against the U.S. dollar, as the Chinese are, it puts you in a (conundrum ?) in terms of monetary policy.
So the big question is really whether the Chinese are going to get more effective monetary policy. Now, given China's productivity growth relative to its trading partners, including the U.S., it's very likely the currency will appreciate. But again, this is conditional on a lot of things, including the capital account being as close as it is right now. If in fact the currency is made completely convertible with the capital account becoming fully open, it's far from obvious that the currency will immediately jump. After all, you have Chinese households who put a lot of money in the banking system, where they're getting negative real rates of return.
It's (not ?) obvious that for diversification purposes, you won't have outflows. If you have more outflows, in the short run, those could alter the dynamics of productivity. And in fact, it's again very, very difficult to tell what the quote, unquote, "equilibrium exchange rate" is if such a concept really has strong economic meaning.
But the bigger problem is what the nominal exchange-rate management implies for both Chinese domestic micromanagement as well as the world economy. And there, there are certainly concerns, because in the short run, Chinese foreign-exchange intervention -- that has significant implications because it means that they are building up large stocks of foreign-exchange reserves and giving the U.S. a lot more rope to hang itself with, which we are duly obliging.
And that, I think, is the real concern right now: that we're simply going back to the sort of situation we had back in 2007, 2008, with the U.S. running large current-account deficits, China and other emerging markets running current-account surpluses. And of course a problem is that many of us macroeconomists were concerned about the dollar crisis that could result in global macroeconomic imbalances. I think we may be setting the stage for that again, but with a much bigger overhang of public debt and other problems as we come out of this global financial crisis.
So I think in that sense it ultimately does have implications for the future of the global macroeconomy.
CHANG: Shang-Jin, let me turn to you. Do you see the Chinese keeping with the current policies, or do you see any signs of a shift? Some would argue that the global imbalances, as Eswar has pointed out, have only become more acute because of this global financial crisis.
So, you know, do you see the Chinese continue at the same exchange-rate policy? We often hear that the Chinese, you know, understand the U.S. objectives, but it's the time frame that they disagree on.
SHANG-JIN WEI: To answer that question, it is important to reflect on your first question about the extent of Chinese currency evaluation. Now, the notion that Chinese currency is substantially undervalued is repeated so often that one thinks it's self-evident.
In fact, the scientific -- you know, the case for this is far from clear, that in -- you know, there are -- once one takes into account structural fractures underlying Chinese saving -- (inaudible) -- balance, my research suggests that, in fact, the extent of undervaluation that can be attributed to currency policy is quite modest. I estimate it to be somewhere on the order of 3 to 8 percent, rather than 30 to 50 percent that people think.
Now, by structural factors underlying savings, we will often think about, you know, social safety net and so on, rising income uncertainty.
Now, by structural factors underlying savings, you know, one often thinks about, you know, a social safety net and so on -- rising income uncertainty. Now, these are part of the story. And these are also something that people often -- you know, often repeat. But they actually turn out to be not the whole story and not even the most important part of the story.
I -- what my research out of the last few years identified were not structural factors. That's very important for understanding Chinese current-account -- (inaudible) -- pattern and exchange-rate pattern. And that is -- that factor is the rising sex ratio imbalance that China is facing. This might sound surprising to some of you if it is the first time you have heard about this.
China is facing an increasing relative shortage of brides, relative surplus of men. And this factor -- you know, the first -- (inaudible) -- factors, you know, the -- in a -- in a normal society like the U.S., the ratio of men to women, marital age cohort is supposed to be 1 to 1. Chinese ratio is about 1.15 to 1, 1.15 men to 1, which means roughly one out of nine men, young men, cannot get married, relatively speaking. And this situation is getting worse -- getting worse over time.
This factor -- this factor is not something that economists, U.S. Treasury officials, IMF, normally think about -- simultaneously boosts household savings and corporate savings so much so that I think it accounts for roughly half of the recent rise in Chinese current account surplus.
Why does it raise household savings? Well, assuming most men do want to get married, most parents with sons want their sons to get married, facing the declining prospects for their son to find a -- find a wife, they're going to beat the experts; they're going to ask themselves, what can I do to make sure that my son will be considered relatively attractive in the marriage market? If being wealthy is one way to do this, raising savings rate is one -- you know, one way a household may think about doing this.
And my research documents that this is a very clear pattern in the data that is, in regions with more (scaled ?) sex ratio, parents with a son substantially raise their savings rate and otherwise the case.
And across regions, in provinces with high sex ratio, the province-wide saving investment imbalance is greater in China. So therefore, for the country as a whole, there's a big part of the household -- high household savings rate in recent years. The rising sex ratio is a recent phenomenon, hence the rising household savings is a recent phenomenon, starting from 2003 or so.
Why does the rate raise corporate savings? Well, many people I think mistakenly thought that China has high corporate savings; they thought the corporate -- high corporate savings is due to a combination of state-owned firm -- (word inaudible) -- state-owned firms and favorable, you know -- (inaudible) -- commodity price -- (inaudible) -- that make state-owned firms (tend to really ?) have large windfall profits. They don't have to pay dividends, therefore you have high corporate savings, you know. I've read investment banks, you know -- (inaudible) -- opinion leaders write about this. It's (not ?) to be very relatively small -- (inaudible) -- corporate savings.
When you look at firm-level data, it's very clear that private- owned firms in the same industry save more than state-owned firms. Why do private-owned firms save? Because they (freeze ?) financial constraint. If they have growth opportunities, they cannot get money from the financial market; they actually have to rely off their savings.
What does sex ratio have to do with this? Well, in regions, data clearly shows that local entrepreneurship is strongly associated with local sex (imbalance ?) -- same reason; for the same reason that in regions with very strong man-to-woman imbalance, man -- their parents may be desperate to raise savings to raise their attractiveness in marriage market. They also become more risk-loving, more willing to take risks, be entrepreneurial and do a variety of other things to make themselves wealthy.
And those are the regions where private sector tend to grow faster, and there's a greater need by private entrepreneurs to have -- to have -- (inaudible) -- savings. So, therefore, data suggests this factor -- you know, sort of it's a sector that's normally outside macroeconomist thinking -- simultaneously raise corporate savings and household savings, and collectively they account for roughly half of the increase in household savings.
What does it have to do with this question about exchange-rate policy? Well, this is -- you know, to the extent -- these are the fundamental structural factors underlying China's high savings pattern and current account surplus, you can do all you want on exchange rates. The exchange -- the effect -- and I think both Eswar and I can agree -- I think it is in China's interests to make exchange rate more flexible. But by itself, it will not do very much to reduce Chinese account -- current-account surplus. It will not do very much to reduce U.S. current-account deficit.
CHANG: Yes. And so, Peter, let me turn to you. So we have, you know, very high corporate and household savings in China; you know, rising foreign-exchange reserves; and in the U.S., a rising fiscal deficit.
So how do you see this, you know, playing out, and over what time frame? I mean, how sustainable is the U.S. fiscal deficit, you know, at the current level? And what becomes the catalyst for current policy to shift?
PETER SCHIFF: Well, it's not sustainable at all, and, you know, maybe it won't even be sustained until the end of this meeting. I don't know, but -- (laughter) --
SCHIFF: You know, the Chinese currency is clearly substantially -- substantially -- undervalued. How undervalued it is we don't know yet. But we know that the Chinese monetary authorities go to great length to prevent their currency from rising. And that is the source of their economic problems. The U.S. has been the principal beneficiary of that policy, although ultimately we're going to pay a huge price for that benefit.
But what's happened over the years is the Chinese have produced a lot more, yet the Chinese people have not been able to reap the full rewards of their productivity because of the monetary policy in China, which transfers a lot of purchasing power that otherwise would have belonged to the Chinese to Americans.
Now, for years, the amount of inflation that China had to create to prop up the dollar -- and by inflation I mean printing their own currency, the RMB -- you have two forces that act on prices. You have growing economies, which produce more output, which tend to push prices down, and growing money supplies, which tend to push prices up.
So in China, because of all the increased productivity, the Chinese were able to print a lot of money without prices rising. Of course, it prevented prices from falling, which should have happened and which would have lifted the real value of Chinese wages and benefited everybody in China, but instead that gain of purchasing power was transferred to Americans. And Americans got to enjoy greater consumption. We got to produce (sic) the goods that the Chinese made without having to pay for them, because we just printed money.
Well, what's happened is we've recently really turned up the heat on that. The amount of money that we're now printing since the financial crisis of 2008 and since QE2, we are now printing so much money and shipping it over to China that China now has to print so much more of its own currency, that the money supply is now growing so rapidly that it is overwhelming the productivity of the Chinese economy and so prices are now really rising for the Chinese.
And this, I think, is what is going to accelerate the realization on the part of China that they've made a very bad decision, that the source of their economic problems is their currency pegged to the U.S. dollar. And it has to end. And I think the Chinese are trying to prepare for an exit from its U.S. dollar policy. They have certainly shortened up on their maturities dramatically and reduced their purchases of U.S. Treasuries.
The significant factor of the shortening maturity is, if China were to own a lot of 10-year or 30-year government bonds, the only way it could get out of those bonds would be to sell them on the market.
The significant factor of the shorting maturity is if China were to own a lot of 10-year or 30-year government bonds, the only way it could get out of those bonds would be to sell them on the market. And of course, if the Chinese try to dump their bonds, our Treasury prices would plunge, and maybe they'd only get 60 cents, 50 cents on the dollar, 40 cents on the dollar.
But if they have short maturities, they don't have to sell anything. They simply allow their bonds to mature and the Treasury has to pay back the money. And, you know, I think, obviously, when that happens, the Federal Reserve is just simply going to monetize the Chinese holdings, because, you know, they're just not going to let -- the Fed is not going to let bond prices collapse and interest rates soar.
And when that happens, of course, all of the inflation that we have been exporting to China stays in America. And I think the Chinese economy will benefit dramatically from this development. I think you will see a big decline in the price structure in China, which will mean that you will have all the domestic demand. The reason that you don't have more domestic consumption is because their currency is too -- is too low. The way you increase domestic consumption is through lower prices. And a higher exchange rate brings down prices.
And, you know, what the Chinese are doing now -- higher interest rates, price controls -- none of that will work. I mean, they're not going to stop the inflation in China until they stop -- until they stop creating inflation. And they can't stop creating inflation until they stop printing money, until they stop buying Treasurys, until they stop buying dollars.
What that means for America, of course, is that we will have finally hung ourselves with all the rope that the Chinese gave us, because then we are going to have to operate without that huge subsidy. And that's what it is. The reason America can live beyond its means is because the Chinese live beneath their means. And that is going to stop. And then we're going to have to make a real choice, because when the Chinese are gone -- and the rest of the emerging markets will follow, because once the Chinese RMB goes up, that's going to take the pressure off everyone in Southeast Asia. They're not going to be buying dollars anymore either.
Their currencies are going to rise against the dollar.
And so now we're going to have to make some very difficult decisions here, because we're going to realize that we -- you know, we have nobody to sell our bonds to, and all the money that we're printing isn't going to be buying anything.
The reason that we can import so much stuff right now is because we can export our dollars in exchange for all these real products. But we won't be able to do that anymore when China de-pegs and the rest of the world allows their currencies to rise. Americans are only going to be able to import to the extent that they can export to pay for it. And if we want to borrow money, we're going to have to find an American who has the savings who is willing to loan it.
And so that means interest rates go way up in the U.S., consumer prices go way up, and we're going to have to deal with our deficits right now, not years into the future, but serious cuts in our -- in government spending.
And we're really going to have to look to the source of our economic problems, which is an enormous federal government that has taxed and regulated our country and destroyed our competitiveness and our productivity. So we're going to have to totally reevaluate that. Because if we don't become productive or if we don't find ways to reindustrialize and start producing again, it's going to be very difficult for Americans in the future, because we're just not going to have all the consumer products that we have become accustomed to.
CHANG: Well, let's probe on this topic further with the other panelists. So some would argue that you -- that China and the U.S., it's a marriage, that the large holdings of dollars for China -- that you're stopping the purchase of U.S. Treasurys, lending of the dollar, that's mutually assured destruction.
Do you see really a shift away from the dollar, that -- do you see the demand for Treasurys being that easy to shift? Over what time frame for that -- could that occur? And, you know, how quickly do you see the internationalization of the renminbi? We've seen some steps taken recently. Renminbi has become a settlement currency.
There's been liberalization of renminbi deposits in Hong Kong. There's also been renminbi-denominated issues as well. But, you know, looking at Peter's scenario, how do you see this playing out with respect to China's holdings of dollars?
PRASAD: So I think China would dearly like to dissolve its marriage with the U.S. The problem is that, as Shang-Jin pointed out, there is a gender imbalance, although I hear that in New York it goes the other way. But if you think about other partners of China to tango, there aren't many around. And this is a serious concern.
I think both Peter and Shang-Jin have pointed out that there is really no good argument from the Chinese point of view other than the very short-run argument in terms of preserving export growth and, therefore, jobs, for China to continue with its currency policy.
It's distorting the economy in a variety of ways, not giving the Chinese households the full benefits of the enormous growth they've been enjoying recently. But it is what it is and China is accumulating maximum amounts of foreign-exchange reserves, about $450 billion last year and the year before that as well.
And if China continues with its currency policy, it is going to involve pretty significant intervention, especially because all indications are that the dollar ought to be falling, for the reasons Peter touched upon: the enormous deficits we're building up, the very loose monetary policy here.
So the dollar should, by all rights, be depreciating. But, of course, we have seen that the dollar still remains the ultimate safe- haven currency. You have turmoil in the Middle East, you have turmoil anywhere in the world, money flows into the dollar. You have turmoil in the U.S., money flows into the dollar, paradoxically enough.
SCHIFF: Not this time.
PRASAD: This time a little less. But if there was serious turmoil, I think this (scenario ?) might happen. Now, there could be a tipping point when there is a shift away from the dollar.
But I think the one big unanswered question on the table, which is what keeps the dollar where it is, and which I think points to a very fragile equilibrium, is this question, if not the dollar, then what? And I don't think we have a conclusive answer or a persuasive answer to that question.
So if you think about the Chinese accumulation of foreign- exchange reserves, it's $450 billion a year.
Where can they put this sort of money? We're learning that the Eurobond market is a very fractured market. As we've learned recently, Greek bonds are not quite the same thing as bonds. So thinking about the Eurobond market as a collective is not quite working. Japan is a pretty big bond market, but again, the Japanese economy isn't doing too great, and it cannot absorb this amount of inflows.
So the reality is that if you look at the sheer size of -- and in terms of debt and liquidity, the U.S. bond market still dominates. So I think China is doing what it can. And in fact, it's encouraging outflows in order to offset some of the pressure in inflows. They've allowed exporters to retain more of their earnings abroad. They're encouraging their corporates and their banks to take money out.
But this is not quite enough to offset the amount of capital that is flowing in, partly because of the trade surplus, but also because China still remains a very important growth story. And in the short run, all indications are that if the currency is allowed to move, it is going to appreciate.
So if you put all of that together, it's going to be very difficult for the Chinese to get away from the -- (inaudible). But I think what the Chinese are trying to do is move as they always have, in relatively baby steps in order to internationalize the renminbi (so to speak ?).
Now, I have always thought that if you think about things like exchange-rate flexibility and capital-account liberalization, these are big, macro moves. And the old Chinese approach of learning by doing -- say, for instance, if you want them to take a tax reform, you try it out in a province, see what works, what doesn't and then expand it to the national scale -- well, you can't do that if you're thinking about capital-account policies or currency policies.
And so the Chinese are actually trying to find a way -- they're essentially using Hong Kong to set up a lot of the action that will allow the renminbi to become much more prominent in the region. And in fact, even before they -- (inaudible) -- some countries in the Asian region such as Malaysia have started holding renminbi was what they consider foreign-exchange reserves.
Now, technically, this is not counted by the IMF as a fixed reserve, because the currency is not convertible. But as far as the countries in the region are concerned, they can use this to settle trades. And they feel that China will back up this renminbi holdings of theirs with hard currency if the need were to arise. And, in fact, the renminbi itself may, of course, become a hard currency.
So I think China in its own way, in its own inimitable way, is actually taking these steps to making the renminbi accepted much more internationally. But I don't think they're quite ready to go the final step towards opening up the capital account and making the currency fully convertible. And given the state of their financial markets, which still have a long way to go to become fully developed, I think this may not be such a bad strategy.
CHANG: Well, Shang-Jin, let me turn to you. Given the domestic priorities that you talked about earlier for the Chinese population, where is currency convertibility in the list of priorities? I mean, you look at the gender imbalance, you know, the rising inflationary pressures, you know, still the wage increases, which, you know, have really improved the standard of living for a segment of the population -- where do you think that Chinese policymakers put currency convertibility -- the time horizon for the renminbi to become an alternative to the use of the dollar as a principal reserve currency?
WEI: It's useful to make a distinction between convertibility versus flexibility. As far as the convertibility's concerned, I think, you know, that they -- that the -- that priority it deserves, perhaps, is much lower than what international community think will happen.
And so flexibility -- I do think, you know, greater flexibility of exchange rate is in Chinese interest, precisely because it helps to manage Chinese inflation on the macro issues, even if it doesn't help to reduce Chinese current-accounts deficit, much as Americans and others want.
On diversification away from dollar assets pressure, I think if you -- if you look at the question mark on diversifying away from U.S. Treasurys, the -- (inaudible) -- quite a bit of a scope for that to happen. I see at least two channels.
One is in some official holding of foreign assets concerns, sort of as a scope to diversify away from just U.S. Treasurys to a broader set of -- broader set of things, you know. I mean, Europe and Japan may not be doing particularly well today, but, you know, if you -- (inaudible) -- from an allocation point of view, right? So certainly it's not guaranteed that U.S. will do better than them in the next five years or 10 years. That's one.
Two, more importantly, there's no reason why Chinese foreign assets has to be held by the central bank or official sector, or even the CIC, the Chinese sovereign wealth fund.
This is where -- (inaudible) -- comes in play. In fact, paradoxically, because there's so much pressure -- international community for China to revalue. And China's looking for everything possible other than revaluation to reduce -- for the exchange reserve holding, it is -- it becomes more willing -- perhaps more willing than perhaps optimal to open up current capital account and to push forward (compatibility ?).
But one consequence, one application of (compatibility ?) is that incrementally more foreign asset positions, which are -- of Chinese economy will take the form of private-sector firms -- mostly firms; perhaps in the future, households -- holding more foreign assets, much like what -- Japanese firms, private sector does -- and less in the form of central bank holding foreign exchange reserve. And that's a -- and when private sector's doing the holding of foreign assets, certainly there's much less reason for them to hold on to U.S. Treasurys.
It's -- therefore I see, even if Chinese current account (balance ?) change in the short run, you will see less demand for U.S. Treasurys from the Chinese side.
CHANG: Well, Peter, let me turn to you and ask you about the U.S. policy response. We've seen that China has avoided being named a currency manipulator in the Treasury report. We've seen that the House of Representatives has passed, you know, measures about economic sanctions against China unless they allow more currency flexibility, but these measures haven't gone through the Senate.
But what do you think that the U.S. policy response and stance towards China should be? And we've heard Obama announcing some very lofty goals to increase exports dramatically in the U.S.
What do you think that the U.S. should be doing right now?
SCHIFF: OK. Well, you have a number of questions there. First of all, as far as currency manipulation, I mean, I don't think what China is doing is manipulation. China mistakenly decided to peg its currency to the dollar. And so they're trying to maintain stability. America is manipulating its currency. We're debasing our currency. And so China is trying to maintain stability with a currency that is being debased. That is a problem. But we're the manipulators, not necessarily the Chinese.
And it's kind of ironic, because the biggest beneficiaries, at least in the short run, of that policy is America. Our current budget would be impossible without the Chinese lender. Americans could not, you know, be going to Walmart and buying products. Our CPI would not be as low as it is without that Chinese currency peg. So, you know, there's an old saying to be careful what you wish you.
Now, you initially compared our relationship with China to a marriage, and, unfortunately, it's kind of a lot like my marriage -- (scattered laughter) -- at least before I got divorced. (Laughter.) And China is going to get divorced, and a lot of times, you know, people are hesitant about a divorce because it's a major decision. But I can tell you, once you've actually done it, it's -- there's an old joke, why is divorce so expensive?
MR. : Right.
SCHIFF: Because it's worth it. (Laughter.) And I was listening, you were talking about the prospects that Chinese males aren't going to get married. I was thinking maybe that's not such a bad deal for the Chinese. But what's going to happen, and, you know, when China filing -- and the MEN are laughing. (Laughter.) When China finally gets this divorce, the problem is there's not going to be any alimony for the United States. And we're going to have to realize what it's like to actually go out and work for a living.
I mean, if you think of a marriage -- and I'm not being sexist, but I'll just say this -- there's a man who's working, and there's a woman who's spending all of his money.
The whole idea behind China is -- and we keep saying, well, gee, what's China going to do if they don't -- they use the American customer. What's China going to do with all of its products if it can't sell them to America? Right, well China is going to consume those products. It's just like if somebody is married and they're spending all their money on their spouse. If they get divorced, they don't have a major problem of what to do with all that extra money. All of a sudden, they can start buying the things that they enjoy, instead of allowing their spouse. And now the spouse, who is not working, maybe that person all of a sudden -- gee, if I want to keep buying this stuff, I've got to go earn it; I've got to go -- I've got to go work for a living; I have to start earning some money.
And that's going to be the situation for the United States. We're going to have to export. We're going to have to produce. You know, a lot of people talk about, well, we want the Chinese currency to rise and we -- so they'll buy more American products. What American products? If the Chinese currency rises, they're going to buy more Chinese products. They're going to buy the same products that Americans buy.
They just -- I don't know if anybody saw this thing they did on ABC on 20 -- on news, but they went into a house and they challenged the people that lived there to find something that was made in America. And then they said, well, look, why don't you leave for a while, and we'll take out all the things in your house that were not made in America. And they came back and their house was empty. There was nothing -- I think there was one thing left on the floor. I forget what it was. But I mean they -- and, you know, they were -- they were stopping people on the street, and they wanted them to take off all their clothes that weren't made in America -- which meant they were all naked. (Laughter.)
So we're going to find out that, you know, we're going to have to start making this stuff. And if we want exports -- I mean, President Obama wants exports; yet everything he's doing is destroying exports, because you can't export what you don't produce, and you can't produce if you have all these rules and all these regulations and all these mandates and all the taxes and all the litigation and all the things that the U.S. government for generations has layered on U.S. industry to make us uncompetitive, to make us unproductive.
The real reason that we're importing so much stuff from China is we can't afford to make the stuff ourselves. And we've been able to consume because we've been able to import stuff from China.
But why can we do that? Because the dollar is the reserve currency and because we can print money instead of making things.
But you mentioned a minute ago that you don't think there's an alternative for the dollar, that the U.S. -- that the U.S. bond market is so liquid. You know, liquidity is a liability, you know. When you want a reserve, you want scarcity. You don't want abundance. The fact that there's so many dollars out there and so many bonds is a bad thing, because that means your value is going to collapse.
So I think what the Chinese want to do is replace their dollar reserves with gold. You know, the world was on a gold standard before it was on a dollar standard. In fact, the only reason that we suckered the world into accepting the dollar as the reserve was because it was backed by gold. In fact, not only was it backed by gold, but farmers could redeem their dollars for gold. And that was what got them to take it. But ever since 1971, the dollar's just a piece of paper. You can't redeem it with anything, and now the world is realizing the problems that it's created.
So I think if you look at China, not only is China the world's biggest producer of gold, it's the world's biggest importer. That's like Saudi Arabia importing oil. They're doing that for a reason. And they're also looking at having other currencies, not just the euro or the major currencies, but they're looking at peripheral currencies. They're looking at Canada. They're looking at Australia. They're looking to Scandinavia. They're looking at -- they're looking to try to diversify this gigantic reserve of dollars, precisely because there are so many of them.
And the time is running out for the U.S. on this, because, you know, if you look at what happened in Egypt and look at -- look at the civil unrest, I mean, one of the reasons that China has preserved this exchange-rate policy was it's looking for stability. Well, now they're getting a lot of instability. And the idea is, well, you know, we need to maintain our exchange rates so we can protect our exports. Well, what good are exports if you don't import?
The only reason that countries export is to import something else. You export to import what other people make more efficiently than you.
But if the Chinese are making everything and all they're doing is exporting it and we give them a little piece of paper, what do they have? All they can do is stack it up. You know, what good is a stack of dollars? You know, what's good is all the products that we get. The money that's piling up in China is giving them nothing but headaches.
WEI: (Inaudible) -- Obama's ambitious goal of doubling U.S. exports in five years, actually, I look at the data and ask myself, has there been any country since 1990 that allow the U.S. to double its exports once every five years? The answer is there's one country that's very close to that, and that is China. U.S. exports to China nearly doubles once every five years, consistently since 1990. No other market allows this. Canada, Europe, Mexico, didn't allow U.S. to double its exports once every five years. In a way, if every country could be like China, President Obama's goal can be achieved.
PRASAD: Which starts from a very low base, of course. But actually, I don't have the rich set of vital experiences that Peter has. So let me refrain from commenting on that. (Laughter.)
But I think it's very important to think about what the objective of American business is. I mainly tend to focus especially in Washington, D.C. and in the heartland a lot on the Chinese currency policy. But this is not what American businesses ultimately care about.
I think about, in fact, there is a complexity and a nuance to this issue, because if you think about American businesses, one can probably categorize them into two or three different categories. One would be the American manufacturers who are being put out of business by Chinese currency policy and other types of Chinese currency policies -- say, the tire manufacturers. We still manufacture some tires in the U.S., I'm told, although I don't have those on my car.
In addition, there are companies like Walmart that essentially have operations in China that view conducive relations with China as something that's worth fostering. Then there is a third and much more interesting group of companies in the U.S., manufacturers especially of relatively high-technology products and financial institutions that want access to Chinese markets. And access is really the key thing that a lot of American business is after.
And that is the group that, essentially, has been the sort of swing vote because the notion was that China might provide a lot more access if, in fact, we can maintain cordial relationships, and you don't want to create the problem there. And what we've learned in the last couple of years and what these businesses have learned is that access to Chinese markets is actually not coming easy.
In addition, there are problems that -- Chinese policies about government procurement and you've probably heard about this notion of indigenous innovation, the idea that high-technology goods that have been procured through the government process have to be -- the innovation has to take place in China. It's ostensibly a policy of generating more innovation in China, but it does have the effect of shutting out a lot of foreign producers, and American businesses are particularly concerned.
So that's where the action is as far as the American businesses are concerned. But if you say in business innovation it doesn't play well in the heartland, so we tend to focus a lot more on currency policies. And I think there are very good reasons why this currency policy is not serving China very well. It's hurting the U.S. in the long run by enabling us to create more problems for ourselves.
But ultimately, this is not the core issue. I think China has a set of structural problems, as Shang Jin pointed out, that need to be dealt with. And trying to deal with those problems while they had this currency exchange rate policy is like trying to undertake a very difficult challenge with one hand tied behind your back.
And I think the other issue is that it does make much more of a conflicted situation in the short run, where in terms of trying to promote employment through exports you set up the short-term concept that makes it much harder to arrive at this longer-term solution, where I think the interests of China and the U.S. are, in fact, much more aligned than they might seem.
CHANG: Well, we have a lot to talk about. So I'd like to thank the panelists very much for their comments.
I'd like to open it up. We've heard about marriage, divorce, alimony, gender imbalances, all kinds of things. I'm -- you know, I think a little surprising coming up just from the trade-imbalance question that we started with.
So I know that we have a panel full of people with very strong opinions. Let me open it up to the audience for questions. And if I could ask you to just please identify who you are before you ask your question --
Your questions, please.
QUESTIONER: Thank you. I'm Padma Desai. I'm the Harriman professor at Columbia University.
Getting away from marriage and alimony and gender, this equilibrium, I have a question with regard to the current deliberations of the Party Congress. It would seem to me that from 2000 to 2009, Chinese consumption has declined by, say, 9 percent. And as a percentage of GDP, it's about 36 to 37 percent, which is very low, whereas U.S. is about 66 to 67 percent of GDP, right?
The question -- the Party Congress has declared that it wants to raise consumption and standard of living of the public. So my question is, how is this politically feasible from the point of the view of the party leadership, considering that I read that a significant number of the Party Congress members now are bureaucrats, businessmen and even film stars? And does consumer welfare figure in their -- in their viewing?
And the second question, what kind of policy measures is the party deliberating with a view to promote consumption? For example, raising the minimum taxable income level. Would you elaborate on that?
CHANG: Yes. Perhaps any of the panelists who'd like to take this. They've also announced that they're going to ease some of the import restrictions.
And how do you see this proceeding?
SCHIFF: Well, I mean, obviously, the most effective way to raise domestic consumption is to allow the RMB to rise. I mean, that's what determines what the Chinese can consume. It's the purchasing power of their wages, the purchasing power of their money.
So the best way to do it is to let the currency go up and then domestic prices will decline and there will be more consumption. And more of what the Chinese produce will be consumed within its borders rather than exported to the United States. Now, if they don't do that, if they try to find other ways to do that, yes, I mean, they can ultimately keep printing money and allow wages and prices to rise together. And so peoples' incomes can increase instead of earning the same number of RMB that have greater buying power, they can keep printing money so that wages can keep going up and up, you know, in line with prices. But I think that's a very ineffective way to allow purchasing power to rise because then you destroy the value of accumulated savings. You distort the economy.
So it's not as good as simply allowing their exchange rate to rise if they try to alter tax policy. I've actually heard people say that, well, you know, China should adopt American socialism. They should -- we should have Social Security in China. They said one of the reasons that Americans don't save is because we've socialized it. And so, in other words, there's not enough socialism in China. They should move away from a market-based economy and adopt what we've got over here, and kind of socialize their savings, and that maybe the Chinese won't save as much if they erect this gigantic Ponzi scheme the way we did
Or putting in, you know, minimum wage. I think now China has a minimum wage, which is very unfortunate. They should look at countries like Singapore that don't or, up until recently, Hong Kong had no minimum wage. To just try to, you know, force wages up by decree is a mistake that can only, you know, lead to unemployment in China the way it's led to unemployment here.
PRASAD: So I actually would probably agree with Peter on a lot of problem he's identified, although his characterization of the problems and the solutions I suspect I would strongly disagree with. So let me state that for the record.
But I think on this issue, the 12 five-year plan is actually a remarkable document. I haven't seen any other country that lays out a plan that says we've grown at 10 (percent) to 11 percent; let's slow down. And it actually sends a very strong signal also to the local governments. In fact, there are three or four very explicit sentences in the national -- (inaudible) -- commission's report on this, saying to state governments, slow down, because breakneck growth is not good and you need to take other factors into account.
Now, the challenge facing China, I mean, it's not that the Chinese don't want more growth. I think they will be happy to get 10 percent growth. But the one thing that they haven't accomplished even in a period of very strong growth is getting more employment growth. Even during a period when the economy was going in real terms at 10 (percent) to 11 percent over the last decade or so, net employment growth has been on the order of about 1 percent or so. Part of this is because of state enterprise restructuring, so they're laying off workers. But much of Chinese growth has actually been driven by investment growth.
So this is where, again, the Chinese households are not getting a good deal because they save a lot, put a lot of their money into bank deposits, get negative real interest rates on those deposits. That money is funneled through the banking system into investment projects, many of which are good, a lot of which are not good. And investment, in fact, has accounted for more than half of GDP growth over the last decade.
Now, China's a capital-poor economy, relatively speaking, and labor-rich. So this may seem like a good idea. But given that this is money being funneled through a state-owned banking system and a lot of this money is actually going large data enterprises, which in addition to relatively cheap capital are getting cheap energy and land subsidies from provincial governments, this shifts all the incentives towards investment-led growth, which is heavy on physical investment. And this is the problem that the Chinese face. What they would like to do is have more money going towards small and medium-size enterprises, the service sector, which can potentially generate more jobs.
So this requires financial system reform.
They would like to boost consumption and Shang Jin has pointed out some structural factors may be relevant. But in addition, as China moves to becoming a more market-oriented economy, there is more uncertainty. The social safety net that existed in the past with the Chinese government basically taking care of you through the state enterprises, which used to drive subsidizes for health, education, housing and so on, those are disappearing, so people are saving a lot more.
So I think there are very big structural challenges, and again, this plan is remarkable in terms of laying out all the problems that they face. And I think it's a very honest reflection of the challenges that they face. And they recognize that growth is not the only answer, that they need to get much more sensible types of growth.
WEI: So just to make the discussion interesting, I mean, they make it clear that making Chinese exchange more flexible, while it's useful for some purposes, is not going to be quantitatively very important in raising Chinese savings rates. At the (beginning ?) exchange rate is not the primary driver for the current surplus, nor the primary driver for the high savings rates. And Chinese government -- in the government program, does plan to strengthen social safety net. I suspect that's going to help a little bit, but it's not going to do very much. Why it's not going to do very much? Because over the last 5 to 10 years, China has made a lot of progress in the direction of strengthening the social safety net, introducing, you know, health care system in urban and rural areas and, you know, a public-private combined pension system -- (inaudible).
In spite of those moves, you see Chinese savings continue to rise. It's prima facie evidence that social safety net is not as important to people, perhaps, I think, certainly, not the only thing that matters. I think in this context it's important to go back to the -- (inaudible) --imbalancing, because -- (inaudible) -- imbalance is (quantitatively ?) a very important driver for why the Chinese rate -- savings rate since 2003.
The sexual imbalance is -- became an issue since 2003. So the timing is not coincidental.
Now, if you ask people in Chinese households, seriously ask people, why do you save, why don't you raise your savings rate, guess what people say? Well, it turns out most households say -- no, about 15 or so households say, I save for retirement. Eighty or so households say, I save for a variety of reasons related to children's welfare. If they have a son, they worry about the son's marriage. And inheritance is a small part of it, so children's marriage and education are the most important reasons that parents will say why they save and why don't they consume more. And education has a lot to do with the marriage (market competition ?) as well, because, you know, there are different ways to make yourself comparative aside from making yourself wealthier -- making yourself more educated, you know, graduating from better schools. Being able to go to Columbia University and so on could help you. So people are -- parents --
SCHIFF: Remember, though, savings is not a bad thing. This is a good thing. We don't want to discourage that.
WEI: No, no, savings --
SCHIFF: Savings is how economies grow. In a capitalist economy, nothing is more important than savings. Investment, economic growth, productivity, jobs, they all flow from savings. So we don't want to discourage savings. If anything, one of the reasons America is in so much trouble is because nobody does save. That's the problem.
WEI: I understand Peter has meant to agree with me. The thing is -- well -- (inaudible) -- I didn't say saving's a good thing. Even though high saving -- (inaudible) -- is a very clear case, even though the exchange rate is not a primary driver for Chinese current surplus. The high -- (inaudible) -- and high savings rate are, therefore, Chinese. Let me tell you why. It's -- one important driver for high savings is sexual imbalance, the need to compete in the marriage market. The extra saving is socially inefficient. Why is it inefficient?
If one important driver for high saving is sexual imbalance, the need to compete in the marriage market, the extra saving is socially inefficient. Why is it inefficient? Because households want to save in order to outcompete the competitors in the marriage market.
But this extra saving does not achieve this goal in the aggregate. In the aggregate, for the country as a whole, the number of males who cannot get married will not be changed by saving behavior. Therefore, this resulting incremental saving is a waste. But no individual household -- no household --
SCHIFF: I think you're putting too much weighting on that one fact.
WEI: -- bear to reduce saving on its own, because you cannot. If you reduce the saving on your own, you're doing your (fund ?). You'd doing your --
SCHIFF: I think you're making a little bit too much of that -- of the -- of the sexual imbalance on it. I think certainly the savings rate is being influenced by monetary policy. And if we had a free-floating RMB that was higher in value; if China had, you know, different interest rates or a different price structure that was market-driven; there probably -- there might be less savings, there might be more. We don't know until the --
WEI: Let me -- we do know. We do know.
SCHIFF: But it is not a bad thing because whatever is saved, the money isn't stuffed under a mattress. That money goes into investment, it goes into production, and it -- and it finances future consumption. So if the Chinese prefer consumption in the future versus consumption in the present, that's their choice. It's not a bad thing. It means that they have a lot to look forward to.
CHANG: I saw some other hands up, and I want to make sure that we get some more questions. And then maybe just a comment on the side here. If you look at the last five-year plan, they actually have a goal for growth of 7-1/2 percent, which was not met. You know, growth was 10 percent. So we have to see how this sort of works out.
But let's go to the back, please.
QUESTIONER: Dale Ponikvar, Milbank Tweed.
You've touched peripherally on it but I'd like a direct comment, please, on the policy of sterilization -- of currency. (Laughter.) And particularly I'd like to know if the policy is intact.
Do you think? And do you think that changes in the policy would impact all the issues we're talking, particularly the currency rate?
WEI: My understanding is that sterilization is very imperfect -- sterilization not in the context of family planning -- for but once is very imperfect, because there's a cost associated with -- sterilization, by the way, means the central bank adjusting domestic credit expansion to offset increasing foreign exchange reserves so that domestic money supply will not rise as much as this foreign exchange reserve accumulation would otherwise imply.
Many central banks in principle can do this, and Chinese central bank does this in principle, but not on a one-to-one basis. And it gets increasingly more expensive, which is why we see Chinese inflation rate rises when U.S. Federal Reserve expands the money supply. Otherwise, you will see a delink between Chinese inflation rate and U.S. monetary policy. So it's evidence that sterilization is not perfectly executed and --
PRASAD: So is there's a very significant cost to sterilization, and in the typical emerging market this proves unsustainable, because if the government is or the central bank is sterilizing the FX reserves by issuing government bonds, it ends up having to pay a higher and higher interest rate, and it earns very little on its foreign exchange reserve holdings than if you're putting it in U.S. Treasurys; you earn very little. So it become a big cost.
Now in China's case, remarkably enough, that cost for a little while in the period 2007, 2008 was actually negative. So it looked like the Chinese central bank, for every dollar that came in -- that they put in FX reserves and the way they sterilized by issuing a central bank bond was actually making money, because they were paying a lower interest rate on the central bank bonds.
But I think therein lies the real hidden cost of Chinese policies, which is the repressed financial system. The banks are raking in a lot of liquidity because they get a very large deposit group. The Chinese households are saving a lot.
They put their money in the banking system.
Now there has been a lot of interest rate liberalization but right now there is a ceiling on deposit rates, and there is a floor on lending rates, which is good for the banks, because they (can/can't ?) compete away this spread. But the fact that deposit rates have a ceiling essentially means that banks cannot compete for deposits, but they are getting a lot of deposits.
Now who can the state-owned banks lend to? They would love to be able to lend more to the private sector, and in fact the interest rate liberalization was supposed to do that. But the incentives are not quite there yet, because, after all, if you make a loan to a private firm, that loan goes sour, you are in trouble. So the reality is that a lot of the lending is still going to the state enterprises. But state enterprises that are doing very well, that are profitable, don't need this money, and overall they cannot soak up all of this.
So when the People's Bank of China issues government bonds -- issues bonds -- and in fact the reason why the People's Bank of China issues bonds is that unlike in the U.S., where we've been generating more and more bonds thanks to our deficit, in China the public debt level is less than 20 percent of GDP, in explicit terms. So they ran out of government bonds to sterilize very quickly.
So the People's Bank of China issues its own bonds. And the banks are very happy to snap that up. So it's made it a lot easier for China to sterilize its FX reserve accumulation, but at a very significant cost.
PRASAD: And this cost ultimately redounds back to the households, because the other guys were not benefitting. And this, I think, is a real hidden tax in the Chinese system, the fact that households are saving a lot of their income, and they're getting negative real rates of return on it --
PRASAD: -- and that ultimately through the banking system, financial system.
SCHIFF: Yeah. Yeah, this is a case where abstinence would be lot better than sterilization.
CHANG: Let's go to the audience. Another question. Yes, please, over here in the front.
QUESTIONER: Thank you. Mike Spruill, New York Life. I've been hearing a lot of discussion so far about what's best for China.
I'd be interested in hearing some of your thoughts about the United States' perspective on this. For example, in currencies, the labor costs to China are a dollar-fifty, $2 an hour. They're 30 (dollars) or 40 (dollars) in the U.S. It seems to me if the currency goes up by 50 (percent) or 100 percent, those jobs are not coming back to the United States. Currency seems to be the wrong issue to be talking about.
The deficit we've had on trade is a trillion dollars over the last four years with China. And it's not going down. The exports have gone up, but the imports have gone up at least as much. Actually, 2010 was higher than 2007.
What's your prescription for what the United States ought to do to get rid of these significant global imbalances? And what's your projection of what's going to happen if in fact we do not do that?
SCHIFF: Yeah, well, what we have to understand -- we have some severe structural economic imbalances that underlie the U.S. economy. In a nutshell, we spend too much, we save too little, we consume too much, we produce too little. And that needs to change.
And part of that is going to be a reduction in wages in the United States. Unfortunately, that is what's going to have to happen. Wages are a function of true worker productivity. And despite the numbers that the government makes up, we are not more productive; we are less productive.
Why are Americans less productive? It's because of all the taxes, all the regulations, all the subsidies, all the things that didn't exist in the past that exist now. I mean, America used to pay the highest wages in the world, yet we used to make the cheapest stuff in the world. Our products were less expensive than the rest of the world's products, despite the fact that we paid higher wages. And we did that because our workers had a lot of capital. They had a lot of tools. That was a result of our high savings rate. And there wasn't a lot of government regulation and taxes that got in the way that undermined the competitiveness of our workers and our capital.
So what we have to do is start dismantling this huge government apparatus that we have layered on our industry so that it can get more competitive.
And because we've allowed our capital investment to decline and deteriorate over the years, wages are going to have to fall. And we have millions and millions of Americans that are unemployed. They need to work. They're not going to work given the social welfare state that we have, given the alternatives and give them the minimum wage laws that we have.
So we have to allow our wages to fall. But currency alone, it's not going to do it. I mean, if the dollar drops by 50 percent, which I believe it will -- I think it's going to drop by a lot more than 50 percent -- it's not going to mean our exports are going to boom. What are we going to export? And remember, what that's going to do is it's going to make all of our raw material import costs go up. A lot of what is made in America is really assembled in America. Much of what we manufacture is manufactured with imported components.
And as the dollar falls in value, those imported components are going to be more expensive. Certainly, the resources that we have to import will be more expensive. Even the resources that we develop ourselves, we have to compete with foreign demand. As the dollar goes down, prices fall for our competitors. And so, all of a sudden, more of what we produce is going to be exported, which is going to drive up the cost to American companies that are bidding for those same resources.
So we have to -- we have to deal with these issues. And just debasing the currency, printing more money, is not going to do it. And if you look at other countries that have surpluses with China, Germany has a surplus with China. Japan has a surplus with China. They have higher wages, by far. In fact, they have higher wages than we do, yet they have a surplus.
So the reason that we have these deficits, it's not a function of wages, even though our wages now are too high and need to come down. But it's a function of government and the burden that government places on American companies that make them so much less efficient than their competitors.
WEI: So I would note the three things on the U.S. side, first of all, from the U.S. current -- deficit point of view, focusing on debt question. It's not a U.S.-China bilateral deficit issue.
The U.S. runs a deficit against most countries in the world. The U.S., again, runs a deficit against Canada; the U.S. runs a deficit against the European Union; the U.S. runs a deficit against Mexico; and the U.S. remarkably runs a deficit against India, which has overall deficit against the rest of the world. So U.S. -- so U.S. having a deficit with China is not a particularly unique phenomenon from a U.S. point of view, number one.
Number two, you know, if it's desirable, I don't think that necessarily reducing deficits per se should be the policy goal. But to the extent some people want to do that, you know, all this part of the package that needs to happen, you know, in this country, of course, is the (real ?) savings rate both in the private sector and in the public sector.
In the private sector in the last few years, we have seen quite a sizable increase in household savings. U.S. corporations as a whole actually save quite a lot. U.S. household savings rate has risen quite a lot since the onset of the crisis. But you don't see much improvement on the current-account side, because much of the increase in the private-sector savings has been offset by the decline in the -- in the -- in the public-sector savings or the increase in public- sector deficits.
So mechanically, you know, you know -- (inaudible) -- how to get there; we want to get there, which is to shrink -- have the deficit -- budget deficit at a much faster rate.
However, it's not all this. This should be the objective. And certainly, you know, people in Washington think that's the thing you want to do. So even though they want other countries to do -- to reduce deficits, the U.S. is not doing everything in its -- in its power to reduce it.
There are things on the margin you can certainly -- one can do. For example, U.S. has lots of export restrictions in the high-tech -- in those sectors that many other countries want to buy, you know, particularly China. I know there's a lot of controversy on these topics. Many of my American friends say this cannot be very important because all of the restrictions put together probably account for 1 percent of U.S. total exports.
At the same time, I think that kind of comment is not quite exactly right. I think the public underestimates the true impact of export restrictions on U.S. exports.
First of all, on a bilateral basis, you know, the restrictions really have the same impact on all trading partners' trade -- perhaps have greater impact on exports to China than on exports to other countries, number one.
Number two, there's also a potential deterrent. Many (essentially ?) don't show up. You know, people don't bother to apply for a license, they -- if firms think that there's no chance for them to get it. So I think, you know, there's a national security need, obviously, for that, but the (imposition of ?) national security has to be much more precise, much more narrow, I guess. On the margin, that might help a little bit.
The U.S. is competitive in many other industries. You know, I happen to work in the industry, education industry, in which U.S. is by far the most competitive in the world. And there's certainly scope, you know, that the U.S. can (take a value of this ?) and increase service exports -- something the U.S. clearly is the leader the world.
SCHIFF: And I forgot to mention -- pardon -- in answering your question, too, one thing that we need is much higher interest rates, the Federal Reserve has to stop monetizing debt, and we have to let asset prices find a true level, which means we have to remove props from the housing market and the education market and health care so that prices can reflect a real level, not the artificially propped- up levels that result from government policy.
CHANG: Perhaps, Eswar, a final comment from you. I know we're at time.
PRASAD: I live in Washington, where there is a sense of complete unreality about the fiscal debates, because most of the action is about these symbolic, little amounts at the margin -- if anything, are going to hurt U.S. productivity.
I think it's pretty clear what needs to be done. I mean, the deficit is a serious problem. We have the net debt level at about 65 percent of GDP now; in the next five years, expected to go up to about 85 percent of GDP. The gross debt situation looks worse. And of course, this doesn't factor in all the unfavorable demographics and so forth that are coming forward.
So I think it's essential that we focus on where the budget action really is, and it's not the nondiscretion -- the discretionary nondefense spending is a very small part of it, and that's where we spend a lot of time arguing. So unless both parties get realistic about dealing with that part of the budget, I don't really think they're going to make very much progress.
And, in fact, the longer this goes on, I think, the more we're going to be backed into a corner, especially if we do get a scenario where the rest of the world starts worrying about our debt levels that makes financing costs higher, just the share of debt financing in our total government expenditures is going to rise and squeeze us even more.
I think tax reform is ultimately going to have to be a very important part of what happens, as well. I mean, I just tried dealing with what my accountant sent me about my tax returns and even then I can't quite figure it out. This is insane, the tax system we have in the U.S. And I think simplification of that code and trying to shift the incentives away from consumption and towards savings makes a lot more sense.
So I think the steps that need to be taken are pretty clear in terms of where we need to deal with expenditures. It's the entitlement programs to a very large extent. We need to reorient spending a good bit. I think, ultimately, it's the industries like education and so on where we are going to have an advantage. And we need to have much more sensible financing, if we do have financing at all, in those realms. And I think tax reform is going to have to be a very important part of this. As I said, I just think there's no escaping it.
CHANG: Well, thank you very much to all of the panelists, and thank you for joining us.
Just an announcement on -- (applause) -- an announcement on the next meeting. So please join the Council on Friday morning, March 11th, at 7:45 to 9:00 a.m. for a meeting with Miguel Fernandez Ordonez, the governor of the Bank of Spain; and Elena Salgado, the minister of Economy and Finance of Spain. And this meeting is part of the Peter McCullough Series on International Economics.
Thanks again for joining us. (Applause.)
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