Council on Foreign Relations, New York City, New York
Tuesday, April 24, 2007
DANIEL K. TARULLO: Good morning, everyone, and welcome to this special edition of the World Economic Update. A couple of introductory remarks -- those of you who have come regularly will recognize these.
First, please, I want to remind you that this meeting, unlike many at the Council, is on the record. Secondly -- I know you've heard this before -- please turn off or at least silence your cell phones, BlackBerrys, now that they're working again, and any other electronic devices you may have. And let's see -- when we get to the question and answer session, as you know, I'll ask you to stand, please identify yourself and wait for the microphone before you actually ask your question.
As I said, this is a -- we've denominated a special edition of the World Economic Update. As you know, most of the time we come here and we talk, as the term update would imply, about whatever the most interesting or important current economic developments may be. So for most of the last eight years we've talked about the current account deficit and then something else along the way.
What I thought -- in the wake of our last discussion and some of the questions that came from you -- was that it would be useful to step back a little and address a couple of longer-term issues relevant to the evolution of the global economy, which in their own way are probably shaped -- will shape policy more than most of the near-term developments that we speak of every -- (inaudible) -- when we get here.
So we changed the composition of the panel a little bit to give us some perspective, both from academia and from government. So in addition to Steve -- whom I know you all recognize, to my far left is Matt Slaughter, who recently completed a stint in the Council of Economic Advisors, and is now back from the Dartmouth Economics department; and to my right, Alan Krueger, at the Princeton Economics department who served with me in the government in the early '90s? -- right when you --
ALAN B. KRUEGER: Mid.
TARULLO: -- mid-90s, chief economist at the Department of Labor.
What we're going to do this morning is talk about, specifically talk about two topics -- although I'm sure a good deal will get brought into the conversation. First will be the issue of job creation, job loss, the impact of the rise in the global labor supply; and secondly, we'll talk about China. Now, obviously those two things are not unrelated and the discussions may bleed a little bit into one another. But we'll try, at least analytically, to keep it a little distinct for some of the initial questions and answers.
So I'm going to begin with the labor question, and I'm going to put this to Alan, who as many of you know, has done some of the most interesting work in labor economics even before he was in the government.
Alan, traditionally, if you talk to an economist about the impact of the international economy on jobs in the United States or other developed countries, you get an answer something like the following: Well, yeah, there's some impact on wages; there's some impact on displacement, particularly low-skilled jobs, but by and large, the trade effects are dwarfed next to technology effects -- the impact of technology on job creation and on wages. And not so long ago I think you would hear, you know, 80 percent, 20 percent impact kind of number -- something in that ballpark.
Just about a year ago, your colleague Alan Blinder published a piece in Foreign Affairs in which he took what was, for a well-known, mainstream economist, a quite different position in which, if I did the arithmetic correctly, Alan was suggesting that as many as 50 million jobs were, as he put it, off-shorable, or outsourcable -- a couple of neologisms -- and basically making the case for the proposition that things really were different now. That instead of it just being a at-the-fringe, at-the-margin kind of phenomenon, that the impact of the global economy on jobs and wages in the United States could be quite substantial.
And as I read Alan's piece, and some of the things that he and others have said since then, it seemed to me that the essence of the case he was making was that this was a movement up the skills ladder. That it was no longer just a question of the lowest skilled workers being affected, but instead higher skilled workers being affected. And that's why the impact of the international economy, as opposed to technology, could assume a much greater role.
So maybe we can begin by asking you your reactions to that somewhat different kind of perspective and analysis, just at an analytic level, and then we'd maybe move on to some of the policy implications of that.
KRUEGER: It's a bit unfair to ask me to comment on a colleague -- especially one who I play tennis with every weekend. (Laughter.) I think Alan's estimate is the best one that's available, in terms of the number of job that are potentially at risk because of off-shoring. And I think Alan would agree with the traditional analysis that if you have an ability to produce things abroad, especially services now, that that should increase productivity in the U.S. -- and in the long run probably is beneficial for the U.S. The issue is getting to the long-run.
So I think -- and I would tend to agree with Alan that the issue is a transition. Alan's estimates, which are the best ones that are available -- although I should also mention that he and I are working on a project now to try to get better estimates of the proportion of jobs that could be done off-site -- he makes a very useful distinction of personally deliverable services, and you need to be there to deliver the service.
One of the things he finds with his current estimates is that it's fairly skill-neutral. So unlike before, where we were concerned that trade was causing a loss of jobs and a loss of wages at the bottom of the skill distribution -- when we look forward, I suspect it is the case that it's going to be much more across the broad -- across the board, not just concentrated at the bottom. Which is positive and negative -- at one level it's positive because it suggests that the greater ability to offshore will not be a cause of rising inequality among workers -- so the good news is everybody's in the same boat, the bad news is that boat might be sinking a bit.
And I think your analysis was exactly right. I was going to mention something which -- I'm on a record for the Krueger conjecture. The Krueger conjecture is the following: every time I get asked where are the jobs going to come from in the future, I point out, have you ever noticed that larger countries have more jobs? And in the U.S. we haven't had any difficulty creating jobs. If you look over the last 50 years, last 100 years, you know -- with blips and, of course, the Great Depression, job growth has been pretty steady, remarkably steady, as we've gone from agricultural to manufacturing, from manufacturing to services.
And looking forward, I would say, based on the past and the kind of adjustments we've needed to make, I don't think the issue is going to be in the number of jobs -- I think the issue is going to be in the quality of jobs. And the path might well be different -- from the future, in terms of the impact on the quality of jobs -- and I also tend to agree with their 80/20, I would have put most of my weight on the technology, although I think there's a big confidence interval, a great deal of uncertainty around the impacts of technology and trade on the labor market.
But going forward I can imagine globalization having a bigger effect, in part because the technology has now made off-shoring much more feasible -- so much more can be delivered at the end of a cable. And then, in addition -- with the demise of the Soviet bloc, China turning to markets, India deregulating -- there are a lot more workers who are now in global competition without a corresponding increase in capital.
And I think you begin -- we're beginning to see the effects of that. The capital-labor ratio, world wide, has fallen -- that's not good news for the bargaining position of workers. And if you look at U.S. -- and more so abroad, but also at the U.S., the share of national income that's going to workers has been falling after decades of being fairly stable. So it may well be that the future is different than the past when it comes to globalization. So in spite of the Krueger conjecture which says that job growth will continue, I am concerned about the quality of the jobs going forward.
TARULLO: Matt, Alan alluded to a couple of analytic points that are brought up in the latest IMF analysis of the world economy -- which devoted a specific chapter just to the globalization of labor, including what the IMF characterized as a quadrupling of the effective labor force, global labor force, in the last 15 years -- and as Alan was also alluding to, the declining share of labor in economic output of the developed countries. Are these -- are these transitory? -- well, obviously the growth of the labor force is not transitory, but is it one-time big jump, and is the decline in labor share a transitory phenomenon, or is there something that's a more secular development here that's going to require a bigger transition in the U.S. economy?
MATTHEW J. SLAUGHTER: That's a great question, and I think every quarter that ticks along -- where we see the same types of income trends in the U.S. and a lot of these other countries, makes us think it's more of a secular, kind of long-term change in the world economy rather than some sort of business cycle issue.
I'll come back to the U.S. and just dig down a little bit more into what Alan said. I agree completely with everything he said, and if anything I'd push more strongly in the sense that one of the really nice things about Alan Blinder's work is he's pointing out that the 80/20 split that you mention, that kind of conventional wisdom in the air that says while income equality has been rising in the U.S. -- depending on what measure you look at since the mid- to late-70s -- that's based on, you know, large collection of studies by Alan and me and lots of other academic and policy economists, but most of that work kind of looked at the period from the mid- to late-70s through the early- to mid- to 1990s.
In that past five to 10 years, we simply don't have kind of a related set of studies to kind of understand what's been going on with trends and income growth in the United States. And one of the things we now know that's a fact is in the past kind of five to 10 years -- depending on what data set you look at -- income growth in U.S. has been -- for individuals has been extremely skewed at the very, very high end of the income distribution.
Per The New York Times story that was on my hotel door this morning on, you know, the returns to the higher hedge funds managers and people like that, the income growth in the United States have had this productivity acceleration in the past 10 years which has been fantastic for average living standards, but average is a really important adjective there because the distribution of those gains and the income height has been extremely skewed.
So if you look at earnings by educational attainment for example -- let me just give you number if I can -- look at 2000 through 2005, the most recent year we have data for, and look at mean total money earnings by educational cohort. And of all the workers in the U.S. economy in that period, the only educational cohorts that had increases in mean real earnings over that period -- so adjust for inflation -- were PhDs and people with professional degrees -- the doctors, the lawyers and the MBAs. And that was only 3.4 percent of payroll jobs in 2005. So during that period, not even college graduates and not even nonprofessional masters degrees -- who together account for about 29 percent of payroll jobs today -- their mean real earnings were falling over that period as well. And that's a real change -- and Alan, correct me if you think I'm wrong, but think we just (don't ?) know yet what set of forces are contributing to those changes.
And Alan Blinder putting out about thinking about offshoring of services and things -- part of what I think of as an empirical person is we just don't know -- you talk to companies and they say, well, gosh, you know, the advances in IT technology now allow us to hire a lot more people around the world to do a lot of different activities. And, are you going to call it technology change? Or are you going to call that international trade -- if it's mediated within a multinational company? Are you going to call that the role of foreign direct investment? So kind of the 80/20 split, I think, if anything is getting a lot harder to understand how to kind of keep score.
But the income growth numbers are very different in recent years in U.S. and in other countries as you said. And I'm very concerned about the political economy implications of that because people tend to be pretty sophisticated pocketbook voters, especially when we look at the following public support for more open borders in the U.S. and other countries.
STEPHEN S. ROACH: Yeah, I found it interesting in actually reviewing Alan Blinder's piece of a year ago last night, and if you look at the detailed tabulation of workers that he estimates will be exposed to offshoring, he lists 100 percent of all the 12,000 economists -- (laughter) -- in the United States, so, my guess is, Daniel, five years from now you'll just have a big screen up here. (Laugher.)
But both Matt and Alan Krueger made a, I think, a provocative and interesting point and that is economists like to parse out the distinction between technology and trade. And Matt just said you can't do that anymore.
I mean, why are we trading services? It's because we have IT-enabled connectivity that allows you to beam the knowledge content of the offshore knowledge worker from Mumbai, Shanghai, whatever, to your desktop in New York. And so that -- it's critical to point out that that distinction is now blurred as never before so you can't do these neat little statistical tests where you parse out the impact of technology versus the impact of trade.
And then the final thing is just to pick up on what Matt said, I mean, why are we talking about this? We're talking about it because the politics right now of dealing with these tough globalization issues are reaching a boiling point in Washington. And it's all about trade frictions and what I think is a strong potential for this Congress -- both in the House and the Senate -- to enact trade sanctions against China later this year. I've testified twice in front of the Congress in the last two months -- the House and the Senate -- I'm telling you these guys, you may not like the theory, the logic, the rationale that they're applying to the problem, and I, quite frankly, don't, but they're dead serious. We had a lot of talk about trade issues over the past two to three years, this is the year when there is bipartisan support to translate the talk into action. So the topics that we are discussing today, this is not academic theory, this is real life drama being played out right now on Capitol Hill.
TARULLO: Want to pick up on that in a couple of minutes, but let's try to get a few more analytic points on the table first -- and Alan, you were mentioning the transition, the getting from here to there, it's a particularly interesting observation in light of the fact that both Alan’s -- you and Alan Blinder and I'm sure Matt as well -- would agree that whatever may happen, has only begun to happen. That is to say that by any numbers that we actually have, the amount of outsourcing is relatively small, so this is all kind of future oriented.
Are there breaks, internal to the system, that will stop the acceleration of outsourcing at some point because either of micro-bottlenecks or simply because the macroeconomy in the U.S. can't sustain it and you'll have a sort of self equilibration? Or is it possible that this will just keep happening in a straight-line fashion?
KRUEGER: Right. That's a good question. I think we probably are at the beginning. And that's the other reason why I think it's really timely to address this now because some of the policies that you would want to pursue for the transition is to make Americans more willing to accept open markets would be good to put in place first -- or at least in combination.
It's a little bit like the demographic ways, where you can see things coming but we're not preparing for them, so obviously improving education of the U.S. workforce, which regardless of the reason for the rising inequality is probably a beneficial thing.
But in terms of, you know, your direct question about the kind of is this going to be linear, I suspect it's not going to be linear and there are breaks which are both kind of good and bad. So one is at a certain point, wages are going to rise in India and China and they're going to face supply constraints. They're rapidly, rapidly investing in education -- really a model I think for the rest of the world -- and quickly narrowing the gap with us, but they still are starting from a very low base. And some of the numbers are a bit misleading in terms of the number of engineers in China and India and probably greatly inflate the numbers. So at a certain point, they're going to reach bottlenecks and their wages are going to rise. So that's one of the breaks here, which is kind of a natural break, and that's the market working.
Another kind, which I'm more concerned about is the natural reaction that's going to be to require if someone is going to provide a service that they're going to need a U.S. license. So to prevent radiologists in Australia or India from reading our x-rays, I can imagine if an area where radiologists in the U.S. require a U.S. license. And that's already going on to a certain extent and you can see that happening with accounting and I can see that to a much better extent.
Just came up with an estimate: 30 percent of workers in the U.S. are in a job that requires a license. Really remarkable and it's kind of been completely under the radar screen. And licensing can be good if it keeps out people who are not going to do a good job reading your x-rays or performing surgery and it can be bad if it's just limiting supply and driving up wages. And I have the suspicion that it's more the latter than the former in many occupations.
So the drive for requiring U.S.-based occupational licensing could put a -- could slow it down to some extent. There could be other trade measures -- trade tractions which I think would be counterproductive.
TARULLO: Thirty percent? I mean can you -- just
ROACH: (Inaudible) -- I just renewed it last week.
TARULLO: No, I'm serious -- that sounds like a really high number so I'm wondering if you -- just give some examples of nontraditional licenses that may not be --
ROACH: You mean every member of the bar is licensed?
KRUEGER: Not only the bar, not only accounting, not only physicians, but -- and not only teachers, not only nurses, but also tattoo artists, mortgage lenders often in many states --
SLAUGHTER: Not all of them. (Laughter.)
TARULLO: The Morgan Stanley Finance --
KRUEGER: In some places it's the banks, not the mortgage lenders.
Electricians in some sates, beauticians -- in some states, the debate is not whether the person that cuts your hair needs a license, but the person who washes it. And I have to say, I wash my hair every morning without a license.
I don't see why that's, you know, in the public safety -- in the public's interest. It's spreading remarkably quickly. And it's not something the government can keep track of.
The number I gave you was from a survey I did together with Gallup, where we asked 4,000 people, "Is a license required to do the job that you do?" And it tends to be higher-educated positions, but it -- but not only. And also if you look -- because there's some professions where there are jobs that are licensed and some which are not and -- depending upon the state -- wages are about 16 (percent), 17 percent higher for workers who will -- have a license, which looks a lot like labor unions, that's -- you know, if you compare occupational licensing to labor unions, which have been declining, you know, linearly since the late 1950s. I think licensing has taken the place of unions and -- kind of under the radar screen and with some costs that unions didn't have.
TARULLO: Matt, did -- Pete Peterson's sitting in the -- at the front table, and Pete can testify to the difficulty of getting people to focus on a problem which is looming but not actually affecting you right at a particular moment. (Laughter.) You just finished a few years in Washington; I've been there a little longer than that. I, at least -- and I wonder whether you share this view -- have no sense that there is any preparation for the kind of shift in either active labor market policies or educational policies that would even begin to the kind of secular trends that the three of you are talking about. Do you share that unfortunately somewhat pessimistic view? And even if you do, are there ideas out there that people should be thinking more actively about than they are right now?
SLAUGHTER: Yes. Unfortunately I'm pretty pessimistic. So -- meaning, start with the -- again, start with the public opinion evidence, which I think is shocking.
In the past -- The Wall Street Journal does some nice polling from end of '99 to the beginning of this year, so in about seven years they've asked a nice question about do you support freer trade in the U.S.? Is free trade beneficial to the U.S. or not? And there was a fall by 16 percentage points in the people that said it was good for the U.S., and a rise of 11 percentage points of people who said it was bad for the U.S. -- so kind of a 27 percentage point swing. And in the most recent survey, March of '07, barely one in three people who have a college degree or above say that the global economy is good for them.
And so again, the breadth -- when we look at the collapse of the Doha development round, when we look at stalled immigration reform talks in the U.S., when we look at all the rising resistance to inward foreign direct investment in the U.S., I think there's a common thread there, which is again this lack of real income growth for the very, very large majority of Americans that's been going on for several years at this point.
And again, that's just data. So that provides us broad public policy resistance. And then when you start to think about policy solutions, you know, folks at the Peterson Institute and other places in Washington -- Brookings -- have done great work thinking about a lot of existing programs we have, but take trade adjustment assistance for example. By definition, TAA is a program that was set up decades ago where only a set of particular industries in the U.S. and a set of particular workers -- and it's mainly manufacturing workers -- are eligible for TAA support. And in recent years total federal spending on TAA has been in the neighborhood of $300 million. You know, that's about 1/100th of 1 percent of federal spending last year.
And the magnitudes we're talking about of the kind of -- the aggregate gains of globalization -- again, I'll cite numbers from Gary Hufbauer and people at the Peterson Institute -- annual income gains that the U.S. enjoys today from previous trade and investment liberalization -- depending on how you do the numbers, we're talking $500 billion to $1 trillion per year higher income in the U.S., thanks to all the trade and investment liberalization we've had in the past. But when you think about the distribution of those gains and the potential need for programs to think about broadening who's directly benefiting from that, the main program a lot of people look at -- TAA -- has had some implementation issues. But again, I'd just come back to the funding issue, which is kind of -- the magnitudes involved I think are just not commensurate with kind of the economic forces that we're seeing.
TARULLO: Steve, so let's turn back to -- Peter's been on this point each of the last couple of sessions and now that he's been testifying before Congress, I knew that the concern level was going to rise.
Based just on what all of you have said, this should come as no surprise to you, right? I mean, if you've got a looming set of dislocations, some of which are perceived already to be happening, others of which from -- you know, you've got an economist who served in a Democratic administration, an economist who served in a Republican administration largely agreeing on the analytics of what may be happening; you've got no solutions that are -- even the kind of solutions that 20 years ago were being offered to people. It's not a particular surprise, is it, that there's going to be a political reaction of saying, "Look, if there's one thing that we can control, and that's the flow of imports into the -- we may not be able to control technology, but that we can control"? And if there's a perception that you've got a shifting of jobs to other countries -- I don't agree with the instinct, but it seems to me hard to be surprised by this.
ROACH: No, Dan, it's not surprising, but it's disturbing for two reasons: one, you know, the Congress believes that you look at a huge trade deficit like the U.S. has and you connect the trade deficit to the pressures on the workforce, and then you take the biggest piece of the trade deficit -- 34 percent of which late last year went to China -- and so you point the finger at China and say, "All we've got to do to help American workers is bash China."
What the Congress refuses to get -- and I've testified on this for years -- I feel like Pete Peterson running about, you know, the demographics and the entitlements time bomb -- is, we don't save as a nation. And so lacking in savings domestically, we import surplus savings from abroad, run massive current account and trade deficits to attract the capital. If Congress wants to deal with the trade issue, they ought to look in the mirror. They won't do that, of course. They want to point the finger at someone else.
The second point that's really critical here that we haven't talked about is, we've done globalization before -- 1880 to 1914. You know, it took a long time for that -- the infrastructure of globalization to be laid because it was a globalization of tangible goods. It was transmitted around the world through ships, rail and eventually vehicles. This is IT-enabled globalization occurring at hyper speed. So the displacement, the shock that goes into the workforce is occurring at a pace that workers and politicians honestly cannot fathom. So that unleashes a tremendous amount of angst and insecurity that has some very destabilizing political impacts. And so this is a very different phenomenon than we've been through historically. And I guess by definition, you know, history always gives you, you know, new twists and turns on the same story. But we really have to I think pay attention to the speed factor here.
TARULLO: Alan -- one more round of questions before we turn to China.
There was an interesting chart in the IMF chapter to which I referred earlier that tried to decompose the various factors that play into labor globalization and trying to figure out how much of an effect each of them had on the compression of labor share in the economy. And one thing that I was drawn to was that the contribution of immigration seemed larger for the United States and Britain than either off-shoring or trade pricing in the effect upon labor in the United States. I know you've done some work on immigration and the effect of immigration on domestic labor supply. How big a role is immigration playing here and in the rest of the developed world, I guess, except Japan where it's obviously not playing much of a role?
KRUEGER: Yeah. I would say immigration is playing some role. One of the differences with immigration is when immigrants come to the U.S., they also increase demand for U.S.-produced services. So it's not just kind of a supply shock. In fact I would rather have the production take place within the U.S. and have the immigration come to the U.S. rather than offshore. Then at least we can tax it and the immigrants will consume services here and add to the vibrancy of the U.S. economy.
I would say, you know, looking backwards -- and it is difficult to parse the different factors and they interact with each other probably more so going forward than backwards -- that the spread of computers was probably the number one cause of the rising inequality that we saw in the U.S. And then I would put some of the institutional changes that we had next, like the drop in unions, the fall in the real value of the minimum wage, deregulation. And then I would put immigration. So I probably would order it the same way as the IMF, but it's still not a major impact of inequality.
And it has a lot to do with the composition of the immigrants who are coming to the U.S., which tends to be very bimodal, which is also adding to the hollowing out of the U.S. labor market. You know, Matt said before we understand the rise in inequality from the late '70s to the mid-'90s, but (it all ?) happened since then. Since then, what has happened from what I can tell is the middle -- the vast middle has really done poorly, and that's a much more difficult problem to address with public policy. The bottom doesn't cost that much money to raise if you want to make transfers. We haven't had that much will to make those transfers, but if we wanted to do it it's not that costly.
But the vast middle is much more difficult. There's a problem, and there I think immigration has contributed to hollowing out of the middle because U.S. immigration has to be concentrated on less-skilled workers and then some very technical workers. It's the middle that's missing, and I think that the policy we have for immigration is completely ad hoc. It's not -- it's done with family reunification in mind, not with economic considerations in mind.
TARULLO: Any -- either of you want to comment on the immigration issue?
KRUEGER: I'd just say Alan's exactly right. California's the leading indicator for immigration, I think, in my mind. And if you look at California, the bimodal point that Alan pointed to is exactly right. Very high-skilled folks. And the guesstimates today are about one in -- upwards of one in six workers in the entire California labor force is an immigrant high school dropout. And so kind of -- if we continue with an ad hoc immigration policy, that's kind of where the indicator for what's happening in the broader U.S. economy.
TARULLO: All right.
Turning to China now, which in some respects is the obverse of what we've just been talking about, I'm going to begin with Steve here, who spends most of his time so far as I can tell over the Pacific or in China itself. Steve, as long as you and I have been doing this series -- and I think you did your first one in 2001, maybe, and I -- I'd started it the year before, we keep asking the question, "Well, is China's growth going to slow down?" And the only thing that's happened in that period is China's growth has picked up from the high single digits to now -- four or five years in a row -- double digit growth. At the same time, something that it has changed is that China has gone from being roughly imbalanced -- on account balance with the rest of the world to running a current account balance of -- last year about eight and a half percent of GDP, this year closer to -- projected to be closer to nine percent of GDP, 60 to 70 percent of which is attributable to trade with the U.S., by the way.
Is -- how sustainable is China's growth pattern, both the amount and the type of growth? And perhaps more importantly than that, what signs do you see that China is shifting its growth model from one largely based on high savings, high investment and high orientation to the export or external sector to one that's driven a bit more by domestic consumption?
ROACH: Well, first of all, Dan, I have learned in really boring into China in the last 10 years, when you raise questions of sustainability about the Chinese economy, do not underestimate the Chinese and their ability to sustain solid momentum in the economy despite a lot of the sort of traditional macro tensions and pressure points that we macro practitioners like to focus on. China, despite all the talk about transition to a market-based economy, their blended economy state still has a dominant presence in most sectors of the economy as so, as a result they can keep pushing this model for a lot longer than a pure market-based system would allow you to do.
When we first started talking about China in 2000 and 2001, there's another statistic that I think you should think about, and that is that the two growth -- the most dynamic growth sectors in China, exports and fixed investment, back then were about -- oh, I think about 45 percent of the Chinese GDP. Today those same two sectors are over 80 percent of the Chinese GDP. There's no example in modern history where you have such a concentrated growth dynamic in two sectors -- exports and fixed investment. And those -- clearly there's a limit to how far those shares can go and you're getting close to that limit, but there's also feedback. If you just keep pushing investment, which is now close to 50 percent of GDP higher and higher, you're -- it's a recipe for excess capacity and deflation. If you keep pushing on the export share, which is now over 35 percent of the Chinese GDP, it's a recipe for trade frictions and protections. And we're seeing that playing out already.
So the Chinese know this. I mean, this is not a big secret. And in the five-year plan that was enacted a year ago by the National People's Congress, they embraced a structural change in the shift of their growth model that would move away from investment and exports toward much more of a pro-consumption dynamic. But -- you know, this -- you know -- especially in a planned economy, you don't push a button and start a consumer culture. They're lacking in safety nets like pensions and Social Security and unemployment insurance.
There's a heck of a lot of job insecurity from the some 60 (million), 65 million workers who have lost everything that the Iron Rice Bowl guaranteed them under the guise of a state-owned enterprise employment historically.
So I think, you know, over the next three to five years -- and I stress three to five years -- you are definitely going to see the emergence of a much more broad-based, consumer-led growth dynamic in China. But it's not going to happen this year or next year with the type of force that will alleviate the need for the Chinese to rely on exports and investment. And that remains, again, a destabilizing feedback into the political economy of trade protectionism.
TARULLO: Matt, you must have spent a lot of time on China over the last couple of years -- lot of interagency meetings, lot of sitting around the Roosevelt Room trying to figure out what to do about it. From your perspective, has there been much change in Chinese policy as opposed to Chinese words about what their policy may be? And I refer not just to the shift towards -- specific shift towards consumption Steve was talking about, but even measures to improve the operation of the financial system, which most people agree is critical to actually being able to relax currency controls and the like.
SLAUGHTER: Right, right. Yes. I think that -- I think there is actual change in policy, so your point is well-taken -- on financial markets, for example. I mean, I think government officials both at the PBFC and throughout other -- Ministry of Finance and other parts of the economy realize one of the industries -- one of the sectors of their economy that has the least amount of market forces, both in domestic competition and importantly from an international trade and investment is financial services and a lot of related services and activities, in contrast to agriculture, in contrast to manufacturing where there's many years if not decades of market liberalization that's gone on.
And they realize that's a real issue, especially from the standpoint of monetary policy. Here in the U.S. it's all -- again, coming back to what Steve had mentioned, the policy discussion in Washington -- I was struck in my time at CEA on the amount of time that gets spent talking about the nominal Yuan-dollar exchange rate, as if that's sort of the magic button, that somehow we could find that magic price that's going to eliminate the trade deficit between our two countries and do everything else that people conjecture it might do. That one nominal price in and of itself isn't going to do anything in terms of changing the real economic forces that are driving growth in China and the links between China and the United States.
But again, there's real -- I think there's been -- when you look at kind of a lot of the microeconomic reforms that have gone on in terms of market trading mechanisms for currency, in terms of trying to introduce -- especially through foreign investment -- a set of companies and institutions that have the technology and techniques to implement a lot of financial services that are needed, from a policy standpoint to have a broader mix of what they can do with their monetary policy, because unlike in the United States and other countries, they don't quite have a sufficiently developed financial sector to have monetary policy work through interest rate mechanisms like we do with the Fed in the U.S. and most other advanced countries. That's a big challenge that they're moving on, but again, that's not something that the Yuan-dollar exchange rate in and of itself has anything to do with, and it's not something that you can do in a week or in a month. I mean, that clock ticks pretty slowly.
So there's real change. And hopefully the strategic economic dialogue -- which I spent a lot of time on with colleagues at Treasury and elsewhere, that Secretary Paulson has been leading between the U.S. and China -- those discussions hopefully will foster the policy movement there.
TARULLO: Just putting together something Matt just said on the Paulson dialogue with what Steve said -- this is just a prediction -- that the next meeting of this group is the third week in May in Washington, and I will predict, Steve, that if something concrete does not emerge from that set of meetings, the forces that you experienced on the Hill whenever it was -- month, two -- two months ago -- are going to be increased by 50 (percent), 60 (percent), 70 (percent), 80 percent.
ROACH: I will -- I will up your prediction, Dan, and predict that nothing will happen with that strategic economic dialogue. (Laughter.)
TARULLO: Yeah. I think -- yeah. That's just -- this is -- I think this meeting really is the tipping point because it's in Washington, because it's the third meeting, because nothing much has emerged from the first two.
Alan, on the -- stepping back a second and looking at the relationship between China and the United States, we've got this embrace really that China and the United States have of one another with us running a very large current account surplus, being the consumers of last resort in the world --
TARULLO: -- deficit, excuse me -- being the consumers of last resort in the world; China running a growing current account surplus. Presumably these two things can't continue on the path that they've been going either, but what are the prospects for a more rebalanced world growth? And I guess importantly from U.S. consumer and workers' point of view, is there any way in which that rebalancing takes place that doesn't include significantly reduced U.S. consumption as we save more and spend less?
KRUEGER: Well, I don't see how that happens without reduction in U.S. consumption. And I think it's great that China wants to continue selling cheap stuff to us. I mean, in a certain respect, we really ought to celebrate what China has done, not just for us -- our politicians tend to focus on the negative -- but also for its own people. I mean, there has really never been a time in human history where so many people have been lifted out of poverty. At the same time it has created tremendous inequality in China, and I wonder in the long run how sustainable that is with its structure.
I worry that we're on a collision course with China. I mean, I worry what's going to happen when the American public wakes up and realizes that China lands a man on the moon, which will happen in the, you know, relatively near future. And I suspect it's the case that September 11th postponed a greater confrontation with China. And in a way maybe that was one of the positive outcomes of that awful event.
So I think we can probably go on for a long time if China wants to continue selling to us and taking IOUs in exchange. I have the suspicion China is going to turn its focus more towards Europe and Asia, which it's already doing, I think, and I think that will especially be the case if the American politicians try to use China as a scapegoat.
TARULLO: The point Alan just made probably bears repeating and elaboration, particularly in the Council on Foreign Relations.
A couple of years ago, Steve and I were involved in a project on national security. We were on the economic side of it, as you can imagine. But it struck me during that period that although the U.S. has had economic -- big economic rivalries and big geopolitical rivalries in the last 70, 80, 90 years, we've never had those rivalries with the same country at the same time. That is, we had economic rivalries and friction with Japan, but Japan was an ally. We had geopolitical rivalries with the Soviet Union, but the Soviet Union was not an economic rival of any sort at all. But with China we've got a situation of a rising power where we both have a sense of economic threat -- whether it's justified or not, it's widely perceived as threat -- with also geopolitical jockeying in Asia and indeed the larger world. And I think, Alan, that that's the -- it's the combination of those things that worries people because a problem in one area -- friction in one area can then carry over into another as well.
KRUEGER: Could I just comment on that?
KRUEGER: I mean, it's a funny kind of rival in that our GDP per capita is probably eight times as much, 10 times as much. You know, our GDP is -- total GDP is three times larger. And China's been growing proportionately faster than we are, but if you look at the levels -- you know, if you use purchasing power, parity dollars, we're actually growing just as fast if not faster.
So it -- I think it's easy -- and you kind of alluded to this -- it's easy to kind of inflate the threat. And I think one of the real difficulties -- we don't understand China. You know, we don't understand their leadership. It's a very different kind of government than we're accustomed to dealing with. And to me that's the real threat, that -- I'm not sure we understand their intentions.
ROACH: But Alan, isn't it the -- the real threat is that our political leaders are distorting the threat because -- you know, you can say all you want about, you know, per capita GDP and income growth in the U.S. The point that we've all made is that the labor share of that growth is now moving down to historic lows, and so the body -- not the -- I guess the Congress equates that with trade and the biggest piece of the trade gap is with China, so "this is China's fault." They are telling the American workers that they have identified the enemy. And so the anti-China sentiment, as I travel around Capitol Hill -- I've never seen it this high.
And it is bipartisan. It's deeply bipartisan. And the risk is, if these bills make it through the legislative process this summer, there's a real risk of a veto-proof margin in either the House or the Senate or both.
KRUEGER: I don't think we disagree. I think that the Congress is catering to what the American public find it easier to believe. And when I say we don't understand, I think I'm not -- I don't necessarily blame the leadership. I think they're following. You know, I think the Congress is kind of catering to their constituents, taking the path of least resistance. So that to me is the source of the problem. The public is not well-informed.
TARULLO: Steve, does China understand China right now?
ROACH: Look, it's -- there are a lot of issues they're very focused on. They need a lot of help. I mean, for example, they don't truly understand the dynamic with the U.S., the political issues that we've just discussed. They understand the threats that they're focused on right now, not just the imbalances in the various sectors of the economy and the disparities in the income distribution, but the focus right now, which is more intense than I've seen in China in a long time, is on the excesses of energy and resource consumption and pollution.
They understand the threat, but they don't understand the solution. And that is a problem. I mean, last year they were very explicit in identifying numerical targets on greenhouse emissions reductions and on energy per unit of GDP, and they failed miserably in hitting both of those targets.
The good news is they're transparent about it in admitting it. The bad news is that they don't really have a grand scheme to deal with these horrific externalities of this open-ended growth model. So there's a lot they need help on.
And, by the way, if they're really serious in focusing on energy conservation and environmental issues, what a huge opportunity for us with the technology in the West to use this to our commercial advantage in providing them with the skills and the tools to work in these areas.
TARULLO: What about the internal politics of China, and specifically fears within the Chinese leadership of political instability? I've always had the impression that a lot of their economic policy is driven by the specter of millions of jobless peasants roaming from the countryside into the cities. Is that an artifact of the past or is that still true?
ROACH: I think it's an exaggeration, Dan. I really do. Look, stability is the overarching concern always in China. So ultimately they will not push the envelope in terms of policies if there's a serious risk of instability economically, socially or politically.
But the system is very stable. They've had accelerating demonstrations over the last five years. They actually count them. You can get a good time series on them and plot the data. But most of the demonstrations are over the critical issue of land confiscation and land reform. These are not sort of, you know, workers that are just rising up and saying no to the system.
The biggest political factor that bears on China right now are these periodic five-year leadership change and jockeying around, and that's going on right now. And that does freeze up some of the decision-making that might be somewhat more aggressive in dealing with some of these issues probably for the next six months.
TARULLO: But I guess, if I can try it from another direction, obviously economic policy in the United States and most countries is driven somewhere between moderately and significantly by attention to the unemployment rate. To what extent is economic policy in China modified because of concerns about potential unemployment? And how specifically do those modifications manifest themselves?
ROACH: Look, last year the economy grew 10.7 percent and generated 11 million jobs. They --
TARULLO: In a country of 1.2 billion people.
ROACH: Yeah, 1.3 (billion) -- well, one-point -- yeah. What's 100 million? (Laughter.) They need rapid growth to keep replacing the jobs that they eliminate through state-owned enterprise reform. They don't need 10.7 percent. My guess is honestly they need somewhere around 6 to 7 percent. So anything on top of that is, you know, a lot of extra fluff which helps them really push the envelope on economic development.
But, you know, like in the U.S., you know, politicians don't like recessions because the GDP declines. The GDP will never decline in China, or if it does, China declines. So a recession in China would be anything below, say, 6 or 7 percent. So they have a different sort of marker, benchmark, hurdle rate in the way they manage their economy with respect to their job and unemployment objectives.
TARULLO: Let me finish -- before we turn to the audience for questions, finish on China by asking each of you what you think the -- you don't have to say the biggest single, but the biggest risk or two to China's medium-term growth.
SLAUGHTER: Thinking about it from the supply side, I think it's going to be the extent to which they continue to introduce market forces, because again, if you look at what's been driving growth, it's not population growth. I mean, the population growth is very slow. So it's not labor force growth. It's mainly capital accumulation and then kind of technology innovation, broadly defined, techniques and technologies.
As Steve said, investment rates have been so high in the aggregate that kind of the growth is going to come from capital deepening. It's probably not going to accelerate much further, if not slow down. So the biggest issue is what's going to happen with introducing more market forces to allow the technology and technique innovations to go on to make their firms more productive. I mean, about 80 percent of the capital stock in China is still owned by the state. So that'd be the one.
KRUEGER: I don't know if it's the biggest, but I would mention the internal migration issues. And there's something like 100 million workers just -- these are the 100 million you misplaced -- (laughter) -- floating between the agricultural areas and the cities who don't have the ability to send their kids to the public schools, and they do care about the quality of the schooling that they're getting, which is not very high, so the way that they integrate that very large workforce which they think they need.
TARULLO: And is that principally an economic barrier to growth or a political barrier to growth? That is, the potential --
KRUEGER: It's both. It's both. I think they're probably worried that if they loosened it up that it would be a much bigger flood than the 100 million. But I think they realize they have to have some kind of transition, and it's kind of under the radar screen as problems go. There are big housing issues for this transient population.
One of the great strengths of the U.S. labor market is we're able to absorb an enormous amount of turnover in jobs. Two million workers change jobs every month, move across the country. We're very mobile. That's not the case in much of Europe. And China is kind of somewhere in between. And I think for them to go through the kind of economic transition they're going through, they have to manage that issue.
ROACH: Well, Dan, you know, I've sort of made a career out of focusing on risk to every economy I've ever looked at. It's easy to focus on risks. I would say, in all candor, the biggest risk about China is they just pull it off, that actually all these risks that we worry about, whether it's the banking crisis, social instability, pollution, whatever, they manage it and they do a very powerful transition.
And by fixating on the risks of the unsustainability of the Chinese growth model, which has become sort of a cottage industry in the West, we miss one of the greatest development stories that the world has ever seen. And they actually pull it off, and we're surprised by that. And actually, if I had to make a bet right now, I would bet on exactly that. I think over the next three to five years, when we do one of these conferences, hooked up with a video screen to the economists sitting in Shanghai, they'll be smiling at us. They will have pulled it off.
TARULLO: No risks. (Laughter.)
ROACH: Please. I would never say no risks. (Laughter.)
TARULLO: Okay. So now we'll take questions and comments from you. And as I said earlier, please -- when I recognize you, please stand up, wait for the mike, identify yourself, and then ask your question. Okay, now we're ready for -- yes, right there, sir.
QUESTIONER: I'm David Robinson, Carnegie Corporation.
As you talked about close relationships between us and China in terms of economic and political tensions, I didn't hear the word Taiwan mentioned, which has enormous both political and economic connections with China. And is there any -- I didn't hear it in talking about risk, but that's something that I tend to worry about. I wonder if any of the people up there do.
SLAUGHTER: I'd just say, Taiwan is always a risk, but it has to be destabilized to come into play. From time to time it does get destabilizing. The current president, Chen Shui-bian, is clearly a nationalist that wants to destabilize the relationship. The fact that the relationship has not been destabilized under his tenure is indicative of the fact that right now this is not a serious threat. That doesn't mean it can't be. It doesn't mean it won't be.
The Chinese have indicated sort of infinite patience in evaluating Taiwan reunification as a long-term objective. If they ever become convinced that that long-term objective is no longer operative, then you have to include it as a very significant risk factor. I think the odds of that are extremely low.
KRUEGER: In my last trip to China, I was asking about exactly that. And one of the things that I was told is that China believes in enclaves. And one of the reasons it's treated Hong Kong that way that it has, is it wants to set an example for Taiwan. And 50 years, 75 years, as Steve said, they're very patient. Think about Taiwan coming back, seeing that Hong Kong was treated separately and has flourished, and if China continues to grow, it's not out of the picture. So I think China does take kind of a long-term perspective, much longer term than we tend to in the West.
TARULLO: (Inaudible) -- slightly less optimistic -- first of all, something on the economic side, which is actually stabilizing. China now imports an enormous amount from Taiwan. The integration of the mainland and Taiwanese economies has actually proceeded at pace, notwithstanding the continued political tensions.
I guess I do think, though, that Taiwan is the one issue on which China's highly rationalist and, in our academic sense, realist foreign policy may break down. I think that's probably the one area in which emotion, in a certain degree of irrationality could, under some circumstances, actually emerge.
QUESTIONER: I think all of you in different ways are rejecting that there's a significant risk of protectionism. I'd like to push you to the next stage. Let's assume that there is protectionist action and its aimed against China. I'd be interested in what you see then. What affect that might have on the dollar, what effect -- how do they respond. In other words, lay out a scenario in which there is protectionism aimed at China. What are its likely implications.
TARULLO: Steve, why don't you start with it?
ROACH: Well, we've already seen two actions in the last month from the Bush administration. One on paper with countervailing duties imposed -- or -- I guess there's a 60-day waiting period when they'll be imposed on China in June. And two, the initiation of two WTO disputes on intellectual property rights.
If that's all there is, you know, I don't think it's a big deal. But, what worries me, Pete, is that later this year the House and Senate pass a broad-based anti-China bill that puts sanctions on a large array of Chinese products. I think the Chinese will respond to that, and the response could be, one of three possibilities: a restriction of U.S. goods being sold into China, or raising the cost of that. A restriction of U.S. investment into China, either a portfolio or foreign direct investment. And then there's the big wild card that, you know, no one believes they would ever use, which is now the $1.2 trillion portfolio of foreign exchange reserves, about 63 percent of which is lodged in dollar-based assets, and start reallocating that portfolio away from dollars.
And that would have horrific consequences for the dollar, for real interest rates, and for the U.S. economy. So --
TARULLO: And for China.
ROACH: I think China would certainly pay a price for that, too. But they would calculate the cost-benefit of that. And the idea, Dan, that, well, they've got this portfolio --
ROACH: Well, I'm saying, a lot of people have this idea, well, they've got this portfolio, they wouldn't be stupid enough to play with it because they would get hurt, and therefore we've got them. Don't -- I wouldn't buy that.
TARULLO: Either one of you want to comment on that?
KRUEGER: I'm going to defer to Matt.
SLAUGHTER: I'd say two things. One is to pick up on the issue of global imbalances. Last year our current account deficit was $857 billion. So on that, we had to sell that many assets to the rest. So, many of you in the room know better than I of what's going to be the shift in probability; that's the relatively gradual depreciation of the dollar we've had since 2002 might markedly change. These stories of hard landing, disorderly adjustment, becomes more likely and actually materializes because the rest of the world starts to view the political risk against the U.S. differently.
And the other thing I'll mention, which is important, I think it's productivity growth. Productivity growth, non-farm labor productivity growth has been slowing since 2002. Some of that may be cyclical. But some of that, I think, we're less sure about the extent to which the productivity acceleration from '95 to 2000 roughly, might have been a one-off event.
And there's a lot of evidence, particularly in terms of industry, that its openness to international trade investment in particular that really drive productivity growth. So, one of the things I worry about at the micro-level is that a broader-based set of protectionist measures implemented in the United States is going to continue to stunt productivity growth, and then we're going to have the income distribution issues. And layered on top of it we're going to have, if we go back to something like the '73 to '95 productivity slowdown we had in the U.S.
KRUEGER: One other thing that I would suggest also is that it probably wouldn't be good for inflation. In the list of problems, it would probably lead to higher inflation in the U.S. And I don't know that it would have all that much effect on the trade deficit. And Matt can comment on this more than I can. I don't think China, and we are in the cone of diversification -- I think they're outside the cone that we're importing are mainly products that we're no longer manufacturing.
TARULLO: Steve, why don't you -- let me ask you to push on Pete's question a little bit more, because you mentioned the countervailing duty case, but then you mentioned the case of China on intellectual property in the WTO. We -- I'm having difficulty reading the Chinese reaction on that. China had quite a sharp reaction. The normal, if I can say this, if you file a case against Japan or the EU or Australia, their tendency is to react by saying the case has no merit, we'll go to the WTO, we'll show the case has no merit. And that'll be the end of it.
China's response was a bit more like this was a hostile act, filing a case in the WTO against us, as opposed to, this was an act in the normal play of a world trade system. Was that -- I mean, obviously, you're speculating too, but more informed than I am. Was that a warming shot across the bow to the United States about how it might react to something more vigorous? Or, is it a reflection of something you said earlier, that they really don't get the system yet.
ROACH: It's hard to say, Dan. I mean, I do go to China a lot. I was there last about four weeks ago. I talked about some of these issues. I would say that the U.S. complaint on IPR was not a surprise in Beijing. They had been warned of this by myself and others for probably over a year-and-a-half.
TARULLO: The administration has been warning them, too.
ROACH: And I think the message they're trying to send is just pretty much what it is on the surface. And that is, that this is a two-way street. The United States trades a lot with China and depends on China. And the U.S. wants China to play fairly. But, the U.S -- or China has some very strong views about the way in which it is being treated fairly in providing some significant subsidies to the United States in terms of the lost-cost, high quality goods. Lots of demand for Treasury, which keeps interest rates low and financial markets frothy.
And that, you know, look, there are consequences of actions, and I think that's the message -- I don't think they were sending anything to be explicit, about what to expect down the road. But it's a two-way street.
TARULLO: Yes, right there.
QUESTIONER: Dan Rosen, China strategic advisor in the Peterson Institute. First, a comment on the previous question. The IPR mandate in China is held directly on Wi's (sp) desk. So, she's got personal, political exposure to an American suggestion that IPR is being fumbled on the Chinese side. So, I think that might have something to do with Chinese reaction.
My question tries to combine the globalization in China questions, and it concerns how globalized China really is. The majority of Chinese exports are the products of foreign companies set up in China. When I talked to Fortune 100 CEOs, not one in 50 of them can name three Chinese brands that have any presence whatsoever in the United States. And one of the ones they do think so, I think, of course as an MNA acquisition, IBM pc.
Is China really globalized, or do we have foreign enclaves in China that are taking advantage of Chinese factors?
ROACH: I guess the short answer is yes and yes. I mean, yeah they're becoming more globalized when you look at some of the more traditional measures, like trade flows across borders. But like other countries, "no" from the standpoint of there many, kind of Chinese multinationals that are establishing and expanding operations abroad, and that HAVE global brands.
That produce, like with India and other middle and low-income countries is just rising.
And so that's why I come back to this question of -- when I think of, because the integration of China and India in Central Eastern Europe, how far along are we in that process per some of our earlier comments -- I think, there's a lot of reason to think that we're pretty early in that overall process because the dimensions of globalization that one thinks of that affect the world -- and in particular the U.S., on a lot of the measures were, countries like China are just beginning to, kind of, emerge on the radar screen.
TARULLO: And just -- one would presume that the establishment of domestic industries that are competitive with the foreign enclaves is the first step towards them acquiring more of a multinational presence. And in that, at least we are seeing some change -- in automobiles and some other sectors as well.
KRUEGER: But, you know, I'd also say that -- you know, looking forward, if the new concern is off-shoring of services, I think China is much less of risk because of the language differences.
TARULLO: Than India?
KRUEGER: Than India would be.
TARULLO: Yeah, okay.
Yeah, right here, sir. We'll get you a mike -- coming from your left.
QUESTIONER: Thanks. Yves Istel, Rothschild.
I understand perfectly, though obviously, and we all do, the points you've made about the political sensitivities of the income issues and the jobs issues, but I have not heard much about, sort of, the countervailing effect on purchasing power. For example, all these imported products at Kmart and Target are, in fact -- the prices have been dropping by several percent a year, and the total dollars of savings to the American consumer -- much less poignant than a job loss, but are much greater than whatever downgrading of job income has taken place. Why has this issue sort of, if I'm correct, has not surfaced as part of the debate? Is it just less sexy?
KRUEGER: You know, Americans are really funny. If you asked them who benefits from trade, they say consumers benefit from trade and workers don't. (Laughter.) They ignore the fact that workers also consume, so there's this funny dichotomy. And I -- you know, my specialty is not pubic relations, but I think we haven't done a job explaining that.
TARULLO: But Alan, how -- let's get a little more deeply into it, how are the gains from lower import prices distributed relative to the wage compressions that's resulted from all the factors we were talking about earlier?
KRUEGER: Right. It's probably fairly uniform, I would say. You know, you could think of some goods like flat-screen TVs, which are a lot cheaper, which would probably be more higher income consumers. But then you can look at other goods like, you know, toys and Christmas presents and so on. And my guess is it would be fairly uniform, and I think there's a little bit of research to support that.
SLAUGHTER: Yeah, if I may -- if you look at pubic opinion evidence, and I had an old college roommate that was in political science. We had data going back to the 1920s on pubic opinion questions about what people think about trade and investment and all these things. And you hear a lot in the policy discussions, "Well we just need to do a better job of explaining the benefits." I think -- that's off-base, I think, because large majorities of Americans for quite some time have acknowledged all the gains, including the greater consumer choice and lower prices, that folks like us talk about.
So I think one of the reasons you don't hear a lot about that today is if you look at the pubic opinion evidence, literally 80 (percent), 90 percent of Americans will say, yes, I understand that I as a consumer, when I go to Wal-Mart, benefit from that flat-screen TV at this price and the t-shirt at that price. But, again, people are pretty sophisticated -- they think about real incomes. And so they think, not just about what the price basket that they're enjoying, how that's doing, but they're thinking about what's happening with their W-2.
TARULLO: I think that, Matt, on that point I thought -- I recall a fair bit of evidence, too, on the proposition that people are affected by what they see as concentrated losses on others. I mean, there's this wonderful little statistic about how people's views on international trade change -- not as they lose their job, but if someone in the neighborhood loses their job in a way that's associated with trade, and that seems to personalize it, and change the views of the balance of costs and benefits.
Okay, we have one more -- time for one more question. Right here.
QUESTIONER: Somewhat of a related question -- given that the --
TARULLO: I'm sorry, could you identify yourself?
QUESTIONER: Sorry. Rob Underwood from Deloitte & Touche.
Given that the debate around globalization exists concurrently with the debate around global warming, do you see any way to reconcile the narratives -- around the impacts of people's daily lives of a response to global warming, with that around the economic disruption of globalization?
TARULLO: A third -- a third long-term issue that people aren't responding to. (Laughter.)
Who wants to pick up on that? You talked a little about global warming, Steve.
ROACH: Thank you. (Laughter.)
TARULLO: Yeah, none of us are raising our hands on that one.
ROACH: Yeah. (Laughter.) Look -- point well-taken. It's -- to get the world to come together these days on collective issues is very difficult. That's perhaps the greatest irony of globalization -- whether we are framing monetary policies, retirement policies, other types of tax policies, trade policies -- it's pretty much like each nation is in it for itself. And so I think that the fabric that brings these types of issues together is the one that you implicitly identified in your question -- and that is, somehow empowering a greater ability to analyze and remediate these issues on a cross-border basis.
And the world will get there at some point -- I doubt if any of us will be around to see that, but we have, we have to sort of, I think, have confidence that when you do have a powerful trend like global climate change, like global trade flows, like global economic development, that there does, out of that, those challenges, arise leadership that can transcend borders. We don't have that now. We don't have a political system that effectively does that, but that doesn't mean that we can pretend that we don't need it or that we won't get there.
I want to thank Matt and Alan for joining us for the first time. And Steve, as always, and thanks to all of you.
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