Global repercussions: The impact of today's U.S. economy panel

February 7, 2013 0:00:54
Kaltura Video

A conversation with Edwin (Ted) Truman, senior fellow at the Peterson Institute; the Ford School's Marina v.N. Whitman, a professor of public policy; and Susan M. Collins, Joan and Sanford Weill Dean of Public Policy. February, 2013.


>> Susan Collins: It is wonderful to have you all with us this evening.  It is great to see everybody.  We are teasing that everyone sits in the back.  And so all of the folks who are going to be joining us later are going to get to have a special welcome if they come up to the front.  So this is an informal, family gathering: the Ford School family.  And so I hope you'll encourage people to come up to the front as they come in.  So good evening.  I'm Susan Collins, the Joan and Sanford Weill Dean of the Gerald R. Ford School of Public Policy and it is great to see both a number of familiar faces.  I look forward to talking with you afterwards.  But also a number of new faces and I look forward to talking with you as well.  With help from many of you in this room, Jennifer Niggemeier and Elisabeth Johnston have put together a really exciting two days, both activities today and activities that are going on tomorrow, and career panels that have an included I think about 44 school students on the trip.  And so I look forward to hearing about those, but I hope that they've been as productive as they promised to be.  You've come this evening for a keynote event which has become a tradition as part of our D.C. trip, and tonight we have a conversation where I will be joined by two very distinguished economists and friends who I will introduce later.  One is my colleague, Professor Marina Whitman and the second is Peter -- Institute Senior Fellow, Ted Truman [phonetic] and I will give more formal introductions in just a few moments.  
I'd like to start though by giving you a little bit of Ford School news.  The first item of news is a very sad piece of news.  And that is that someone who was a beloved long-time member of the Ford School community, a faculty member, Michael Cohen, who those who were active in the Ford School during its IPPS days will probably remember very fondly, died unexpectedly over the past weekend.  He had been battling cancer for a long time but it was a surprise and a shock.  And so we are very saddened by that.  There is information about a service this weekend that's on our website and also about the very many contributions that he made.  He was one of the really core intellectual faculty members who helped transition IPPS into a school.  And he was also one of the founding members of the School of Information.  And so had a great many contributions to the university, more generally as well.  So I encourage those of you who remember him to take a look at our website for more information.  
I also wanted to share some exciting Ford School news, that I hope that you will join us in activities related to and that is that we are starting celebrations for two back-to-back centennials.  2013 as many of you know, marks the hundredth anniversary of President Ford and we have a number of special activities that are already underway to commemorate his life and his legacy.  Brent Scrocoft [phonetic] will visit the Ford School later this semester to dedicate a [inaudible]: a smaller version of the statue of President Ford that sits in the capitol rotunda which we will have in our Great Hall.  And I hope many of you will join us there for that.  And Paul O'Neill [phonetic] who was former treasury secretary will be our commencement speaker this year in honor of again, what would have been the hundredth anniversary of President Ford's birth.  But of course, it's all of you in so many ways, our students and our alumni and members of our community, who really continue the legacy and the many contributions that President Ford made to public service.  And you're really one of our best ambassadors throughout that.  And we're so proud of all the things that you do.
I'm going to ask you to help us celebrate that centennial in a way that I hope you'll think is fun as well as - oops - as well as helping to spread the word about the school and helping us to kick off this centennial, and that is our Button Celebration.  So you see that I'm wearing a button.  Many of you took buttons as you came in.  Our speakers, our panelists, have their buttons.  And I hope that you will demonstrate your pride of the Ford School and wear it all around Washington and in your travels and all the places that you might be.  We're working on the details, but in fact we are about to launch a special Ford School picture of your button with President Ford and you might have seen the ad for it out on the table.  And so the idea is to go through all of your contacts list and see who is influential and impressive or just a really cool person that you would like to have a photo of wearing our Ford School pin or hundredth celebration of President Ford pin.  So get a picture, send it to us and we will have a really special prize for who is designated as the winner of that fun contest.  So you'll be hearing more about that and I hope you join us with that -- with that little contest as well.
In 2014, the school celebrates its hundredth anniversary and so that is the second of our back-to-back centennials.  And we're planning a number of activities and events.  Stay tuned.  Certainly one of them is going to be a reading in for alumni and we hope to announce the date in the coming months.  And look forward to seeing all of you and all of you Ford School friends joining us for that event.  I hope that you all saw the most recent edition of the Ford School Feed.  If you didn't let us know because we want to update your email address and make sure that you are on our card -- on our list for that.  And I hope that all of you put your business cards in.  If you didn't, I think Cliff and Jennifer were collecting - maybe Elisabeth and Amy as well - were collecting cards.  We always do a special drawing.  So let me get the basket and I will -- our last minute cards.  There we--
[ Inaudible background discussions ]
It's great for us to be able to stay in touch with all of you but -- oh wonderful.  Okay.  
>> Okay, okay.
>> Susan Collins: We've got some more.  Andrew has more.
>> Alright, dig deep.  Dig deep.
>> Susan Collins: Okay, dig deep.  And I'm not looking.  And we have Keith Fudge [phonetic].
>> Is your name [inaudible]?
>> Susan Collins: [laughter]  Never, never.  So we also have a special prize for our winner and this is our prize winner.  Now I know that further north, there's going to be a huge blizzard.  I don't think we're quite going to get the blizzard here.  At least I hope not.  Maybe just some rain.  But, Keith, you are going to be very warm because we have our Ford School travel mug for your coffee on your morning walk and we also have a scarf for you.  So I will leave that there and--
[ Applause ] 
Okay, so now for our main even this evening.  We are very fortunate to be joined by Ted Truman who is a Senior Fellow at the Peterson Institute for International Economics.  And he was a former 
Assistant Secretary for the U.S. Treasury of International Affairs under President Clinton.  I got to know him when he was the long-time Director of the Division of the International Affairs Division of the Federal Reserve Board, and is -- has enjoyed staying in touch with him throughout the years and look forward to hearing his thoughtful remarks later this evening.  Also joining us is our esteemed Ford School Michigan colleague, Professor Marina Whitman who of course is both at the School of Public Policy and the Ross School of Business.  She was a member of President Nixon's Council of Economic Advisors, among a number of very interesting career positions.  And many of you may have seen her recent memoir, "The Martian's Daughter," which was published this past fall by the University of Michigan Press.  And for those of you who haven't read it, I highly recommend it.  It is both a fascinating read, history, economics, very thoughtful and very, very interesting life and I encourage you to take a look at it.  There's actually a sample copy of it up there.  So both Marina and Ted have had careers that are really dedicated to understanding the U.S. economy and its role in the international system from a variety of different vantage points.  As we look at what's happening today, the intertwining of economies is increasing, and there are severe challenges that certainly the U.S. is facing, that Europe, Asia, emerging markets, and again, they're increasingly intertwined.  And so we're very fortunate I think to have the range of expertise that both ted and Marina bring to this topic for our conversation this evening.  So here's our format.  We're going to start out by inviting Ted to launch our discussion by giving some initial remarks about the outlook and his perspective.  And then he'll join me and Marina for an initial conversation between the three of us.  I want to leave at least 20 minutes for questions from the audience.  So I encourage you to think about what you want to ask him, but the three of us more generally, during the initial part of the discussion, and then we'll invite you to come to the speaker, which is over there, to ask questions for the last part of the session.  So with that, why don't we get started?  And I am delighted to invite Ted to give his remarks.  Welcome.  
[ Applause ] 
>> Ted Truman: Well thank you very much.  I was joking that Mr. Fudge gets to ask the first question.  And if no one asks the first question, we're going to call on you.
>> Okay.
>> Ted Truman: So it is a pleasure to be here with Marina and Susan this evening.  I've known -- I won't reveal how long I've known the two of them.  I have known Marina longer than I've known Susan, leave it at that.  And my connections with Michigan are several, but somewhat tenuous.  But may be of some marginal interest.  So my wife's great-uncle taught at the law school and more interestingly in some respects, her -- his wife, whose name was Margaret Tracy [phonetic] was a Professor of Economics there before World War II.  So for a -- so this was an example of Michigan being substantially ahead of its time I think.  And my wife's mother graduated there -- from there.  And then the summer of 1958, I spent in Ann Arbor while my father was working with the America Votes Project and I played a lot of golf.  And that's the only course on which I've ever broken a hundred.  [laughter]  Then nine years later when I was on the job market, I visited Ann Arbor and was not deemed worthy of an offer but we have -- but I have been back a number of times, actually.  I have a relative who lives in Ann Arbor.  And to date we do tend to root for Michigan -- do root for Michigan and the Big 10, including during the basketball game last Saturday night.  But that's only until the Maryland Terps join the Big 10.  [laughter]
So this evening, we're supposed to be discussing developments of the U.S. economy and policy and implications for the world, and I'm going to bend slightly the topic by thinking also of things the other way around - the implications of the world for the U.S. economy - because as Susan mentioned in her introductory remarks, we live in a joint world, a [inaudible] system which I was recently learned we're supposed to call now a "complex adaptive system that is always in disequilibrium."  This is -- I'm sure you learn this in school these days.  I just learned it yesterday.  I'm going to cover sort of four subtopics.  One, the outlook for the U.S. and the global economy, which continues as a timid subpar recovery.  Then a little bit on Europe which may resume growth this year, but faces I think a decade of stagnation.  The tepid U.S. recovery will continue, but we will make a marginal net contribution to the global economic activity in contrast to the half a percent a year that we contributed in the middle part of the 19 -- the early part of the 19 -- that past decade and the 1 percent a year actually the rest of the world contributed to us in 2007 to 9.  And then you have the merging market in developing countries which will continue to go fast, and faster than the advanced countries, but their growth will be substantially below their pre-crisis pace which I think demonstrates the fact that they have not decoupled.  I remember actually Susan, you've written on this subject, haven't you?  And that they cannot alone drive global growth back to potential.  And then also I'll talk a little bit about the United States and Europe and their respective policy challenges, ours being more of a political paralysis with little effect on the rest of the world so far.  And Europe being much more serious very large effects on the world so far.  And lastly, as a former central banker, and it's still slightly more respectable to be a former central banker than a former treasury official.  The central banks are controversial in the world today and the issue of currency awards are one manifestation.  They're more real than imagined: more imagined than real in my view, but they illustrate some of the potential [inaudible] of the world today.  
So on the outlook, Christine Lagarde, the Managing Director of the National Monetary Fund, recently opined that the outlook was for a timid recovery and her comment coincided with the latest World Bank -- I mean IMF's projection for the world of 3 and a half percent growth this year.  And the word "timid" is justified by the fact that there's certainly a risk to the outlook, and by the fact that for more than two years, the IMF staff [inaudible] putting together its outlook as "marked progressively," marked down the outlook for say this year.  Indeed, for the level of global economic activity is now projected for this year to be 3 percentage points lower than it was anticipated two years ago.  And even then, they were hardly projecting a boom.  And that, if you want to have some number -- the two numbers associate with it, that is one and a half trillion dollars -- 2 and a half trillion dollars or 300 dollars per capita globally.  And in my view, most of this lost output is attributed to the failure of the Europeans to decisively address their -- the Euro debt crisis.  And that failure has adversely affected us, the United States, and we have not had the policy scope to compensate.  
So a little bit more on the pre-pieces of the puzzle.  The IMF now projects that the Euro area will have a shortfall in the same sense that I used it before of 4 and a half percent.  And the explanation for this bleak outlook is their failure to address and resolve the debt crisis.  Three years ago, in early 2010 the European authorities failed decisively and comprehensively to address the Greek crisis and the result was a spread of economic and financial contagion, both within Europe and abroad.  And the inevitable fiscal belt tightening in the program countries - the countries in crisis - which now are five, or Cyprus to 6, makes them six, has been accompanied by fiscal contraction which is inevitable.  But there also has been physical contraction in the rest of the Euro area which has in turn exacerbated the slow downs and recessions roughly by twice as much -- half as much in the other countries like Germany, France, Austria, the Netherlands, as in the program countries.  And this generalized fiscal austerity and the fact that the European Central Bank has been behind the eight ball, not behind permanently but behind the eight ball, which doesn't mean that they haven't done anything, have exacerbated the crisis and the financial situation with negative effects on the world as a whole.  And even with a mild recovery that the IMF projects for -- in 2014, if you take their numbers over the 10 years ending in 2017, the Euro area will average growth of one-half percent per year.  So that's what I mean by stagnation.  And I think the point is that no region has been immune from this sort of -- this slowdown and the spillovers from the Euro debt crisis which I think demonstrates the point that it's largely their problems rather than a surge in commodity prices or other things you might point to: the Arab spring, whatever it might be.  So the projected shortfall of U.S. economic activity is about 2 and a half percent on the same basis, but -- and even with -- and we're supposed to get maybe close to that at growth this year -- oh excuse me, it's two percent this year with some pick up in the second half of the year.  But this is the broad consensus but more recently I think as forecasting lags facts.  Sometimes seriously.  And I was interested to note that directional budget office came out with a forecast for this year.  Now they've just -- closer to one and a half percent two days ago based on the fact that not only have we had the tax deal but it looks like the federal sequester will go into effect largely as well.  And as far as the merging market in developing countries are concerned, they're projected to grow at 5 and a half percent this year, but that compares with 8 percent the year on average in the pre-crisis period.  And there are shortfalls say a basis of about 2 and a half percent.  And again, every region of the world has a short fall.  And basically I think that demonstrates that they have not decoupled from the advanced countries and they lack the capacity to propel by themselves, global growth back to potential.  No group as I said has been immune.  For example, even in Asia, developing Asia which we think is the most dynamic on the same basis their outlook this year.  The level of economic activity in the emerging market in developing countries in Asia is expected to be 4 percent lower than projected two years ago.
So what about the United States and Europe?  I should say in advance, it's going to sound like I'm beating up on Europe but I started out doing my work of Europe when I went to Michigan to do my job interview and I actually gave my paper on trade creation and trade diversion in the European economic community.  ^M00:20:32  Maybe that's why they didn't hire me.  So the principle difference between the crises in Europe and the United States - if you want to call them that - is that in Europe, you have economic crises combined with political crises which in turn have exacerbated the economic crisis.  And the United States, we've only - only, quote-unquote - had essentially political paralysis associated with our incapacity to achieve consensus over the shape and timing of getting our fiscal house in order.  So one question is whether the United States has been fiscally profligate and opinions on this of course can differ.  The IMF estimated last fall that over the 3 years ending this year, the United States will have reduced its [inaudible] adjusted general government budget position by 3 and a half -- 3 and a third percentage points of potential GDP.  And that probably is now an underestimate by the way.  And the rule of thumb which they pronounce for countries are in good shape is that prudent adjustments in fiscal positions should be more on the order of one -- two quarters to one percent a year.  So we could be even overdoing it by that standard.  But I think the basic point is, you guys are living or most of you -- many of you have lived or worked in Washington, so you may not agree with this, but I would argue that the underlying debate in the United States about fiscal policy is not whether the budget deficit is -- and the build-up of government debt, it should be cut.  But how fast, how far, and by what means which is relatively simple set of questions.  Anybody can do it with a spreadsheet.  They may not all come with the same answer, [inaudible].  And we have not had a crisis and any serious crisis yet, but any serious crisis clearly would reverberate around the world.  But today, the rest of the world in my opinion, is more worried that we'll be -- do too much too soon rather than wait too long.  In other words, our political paralysis has not yet seriously affected the world economy.  Ken Rogoff [phonetic], another former colleague of mine, recently wrote a in the Financial Times that "The world is right to worry about U.S. debt," but at the end of the article - that was the headline - in the end of the article it said, "A little bit."  [laughter]  Which I think is probably about right.  
In contrast, the European crisis started out as a traditional macro-economic banking crises which normally are resolved by -- in 6 or 9 months these days.  Europe is in its fourth year and the reason is that the European leaders have bickered about how to address the immediate causes and at the same time, they have engaged in an existential debate concerning the future of the Euro after 6 decades of progressive European economic and financial integration.  And finally during this past summer, it was agreed that the Euro is irreversible and then that decision lasted just -- until a few weeks ago when the German Finance Administer said just that maybe Cyprus is an exception.  Now to be fair, sympathetic observers argue that delays in the European decision making are a necessary complement to fundamental long-term economic [inaudible] reforms and are necessary to [inaudible] political leaders in affected countries to take tough measures and to deal with the problem of moral hazard.  And the Euro area may observe -- emerge stronger from the crisis and in fact I -- that would be my best guess, but meanwhile I think it's fair to say that the heavy economic toll has been attracted, not only in Europe, but as a I demonstrated around the world and there's some considerable risk of further political unraveling.  As one headline I saw this past week said quote, "[Inaudible] rise as markets discover that the crisis may not be over after all."  
So that brings me to my last subtopic: currency wars.  With the global recovery well below par, the central banks have kept a fee on the respective accelerators led by the Federal Reserve.  And that has been controversial.  And one area of the international controversy has been captured by this term, currency wars.  So I do, do a little teaching these days so this -- this is a teaching part of my talk.  So let's unpack this term.  In a world of low inflation, fiscal policy is largely paralyzed like it or not.  Monetary policy and for those countries with the scope exchange rate policy are the only tools available to stimulate their economies in the short-run.  So we might want to step back and ask ourselves what we mean by exchange rate policy in this context.  And one possibility is what is called by economists "oral intervention."  That's expressions of official opinion that a currency is too strong which are largely harmless.  They make good headlines in the Financial Times but that's about all.  And they show the people that the officials care.  Sort of feel good stuff.  Second candidate is active purchases of foreign currency to drive the country's currency down which is of questionable lasting effectiveness, except in countries that are sort of disengaged from the global financial markets.  And a third candidate is directing monetary policy at an [inaudible] exchange rate objective as Switzerland is doing which is somewhat more problematic for the rest of the world, depending on the circumstances of the particular country.  But I would argue that the aggressive use of monetary policy as we generally understand it to the purchase of domestic assets in order to address weaknesses in economic and financial conditions as is be done by the Federal Reserve, is something else, and should not be a major source of global concern.  Of course it is.  And the counter-argument is that the Federal Reserve Expansionary Policy has two offsetting effects.  On the one hand, it tends to depreciate the dollar but thereby absorbing demand from the rest of the world.  And on the other hand, it tends to stimulate domestic investment and consumption, thereby adding to global demand.  And then that effect on the rest of the world may be either positive or negative, but it's small because you take a plus [inaudible] minus, if you take them together, they're going to be smaller than the absolutely of either.  And it's approximately zero [inaudible] the U.S. case.  Now different countries may be affected differently, so it's zero on average.  And the problem I think is that other countries may focus on the negative effects and not ignore the positive effects.  But what we do know is that tensions and the risks are increased and the bottom line we also know, is that all countries can't devalue their way to prosperity at the same time.  Assuming they can divide -- devalue the way to prosperity at all which is questionable.  And the risk is that in trying to do so, trade and other frictions will increase.  In other words, we live in an interconnected world in which every country can and should have views about its own policies, as well as those of other countries as I've tried to illustrate tonight.  So I hope I've given you all, including Marina and Susan, something to think about.  And I welcome our discussion of these issues as well as anything else that's on your mind.  Thank you.  
[ Applause ] 
>> Marina Whitman: Give Ted a chance to sit down.  Ted, let me start by asking you to unpack a bit more, a couple of related comments that you made that the European -- the E.U. clearly had a crisis whereas the United States didn't.  It merely had a paralysis at the moment.  And secondly that while the European situation was having negative effects on other countries, the United States was not.  And despite the significant contractionary effect of U.S. fiscal policy.  So I was wondering if you could say a little bit more about those distinctions and why you make them so clearly.  
>> Ted Truman: Well I think partly I -- it's a question of sort of looking back and saying, "What really has changed over the last 2 years?"  And although lots of things have been going on in the world, commodity prices have gone down, that helps some countries but not others, right, in general they've gone down.  But the -- that other events, economic and political, we haven't [inaudible] right.  If your [inaudible] of Paul [inaudible], we could have done a lot better.  That's a different issue in some sense, but we sort of have muddled through.  So this sort of bad effect on the world has been small, right?  And in the European case, they sort of magnified their own problems, partly because they're all tied together -- [inaudible] all tied together.  And that sort of -- the internal linkages magnifies each other as well as some of the policy aspects of it as I've suggested.  And you have had a lot of uncertainty generated by the international financial markets.  I mean you actually see articles in newspapers and I suspect a more academic [inaudible], which say in some sense, and unusual period in which events in Europe have been driving day-to-day movements in financial markets.  Right?  And one of the sets, not continuously over time, but one of the features was just a general rise in risk aversion, right, which has affected the merging market [inaudible] countries [inaudible].  So money will come back into the dollar in particular, the Swiss Franc, which is one of their problems for them.  And that had adversely affected [inaudible] market in developing countries and that has a further feedback effect on the United States.  And this sort of major component of the increases in risk aversion over this last couple of two or three years has been the European crisis and whether they're going to have the big bankruptcy -- national bankruptcy [inaudible].  So that's the logic that I would use to make that argument about Europe and in our case, which obviously could have done better, right?  But for better or for worse, I mean how people could even say for worse?  There hasn't been any financial market manifestation of our -- particularly of our incapacity to figure out what we want to do with the fiscal situation over the medium term.  And so I -- that's basically the argument.  Now that doesn't mean that you know -- we certainly have the capacity to do this though but we hope it doesn't happen.
>> Marina Whitman: The whole kind of thesis that your talk was on, had to do with these repercussions in both directions, or in all directions.  And a lot of the mechanisms by which this occurs were implicit in what you said, but I was wondering if you could sort of say explicitly and sort of fairly briefly, what are those different mechanisms by which countries affect each other economically?
>> Ted Truman: Well they're -- they're obviously as you say if you, your question implies, they're multiple.  So there is trade, right, which in turn is linked to economic activity.  There is finance in terms of financial flows as well -- both financial flows and direct investment flows.  There are monetary financial market conditions, including risk [inaudible] of various types of assets.  So I think you have all those different channels.  Now they don't all work the same way.  I mean in some sense, one of the reasons why we have -- it's not just the Federal Reserve which is driving down long-term interest rates in the United States, it's because the European crisis is driving down long-term interest rates in the United States.  And indeed over the last several months, you had a back-up -- a back-up is probably where you're only getting slightly above 2 percent.  It's hard to argue that it's a back-up but you've had a rise of 30 to 50 basis points and long-term interest rates in the United States, even as you've had the same rise in long-term interest rates in government interest rates in Germany which reflects a somewhat calmer situation.  So you have all those kind of channels.  It seems to me that they're affecting the system as a whole.  And we are bound more together.  I mean again, I think it's -- it is impressive that not only in the global financial crisis itself, but in this European [inaudible], all -- not all countries.  That'd be too much.  But all regions of the world have been affected similarly.  If you think of other -- the other major period in the post-war, two other major period in the post-war period, where you had sort of global events where the oil price crisis in the 70s, when you had lots of countries going into recession, but not everybody did.  And the global recession [inaudible] debt crisis of the early 80s.  But again, if you look at the data, not everybody was going down at the same time.  Not everybody, region of the world had a lower growth last year than the year before, which is pretty remarkable to have that given the sort of -- you think about the diversity of countries and regions of the world, that's pretty remarkable to have that.  And I think that just is demonstration of the fact that we're all [inaudible] together even more than we used to be which is partly why you had things like the G20 and so forth and so one being wield into action.
>> Susan Collins: So I'm going to jump in with a question and just play devil's advocate and push you a little bit further and then I think we should open things up to the audience.  So if I wanted to argue that perhaps you are letting the U.S. off the hook, and that your arguments suggest that the U.S. is much less to blame for the challenges of pulling this very inter lot global economy out of the challenges that they're all facing.  So I wonder what you would say to the view that what's happened in the U.S. is that with a spreadsheet, you couldn't figure it out how to deal with this fiscal problem as you've suggested?  One way to have dealt with it and [inaudible] is one that, there are many who would argue in this direction, but one way to deal with that would have been to make it very clear that there was a long-term plan and that it was -- the debt and the fiscal problems were going to be addressed over time but to be much more expansionary in the short-run and possibly we wouldn't have seen the very poor growth in the last quarter and the U.S. would have provided much more of an engine of growth globally.  And that's a very different scenario than the one you painted.  And relative to that one, it sounds like the U.S. has more to account for than you suggest.
>> Ted Truman: Yes, well I did say the United States could do better.  Could have done better, right?  And what you lay out I think is one I would subscribe to.  So if you and I were the economic czar and czarina, we'd probably could sit down and you know, figure this out, right?  And one thing would be why didn't -- weren't we able to say, "Well we have this long-term plan, which addresses the long-term issues of entitlements and associated issues," right?  And then we have the short-term issues and short-term plan and by anchoring the longer term expectations, you have more [inaudible] in the short run to be more expansionary which makes quite a lot of sense.  I'm interested by the way, just to be slightly provocative and personal, I mean so yes you mentioned I was in the treasury for a while and therefore was working with Larry Summers [phonetic] when he was both Temporary Secretary and Under Secretary.  And the interesting thing is that over the last year his -- Financial Times [inaudible] first on that.  Right?  So he was a [inaudible] a year ago.  And his most recent one was the other way around, that we have to tack down the long-run and then we have more scope in the short-run.  And I mean that's even exact [inaudible] the fact that we probably were in the wrong position when we started, right?  But that's sort of -- that's spilled milk, right?  So I think we certainly could have done better and that we would have been better and because we would have been better off, the world would have been better off.  Though I have a tendency to [inaudible] not to give a false analogy.  So those are sins of omission if I may put it that way.  We failed to do what we should have done.  And I think in the European case, at least viewed from the perspective of a student of financial crises, they had sins of commission, right?  They -- the device they had was to use massive policy and financial force to stop the contagion.  And they were unable - I think that's the right word [inaudible] - unable to do so.  That certainly was the - if you want to put it, to be crude about it - but we are in Washington after all.  That was the advice that they were getting as far as I know from the administration.  Alright?  ^M00:40:08  You know, you have a crisis.  The way to deal with a crisis is you use overwhelming force.  The Powell Doctrine as it's sometimes referred to.  And they didn't have the governance capacity to do that because they didn't trust each other enough and therefore they - you know - they sort of muddled through and that meant that things got worse and worse.  That's the sense in which I think the distinction about omission and commission may be a little exaggerated but that's what we're here for.
>> Susan Collins: So I suspect we could continue this but why don't we open things up and see if anyone would like to ask a question or share a perspective.  We have a microphone that's here.  I want to make sure that people can hear.  So please come on up and ask your question.  
>> Hi, so my name is [inaudible].  I'm a student from Jordan.  I do not know if we can say that the Arab spring affected the U.S. economy but I can -- I mean, this is a speculative question.  I -- this is the first time that we are living in a world that has more people living in urban places than rural.  And I wonder how we can -- how the U.S. is ready for this or how it will affect the U.S. economy in general, this paradigm shift in the world?
>> Ted Truman: Well my answer would be - though I'm looking for your help - [laughter] Susan, she's done a lot of work on these long-term friends but I don't know whether that's one of them.  In some sense, it's a long-term trend.
>> Yes.
>> Ted Truman: We may have -- we reached a tipping point just as we reached the tipping point in the sense that merging market [inaudible] countries now account for more [inaudible] of global GDP on a [inaudible] term.  So we've reached a sort of tipping point and I think you're right.  So -- and the world is much more complicated: difficult to manage, right?  So the way I tell the story is, "If you live in New York and there's a problem, like a big snowstorm, the whole place shuts down.  If you live in Washington, which is a big city or a small city -- your reasonably big, medium sized city by U.S. standards, not by Chinese standards.  It's a village.  If you have a big snowstorm, right, how are you going to handle it?"
>> In D.C., if you have a small snowstorm, you can't handle it.
>> Ted Truman: Oh no, no, no.  I said how to handle the people that live here right, who don't know how to drive in snow.  But the truth of the matter is, you can walk home.  Many people, not everybody.  But you can walk home.  So the city is -- and the city is much more manageable as an entity.  It doesn't break down [inaudible] and so you actually need [inaudible].  Another example is which is -- I didn't realize this until I was talking to somebody in administration.  So we had this big hurricane, Sandy.  And just as in the case with New Orleans, but we all have read about that, people have been apparently warning about a big hurricane in New York City for decades, and saying we were unprepared, right?  Because the infrastructure was not there to deal with that many people and those kinds of circumstances.  And as someone who [inaudible] was growing up in New York City, the fact that you found subways flooded, you know it blew my mind.  I mean I've lived there for 10 years, right, so I'd never heard of any subways being flooded.  So there are these more complicated problems and I think it makes it more difficult to -- if you don't get it right, it really gets -- you end up with much bigger disaster right?  If you're off on some -- in Hillsdale, New York, you can -- you know, you can go out and -- where I have a country place.  That's why I used that in an example.  Right, you can go off.  You cut your wood, right?  You can shoot your own deer, right?  Assuming you have a license to carry a gun.  And so [inaudible] and life is more complicated.  But, maybe you could be optimistic about it.  I mean I think it's a -- I heard on the [inaudible].  So this is the birthday of this famous American writer by Sinclair Lewis.  And he wrote a book called, "Main Street," which I must have read when I was 16 that summer in Ann Arbor.  But it actually made fun of Main Street.  It made fun of small town America which is not exactly what we've actually been doing when we talk about Main Street versus Wall Street over the last several years.  So and that's -- [inaudible] over there's a certain sense of which we've made -- I don't know whether it's progress, but change.
>> Susan Collins: Let me just add a couple of thoughts to that.  I mean you said, is U.S. ready?  I think essentially that there are a lot of changes that we're still grappling with, not just the U.S. but more generally.  And let me just highlight a couple of trends which Ted talked about.  One is -- there's -- the way that risks play out when people are concentrated are quite different, and so there are these small probabilities of catastrophic events.  And I think arguably dealing with those is more challenging when people are more concentrated because there's a -- there's a, you know, impact more people and more activity in a small area.  So one issue related to that increased concentration is how you manage those small probabilities of things that are catastrophic.  I don't think we know well, how to deal with that.  I think that's a huge challenge which relates to infrastructure.  We also have seen in China in particular the growing urbanization and congestion in some of the major environmental challenges.  And I think some of those sustainability trends and issues are things worth grappling with throughout the world.  And it's not something we've solved certainly.  At the same time, some of the plusses have to do with the fact that there are [inaudible] economies so -- to the extent that things are interconnected.  There are a lot of activities that actually are perhaps more productive and so they're both plusses and minuses.  So have we figured that out?  Absolutely not.  I think it's a really interesting, challenging thing that has plusses and minuses like most parts of what we see happening out there.  So really interesting question.
>> Marina Whitman: There is another long-term tipping point, if you want to put it that way, which interacts with these others [inaudible] organization and the issue of the growing significance of the developing countries, and that is the [inaudible] drop below replacement birth rates in virtually all of the rich countries, which means that - and actually it's true of China as well, because of their one child policy - which means that the -- there is going to be increasing difficulty in these countries.  And the working population making good on the promises that have been made to the retired or older population.  And none of the -- actually the United States - although it's having all this to-do about social security and healthcare - is better off than almost any other rich country, largely because of immigration.  But every one of the--
>> Ted Truman: Our promises are smaller too.
>> Marina Whitman: Our promises are smaller too, that's true.  But the fact is that none of these countries has figured out how to deal with these issues.  And of course China has the additional problem which is reflected in this question.  [coughing]  Excuse me.  Will China grow old before it grows rich?  Because at least in the developed countries, their rich enough so that they have some chance of dealing with this problem.  China is still a poor country despite the very rapid growth of income. And yet, they're going to face the same problem as well while they're still poor.  So for them, it's kind of a double whammy.  Thank you.
>> Thank you.
>> Susan Collins: Other questions?  
>> Thank you for speaking with us today.  My question is kind of in two parts, but they're both based on a theme that I detected in your talk which is that a lot of the problems that are faced in developed world and recovering from the crisis of 2008, have seemed to be more of a political problem than an economic problem.  And what I mean is that, in the view of many mainstream economists, that -- the proper response would have been a short-term fiscal monetary expansion, followed by paying down that expansion in the medium to long-term.  And so my question is, "How would you formulate the argument since you're speaking to a lot of future and current policy makers right now, how do you formulate the argument, both domestically for something like a short-term fiscal expansion?  For example, taking advantage of negative real interest rates to fund something like an infrastructure bank.  And to the Europeans, convincing the Germans and the IMF, that austerity went out of fashion in the 80s and it's showing really poor results right now."  So how would you formulate those arguments, and they could be different for different audiences?
>> Ted Truman: I think and you asked that -- I'll be interested in Susan and Marina's answers to this question -- so I think you ask a very -- those are actually two questions.  So one is how do we talk to ourselves?  And the other question is how we talk to the Germans.  And I know -- I mean -- they are related in some sense, although [inaudible].  When I'm being flip, I blame the professors.  [laughter]  By the way I do, do some teaching [inaudible] but I did it in the beginning of my career and at the end of my career.  But in between I did [inaudible].  These people went - you know - they learned their economics from these people and then they did seem to have not learned it.  And by the way, I have some classmates through graduating the same college that I did.  And I said, "Well we all took the economics.  How come I learned something different than you did?"  ^M00:50:58  But I think [inaudible] some sense you don't.  We have a -- well first of all, you have different values.  That starts -- that's one of the points, but we don't always recognize the problem at the same time.  And then we don't have the same diagnosis.  And therefore, not surprisingly we have different medicine prescriptions for that crisis.  I mean and it's [inaudible] we drew that fiscal sustainability which is a little hard to actually -- whatever you mean by that term.  Right?  Is as opposed to unsustainability.  Is to be preferred, right?  Then the question is, "How do you manage yourself around the fiscal sustainability?"  So is the - wherever you get off, whatever the path is to fiscal sustainability, you just say, "Oh well, we've got to go right back because," which is sort of a political economy question.  Because the longer you stay away, the harder it is to get back and the more difficult it is to push that - mixing my metaphors - that rock up the hill.  Or do you sort of say, "Well, we can handle this?"  Along the lines that Professor Collins was suggesting earlier right, where you have both a medium-term and a short-term plan at the same time, which you could sell not just in the United States to us, to the here one would hope, but we didn't.  And tried -- there were some efforts but they were pretty weak.  And we certainly didn't sell it to our critics abroad.  Now the critics may be wrong and [inaudible] short-term status [inaudible] economic stabilization, but they're right in the -- and certainly right for the reasons why Susan -- excuse me, Professor Collins asked the question earlier.
>> Marina Whitman: I would say that we've got it exactly backward.  And the reasons I think are not so much because the politicians didn't learn anything from EC 101, as because politics trumps economics pretty much every time.  And what I mean by backward is that as Susan said, what we needed now was stimulus to get us moving again, but with a credible medium or long-run plan for getting at the deficit.  And that really means attacking entitlements.  Now, what we've done instead is done absolutely nothing on the long-term and meanwhile introduced totally unwarranted fiscal drag in the short-term.  Ted, what did you say was the [inaudible] forecast?
>> Ted Truman: One point 4 percent they now have on the assumption I think basically that the sequester will be implemented.
>> Marina Whitman: One point 4.  But you also said that that's about what it should be?
>> Ted Truman: No, no, no.
>> Marina Whitman: Oh.
>> Ted Truman: That's marked down.  So the general forecast I think is sort of in the 2 plus range these days, right?  And so the sequester takes [inaudible] I'm told by the experts.  So we quoted for send-off of [inaudible] this year on top of everything else.  So that gets you from 2 and a quarter and to one and a half.  So that's a [inaudible].  But that's, you know, that's flirting with -- once you get under, you're around one percent, you go into recession.  That's the way numbers bounce around.  But I don't think as I say, that the reason is that the people - I was going to say down there in Washington but I guess I have to say - here in Washington, think that this is the right solution.  It's just the, for quite different reasons, people are both sides of the aisle think that it is the least politically costly solution.
>> Ted Truman: So one -- I think one distinction is, and it applies to the comparison of the European debt crises with the debt crises that you read about or knew about in the merging markets.  So they all have political economies, right, but the emerging market crises are like the crises in Greece itself, right?  They don't have any choice, right?  They've been noisy about making the choice, but they basically -- you don't have any choice what they have to do, right?  And so at that point, the economic trumps the politics, to use your term, right?  Economic trumps the politics.  In Europe as a whole, right, they -- because they're wealthy enough right, the politic can trump the economics and here too, right?  So why we haven't addressed our longer-term problems, well the politics comes to economics and we're wealthy enough in some sense to be able to muddle through for a while.
>> So I'm actually going to suggest something because we're basically out of time, but I have folks who wanted to ask [inaudible].  Okay, so what I'm actually going to invite people to do is to come and talk with us during the informal time.  And so we have other opportunities as I hope everyone will stay for us to continue this conversation.  But since we are out of time for this part of our event, I wanted to thank Ted and Marina for joining me in this conversation.  
[ Applause ] 
Clearly there are a lot of challenges, both for the U.S. economy, but more globally.  And so this is not a conversation that we have come close to ending.  I also wanted to thank all of you for coming and joining us here this evening.  And hopefully continuing to think about some of the issues that we've raised.  We are also hoping that you will all stay and be active participants in our student alumni network which is the next part of our event.  And I have to say, it was one of my - oops - one of my favorite activities, because it's an opportunity both to find out what a number of people are doing, but also to hear about interests of students who are looking forward to some of the careers that they are preparing for.  And so a special thank you to all the alumni for coming here and for spending time talking to our current students and helping them with a number of the kinds of questions that they may have.  As you I hope saw, outside we have divided things into a number of tables that are highlighted with different topics and each table has a set of hosts and so I'm going to ask on behalf of me, Jennifer, Elisabeth, Amy, our team here, that you spend perhaps the first 20 minutes at the tables that are the most closely related to your interests or your current activities.  And then certainly by all means, I hope you have a chance to catch up with all of your friends and others who are here with us this evening.  So again, on behalf of all of us, we are delighted to see everybody and hope that you stay and enjoy the food and our networking reunion.  So a final thank you to Ted and Marina.  
[ Applause and inaudible background discussions ]