Global economic hazard You have four
primary risks. You have the unsustainable pattern of capital
flows, which at some point won’t be sustained and
may lead to a disorderly adjustment process.
You have substantial geopolitical risks around the price of
oil and what’s going on in the Middle East, and
while the world economy has weathered those well so far, you
can’t be confident that the process will continue,
and there’s substantial implied volatility in the
oil market today.
You have the prospect that the US, which has been the major
source of demand for a growing global economy for the last
several years, will slow down as a consequence of the increase
in interest rates that have taken place, and as a consequence
of a slowing of consumer spending as the housing-spurred
spending of the last couple of years unwinds.
And finally you have the risk of another shock that
we’re not now planning for, another terrorist
shock or a flu shock or financial problems arising from some
expected source after a period when risk premia are very low.
Advice to Hank Paulson
Only about a third or fewer of people who smoke die of
something related to their smoking, but nonetheless smoking is
highly imprudent. In the same way, no one can be confident that
the US trade and current account deficits and associated
foreign borrowing will lead to substantial financial
disruption, but it is surely running a risk that we
don’t need to run – the right set of
solutions have been recognized for quite some time.
They involve increased US saving, the promotion of domestic
demand in east Asia; they involve the more active growth
policies on both the supply and demand side in Europe; they
involve – they hopefully will involve over time
– a lower price of oil promoted by better energy
policies in the US and elsewhere.
There is less mystery in what should be done than in the
politics of getting it done. While the current account deficit
very importantly reflects developments in other parts of the
world, in a kind of investment shortage relative to the supply
of savings in other parts of the world, the actions the US
takes will have a very important impact on whether these
imbalances are corrected.
We’re running real risks. Just how great the risks
are I don’t know, but they’re
certainly larger than we need to be running.
The US leadership challenge
After the Second World War, there was an enormously productive
period of US leadership, which was channelled through the
creation and strengthening of international institutions
ranging from the UN to the World Bank. In retrospect, the post
Cold War period has not seen an equally productive period of
institutional innovation. That is a profound challenge.
The US does need to play a leadership role if global public
goods are going to be provided, if the system is going to
remain open. But it cannot play that role alone, and it will
have to find more effective and legitimate ways to pursue its
interest in a stronger global system than it has these last few
The appropriate approaches vary from sphere to sphere. On the
one hand, the new US development efforts and increased
commitments are welcome. On the other hand, there have been
serious problems with the follow-through on those commitments,
and it’s unfortunate when assistance is provided
in so fragmented a way by so many countries working separately.
The US could take a substantial role in fostering cooperation
there. There’s a growing consensus on the
long-term risks associated with global warming. Kyoto is surely
imperfect in many ways, but that’s not an excuse
for abdication. And here too the steps that the US takes could
be enormously important. On the other hand, there is a danger
that multilateralism can become a device for promoting inertia.
And the US is right to be focused on trying to bring about
productive change, so it’s a very difficult
balance that needs to be struck.
It’s always a mistake to assume that there are
ultimate victories or ultimate defeats – for the Doha
Round, much less for the world trading system. There tends to
be a failure to recognize that the integration taking place
through information technology, through the changing nature of
output, through reduced transportation costs is actually
probably a larger integrating force than the changes that are
brought about by public policy through trade agreements.
Nonetheless, the breakdown [in trade talks] is a serious matter
and reflects what is a central challenge – maintaining
a political consensus for an open trading system in the US,
Europe and around the world. I don’t feel in a
position to apportion blame. There’s plenty to go
around, but it’s less a matter of the
intransigence of individual officials than buttressing
political support for the system, which will go importantly to
the broad thrust of economic policies, certainly in the United
I think there are real domestic political constraints in the
US, but in other countries as well, certainly in Europe,
against pushing integration forward. —Interview by