Abstract

Following the formal presentation, Mr. Summers took questions from the audience.

Following the formal presentation, Mr. Summers took questions from the audience.

MR. SUMMERS: I would be delighted to take a few questions. As I do, I should probably say now what I have assumed all along and perhaps could have said at the beginning, that any views that I have expressed here are my own views and should not be attributed to any other American or any other institution.

Question: My question is in two parts. First, given the strong growth of the U.S. economy and associated high returns to investment there, surely central banks are not being so irrational if they concentrate their reserves in U.S. assets? Second, how can you speak so generally about “quasi-fixed” exchange rates in Asia, given that this description really only applies to China?

MR. SUMMERS: The second part of the question was about whether it was really right to speak with the strength that I did about quasi-fixed exchange rates, given that it was really only China that had a fixed exchange rate and the others did not. Here I would take refuge, but confident refuge, in my use of the word “quasi.” It becomes a matter of semantics with a nonfixed exchange rate in which intervention is used as a heavy and substantial tool to maintain very low volatility around a certain level as to what type of exchange rate regime that is. If one looks at the various examples I gave of what I called “quasi-fixed exchange rates” that came to grief in the 1990s, two-thirds of them had monetary authorities who would explain how they weren’t really fixed exchange rates, if you thought about them right. For example, they were bands, and they had got to the edge of the bands. But I think it was a good de facto description of what was going on. Without trying to debate it country by country, I would insist on my broad characterization.

The other part of your question was whether, with the United States growing fast, its assets must have a high return, and also it’s got a terrifically liquid market, isn’t it clearly the right thing for the central bankers to invest in dollars? Here I would say two things. I certainly would not want to suggest how you or any other central banker should manage your reserves, but I would point out that when you buy U.S. treasury bills, what you get is 1.75 percent, and it doesn’t really matter whether the U.S. economy grows rapidly or grows slowly. And that is, as I said, a negative interest rate in real dollar terms, and I think that’s the number that one should focus on.

And I guess the question I would ask is: If one looks at societies that, after all, on a global standard, are capital-poor, that constantly present themselves to international development agencies as having a wide range of projects available to them with very high rates of return, one has to wonder why a significant fraction of national wealth is being invested at what is almost certainly a close-to-zero rate of return. And that’s what lies behind this kind of very large accumulation of reserves.

Question: I would like to know how you view the role of the deficit in public finances in current account deficits.

MR. SUMMERS: The question was what about public finance deficits and current account deficits. I rooted my explanation of current account deficits significantly in reduced national savings. And if one looks at the figures on national saving in the United States, what one sees is two phenomena. One is a secular downward trend in the rate of private savings. That isn’t very well understood but it is very pronounced. I suspect it has to do with the far greater ease of private sector dissavings as it gets easier and easier to borrow money on credit cards and second mortgages and the like. And then one sees a substantial swing in the position of the public sector between the year 2000 and the present time, which, in an arithmetic sense, contributes to national savings.

I think you will find near-universal agreement among economists that the most potent and reliable way to increase national savings is to reduce government dissavings. And, so, when I referred to the importance of increasing national savings, certainly fiscal consolidation is the most direct route toward the achievement of that objective.

Question: What would the effect be on the U.S. current account deficit if most, as distinct from some, of the work done by women, in caring for children and elderly parents, for the home and partners and voluntary work in the community, was substituted by immigrant labor and their consequent remittances to families abroad?

MR. SUMMERS: I tried to think about what questions I would be asked after my remarks, and I tried to anticipate what answers I would give, and I would have to say that I’m on my own here because I didn’t plan for that question.

I would not presume to attempt a very precise answer. The only thing I would say is every time I had occasion to look at the data on remittances, if you look for phenomena that are very important in the real world and barely considered in economics textbooks and economic models, remittances would be high up on that list, and so I suspect that any very substantial change in immigration patterns would have surprisingly large impacts on current account deficits, but that’s as much as I’m prepared to say.

Question: First, do you see any link between the NAFTA agreement and the worsening of the current account deficit here? A second question would be, Do you see any link between the current account deficit and the strong-dollar policy that was for a long time the policy of the United States, and what kind of dollar policy would you advise today when you have a worsening of current account deficit? Finally, I have read somewhere that the manufacturing sector in the United States is only 16 percent of the U.S. economy; given that, do you believe that there is any possibility of correcting the current account deficit? I mean, of having more exports without a bigger manufacturing sector?

MR. SUMMERS: I feel like I’m taking my oral exam! On your three questions, with respect to NAFTA and the U.S. current account deficit, I would plead NAFTA completely innocent. The current account deficit is driven much more by the phenomena of savings and investment. And, in fact, if one looks at the trade agreements the U.S. has entered into, the reduction in foreign trade barriers far exceeds any reductions in U.S. trade barriers because the U.S. economy went into those agreements already much more open.

Your second question was about the strong-dollar policy. Well, the strong-dollar policy is an expression of what seems to me to be a very fundamental principle of national economic management, and that is that the strategy of artificially devaluing a currency to seek competitive or commercial advantage is, for a major industrial economy, an unsound policy that carries with it risks that are not commensurate with its benefits, and it seems to me that the strong-dollar policy understood in that way should be a constant in the policy of the United States. That is not to exclude the recognition that there may be occasions on which other countries’ currencies should, for either their own domestic reasons or reasons linked to the global system, be allowed to fluctuate.

Question: I think you are guilty of wild optimism when you talk about governments dealing with a long-term problem. A long-term problem for the government is next Wednesday or, at most, next Thursday. To think these governments would look as far ahead as you suggest seems unrealistic. And, in fact, most new ideas come from the private sector people like yourself, Jacques de Larosière, and Paul Volcker, who have examined a problem and then made a report to the government for the government and the people about this issue. What’s your view on that?

MR. SUMMERS: The questioner expressed the view that governments are unlikely to take on long-term challenges and are likely to gravitate to the expedient and the short term—a view that is certainly suggested by the variety of examples that I gave with respect to overly long-maintained exchange rates. He also raised the question of why I would be hopeful that suggestions such as the ones I made would be adopted—well, hope springs eternal, I suppose—and also the question of whether it was useful and helpful, as I believe it is, for private citizens to participate in the dialogue and the process of opinion formation on these issues, and I believe that does ultimately have an important impact on governments. And I believe that’s the reason, frankly, why what the Per Jacobsson Foundation has done for 40 years is so important—what is actually so important about these meetings.

There are two things that happen at these meetings. One is there are agreements reached on specific things and communiques issued, and the other is that hundreds of people talk and argue with hundreds of other people about these issues and what is to be done and what is the right way to understand them. And out of that comes improved understanding, changes in the Zeitgeist, and that is ultimately what drives policy. And discussions, like the one we are all having here, are an important part of that process. There may be ways in which in some situations it can be formalized. Certainly, the work you have done through the Bretton Woods Committee has been helpful at a number of junctures in influencing the Zeitgeist, which, in turn, influences policy.

But I believe that the famous passage from Keynes about how everything statesmen do is really the distilled frenzy of a forgotten scribbler needs to be updated: that the basic thought that what policymakers are responding to is the climate of ideas is exactly right, but in the world of Blackberries and e-mails, it’s less the distilled frenzy of a scribbler from decades ago and more the facts that come from a think tank. But these kinds of discussions actually are very, very valuable. Whether anything I have said today has particular merit or not, I think these kinds of discussions actually make a very big difference.

Question: You suggested a set of two actions: one, an increase in U.S. national savings, the other, the adjustment of the exchange rates in the quasi-fixed rate countries. It sounds very attractive, but I have one question. The question is that the first action, to increase U.S. national savings, seems to take a long time, whereas the adjustment of the exchange rate can take immediate effect. How do you comment on this mismatch in the time required to take effect for those two actions?

MR. SUMMERS: It’s a terrific question. I suppose there are three answers that I would give to it, but it is a very important issue. The first is that some significant part of what’s important about increasing national savings happens if there is an incipient increase in national savings that can be expected to be delivered in the future. So, if one looks at what happened in the United States in 1993 and 1994, there was through the passage of an economic program in 1993 a rather discontinuous change in the sense of sustainability, even before all of the measures were implemented. So, the first point is, we have a capacity for multiyear budgeting in the United States, and the expectation of forward savings rates casts a shadow backwards.

The second answer that I would give is that I was consciously rather vague about the nature of the exchange rate adjustments that were appropriate, and that was frankly because I wasn’t certain that I knew what the right arrangement was. There are obviously a multiplicity of modes that one could imagine on a spectrum from a repegging at a different level to a float, to an adjustment followed by a float, to a float within a band, to a float that is substantially managed. And it would depend upon the constellation of circumstances in which an agreement was being reached, and a variety of issues in the particular context, just what the right form would be.

But, if you think about most of the options that I just described, they would allow for the exchange rate adjustment to be more continuous. That is to say, if it was simply a repegging, your problem would arise in a very powerful way. If one imagined, as I suspect is more appropriate, an upwards adjustment that was both upwards and with more flexibility, the question of timing, in a sense, manages itself rather more.

I guess the third thing that I would say is that I think the consideration you adduce complicates the process but, in a way, doesn’t eliminate my argument because it seems the crux of the argument I’m making is that exchange rate adjustment, without any change in U.S. national savings, is not likely to be healthy, and a change in national savings that reduces U.S. demand without any expenditure-switching policy is likely to be unhelpful. So, even if the matching is imperfect, some matching is better than none.

MR. DE LAROSIÈRE: Thank you very much, Larry. I would like to thank you for the superb lecture you have given us. It has lifted our minds. I think it’s an extraordinary performance you have given, and it’s really the kind of global exercise, and global thinking, that we all need. So I would like you to accompany me in applauding our speaker.

Now I have two pleasant announcements to make; they’re going to be very brief. The first one is that you are all invited to the reception at the lower floor of this building. And the second one is that I will be succeeded in this position of Chairman of the Per Jacobsson Foundation by Andrew Crockett, and I think this is very good news. I have reached, indeed, the age of 75 years old, which is the limit in our Articles of Agreement to serve as the chairman. So it’s with great pleasure that I announce that from now on it’s Andrew who is going to chair these meetings. All the best, and thank you for coming.