The State of the Global Economy
With Steven Pearlstein
Washington Post Financial Staff Writer
Wednesday, May 28, 2003; 11 A.M. ET
The leaders of the G-8 industrialized nations will gather in France this weekend to discuss the state of the global economy and what, if anything, needs to be done to return the world's richest nations to economic growth.
In his column today, Steven Pearlstein writes: "With both Japan and Germany already in the soup, there is a growing sense of urgency among economists and policy experts about what many view as the most serious threat to global prosperity in 20 years." Read the full column.
Pearlstein was online on earlier today to discuss this topic. A transcript of the discussion follows:
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Harrisburg, Pa.: While representatives of the G-8 meet, are they planning to have any discussions concerning the Asian markets? If so, what is on their agenda about this enormous section of the world market?
Steven Pearlstein: Not likely to be a main topic of conversation, although China might come up in the context of currency. The Chinese yuan is pegged to the dollar even though it should appreciate and they are keeping it artificially low. This is trade and economy distorting, they know it, but they don't want to take a hit to their export economy to fix it. Instead, they just keep piling up huge trade surpluses with the U.S.
Alexandria, Va.: Question: Is it really possible for the world's richest countries (G-8) to expect economic expansion as long as there is a drag on their economies caused by the lagging rest of the world? Do you think G-8 may start thinking about creating other "Unions" like the EU, to encourage other economic groups to be created around the world? Sort of like another ASEAN, but on steroids? Africa could use one; South America could use one; Scandinavia could use one (separate from the EU)... OR would that be anathema to the G-8's dominance of the world economy?
Steven Pearlstein: That is a fascinating question. No, the G-8 would not oppose it, I don't think. In Africa, they would certainly encourage it. Not clear South Asia particularly needs it. And of course South American union already exists and is ripe for expansion.
Laurel, Md.: We had a chat yesterday with the Worldwatch institute about how the economics of industrialized nations affects the stability of developing ones. How has the current economic situation in the G-8 affected sub-Saharan Africa, Latin America and South Asia?
Steven Pearlstein: Big time. The flow of new investment and lending into the developing world has slowed down dramatically. The good news is that "spreads" are now down to 8 percentage points -- that is, the difference between what developing countries as a group have to pay to borrow and U.S. Treasury yields are down to single digits after soaring. That means that the markets are viewing lending and investing in developing coutries as less risky. One would expect flows would now pick up again, but its not a sure thing. Lots of people lost lots of money recently and it will require that those old investments be "cleaned up" before there will be a lot of new ones.
Laurel, Md.: Whenever anyone brings up why the U.S. economy has been growing so slowly for so long, I always think it comes back to the fact that we had the longest economic expansion in history, with well-known excesses and it's going to take a long time to pay the price for too much telecom infrastructure and busted dot-coms.
How much of the rest of the world's problems are related to an overheated U.S. economy in the '90s, Japan in the '80s and other Asian tigers that grew very fast? (Did Europe have anything equivalent?)
Steven Pearlstein: You're absolutely right, its really all about wringing out the investment excesses (and the other excesses and imbalances that flowed from it) of the late 1990s. And despite what you here from the economic forecasters, who don't really understand this aspect and don't have computer models of it, it means continued slow growth in the U.S. and, to a lesser extent, in Asia and Europe. Its not just that capacity needs to get rationalized and wrung out. It is also that prices have to be brought back to sustainable levels--not just stock prices, which has happened, but prices for goods and labor and professional services. People really can't earn what they used to earn, and many are still holding out hope that they can.
Arlington, Va.: I'm struck by the different interest rate policies in Europe and the U.S. Is it the case that the European banks left rates higher as a way of preserving their powder for real crises? Is the Fed so overextended on interest rates that it has lost its ability to stimulate the economy further?
Steven Pearlstein: The European Central Bank left rates higher because they are more focused on inflation fighting, both by tradition and by their charter. Until the backward looking inflation rate falls below their official target of 2 percent, they are not inclined to cut, even though they know inflation is not really a problem and their rates are slowing the economy. As for the Fed, it is running out of ammunition: for technical reasons, they believe they really can't lower rates much below 1 percent. But they have other ways to stimulate, by targeting rates other than the traditional federal funds rate. And they can do that by going into the market and buying other type of federal and agency bonds, effectively driving down longer term interest rates.
Norfolk, Va.: Will the strong dollar policy adopted by the Bush Administration lead to a scenario of competitive devaluation such as what destroyed the world economy between two World Wars?
A student of International Political Economy
Steven Pearlstein: That's a good point and it is worth worrying about. Japan is already doing that and some other Asian countries that compete with it in export markets might be encouraged to do so. China, by keeping its currency pegged to the dollar, is also doing it effectively. Although the administration's new "let it fall" policy for the dollar might look the same, and may be motivated in part by the desire to spur exports, its not in the same category since everyone knows that the dollar has to come down in value at some point. That is not true elsewhere.
Reston, Va.: Does Secretary Snow's relative inexperience on the world stage hurt the U.S. when it comes time for these big economic confabs?
Steven Pearlstein: Not really, although it may be true he would, at this point, not be willing to be as bold and do some of the things I suggested today during his early outings. I should remind you that the Secretary won't be at Evian. Only the President and his White House staff.
Washington, DC: Could you elaborate on this item from today's column: "...a Eurozone charter that has proven ridiculously inflexible in the face of economic downturn."
Steven Pearlstein: The charter prevents countries from running a budget deficit in excess of 3 percent of their gross domestic product. Most of the time, that would be a good rule, but not when economies slow and could benefit from some old fashioned Keynesian stimulus: government's buying things and sending people money to spend. The charter's emphasis on inflation targeting also ties the hands of the European Central Bank.
Bethesda, Md.: Japan has had a terrible economy for more than a decade. Why haven't the G-8 leaders aggressively pursued getting that economy back to growth?
Steven Pearlstein: They push and prod but the Japanese system is very slow to reform for reasons having to do with its political and economic structures. They took some moves in the last week (no doubt in preparation for the G-8) to begin cleaning up some of their bank balance sheets. But it is still too little and too slow. And there are all sorts of reforms of their non-export economy, allowing it to be more flexible and entrepreneurial and market driven, that need to go on for that economy to regain its footing. I'm afraid that in the short run, Japan has to be assumed to be part of the problem, not part of the solution.
Washington, DC: When you say that the G-8 nations should lend a $100 billion to Middle East countries to help them build up their infrastructures, do you exclude the oil-rich countries from that list (other than Iraq, of course)?
Steven Pearlstein: No, I specifically meant to include Iraq. They will have the oil revenue to eventually pay, but the need for stuff right now is so great that they could benefit from some significant borrowing for infrastructure building and rebuilding.
Rockville, Md.: What is meant by "global prosperity"? What are the indicators? Is distribution of wealth necessarily a consideration in global prosperity? Is debt (e.g., trade deficits ~ but then, I suppose they zero out...) factored into global prosperity? Are all assets considered in calculating global prosperity? For example, do non-cash assets like storehouses of wheat, oil reserves, etc. counted in calculating global prosperity? Or, is it just a concept? Thanks!
Steven Pearlstein: Maybe I should have said global economic growth but, as you point out, alot of growth in one place but none in others would not be satisfying. Its more a concept than a measurable thing.
Silver Spring, Md.: How serious is the U.S. dollar crisis?
Steven Pearlstein: Not serious at all as long as it remains orderly and not overly speculative or go too far.
Alexandria, Va.: In answering Laurel's question, you wrote: "Its not just that capacity needs to get rationalized and wrung out. It is also that prices have to be brought back to sustainable levels--not just stock prices, which has happened, but prices for goods and labor and professional services. People really can't earn what they used to earn, and many are still holding out hope that they can."
It seems to me that the housing bubble absolutely has to pop to produce the type of price reductions that you're talking about. That bubble is maintaining the pressure for high salaries. Or maybe I have it reversed...
Steven Pearlstein: There are housing bubbles in selected places, including probably Washington D.C. But that excess won't be wrung out until people get real about the fact that their incomes have been reduced. And that is still happening. Some people have enough savings and home equity to tap that they believe they will just ride this temporary thing out until they are paid at 1999 levels again. They are desperate not to admit that that ain't gonna happen.
Kansas City: I think I read the Financial Times wasn't very enthusiastic about the Bush tax plan that was just passed. How does the rest of the world view what the US is doing economically and is there any concern about potential impact on the rest of the world?
Steven Pearlstein: I'm sure the global opinion is that the tax cut was a bad idea in the long run because it runs up the deficit too much. But in the short run, it is undoubtedly helpful in stimulating the U.S. economy, although perhaps not as much as the Bush administration believes. He will use that in Evian to say, "See, look what we're doing to help the global economy."
Washington, DC: I see we're finally going to sign the free trade deal with Chile. How much of a factor is free trade when we're talking about the ability of the G-8 countries to spur global growth?
Steven Pearlstein: In the short run, not much.
Long Beach: What punitive measures will Bush be using against the French and Germans? Shroeder appears to be getting pressure to mend the fence with the USA, with Bush having none of that. Have we become nacho eating humiliation mongers, or what? Why does blind allegiance to pre-emptive strikes (based upon suspect intelligence) equate to either being with or against us? Will it take a European boycott of American icon products, like Coke and McDonalds and Levis?
Steven Pearlstein: Those are good questions to which I have no answer. But using trade and investment to punish each other for non-economic disagreements is not out of the question. And it is dangerous to the global economy.
Baltimore: Argentina is a mess. Why hasn't the G-8 done more to help what was once the brightest economic star in South America?
Steven Pearlstein: Argentina is slowly getting its act together. Frankly, it is better left to do that alone, without a lot of interference or financial help from the outside. It needs to renegotiate its debt with creditors and reform its economy and get its political house in order. Get the banks refinanced. Then it can grow again. Argentina is now readjusting in all sorts of ways to the reality that it is a lot less wealthy than it thought.
Vienna, VA: It seems that the way things are going, we will become a banana republic in a few years (a large powerful wealthy class, a well financed military system, and everyone else will be either poor or in prison).
The U.S economy now requires a household to have two incomes to survive. The pressure is on to not only keep wages low, but push them even lower. Concurrently, housing and rentals consume 50-70% of the incomes in those of the lower middle class and are increasing their bite. Credit card debt is higher than it has ever been (my read on that is that people are tapping into the money just to meet regular expenses). Foreclosures are high.
The meager earnings generated in the lower middle class aren't enough to cover expenses. And the cash flow discrepancy seems to be quickly moving into middle class. The Global Economy doesn't seem to be providing any benefit to the average American. Or am I just misreading things?
Steven Pearlstein: I think you're misreading it. There is no real indication that the lower middle class is worse off year to year, although its not getting better off these days either. Actually, during this recession unemployment has hit harder at the professional classes than ever before. Nor is there any indication that the ladder out of the working class is any harder to climb than before--in fact, the opposite is probably true. I'm not sure this is the place to have a long discussion about the impact of trade on wages and living standards but the literature is clear that it is good on balance but may be bad for particular sets of workers and households where people lose their jobs and they don't have easily transferable skills.
Washington, DC: In an earlier answer you said that only the President and his staff are attending the G-8 summit on behalf of the United States. Is this the normal contingent, or will other heads of state have their financial experts in tow?
It seems the Bush administration is extremely thin in international diplomacy, which is the only thing between doing nothing and using military force in a time of crisis.
Steven Pearlstein: The finance ministers met a few weeks ago and I guess this time they decided not to bring them along (in the past, it has gone both ways).
Washington, DC: Let me re-ask my question: You're not suggesting that the G-8 lend billions to Qatar, UAE, Saudi Arabia or other oil-rich nations? I imagine you're talking about countries like Lebanon, Egypt, Jordan, etc.
Steven Pearlstein: That's right.
Washington, DC: What do you think about Paul Krugman's assertion yesterday in the New York Times that the Bush Administration is deliberately creating a financial crisis in order to cut social programs?
Steven Pearlstein: The starve the beast theory has wide currency among liberals. I'm sure there are Republicans in Congress that are inspired by this prospect. I'm sure Bush thinks the world would be better off with a smaller federal government, even though he has not identified where he would cut it. But in general, I'm not inclined to be very conspiratorial in assessing the motives of others.
Alexandria, VA: How have the internal dynamics of the G-8 been affected by the most recent political disagreements over the invasion of Iraq? Does this set us back any in terms of redefining our relationships with other members? Are there trust issues involved here in terms of economic expansionism being coupled with political expansionism? I personally don't believe economic hegemony need necessarily follow military hegemony...
Steven Pearlstein: I'm sure it will affect things a lot this time around. Bush will be there urging the others to take big political risks at home to help the global economy, and it would help a lot if he had a good and trusting relationship in making that plea.
Alexandria, VA: On the idea of a trade sanction moratorium: Threatening trade sanctions seems to be one of the EU's and US's favorite sabre-rattling devices... whatever happened to the WTO's ability to try to resolve these situations where necessary instead of just being a place to lodge a complaint. I apologize if the question appears misinformed, but I'm an amateur in this field.
Steven Pearlstein: No problem, this stuff is so arcane I don't pay much attention either. In fact, our disputes are submitted to the WTO and it is on the basis of the WTO rulings that countries are allowed to "retaliate" against trading partners to "compensate" for their illegal trade behavior. The Europeans will soon be allowed to retaliate against us for our corporate export subsidies. And we may be able to retaliate, under WTO rules, for their ban on all genetically-modified food. But there is nothing requiring each of us to retaliate. So that's why I propose a moratorium on retaliation threats.
Herndon, Va.: In the long run, doesn't the U.K. have to adopt the Euro? Not legally, but economically, doesn't it make absolute sense for the Brits to get onboard? It's a shame that any government that makes that decision will immediately fall, but that's democracy.
Steven Pearlstein: Not even required economically, although I'd expect it would happen in the next decade. The economic conditions have to be right. A lot of it has to do with London's apparent role as the financial capital of Europe and wanting to maintain that. Politically, I suspect the more time that goes on, opposition will wane.
Vienna, va.: Will Chirac, Schroeder and other leaders who have run afoul of the Bush White House get an opportunity to bow and scrape for forgiveness at G-8 this weekend? Is that the real purpose of this rendezvous? On the same lines, if the Euro-cabal lent $100 billion vis a vis Iraq, would that really be something the U.S. would be in the mood to look at in a positive way?
Steven Pearlstein: You can be sure there will be very little bowing and scraping, nor should there be. It is time for the U.S. to be magnanimous, although my colleague Mike Allen reports today that President Bush is not so inclined. And yes, on the export financing by Europe, the reality is it would need to be blessed by the U.S., which we should do.
Starve the Beast:: I don't think creating a financial crisis is what Bush has in mind; but I do think (his kind of) Republicans do see the recent tax cut as more a tool of re-aligning the people's relationship with the government than a carefully chosen tool designed to address the current economic situation.
Steven Pearlstein: Probably right on that one.
Alexandria, Va.: To follow up on retaliation -- is it true that one of the latest and silliest battle moves has been to apply the idea of "it's champagne only if it's from Champagne" and "cognac if from Cognac" to all sorts of things, notably cheeses, etc? Do we say goodbye to knockoff Stilton and Havarti?
Steven Pearlstein: Not sure on that one, although I know the French are keen on it. Good labeling should be able to solve that problem if people want to be reasonable.
Springfield, Va.: Dear Mr. Pearlstein:
Do you think it likely that the G-8 will adopt any of the plot lines you suggest in your column today. I am pessimistic about their courage.
Steven Pearlstein: Me, too.
Steven Pearlstein: Thanks folks. See you next week.
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