Drezner/Bergsten — the bootleg tapes
Here’s a more complete transcript of my interview with Peterson Institute for International Economics founder C. Fred Bergsten that Foreign Policy excerpted earlier in the week. I edited and abridged the transcript to clean up some of grammar. Have at it — Bergsten’s discussion of his role in the Trans-Pacific Partnership should make for interesting ...
Here’s a more complete transcript of my interview with Peterson Institute for International Economics founder C. Fred Bergsten that Foreign Policy excerpted earlier in the week. I edited and abridged the transcript to clean up some of grammar. Have at it — Bergsten’s discussion of his role in the Trans-Pacific Partnership should make for interesting reading!!
DANIEL W. DREZNER: I guess the first question I would ask is, what do you think the [Peterson Institute for International Economics’] greatest accomplishment has been?
C. FRED BERGSTEN: I think our greatest accomplishment has been to educate Americans on the benefits of globalization. And the first calculation that tried to quantify the effects, namely a trillion dollar a year — higher — national income, the potential for further gains of another half-trillion a year could go all the way to reducing barriers to global trade. Um, it’s been a tough battle. It started in earnest I’d say in the NAFTA fight in Congress, and it continued during every one of the trade policies at the time. It’s of course come up repeatedly in the capital flows context as well with all the monetary crises going back to the 80s with the debt crisis, and the 90s with Asia, Russia, Brazil, Mexico, etc. And now, with the crises of the high-income countries…but I think, putting it in the broadest terms, we have been the people trying to expand understanding of globalization — its benefits and costs, which there certainly are — but how [on] balance, it’s a positive force, both for the U.S. economy and for U.S. foreign policy. In doing that, we have never tried to cover up or short-change the costs, particularly the adjustment the cost to workers and [immobile] factors of production, but it’s mainly workers. We’ve quantified that, about 50 billion a year to offset against the one trillion a year of gains –20/1 cost ratio — pretty overwhelming but that is significant cost. So that has to be dealt with, and the U.S. has not dealt with it very well. Trade adjustment is miniscule — one billion a year. We need to invest more to deal with the downside; the cost of losing, in order to keep the benefits of globalization on a stable basis. And we’ve argued that throughout, and I think our balance carried the day. But the battle rages on, as you know, so much work yet to be done.
DWD: Of course, I know you’re a Fletcher alum, and I’m speaking right now from the Fletcher school, so I have to ask this question: In what ways did your Fletcher experience prepare you for going to DC and then sort of creating the Institute for International Economics?
CFB: Well, it prepared me really well because I learned really most of my international economics there, from the top professors of the day, [like] Charles Kindleberger.
DWD: Kindleberger was there when you were? Oh, I didn’t know that.
CFB: Charlie taught a couple of courses — a course on Europe, Europe Economy, an economics course on development with Humphry called the Don and Charlie show — that was one of the highlight performances on the campus. But their teaching gave me most of my roots in international economics, and always — obviously in a global context — but also in a real world context; a political economy context that was, of course, really useful then for going into the policy world, which I did, most immediately into government, and then with that of most of my 20 years of career then to creating the institute.
DWD: Do you think America’s foreign policy establishment has become more or less economically literate since when you first started IIE?
CFB: I don’t think there’s been much change. They were not very literate then, and they’re not very literate now. My first big job — I had a couple of lesser jobs — my first big job was becoming economic deputy to Kissinger when he was National Security Advisor under Nixon.
DWD: Did he know anything about economics?
CFB: I’m going to tell you. When he asked me to take the job as one of his six deputies — he had deputies in the regional areas — a couple functional, and I was functional, everything was done at that time — everything on foreign economic policy — was done through the National Security Council. No National Economic Council, there was nothing like that. International Economic Policy was viewed as a branch of foreign policy, all done through the National Security Council. But it was viewed by all the foreign policy types as a tool — foreign policy didn’t really understand or care about the economics of it.
So, when Kissinger asked me to take the job, he said, “Fred, I want to make a deal with you. You do everything in my name and never bother me.” I was 27-years old, I was a bit taken aback, and I said well, “If that’s the way you want it, we can try, but I’m not sure how that’s going to work.” And I of course figured he would modify. Well he did not modify. It worked for a couple of years, but then some really hot issues started to require his personal involvement, and he just wouldn’t do it. And so, after a few months of that, I went in and told him I was quitting. And he was shocked and asked why, and I said, “Henry, it’s because you neither need nor deserve the quality of staffing I’m giving you. The truth is, arms control, U.S.-Soviet relations, all those things, wait till you clear your inbox. But the world of economics and finance does not wait until you clear your inbox. And therefore I can’t do my job right.” And he was again shocked, and [George Shultz and I] actually created a new institutional mechanism within the White House, to coordinate for economic policy in the future, basically taking it out of the National Security Council.
That was in fact a historic shift, not that the specific change had much impact, but that was a historic period – 1970 – right when [[ ]] economic policy moved away from being a tool – almost a vestigial tool — of foreign policy into something that, going forward, balanced domestic economic concerns with international concerns, with the balance shifting more and more to the domestic over time. And now, the foreign policy department, the State Department despite Hillary Clinton’s speeches, have almost nothing to do with more economic policy.
DWD: Do you think that’s a good or a bad thing, though? I mean, I understand why you would want economic rational to guide foreign economic policy, but you would also presumably want there to be a national interest component?
CFB: Yeah, I think it’s unfortunate. Now, I put a caveat on what I just said by indicating that in the crutch, when you get to really big issues, big decisions, like on trade deals, NAFTA – recently to create U.S. agreement. At the end of the day, the Congress votes those things on foreign policy and national security grounds. You have to neutralize the economics at least, make sure the economics are not viewed as a loser for the U.S., but they basically carry on fundamental foreign policy on it. And the same way with everything towards Europe and the euro:
The bottom line question is whether the United States supports a united Europe and wants to keep it going, and there remain hot debates on that, as there have been from the creation of the common market, but again, in the crutch, in the original Kennedy, transatlantic two-pillar strategy has prevailed, and the U.S. has opted to support united Europe. That may be put to the test again if we have to put up a lot of money to rescue the Euro zone. It’s kind of peculiar on a day to day basis. As I say, the foreign policy side is almost out of it, but when it comes to big decisions, even completing U.S. trade agreement most recently, Obama didn’t really want to do it: The Korean president was coming, and if Obama didn’t produce that, it was a failure. And so he has to finally sod off and agree to the deal. Trans-Pacific Partnership [TPP], which I was much involved in the planning on, he didn’t really want to do it, but Lee Kwon Yu, (probably coached by me) told him that if he didn’t take some economic initiative toward China – toward Asia – he was leaving all the reign toward the Chinese and to forget about U.S. influence. That just shook Obama to the core, and he just said, “Look, what should we do?” And [Larry] Summers called me. We had a dinner for him, and we plotted out the Trans-Pacific Partnership.
So foreign policy does come in at key points, but it really almost requires almost crisis-type environments for it to happen.
DWD: Interesting. You talked about how the institute’s greatest accomplishment is trying to educate Americans about globalization, not to suggest that you’ve been perfect, but what, if there’s an issue that, over the years, the institute erred on, or made a mistake, is there any that you would sort of highlight? What’s the biggest mistake you guys made?
CFB: Well, there’s probably, I don’t think there’s a substantive issue on which we made a big mistake, or recommended a policy that turned out to be wrong or misguide. The tactical things that was very difficult and continues to be is engaging in debates on trade policy, particularly in the Congress, on trying to win support for things like NAFTA or the other free trade agreements to be negotiated. But Congress always wants to know how many jobs they’re going to create. As good economists, we all take the view I think that trade agreement does not unbalance create, or destroy jobs, it alters the composition of the workforce. Now that of course is on a full employment assumption, which is true over the long run, but not true in the short run, so then you’ve got to explain that which is already hard.
Secondly, beside the cyclical point, there’s the partial equilibrium of analysis. You say, well, of course, the trade agreement creates a certain number of jobs in certain industries and it may destroy jobs indirectly in other industries, but then there are all these indirect effects., and that oases through the economy as a whole, and to do it right, you have to have general equilibrium models, and that’s where, at the end of the day, you come to the economists’ pretty tried-and-true conclusions that it’s neither a creator nor destroyer. But if you respond with those arguments, you essentially disinvite yourself from the debate. No- they don’t want to hear that; they want to know how many jobs. So you then say it’s a difficult, tactical choice. Do you play the game, essentially through the parts of equilibrium analysis, and ignoring the cyclical stuff, or do you stick to your intellectual guns. We have chosen, in most cases, to play the game because we felt it was better for the outcome for us to do that than upset ourselves from the debate. And we have big internal debates about whether that was right.
DWD: Your think tank thrives in a period when, to be frank, most think tanks have acquired a more partisan edge to them — the ones that were created around about the time you were or after you have clearly been on one side or another of the ideological spectrum. But your think tank has a reputation of managing to talk to both sides of the aisle. How you managed to preserve that? Is that an endangered species in Washington?
CFB: We have been aggressively centrist, you’re exactly right. And we have consciously made sure that we called each issue as we thought it ought to be called from an intellectual standpoint without regards to the politics of the day. And sometimes that has led us to unpopular stances. It has led us interestingly (and I’ve gone back and kind of traced this) into stances which were roughly equal in support of Republican and Democratic administrations over the 30-year life of the institute. With the Republicans, we’ve tended to be with them on trade and critical of them on some macro and monetary stuff. With the Democrats, it’s been the reverse. We’ve been critical of them on a lot of trade, but more supportive on monetary and macro. But when you put them all together, we’ve been roughly 50/50 in support of any given administration, and in the totality of the administrations over time. And I think we’ve done it because we’ve stick to our intellectual guns; we’re totally nonpartisan, but we have certain values, as I said: globalization, freer markets, freer trade, international economic cooperation – those are all things we believe in, and we do not vary those views depending on what administration is in office or what the different sides of the aisle in Congress tend to support. There actually have been surveys that ask for perception of the top 15 think tanks, perceptions in the Congress perceptions in the media, and we were the only economic think tank – and I think one of only two total (CSIS was the other) – that came out being viewed as balanced and neutral. Now I was very proud of that, because I think that that’s been one of our key landmarks, and one that enabled us to maintain our credibility, our influence, over this span of time, whoever happened to be in office and whatever was the balance in Congress.
DWD: Having read a lot of your work, it strikes me that your position tends to be pro-executive branch, because Congress obviously imposes, in some ways, the biggest impediments to a lot of the policies you prefer.
CFB: Well, Congress has to be convinced. I guess I’d put it that way. They have, of course, strong components within that have opposed trade agreements. They’ve had strong components on the other side of the aisle that have opposed trade adjustment assistance agreements. So, we have often felt we needed to point our research in opposition to specific congressional initiatives. Several come to mind, but there was a case [a few] years ago, where steel quota legislation had passed the House, was about to come to the Senate floor – frankly the White House called us and asked for help. They were terrifies it was going to pass, and this was during the end of the Clinton period, and we had done huge amounts of analysis – Gary Hufbauer does lots of stuff on protections costs in general, he’s done earlier stuff on the steel industry, and we whipped out a brief, and in just a couple of days, it got in the hands of every Senator, in the hands of every editorial board; Hell, half the Senate was carrying it around and some quoting it; every editorial in the main papers cited from it. And it all showed that the cost to every consumer of every job saved to the bill – even under the dubious assumption that it would save some jobs – $900,000. And on the basis of that, the bill was surprisingly shot down. It failed, and I always thought that was a quintessential example of a think tank doing its job almost perfectly. But after that many times, I don’t have many examples like that. But we’d done the basis research, we had the credibility and reputation on the issue, we applied the basis research to the case and point, we marketed the product around so all the key players had it in their hands, and because of our credibility and reputation, they paid attention to it, and it all came together and got what was clearly the right outcome from the national standpoint. So in a case like that, it was opposing a congressional initiative siding with the administration in that case, and for the reason indicated.
DWD: Do you think on the whole America is more protectionist than it was when you founded the institute?
CFB: Well, I think it’s hard to say on balance. The polls tend to show that the country is more protectionist, if you ask the individual voter. On the other hand, the share of the economy that is globalized has expanded enormously. The share of trade in our economy has tripled from the time I was at Fletcher, and roughly doubled from the time I started the institute. So in terms of our international engagement of our business community, our whole economy, we may have gotten beyond the threshold where it may have been possible to go protectionist in a big way, which is  of too many business arrangements, supply chains, international alliances – all that has really gone enormously far on the real side. The financial side, of course, is even more intertwined with the huge intermingling of capital flows, cross-border flows in both directions, massive amounts of turnover in the foreign exchange and other financial markets that are, by their very nature, international. So it’s almost impossible to conceive of the U.S. going to capital controls, even the type we had in the 60s when I was first in government, the U.S. had (people forget) pretty extensive capital controls in the 1960s – they were kind of with a velvet glove but they were capital controls nonetheless. It’s very hard to imagine that, and it’s even hard to imagine going back to any kind of crude trade protection.
So part of the answer is that more subtle means of protectionism have taken sway where people are learning to manipulate things like technical standards and customs procedures, and all sorts of behind the border and highly obscure corporate specific or industry specific devices to try to achieve the same outcome, and we’ve recently done a fair amount of work cataloging that and showing that it’s a bigger threat than people realize, and the relative complacency that has been prevalent in the world about the absence if a big, protectionist reaction to the Great Recession – that should not be overdone, and people should not be excessively complacent because new varieties of the same old hill are creeping in, in addition to which, of course, competitive currency competition has come back with a vengeance, led by China. I mean, here’s the world second biggest economy, biggest  trader, aggressively and blatantly manipulating its currency for over five years to keep it hugely undervalued, that’s exactly what the whole Bretton Woods system was design to avoid replicating for the 1930s, so in that sense the system failed the stress test. A lot of this stuff is alive and well and to come back to the second part of your question, what we at the institute have tried to do is send the international economic system to preserve and protect and expand further the benefits of globalization – not just for the U.S. but for all countries – try to identify and fight off a tax on that open system, and where necessary, propose systemic reforms to try to stay ahead of the curve and keep ahead of the positive present pressures to deviate from the open world economic model that is our short preference, so I think I would have been able to answer the first question by emphasizing our view of our role as being a prime defender of the open global economic order, and the rules and institutions that have been constructed but have to be constantly modified, reformed updated, and modernized to achieve that.
DWD: You studied under Kindleberger here. His most well-known book is [about] the [global economic governance] problems with the 1930s – how would you grade how well… global economic governance has done since the 2008 crisis.
CFB: Well, I’d give it a very strong B, because it did mount a very effective immediate response to keep things from plummeting to possible Depression-era depths. On the other hand, it has not been good (yet, at least) in forging the kind of fundamental reforms of the system, particularly in term of his political legitimacy as governance structures are necessary to catch up to the really tectonic underlying changes in the… power structure. Already before the crisis broke out, the emerging markets in developing countries had become half the world economy and they were growing three times as fast as the rich countries, and so their share was growing every couple of years. They’re now half the world economy, a decade from now, it will be 2/3 the world economy. Their share will continue to grow. But obviously the government mechanisms of the institutions have not funded that. The crisis forced the shift from G-7 to G-20, which was a major step in the right direction, which has yet to confirm that the G-20 is an effective steering committee for the world economy; maybe too big to do that. But we have not seen anything like commensurate changes in IMF, WTO, World Bank, etc. And until that happens, you can’t be confident in the strength of the system. You seen this week, the IMF tries to raise an additional firewall to help defend the war against the European crisis, but the BRICS who are the national, big contributors now, particularly China, but the other three as well, they have not yet put up money. They said they will, but they have not said how much, and they’re holding back to whoever changes governance structure of the fund, which is certainly deserved, but it’s just not there. Those countries are just not prepared to put up what they should as new emerging leaders – punitive leaders, certainly I would say necessary leaders – of the world economy going forward. So it’s a crystal clear illustration of how the global system has not yet recognized and ratified the fundamental change in the economic power structure, and you refer to Kindleberger’s famous book of course, that the U.S. was not ready to lead, and the British stole all the good, so the system was a vacuum and therefore it collapsed. So the current analogy is that China is the new superpower, but certainly shows very little sign of being ready to step up and play a global leadership role. I wouldn’t say the U.S is unwilling… but again, with this recent example of the IMF firewall, the U.S. is not contributing.
Now, I happen to think that’s right because I happen to think there ought to be surplus creditor countries that contribute to the world’s biggest debtor countries, but that’s simply another way of saying the U.S. has lost its ability to continue to lead. And if somebody else – and China is the natural somebody – doesn’t step in, at least to increasing degree, you could have another vacuum, a la the 30s, possibly analyzed by Kindlgeberger. So there we are and that’s, I think, the biggest existential risk to the current global economy. The traditional problem of engaging the rising power in the system could once again be fumbled. It was fumbled in the late 19th century with the Germans, it was fumbled again in the inter-war period terribly and [been] disastrous itself. There have been examples where it was handled well as well, but this could be another of those disasters period if it’s not handled right.
That’s why I proposed – about 6-7 years ago – I proposed a U.S.-China G-2. I did not mean it to be a formal institution that would supplant the G-20, or at that time the IMF or anything else, but really, a steering committee within the steering committee, because unless China and the United States agree, they’re not going to get progress on any major global economic issues now. We see it with the exchange rate system, we see it with the Doha round, we see it with climate change, and if those two can’t find ways to work together or at least find ways to agree to disagree, the economic system’s going to be in trouble. There was patchover in the initial response to the crisis, which is why I give the system a B, but it has certainly not dealt with the right problems I describe, and I think until it does, we can’t be sure it passes the stress test. To me, this is the real stress test of the Bretton Woods system. Immediate response ok, but still unclear.
DWD: Another question, and that is, I think a lot of foreign policy recognize the importance of international economic issues, but let’s just say less than economically literate. From the Peterson Institute of International Economics, or other groups that you can think of, what would you say are the gateway drugs for them to become a little more knowledgeable and a little more comfortable thinking about economics?
CFB: Well, there are some good textbooks about international economics. You teach it, I think, don’t you?
DWD: I teach international political economy, yes.
CFB: So you know the stuff. I’m biased toward John Williamson – he’s a colleague of mine, but his textbook is very good as well. So if you really want to get a fundamental grounding, a textbook would be the way to go. If you want shorter, overview pieces, then some of the articles I’ve done in Foreign Affairs, some of the monograms we’ve put out from the Institute of the trading systems, the financial systems, stuff like that are probably as good as you can do because we always write for a broad audience; we try to avoid jargon, econometrics, etc. that could really throw the reader off.