Q1) Let me start by asking you to assess the performance of the Clinton Administration throughout the nineties in defending the US position in the world’s economy?

 

Well, I think that the Clinton Administration approach had a few critical components.  First, early on in the Administration, a trade-off was recognized between fiscal discipline and large spending initiatives and fiscal discipline was favored. It was predicated on the view that there were not really many other choices. This was based on the idea, which turns out to be correct, that if we are fiscally more balanced, we get rid of the structural budget deficit, and create more room for better capital market conditions. 

 

The second part was to try to achieve this in as progressive a way as possible. This means in the case of tax decisions, the tax relief is focused very much on the bottom 20 or bottom 50% while the tax increases are focused very much on the very top. That is one example of progressive policies.  Another example is that a lot of the programmatic spending increases that occurred in education were directed at programs like Headstart or grant programs for colleges for low-income or middle-income students.  The focus was to target tax relief to the lower income distributions.

 

And then, the third part really was contrary to expectations.  The perception was that the Democrats were inward looking, protectionists, and that they would not engage the global marketplace.  Back in the campaign 1992, Clinton made the decision to support the North American Free Trade Agreement with some adjustments. That was a signal I think of the kind of trade engagements the Clinton Administration was willing to pursue, without actually a whole lot of support from one of its strongest basis, the labor movement. This continued through the entire first term of office.  On the other hand, even in the second term, you would have to say the Clinton Administration was deeply engaged in things like moving finally to a W.T.O. with China, which was major from a Democratic point of view. This was not an easy policy to pursue and they pursued it consistently in two agreements. I think that this reflects how committed they were to engagements in international trade. So, from the NAFTA negotiation to the China membership in WTO, neither were traditional Democratic approaches.

 Q2) What is your overall assessment now looking at the range of policy objectives: A+? B-? Given the constraints, which are many in political, domestic and international terms?

 

Well, I think from a policy point of view, there have been very few and only relatively small policy areas where I felt the Administration was not doing the right thing.  So I would give the Administration an A-.  I think that the economic policy was very sound given the constraints. Going back even to 1993, my proposal would have been a larger gasoline tax and that was impossible, so we had a 4.3 cents increase instead.  The politics of the moment (not just of that moment but ever since) have made it impossible to put together a coalition of Republicans and Democrats to support it. So, instead we got a retroactive marginal tax increase on the top 1.5%, which I think is fine but they made it retroactive. They made it retroactive because they had to fill a hole. That is just one example.

 

The Administration is justifiably proud that they devoted the largest increase in resources to access to higher education since the G.I. bill.  We know that some of these grant programs actually work in a more targeted way than some of the tax credit programs but the tax credits programs are the only one ones you can get through. So that is another example of choosing a policy forum which is not the perfect policy forum.  Tax credit for education is less perfect as a policy forum than a targeted grant, but you cannot do the grant because you cannot get Congress to go along. So I feel very satisfied that the Administration laid out the right goals and pursued them about as well as they could.

 

Q3 ) And in terms of international trade, which is your area.  How has the US performed as a leader of the free world and the free world economy in terms of stirring a course towards liberalization, market access, building the institutions of WTO? … What performance assessment  would you offer here?

 

I would extend the same ranking as before.  That is my assessment for everything.  I might even give an A. There are small mistakes but again they are political issues.  One of the things I really felt was a misguided policy was the Helms-Burton Act.

Helms-Burton Act is a specific example of a tendency of US policy-makers to find a unilateral sanction threat or sanction approach to change behavior of a trading partner or a political partner. And I know and the economists in the Administration felt that sanctions did not work.  Often the behavior you wanted to try to change actually got worse rather than better. The economic costs mostly were imposed on the US not on the target.  This came up with Iraq, Yugoslavia, and with Cuba.  If the President had vetoed Helms-Burton, Congress probably would have passed over his veto.  At time, the Cubans had shot down some civilian planes and that really caused the relation between the US and Cuba to deteriorate. There really was a sense of trying to punish Cuba for this breach of air space.

 

Q4) I have a question that is more process-oriented.  In an open globalized economy with a lot of capital, currency, investment across boundaries, and permeability of the economies, what is the impact of the individual decision-makers on the course of international economic outcomes?  And you were one, you had a great deal of influence at some point to really inflect, change the course, narrow the options. Do the individuals make a difference?

 

With individuals in the policy-making process, I think that Clinton mattered a lot because he has enormous political skills and, even at his weakest, he was able to use them. It is quite possible that if you had a Democratic Congress and a Republican President, that you would not have gotten all these trade agreements passed.  The Republicans had historically voted for trade liberalization. The Democrats opposed.  I do not think you would have gotten the NAFTA agreement through without Clinton.  Again I would go to the China-WTO deal. That is a deal, I think, that is one of the most important accomplishments of the Administration. We started to work on that back in 1993-94, when the economic group absolutely put at the top of the agenda to get this WTO done and get China engaged.

 

It took a while but again it is not obvious that a Democratic President would want to use his political capital that way. So I think individuals do matter. The leadership of the US, or the willingness of the US, to take a lead on the situation of the Mexican default. That was another interesting example.  If I go back in time to early 1995, the President was facing this new and very hostile congress and Mexico was facing a possible default.  Here I think individuals did matter. Bob Rubin, Alan Greenspan, Larry Summers, the Vice-President… a lot of people sort of got together on what we were going to do, went to the President.  First, we had to convince the President that something had to be done. That was actually pretty easy. He quickly said “yes, we have to do something”. So, I think all those individuals who went to the President that time were basically saying that something had to be done. And that matters.  I can say the things are different because of what we did.

 

Q5) Could you comment on IMF reform?

 

I had the luxury of not being there during the crisis. I did follow it and have been involved in various sorts of commissions about what should be done. I personally feel that the IMF did some things at the beginning of the crisis, which actually have made it worse. The record shows that the IMF pretty quickly learned from its mistakes.  I think the truth of that crisis is that it was unexpected.  It hit the global economy with great speed and policy makers around the world made a lot of mistakes because they did not expect this.   They had never seen anything quite like it. I think the record shows that the countries that actually were extended the IMF support, used and followed the IMF structural proposals, have actually done the best.

 

People were saying that we need to have world bankrupt support. The IMF has not done a bad job and things would have been worse without it. That does not mean there is no room for improvement and I think some improvements that have been proposed make some sense.  I think trying to make sure that the IMF is not in the business of long-term development assistance is correct. That is not its institutional expertise, and more of the structural and development tasks should be done by the World Bank.

 

 

Q6) To me, the single largest achievement of the Clinton years is the elimination of the budget deficit. I do not want to say it is an unintended consequence but how did it come about because that is normally a Republican agenda, at least viewed from the outside of the US?

 

Well, it came about because over the 1980s and going into the 1990s, the concept which was very important in the US economic policy was one of structural and hypothetical budget benefits and budget surpluses.  Structural refers to the fact that regardless of where we are in the business cycle, we must determine if we have a balanced budget, a surplus or a deficit? What happened in the 1980s was that we built in a persistent structural budget deficit.  It was large enough that I think economists began to worry about it adding a deficit premium onto the long interest rate, causing a lack of confidence in US fiscal responsibility, and changing the characteristics of the capital markets.

 

So this has been in the air for a long time.  Commission after commission of academics and business leaders kept putting at the very top of the agenda the need to address the US budget deficit and debt. So over several years, this thing became the major economic item that needed to be address. The President and the Vice-President knew what people were thinking. They knew that this was a major policy issue. They both came out of the Democratic Leadership Council, which was the most centrist part of the Democratic Party.   This very centrist group of New Democrats had been trying to define an agenda that was both progressive, in the Democratic sense of the term, and fiscally responsible.

 

This Administration responded to an agenda, which had been given wide spread acceptance by business leaders, financial market leaders, academic economists and they went with it. They accepted this as a necessary but not a sufficient condition to make the US economy strong.

 

Q7) What about trade in terms of the platforms of the current candidates, Bush and Gore?

 

I think in the trade area, there is not in reality likely to be much difference between the two as leaders. I think the issue here would be the politics.  I think it may be easier for a Democratic President working with a Republican Congress.   Nobody knows how the congress is going to go but I think people think that the Republicans will keep the Senate and the House is very close to call.  It maybe Democratic or Republican but it is not going to be a big majority either way. There are anti-trade forces on both the Republican side and the Democratic side. You are going to need to have someone who is very much of a centrist. I think both Gore and Bush are centrists.  I think they will both be inclined towards the same kind of trade policy engagements.

 

One of the things I think is likely to be different is the unilateralist rhetoric of the Bush foreign policy.  There is a lot of “the US basically need to do what it needs to do and it cannot rely on multilateral institutions as much, and multilateral institutions have let us down and maybe we should exit from theABM Treaty, just because we think it is not a good treaty”.

 

You know it is true that the US is the only military superpower, but we do not want to be engaged on the ground in military actions, except in the most extreme circumstances. If you do not want that kind of engagement, then in order to help move the world along to solve problems, you need to be very multilateralist, involving your allies in institutions and in conversations about trying to work at shared goals. My concerns are in the foreign policy area.

 

The Clinton Administration was very good at reaching out to regional organizations, multilateral organizations and trying to do things in a collective fashion. Of course, George Bush Sr. was good at that. He did that with the Gulf War. But I am worried some of the rhetoric that I hear from advisors in foreign policy surrounding Bush.

 

Q8) Let me ask you a question in industrial policy in a globalized world. Is there a place for it?

 

 Well, I think that the main lessons from the US really have to do with  two things. One is the support for the basic high-level university research and education. Here in Berkeley, we train a huge number of PhDs that then go out and populate these private economic entities, create them and make them successful. The Government should have this commitment to higher education also this commitment to basic scientific support which you see in NSF or NIH.

 

The second thing is the R&D support for military spin-offs.  Successful examples include the Internet story and the aircraft story to a certain extent.  I think in that sense industrial policy spin-offs that come out of the military have become less important and therefore, even as we continue to spend on the military R&D, it is less likely to have an industrial policy effect.

 

Q9) What about choosing national champions? Targeting?

 

With Partnership for a Clean Vehicle, we have basically put money into a partnership with the major US automobile companies to develop a more energy-efficient vehicle. As far as we can tell now, it seems that the Toyota Condor is ahead on this. We spent money on it, and it does not seem to have really catapulted the American car companies ahead. In fact due to low gasoline prices in the US the recent emphasis has been onthe development of SUVs. So here you are, you put some money into getting the car companies to behave in a more fuel-efficient way, but the markets are moving the other way.  So you cannot get industrial policy, you will never be able to spend enough to override what the basic market incentives are, or are not. I think that was a good example.

 

Q10) So the lesson to the European folks is?

           

I think if you want to encourage something and the market is going that way, you are more likely to be successful than if you are trying to go against the market incentives. In the European case, you have much greater agreements on using both regulations and prices to improve the energy efficiency.   In that kind of climate, a set of policies to promote the development of energy efficient technologies is more likely to be successful than in a climate where you have low energy prices and you are not doing anything else to encourage change.  I would say industrial policies for promotional or market enhancing reasons when you are in this environment are more likely to succeed.

 

Q11) US-EU: more conflict or collaboration ?

 

Well, I think the transatlantic dialogue between the US and Europe on economic issues has actually been a positive force. You know you hear a lot more about the conflicts (organic food, banana, hormone beefs, aircraft conflicts…) but I still think that on broader issues some cooperative things have happened. I think the US and European efforts to cooperate and trust have been very beneficial. You know they worked together recently on discussions about Microsoft and Worldcom/MCI, where you have large global players on both markets.  I think there is a reason to have a greater collaboration, cooperation, discussion between regulatory authorities. There are raw spots in the relationship but on the other hand I think that the communality of interests is really the more powerful force. So the disagreements get played up, and there can be tense moments but the disagreements are fairly specific around fairly narrow issues. Communality of interests at a broader level seems to be very profound so I think that is the best part.