World Economic Update

Financial Times’ Edward Luce, McKinsey Global Institute Partner Susan Lund, and President of the Peterson Institute for International Economics Adam Posen join CFR Fellow Sebastian Mallaby to discuss trends in the global economy. The panelists discuss the newly released IMF report and the economic situations in the United States, the United Kingdom, and many emerging markets around the world.

The World Economic Update highlights the quarter's most important signals and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

MALLABY: Well, good morning, everyone. Welcome to today’s Council on Foreign Relations World Economic Update. I am Sebastian Mallaby. We have here next to me Ed Luce, the U.S. columnist for the Financial Times, Susan Lund in the middle, who’s a partner at McKinsey Global Institute and responsible for many of the fantastic research reports you see coming out of the McKinsey Global Institute, and then Adam Posen, who is president of the Peterson Institute for International Economics.

OK, so this is the World Economic Update, as I said, but you know, world economic discussions feel more and more political these days. So we’ve allowed, you know, next to me, the political commentator to infiltrate. I thought I’d start with Susan, and just ask a bit about the IMF report that was released just a week ago or so, which made a big point of getting into the politics. And I know within the Fund there was a bit of soul searching about whether that was appropriate, or even legal, for the IMF to talk about political risk. What was your response to that?

LUND: I think that it’s right on. So their forecast, of course, downgraded global growth, but had emerging markets looking good. But the theme of the—of their conference was making globalization work for everyone, and also making technology work for everyone. So there’s increasing discussion that we’ve got a world with two enormous forces—technology and globalization—that are both, for different reasons, producing sort of a winner-take-all effect, where some people, the top 1 percent or even 10 percent, are doing extraordinarily well and reaping enormous returns. And then, you know, the large part of the population in Europe and the U.S. is being left out.

And interestingly, you know, if you look at the other end of the spectrum, emerging market citizens are also seeing incomes rise. But you’ve got these distributional issues that have not been seriously addressed, really by any country. And maybe we need new thinking on policy. So I think that was the theme of what they had to say about global growth. The actual economic outlook, as we all know, is Europe is going slowly up. The U.S. is going up somewhat faster. Japan continues to go sideways. China is slowing. India is doing great. You know, that’s sort of a snapshot of where the world is going.

MALLABY: Ed, one of the political risks that have surfaced is sort of this feedback loop danger, where the unequal growth that Susan talks about fuels populism. And populism fuels bad economic policies. And you get less growth. And then populism make get worse. But the presumption there is that the sources of populism—and I know this is something you’ve written about a lot—the sources of populism are basically economic. Do you think that’s true?

LUCE: Not entirely, no. I mean, if you look at the data—taking Trump supporters—if you look at the data there, they’re not actually dramatically lower than the average income of Americans. In fact, there are different studies, so there’s a lot of fog on this issue. But if you look at one recent study, they’re actually higher—the median Trump voter is higher than the median income. I think it’s certainly true to say that Trump voters have lower educational status. And they’re not the same thing.

In terms of populism fueling—I quite like the way Mohamed El-Erian puts it. There doesn’t seem to be that much dispute amongst most economists about what should be done. Fiscal’s got to pay a bigger role. Monetary is, you know, pretty much played out. But we’ve got bad politics driving out good economics. And unfortunately I don’t see much sign that in the U.S. that’s necessarily going to change, although it gets very unpredictable after November.

In Britain, it is changing a little bit. There has been an abandonment of the previous government’s—of George Osborne’s austerity targets, and Theresa May has sort of embraced this inclusive capitalism. I suspect Hillary would like to do that. She’s certainly got a fiscally stimulative plan in mind, but whether she gets anywhere close to being able to implement it is, at this point, anybody’s guess.

MALLABY: I want to pick up on that with Adam, but I just want to give you a chance also, Adam, if you’ve got anything further about the fact of the IMF getting into politics as a dimension of its analysis.

POSEN: Well, I mean, Susan summarized it well, but I actually—for all the soul searching, you’re right, they did, I think it was too much fretting over nothing. It’s part of this more general thing that Susan referred to, that emerging markets are actually—at least the big ones—relatively better, and the developed markets are relatively worse. I mean, the IMF never had any problem really talking about political risk in development countries. I mean, they did it sort of implicitly with cross-national studies, talking about the quality of institutions, the quality of governance, or deciding which places they could have programs or not.

So this is—while I understand their forbearance from a political point of view, this is just real world, that they’re applying some of the same standards. And if you look at the decision making in the U.K., or you look at our party system in the U.S., and our lack of ability to agree on a budget, you know, it seems fair to me. Just—I don’t want to preempt you, Sebastian, but just, again, picking up on Ed and you on the fiscal side. I mean, one of the things which would be a sort of fun irony is if you got a sort of positive feedback loop. In general, I agree with the negative feedback loop. You mentioned the IMF outline where you think of Latin America. There were these period where you would get a populist government, things would get worse, you’d get more populists, and it goes down a spiral.

But if this accidentally got us to fiscal stimulus, that wouldn’t be such a bad thing. And if it’s sort of within limits of pandering, right? So Merkel decides, well, I really don’t want to keep losing votes to the anti-immigrant extreme right party. So let me do a tax cut for the petty bourgeoisie. Clinton comes in and manages to buy off certain districts in Kentucky and Ohio with, God forbid, not coal subsidies, but something for the people who did coal. You know, this kind of measured response to populism, of bribing your populists, isn’t the worst outcome economically.

MALLABY: OK. But, I mean, Ed brought this up in the context of Britain, where not only does the switch in government after the Brexit referendum imply a fiscal stimulus, it also implies a massive structural change in the economy—hence sterling falling recently. Do you feel like the recent move in the market is enough? Does it have to go further? How do you see—I mean, U.K. enormous current account deficit going into this crisis. How bad could this get?

POSEN: I think it could get pretty bad. I mean, I think there’s three ways I would think of looking at driving sterling down, all of which say it’s got further to go. The first is just do some algebra on this is how big the current account deficit is, which is actually quite large, has been for several years. It’s going to expand, assuming that you have a—the downfall—the expansion of fiscal policy is bigger than the cutback in investment. So that tells you sterling probably has to go to 115, roughly, versus the dollar, and lower than it’s been against the Europe.

The second way of looking at it, going to what we were just saying, is governance, that this says something about a very fractured society, or at least divided, let’s say—fractured may be overstated—but divided society, with genuine geopolitical risk on the Scottish border, on the Northern Ireland border. And that just makes it fundamentally worse than it’s been. And thirdly, you know, sterling has been a de facto reserve currency long after the U.K.’s role was so big in the world economy. And this basically—whatever good things my former colleagues at the Bank of England do, this is a fundamental erosion of that. So I think on every bound I would expect sterling to go further.

MALLABY: I’ll come to Susan in a minute, but maybe give Ed one more chance to talk about his country—former country—however you think about it. I mean, the IMF projection on U.K. growth is 1.8 percent growth this year, 1.1 next year. In other words, not a recession but a slowing down. I suspect they finalized these numbers before the party conference at which Theresa May, the prime minister, signaled a hard Brexit. Do you feel as if the notion that they’ll avoid recession next year is too sanguine? And how do you see it politically playing out? I mean, is this—is this something that’s a vehicle being driven at high speed into a wall or kind of the—can we avoid the crash?

LUCE: That’s how it looks right now. I just got a green card, by the way, and I’m eligible for an Irish passport shortly. So I’m considering it as well. (Laughter.)

MALLABY: And the value you assign to the green card has just gone up—

LUCE: (Laughs.) Yeah. Like, an old New York cab license medallion. (Laughter.) Look, Philip Hammond, the U.K. chancellor of the exchequer put it pretty well. The markets clearly haven’t digested what happened on June the 23^rd. And the Tory Party conference with the hard Brexit messaging, you know, was a sort of belated moment of realization and the sterling flash crash, et cetera. You know, there’s been an awful lot of poking fun at economists between Brexit and then about, oh, you were predicting a recession. Look, it’s not happening. I think Mark Carney—Adam, correct me if I’m wrong—did a pretty good job in the intervening period in propping up the market. But the sort of longer-term structural hit to the U.K. economy of what is happening, I have no doubt whatsoever, whatever the short-term cyclical response.

It’s worth noting that, you know, there is this storm in a teacup going on in the meantime, where Theresa May criticized the Bank of England for propping up asset prices through various QEs and monetary stimuli, and therefore increasing inequality, London property prices, et cetera, and therefore also encroaching on the central bank’s independence. This crossed a line. And Mark Carney, you know, hit back quite sharply last week. We are independent in terms of how we implement. You set the—you set the overall policy framework. We decide the policies. So that role is how also in doubt. The competence of the British government to negotiate a Brexit that minimizes uncertainty and doesn’t cause an investment drought has to be severely doubted. I mean, if you look at the three musketeers—Boris Johnson, David Davis, and Liam Fox—they’re not the kind of musketeers you imagine defending their queen very well. (Laughter.)

MALLABY: Susan, you know, as Adam sort of hinted at earlier, we used to talk about political risk very happily went it meant emerging markets. One of the interesting things right now is that the IMF forecast was downgraded for developed markets, but actually improved for emerging markets. And at the same time, this political risk was the theme of the report. So if you sort of take a three- or four-year, or five-year view on emerging markets, I think you just published some work on this. And do you think they’re doing better than one would have predicted, you know, say, five years ago? They’ve gone through this enormous commodity price shock, a lot of spillovers from quantitative easing, which have done things to their capital markets, their currencies, and so forth. And yet, they seem to be doing OK. Is that right?

LUND: They are doing OK. And take China out of it. China is slowing, and will continue to slow, for different reasons. But emerging markets, minus China, are in relatively good shape. Now, country to country, there’s different issues around political violence in some of the African countries. But overall, you know, these are economies that over the last 15 years, by and large, have reformed political systems, have brought inflation under control, have reduced government debt, built up relatively healthy fiscal positions. And all of that is bearing fruit. Now, some particular oil exporters are going to be hit really hard right now with very low oil prices that really aren’t going to recover to anything near their peak. So they need to diversify revenue sources very quickly. And that’s a painful adjustment.

But by and large, I think that it is—emerging markets still have the demographics. They have young people entering the workforce. That matters because, just very crudely, GDP is number of workers times the amount of worker—each worker produces. So when you get more people flooding into the labor market, like we had in the U.S. and Europe with the baby boom generation, you get GDP growth as long as you’ve got employment. They also have a productivity opportunity because they’re just adopting current technologies to catch up to the frontier. And with new digital technologies there are many ways in which they may actually leapfrog ahead of advanced economies. You saw it with the adoption of cellphones skipping over, to a large extent, the landline telephone. In digital payments and financial services, they’ve got another opportunity.

So increasingly emerging markets, as a group, have a lot of opportunities to continue a demographic dividend, industrialization, use new technologies to leapfrog ahead. And I think we always say, not all of them will make it. You know, you have to look at it as a portfolio of countries. And some will fall off because of renewed civil unrest or political risk or commodity price drop that’s not made up for in time. But as a group, it is still a pretty healthy situation, particularly compared to all those same structural trends that are not working in the favor of advanced economies.

MALLABY: So just to disaggregate the group a little bit, you said you’re taking out China. You mentioned earlier that India is doing great. Amongst the others, who are the stars, do you think?

LUND: OK. So if we just do a quick tour of emerging markets. China is slowing, and will continue to slow, in part because they’ve hit middle income, in part because they have a potential—I mean, they have overcapacity for sure in steel and some industries, possibly in real estate. They have had a rapidly growing debt. Now, its overall size is not so much larger than the U.S., or Canada, or Australia. But the fact that it’s more than quadrupled in size in the last seven years—so their total outstanding debt went from 7 trillion (dollars) to now $31 trillion. Now, any bankers in the audience know that when you expand credit that rapidly the chances that you’re doing good underwriting on all the debt is very low. (Laughs.) So there’s—China’s got lots of issues.

India is now growing faster than China has been for the last more than a year, and is projected to continue to increase and accelerate. The Modi government may not be as effective as we might hope, but has embarked upon good structural reforms, has a big push on digital. And India’s got a young population.

Southeast Asia’s doing overall still a lot of growth. So ASEAN as a group is growing at over 5 percent, say 5 ½ percent, which is really quite robust in the face of the recent turmoil and commodity price collapse. So Southeast Asia still has a lot of growth left.

Africa’s growth has slowed. And research that we just did showed, though, that it’s really due to the North Africa countries that went through the Arab Spring. Those economies are still really struggling because of political uncertainty. And then the big oil exporters, like Nigeria and Angola, other commodity exporters. Those are big parts of the Africa—the African continent. But—

MALLABY: But non-oil sub-Saharan African is still doing quite well?

LUND: It’s still actually accelerating growth and, you know, has opportunity. And then Latin America, you know, what can I say? Like, Brazil is in a deep recession—self-inflicted. You know, Argentina’s a country that in the 1950s had the same GDP per capita as Switzerland. So that shows you what decades of bad government decisions can do. And I do worry about Latin—the biggest economies, Brazil, Argentina. But you’ve got Peru, you know, is doing relatively well. Colombia, although now the peace accord is a little bit uncertain. So Latin America—apart from Brazil and possibly apart from Mexico—has growth. So overall, it’s a pretty—it’s where the growth is going to be, apart from the U.S.

MALLABY: Adam.

POSEN: Sorry. I just wanted to add something, a slightly different take on Latin America from Susan, because we at Peterson Institute have started worrying about this. I think a year ago there was a possibility of thinking about a positive, virtuous circle. You had Dilma reaching the end of her string in Brazil. You had Macri coming on in Argentina. You had the historic outreach of the U.S. to Cuba and the potential for transition there. And Venezuela, as horrible as a human tragedy it is, the hope was it would hit bottom. And so then there was this idea you could think that, OK, you’ve got Peru and Colombia, as Susan said. And you’ve got Mexico. And you maybe start getting an upward spiral reinforcing.

And what I’ve started worrying about is the negative spiral, which is Brazil probably does a little better than it did this year next year, but as debt count bounces go, this is a pretty low bounce. Venezuela, obviously, continues to be horrible. And then you have them trying to do good things in Colombia. Susan rightly mentioned the referendum. But also you’ve got refugees, literally, spilling over from Venezuela to Colombia at the same time. You’ve got Argentina. They’re trying to do the right thing, but they’re—actually the only world economy they’re really integrated with is Brazil. And so it’s—so I fear it could go in the other way. So to be a little political, it would be nice if Secretary Clinton or, God forbid, Mr. Trump as president realized Latin America doesn’t begin and end—U.S. interest in Latin America in doesn’t begin and end with the Mexican border. Anyway.

MALLABY: And, Adam, can I just press you to—that was a good, I think, I’d call it a sort of near-term forecast, or a near-term set of analytical guidelines. If you take a little step back, and you think about emerging markets and you think the crises in the late ’90s, and the prescriptions which they largely followed about improving the macro framework, have a flexible currency, accumulate central banking reserves, look after your budget, more or less—these disciplines were broadly adopted.

And it seems to me you can make an argument that in the face of what is after all this enormous commodity price swing—way up and then way down—which ordinarily would cause crises all over the place, probably also I would say the fluctuations in exchange rates and capital markets created by QE. Three years ago at Jackson Hole, at the Fed’s conference, Helene Rey put into that paper about the spillovers from quantitative easing and the way that it pushed EM currencies around, particularly in Latin America. And Mexico was her best example. In the face of those shocks, couldn’t you argue that actually countries like Brazil, despite the political crisis, despite the debt-cap balance, relative to what you would have seen in the late ’90s, is all right?

POSEN: I think your broad point is absolutely spot-on, Sebastian. And I mean, I’m not going to give myself credit for prescience, but I was one of many people pushing back against the Rey and others argument that the QE spillovers were the fundamental determinant. It was all these things that you and Susan have listed that were the fundamental determinant. And despite all the talk and the complaints, notably from Brazil and India, about the spillovers of U.S. and other QE, absolutely right, these countries were more resilient and the effects were smaller, even with the commodity price fall.

I guess the two things I would say beyond that are Brazil is not the example that you want to use, because Brazil—it’s productivity growth has been terrible, its fiscal erosion has been terrible, even if it was well-intentioned. And when we talk about bad recession, as Susan did—I mean, Brazil’s last two years of growth are the worst it’s had at least in 50 years. I mean, so even the previous debt crises did not have a slow growth in Brazil did. So I wouldn’t focus on Brazil, but broadly, I think you’re absolutely right.

And the second thing—and here I’m going to dabble in political economy and Ed and others can correct me—I’m wondering if there is, in a sense, a perverse maturity on the part of at least some emerging market voters that—like, take Mexico. Things have not been great in Mexico, but they—a lot of the populace seems to be better able to say, well, compared to what’s realistic and feasible, actually things aren’t so bad. They sort of do your mental exercise. Whereas arguably part of the problem in the U.S. or France or the U.K. is people saying, we’re not growing the way we did 20, 30 years ago, and I’m peeved, rather than saying, well, we may be doing as well as we can. I don’t mean to trivialize people’s pain, but I just think it’s an interesting political economy point, that in Latin America there seems to be more awareness of that.

LUND: Yeah, let me pile on that. I also don’t want to trivialized the pain, but one of the deep ironies to me is that the populism in the U.S. and the backlash against trade in particular, and globalization, is looking at the last 15 years but not the next 15. So without doubt, the U.S. went through a massive structural change in the manufacturing sector, where labor-intensive manufacturing has moved offshore or been automated, or both. And that resulted in a steep decline in manufacturing employment. And many of the, you know, middle aged workers with less education who have been hit are looking back at this period in the post war when the U.S. was a manufacturing powerhouse. But that era was gone. I mean, the U.S. manufacturing built up at a time when Europe was devastated after World War II, and so was Japan. And so the U.S. had these decades of being the manufacturer—the manufacturer for the world. It was the China of the world. But that era is over.

And you know, that’s—so it’s a backward-looking phrase. When we look at, you know, globalization and trade, actually trade is flat, has been since the Great Recession, more or less. And the next era is really about digital and services, where the U.S. is quite strong. So I think it’s a—it’s a pity that we didn’t use that time to understand the—you know, and reboot the labor force in particular communities. But all this anger is definitely over what has happened it’s not what will happen.

LUCE: Both of you make good points. I just want to pick up on one, because Latin America is a very, very good way of measuring American democracy. And I think, you know, the history of wild gyrations politically in Latin America between orthodoxy and populism—populist backlashes against orthodoxy—is very much—has very much been a function of huge Gini coefficient. I mean, basically massive inequality, the most unequal part of the world. And nowadays, we’ve got larger middle classes in Latin America. Brazil’s might be shrinking temporarily, but Mexico’s middle class is way larger than it was in the ’80s.

And America’s isn’t. I mean, there is actually a larger upper middle class, but there is also a larger lower middle class and underclass. So the middle of the middle in America is retreating, hollowing out. So we’re unsurprisingly, I think, getting a Latin Americanization of American politics. With inequality like this in the economic sphere, you’ve got an equally sort of maldistribution of political influence. And there’s inevitably going to be a backlash against this. So I don’t think—I think Trump has been a surprise, but I don’t think that the forces behind him should be anything of a surprise.

MALLABY: And supposing Secretary Clinton is elected, how do you see economic policy playing out? Is it an opportunity to address some of these issues? Or would you actually see more risk than upside, like, you know, policy could be all derailed, there could be gridlock, whatever, that policy could be worse for growth, not better?

LUCE: I’ll give you the glass half full, because I’m accused of being too gloomy sometimes. Of course, it depends on the high margin of victory. And it depends whether she—or, the Democrats regain the Senate, and what happens in the House. But you know, assuming they regain the Senate and assuming that Paul Ryan has some control over his caucus in the House, and remains speaker, as many others have pointed out, these are two pretty transactional Midwesterners, Hillary Clinton and Paul Ryan, who are not sort of on the showman side of politics. They’re doers. And I think the glass half full scenario is, you know, a big deal on corporate tax reform, which includes repatriation at lower rates and infrastructure. And you know, it is worth—it is worth noting that this the first election in a long time where both candidates are supporting much higher spending on infrastructure. And that that kind of deal could have a very stimulative demonstration effect on other things.

What would give me pause is two things. One, if Ryan’s majority is shrunk, that means the Freedom Caucus is a larger share, and so therefore he’ll have greater difficulty managing it. And two is that Hillary has promised repeatedly and very specifically to begin a comprehensive immigration reform legislation within the first hundred days. Great on policy grounds. We all agree it’s needed. But I think if you look at the politics and you look at the kind of election we just had, if she carries out that promise in the first hundred days, that could blow the politics up. So I started with the glass half full and I’ve ended with it half empty. I’m sorry. (Laughter.)

MALLABY: Adam, you wanted to say something.

POSEN: Just one of the things that I think people are aware of, but bears reemphasis, is nowadays, particularly after Bush/Cheney, the president has an extremely large executive order power, as long as it doesn’t affect taxes or budgets. So regulations, particularly in the environmental sector and health, foreign policy, trade, a lot of enforcement mechanisms in the labor market. And so I do think that Ed’s got the main story absolutely right. I completely—I read him, I agree. But just that there is a bigger swing potentially. I don’t think Clinton would be hugely different than Obama, but it will avoid some backtracking and uncertainty on various regulatory areas. And there is some potential, particularly in the anti-trust, which Secretary Clinton surprisingly, and I think constructively, made a part of your last big economic speech. Some room for doing that, which may be productivity enhancing.

MALLABY: OK. So at this time let’s bring members into the conversation. Remember that this is on the record. If anyone has a question, please put your hand up. And if you don’t, I’m going to ask another question.

Right, so I have another opportunity, which is I want to come back to something Susan said, which is about the performance of trade as a share of global GDP. We obviously see a lot of political evidence of criticism of trade, both in the U.S. election and elsewhere. But should we worry about the data already? In other words, I think it’s right that trade as a share of GDP has actually fallen in the last year, and it sort of leveled—fell after the 2008 crisis, came back up a bit, and is now kind of trending down slightly. Is that a cause for concern, or is that sort of some kind of statistical oddity?

LUND: It’s not a statistical oddity, but it’s also not a cause for concern. So it has plateaued and been declining actually for the last five, six, seven years. It is a cause for concern if you’re a port operator or a shipping company. Hanjin, a large Korean shipper, is now in bankruptcy.

But what it reflects is the fact that, for the 20 years prior to that, China entered the global economy and turned manufacturing around the world on its head with the creation of very long supply chains that, with the falling cost of transportation and communication, you went from having one manufacturing plant and all of its suppliers around it into having these global supply chains.

And so when you look at the gross value of trade, you know, the amount of trade that goes into a single iPhone is multiple—counted multiple times because a part is produced here and shipped there and then added on to here, and so on. So that process is over. I mean, that’s played out. Manufacturing supply chains are as long as they’re going to be. And then there are a range of technologies that actually suggest they’re going to get shorter.

First of all, companies have learned that it’s expensive, costly, and difficult to manage very long supply chains; that an earthquake or a tsunami in one country somewhere in Asia can suddenly disrupt global supply of key parts. And then there’s new technologies like 3-D printing. So GE has just said it’s going to buy a thousand 3-D printers to produce components for airplane engines here in the U.S.

So that is going to be fundamentally different. What you’re going to ship around the world are digital files, just like you do movies and books and games today. It’s just digital trade. But the actual production, not for all types of manufactured goods but for some, will be then produced where they’re used.

So I’m not worried, but I also don’t think it’s a blip. If anything, you know, we may have reached peak trade. And it’s—as much as we talk about nationalism and the backlash, on the policy front, you know, there’s questions about whether TPP is going to be passed. And then there are things like the EU tax on Apple and lawsuits against Google. So there are some causes for concern for anti-globalization turning into actual action, but none of that explains why we see this slowdown in trade. And it’s nothing to worry about. It’s a realization that that was one era, and we’re now in a different era.

MR. POSEN: As you might expect, at PIIE we’re a little less sanguine than Susan is on this particular issue. My colleague Caroline Freund has argued that when you—this doesn’t gainsay what Susan is saying, for example, with GE, but that if you look up to date, there actually isn’t that much evidence of shrinking supply chains, that the share of components being shipped around the world in total trade actually hasn’t moved very much. Its total trade has gone down.

Our colleague Gary Hufbauer—and there are others around the world, like Simon Evenett in Europe—have been tracking the rise of sort of micro-protectionism by American, by British, by French, whatever rules; various other things that the Chinese are doing. And actually the amount of new protectionism, not outright trade war but various measures, does seem to have gone up meaningfully.

So the ultimate point, though, which I think is implicit in Susan’s, which I think is right, is trade is not an end unto itself. It has to serve some purpose. So she’s right in the sense, I believe, that if there was a natural productivity reason to stop expanding supply chains, we shouldn’t worry about it.

What is concerning is, again, like I said with Clinton on antitrust, one way of looking at part of our problems in the world right now is actually insufficient competition in various fields. The Economist—not—(inaudible, background noise)—The Economist has done some fabulous work on this, as has Council of Economic Advisers under Jason Furman. And we just published something by our Gary Hufbauer on the link between declining trade and declining productivity growth around the rich world. And it may be that this is all one—I mean, it’s not everything, but they’re all linked together. Declining competitiveness, declining competition, is reducing trade, and reducing trade is reducing pressure for productivity. So I’m a little less sanguine than Susan is on this.

MR. MALLABY: On the political economy, that—

MS. LUND: One thing, though—

MR. MALLABY: That’s a point very much worth emphasizing, which is that, on the one hand, trade is accused, and maybe rightly accused, of leading to skills-biased outcomes and, you know, the rich are in a better position to do well out of trade, and so forth.

At the same time, if the key to middle-class income growth is middle-class labor productivity, and the productivity is improved by trade and competition, it’s not clear what the bottom line is. If you’re on the median of the U.S. income structure, maybe trade is good. Maybe it’s bad. It’s good for productivity reasons, bad for distributional reasons; hard to see how that breaks.

MR. POSEN: Well, it’s also good for distributional reasons from a consumer point of view, but anyway—

MR. MALLABY: Yes.

MS. LUND: Yeah, let me make two points. One is that my point about supply chains is that they’re no longer lengthening. So the period in which trade grew twice as fast as global GDP was the creation of these. They’re now more or less set. You know, I’m still going to argue that, if anything, they’re shortening. But the point is that they’re not going to grow significantly faster than GDP. I think we’d both agree.

The point about the median income is the one thing that’s missing from the current political debate on both sides, which is skills and education. Infrastructure is great. We’ll create some jobs in the short term. But what’s really needed is a serious policy for mid-career people who can’t go back to school for two years or four years to be retrained but who could spend three months or six months.

So the whole job-retraining assistance in the U.S. has been woefully short of what’s needed. And if we really want to address this, there are things that the middle of the middle, as Ed says, can do, but not with the skills that they have. And it’s not hopeless, though. There are all sorts of examples of companies and different nonprofit programs that show you can take somebody and, in a six-month course, give them concrete employable skills. But that does take money to put that person through six months, and it’s something that I don’t see anybody talking about.

Fiscal stimulus is great. Infrastructure is great. But to really address the woes of the middle class, I think there needs to be more discussion about skills.

MR. POSEN: I’m sorry. Can I just say one thing quickly that I completely agree with, and I think that is something where Secretary Clinton should be criticized. Giving a handout for college education to middle-class kids is not going to matter as much, either economically or politically. It’s the kinds of things Susan was just talking about.

But what I want to say is I fear, since this is on the record, I fear we’re being much too economically determinist. So I know Ed doesn’t fully believe this, but in last response to Sebastian you might have thought he’s saying, you know, it’s skill-biased and economic change and inequality that’s driving Trump is the whole thing.

Let’s be very clear here. Single women, African-American men, people who were not white rural males, had to go through these kinds of adjustments regularly throughout modern American history. Part of the backlash is that people who were privileged and relatively protected are no longer protected.

MR. LUCE: Oh, I totally agree.

MR. POSEN: Yeah, I know you do. I just want to be sure that’s on the record here. This isn’t inequality one up. This is particular groups of people who’ve been privileged, are being forced to suffer what others in the market economy have in the past suffered, and they resent it.

MR. LUCE: And can I add something to that, because—and I’m sure Susan will have a view, too—that, you know, we focus on the, whatever, 77,000 steelworkers’—

MR. POSEN: Right.

MR. LUCE: —jobs there are in this country, which are very good jobs nowadays, but far fewer than they used to be, and not on the 810,000 home-health aides.

MR. POSEN: Right.

MR. LUCE: And I think the reason we focus very angrily on the former and serenely ignore the latter is because the former are male jobs and the latter are female. There’s a strong gender element to all this as well.

MR. POSEN: Absolutely, absolutely.

MR. LUCE: I’m sure you’d agree. Or maybe you won’t.

MR. MALLABY: No, we do have a member over there who would like to ask a question.

Q: Thank you. Mohammed Khaishgi from the Resource Group.

I have a question on Europe, and I guess want to take ourselves to two to three years back when the demise of the euro was being forecast with all the issues between Northern and Southern Europe. And, of course, now the forces tearing at Europe are, you know, Brexit-like movements.

The question was more with the forces that were in play two to three years back, which were papered over by the European Central Bank, how relevant are they? And how many years, in your opinion, have the Europeans bought until those rise to the fore again, at least from a monetary perspective, as opposed to a political perspective?

MR. MALLABY: I just want to put on the record that I just—I’ve won the private bet I had with a friend that, you know, we could do a half-hour discussion first and not mention the eurozone. But now I’m happy to open it up to the euro. (Laughter.) I mean, so Adam, I mean, a couple of things spring to mind on this question. One is, as the questioner said, you know, the possibility that this whole contraption of the euro has been stuck together by the glue of extraordinary monetary stimulus, and maybe that game at some point stops.

The other thing is Portugal. I mean, Portugal is the country which, I think, is most in the news this week because of a potential downgrade that would then trigger the inability of the ECB to buy Portuguese debt. And that would mean that Portugal not only can’t do fiscal stimulus because of EU rules, but also then gets deprived of the monetary stimulus because it’s not investment grade-rated, if that was to be the case. So it feels like, on various dimensions, we could be on ice that is not as thick as we thought.

MR. POSEN: So I think it’s right to raise this. And you’re right, obviously, Sebastian, that Portugal is a real tough part of this.

But I guess I want to push back a bit at the questioner’s sort of frame. There were a number of us, including notably my colleagues at Peterson—Jacob Kirkegaard, Fred Bergsten—who were out there throughout saying rumors of the euro’s demise are exaggerated; it’s not going to happen. And I was sort of saying that internally at the Bank of England.

As you’ve seen with the recent publication of Sir Mervyn King’s recent remarks, there were a lot of people at the Bank of England and in the London network who expected the euro to blow up. And I always warned that was unlikely. This isn’t because I think the euro is wonderful. This is because bad things can persist an awfully long time without falling apart. Think of the Ottoman Empire. You know, I mean, stuff can—(laughter)—you know, stuff can last a long time.

But also, to be a little less glib, although I think that’s accurate, I don’t view it as just ECB papering it over. You have to give some credit to the agency of the people of Ireland, the people of Spain, the people of Greece, and the people of Portugal, who have voted repeatedly by large majorities for parties that would keep them in and do what was required to keep them in, even though the deal they’re getting is lousy, and I think it would be better for all involved if Germany and the rest forgave some debt and all that.

But despite that, it was ultimately people, majorities of democratic societies in Greece, Portugal, Ireland, and Spain, who, by their revealed preference, said it’s worth it to us to go through this to be part of the euro and Europe. And so as long as that’s the case, we can say it makes no sense. It’s inefficient. It’s fragile. The ECB has run out of ammo. You can say a whole bunch of reasonable things.

But I am certain—I shouldn’t say certain in this world, but I am as close to certain as I can be that the people of Portugal will make whatever suffering and adjustments are necessary over the next year to get them back to investment-grade and stay with it. And again, that may not be an economically optimal outcome by any means, but I think that is the revealed preference of the people of Europe.

MR. MALLABY: So I want to just push on that a little bit. Adam is absolutely right that the weight of opinion of the Peterson Institute was correct. And I think a base case would be that that view that the euro sticks together continues to be correct.

But let me just try an analogy by way of provocation, and maybe some of you would like to jump in on this. So the analogy would be to say, look, the Trump phenomenon here in the U.S. is something which, if you look at sort of proximate causes of this—I mean, if Trump is supposed to be some reflection of anxiety over globalization, well, actually, globalization has been slowing down recently. Trump is some proxy for the disruption caused by technology. Well, there are some people out there saying that actually technological change is slowing down.

So what’s going on? Why is Trump here now when a lot of this stuff, globalization and technology, was more acute in the ’90s than it is now? Well, one thought would be that you get a lot of lags. The political and cultural response to disruption takes a decade or something to materialize. People at first are a bit discombobulated, but their voting habits are set. And the anger builds up, builds up, builds up, and then it sort of pops quite a long time later.

It seems to me if you look at these trends in European voting patterns that you’re talking about, yes, governments have been returned to power that are, broadly speaking, sympathetic to staying in. The costs of leaving, of course, are completely ginormous. You have to redenominate every contract if you leave the euro. You know, but it’s not to say that opinion in continental Europe doesn’t show mounting disgruntlement; you know, voting for anti-Europe French parties, European politics being reconfigured such that the classic government now is kind of a centrist coalition, with a big fringe on the left, a big fringe on the right. Instead of being a left-right dichotomy, it’s kind of the middle with the fringes.

It doesn’t look all that healthy to me. And if you extrapolate another five years, I do wonder. But maybe somebody else has a view on this.

MR. LUCE: Well, we haven’t mentioned the Italian referendum.

MR. MALLABY: Right.

MR. LUCE: And, you know, Matteo Renzi has been, I’d suggest, dumb enough to follow in David Cameron’s footsteps, which is to put his own job on the line and thus give voters an incentive to vote against this referendum and bring it down. And if that happens, you know, that could trigger all kinds of crises, including the Italian banking sector.

You know, if you take the Robert Gordon view of the world—and I think—I don’t know about his prediction for the future; he’s probably too optimistic. He can’t know. None of us can know. But if you take his description of the recent past, this has been building up a long time everywhere in slightly different variations between Europe and the United States. But the productivity slowdown is deep. It’s structural. It’s long term, and the effect of the labor market on, you know, previous generation of employees, and now they’re, I think, reasonably negative, perfectly rational-based negative expectations for the kinds of economic insecurity their children are going to be facing is something Europe and the United States have in common.

The policy response to this—a Marshall Plan for the middle class, skills, training, infrastructure, fiscal taking out more of the slack than monetary—the policy response is absolutely clear. But I’d go back to what I quoted from El-Erian. You know, bad politics is driving out good economics at the moment. And, of course, that makes good politics even more difficult to imagine, and the economic outcomes even more discombobulating.

So something has got to cut this vicious circle. And it’s not really clear what it’s going to be.

MR. POSEN: Can I—sorry, Susan should go instead of me. I’m sorry.

MS. LUND: I would just say, Sebastian, I agree that there is a lag. And I think that Brexit showed a lot of people in Europe who have never been in support of the eurozone. I mean, the euro as a monetary phenomenon was supported by the elite and the business and politicians, not the middle class. And I think that Brexit was an example that maybe we can do something.

I happened to be—I was actually vacationing in Europe at the time, so I asked every taxi driver and waiter and waitress that I found, what do you think of that Brexit vote? I wasn’t in the U.K. I was actually in the Netherlands and Denmark. And I heard repeatedly, oh, lots of people in our country feel that way too. And that’s only the first.

Now, this is all anecdotal, so take it for what it’s worth. But I think that there is a middle class in Europe that has never supported the euro. And I think that immigration—I heard repeatedly that the absorption of refugees and, you know, I waited for a decade to get public-assisted housing, and refugees come in and immediately get an apartment.

MR. POSEN: Yeah, I think that—

MS. LUND: I think that that has been a trigger point that makes it different going forward than what we’ve seen in the past.

MR. POSEN: I think this is—I think what Susan touched on is very important. And this is another parallel with Trump, Sebastian, is that we can’t talk about it in just economic terms. If you look at the far-right parties, which are gaining members and supporters, in the Netherlands, in Germany, for example, or Finland, these are countries where they’ve arguably benefited hugely from globalization. The displacement of middle-class jobs has been—middle middle class has been much less than other places. And yet it is the taking in of refugees and the perception of immigrants that is the issue.

So I think we can’t—you can argue that if everything was economically wonderful, the ugly side wouldn’t come out maybe. But I don’t think we can entirely say it’s economics and it’s anti-euro. It’s—a lot of it has to do with immigration.

The other thing was I remember saying—I don’t remember when—but in this room at a previous event on Europe within, you know, three or four years ago, you know, things do take time. It took several years from when you had the horrible hyperinflation in Germany and the unemployment before you got Hitler—it was a full decade—and that in a Europe which is designed to keep out splinter parties and which is designed to have a euro state—I mean, excuse me, a welfare state—specifically to prevent that outcome, it was going to take longer.

And so I see your point. But I think it’s also—again, there is a tendency in Anglophone U.S.-U.K. to downplay the extent of genuine support—perhaps not for the euro specifically or specific immigration, but for the European project amongst a wide number of people in Europe. And I don’t think we should lose sight of that.

MR. MALLABY: Was there another—yes, sir. Right over here, yeah.

Q: Good morning. Paula Stern.

This is a question I asked Jeff Immelt a couple of weeks ago. It doesn’t matter whether it’s Hillary or Trump getting elected; you still have the Congress you’ve got to deal with when you’re dealing with fiscal policy.

So if you need the investment in human-resources skilling, R&D, basic R&D, and infrastructure, how do you get that with a Congress that reflects a distrust of the government and a need to, if you will, shrink the government? How do you thread the needle in order to get the kind of productivity and increased growth that would come from those kinds of fiscal stimulus?

MR. MALLABY: Yeah. Maybe Ed can talk about that. But, I mean, just to build on the question slightly, it seems to me there is something going on now where we’re all fed up with, you know, central-bank stimulus, or at least—I’ll rephrase that for Adam.

MR. POSEN: Most people, I think.

MR. MALLABY: There’s a rising tide of skepticism about central-bank stimulus, and some evidence that some new tools, like negative interest rates, may not have worked entirely in Japan. But—so there’s talk about switching the initiative from monetary to fiscal. But the original reason why we switched it from fiscal to monetary a generation ago was that the fiscal never works. It’s always slow. It’s always badly designed. You know, it gets in the sausage factory.

The sausage factory, in the meantime, has gotten worse, not better, surely. So we’re switching back, ironically, to this fiscal approach just when politically it seems least likely to deliver a good result. Or is that too negative?

MR. LUCE: Well, I mean, I think that the Obama first two years is probably the best scenario for Hillary pushing through. In other words, she has control. The Democrats have control of both houses of Congress. The system is not designed to have one party imploding the whole time. (Laughter.) And, you know, this is taking many iterations and many defeats, and I don’t know whether this defeat will be interpreted as a defeat for the extreme shut-government-down conservatism or not. Ted Cruz and others are—well, until recently, he was well-positioned to exploit a Trump victory. He’s perhaps thankful he screwed up what he laid down in the convention.

MR. MALLABY: Trump victory or defeat, you mean?

MR. LUCE: Trump defeat and say it’s because we strayed from the true path of conservatism. Once the Republicans continue to disintegrate as a coherent party, I think it’s very hard for anything to happen unless they are in a minority, a below-40 minority in the Senate, preferably, and that’s not going to happen. So that’s Hillary’s best shot at getting stuff done.

I don’t have comments on the sausage factory and the efficiency of public-sector investment. I think the stimulus did its job. It didn’t raise productivity, though. So the goal of raising productivity is a subject I should leave to the experts.

MS. LUND: Let me say two things. I mean, I’m optimistic. I’m an economist, so I don’t have to worry about the politics. But, I mean, two reasonable thoughts, right? One is that there are a variety of, I think, small taxes. So the question—I spend much of my life being worried about debt and too much debt. So paying for infrastructure and reskilling through more U.S. government debt would not be my preferred solution, although let me point out that at ultra-low interest rates, a little bit more would be fine.

But there are many things. We’ve got ultra-low gasoline prices. Why not raise the gas tax to pay for infrastructure? And I think that the political divide, you know, is going to take new rhetoric, because the issue of education and skills should not be a right-left, Republican-Democrat issue, right? Who doesn’t support getting people the skills they need to participate in a modern economy? And you can look at other countries like Australia, where, you know, the conservative party pushed through massive new reskilling.

So I think that with the new language around this and way of looking at it, maybe you can get to more of a bipartisan consensus in Washington. Who’s going to develop that? I don’t know, Paula. Maybe it’ll be—maybe you’ll help.

MR. POSEN: Paula, let me—

Q: Trying to help any way I can.

MR. POSEN: You always do.

Q: Thank you.

MR. POSEN: Paula, let me just add one bit of global perspective. So Sebastian rightly started us off with the idea about geopolitical risk and the sausage-making, all these things, indicate the U.S. is increasingly an outlier. So on fiscal policy, let’s just remember, if you go through the G-7, Trudeau’s Canada is committed to stimulus. Abe’s Japan is committed to stimulus. May’s U.K. is committed to reversing austerity and the stimulus. Italy, whatever way the referendum goes, they’re going to do stimulus. France has one of the strongest political budget cycles in the world; meaning their election is coming up, they’re going to do stimulus. (Laughter.) Germany, even under Schauble, has said we’re going to do a tax cut or something—we’re not going to stick to the schwarze Null, the hard zero. China is doing some form of stimulus; again, probably not that efficiently, but they’re doing it.

So all of the G-7 plus China, except the U.S., is delivering on fiscal stimulus at a time when, as they have said, we want to move from monetary to fiscal. So, again, I can’t speak to the politics, but that’s a very awkward situation, especially since, if the U.S. did it at the same time as everybody else, for a year or two—not forever, just a year or two—the advantage of simultaneous stimulus is you get much less distortions about exchange rates, much less distortions about capital flows, much less spillover that France stimulates and the money goes to the U.K. Multipliers go up.

If we’re going to do it, it’s better if we all do it at once. So we’ve got to at least get that message to Secretary Clinton’s team, as well, whatever difficulties are in the Congress.

MR. MALLABY: I’d like to try and fit in a last question, David here. And then we’ll answer quickly.

Q: David Apgar, still working on Haiti for the IDB Group and a small-business advisory startup.

I’ve heard you, I think, two and a half decades of these updates. And this is really a good one. So, just all of you, thanks.

MR. POSEN: Thank Sebastian.

Q: Yeah, yeah. And thanks, Sebastian, too.

I’m wondering—and where else would we hear that the eurozone is kind of like the Ottoman Empire? I’m wondering, Adam, if I actually might tempt you to agree that there is an inequality back channel that might be driving what’s going on in the U.S., not that today’s loudest resenters are economically hurting, but that they’re saying, wait a second, these donors, who are supposed to be protecting us, were just getting rich.

If you do agree to that, though, it suggests that populism in the U.S. is really different from populism in Europe. And you don’t hear that that much. I wonder if any of you might want to comment on that.

MR. POSEN: I’ll just say I apologize if I in any way suggested that I deny either the fact of hugely rising inequality in the U.S. or the importance of it. I just wanted to push back against all of us sounding too purely economic. That’s all. I completely agree. And the resent—and one thing which I didn’t opine on—again, I read Ed; I read his colleagues in the FT—you know, clearly there is an anti-elite or anti-donor or anti-establishment backlash.

I think you’re right to say that the U.S. fundamentally corrupt system of privately financed campaigns is extraordinary, and it’s understandable if people are very angry about that, full stop. But I do think there are still some parallels with Europe. I mean, look at the—we don’t want no experts from Theresa May, right? There’s a lot of stuff in Europe as well.

Being anti-intellectual, you know, we’re sitting here, think tankers, talking at a think tank. You know, I’m not going to whine about that. (Laughter.) That’s—I’m still allowed to do my job, so I have no basis to whine. But there is something, and it might even have to do with the sainted Al Gore’s, you know, book about the collapse of reason or the lack of reason, I think global warming being the most obvious candidate. People don’t want to believe what they don’t believe. And there, obviously, the U.S. is an outlier.

So I’m not giving you a very coherent answer. I just—I hear you. I agree with you. I think it’s there.

MR. MALLABY: It seems to me I think we’ve come full circle slightly. This is the vicious-circle point we began with, where, in the ’90s, the experts, the technocrats, the elites, appeared to have answers that were working for people, and so they got respect and they could do good policy, or somewhat good policy. The problem is you go into that negative side of that same cycle. The elites don’t seem to be delivering. Therefore, they don’t get respect. Therefore, their space to actually do things is reduced. And the trick is to find how you exit that vicious circle.

But on that extremely optimistic note—(laughter)—I think we should call it a close. Thank you to Adam, Susan, and Ed. And thank you for coming. (Applause.)

(END)