How is the performance of US economy in 2005? What major challenges does US economy face today? How does China's approach to economic growth differ from that of America? Under the context of economic globalization, how could China and US establish win-win relations in the economic field? With those questions in mind, our People's Daily Online Washington-based correspondent Yong Tang recently conducted an exclusive interview respectively with Dr. Paul A Samuelson and Dr. Robert Mundell.
The authority of these two interviewees is without doubt. Samuelson was a Nobel Prize Laureate in Economics in 1970, thus becoming the first American economist to receive such a prestigious award. As Professor of Economics at the Massachusetts Institute of Technology, Samuelson is the author of an influential book entitled Economics, which was first published in 1948 and revised regularly for the following fifty years. Perhaps more than anyone else, Samuelson has personified mainstream economics in the second half of the twentieth century.
As Professor of International Economics at Columbia University, New York, Mundell received the Nobel Prize in Economics in 1999. Mundell laid the theoretical foundations for the European Monetary Union. His theory of optimum currency areas, highlighted in the Nobel Committee's citation as one of his most significant scientific contributions, has served since the 1960s as an analytical framework for numerous debates on the validity of the creation of a European currency. Mr. Mundell was an ardent supporter of the Euro, of which he is considered the godfather.
Yong Tang: It seems that American economy in 2005 is quite good. According to the Department of Commerce report, the economy grew by a robust 4.3% annual rate during the third-quarter and real GDP in the fourth quarter appears to be increasing at a healthy pace of greater than 3%. For all of 2005, real GDP is on track to expand by 3.7%.
With an economic growth rate above 4 percent, an overall GDP inflation rate below 3 percent for the year and an unemployment rate currently at 5 percent, the performance of the U.S. economy has understandably been the envy of the developed world. Why does the US economy grow so strongly?
Samuelson: US real GDP growth will help sustain 2006-2007 global growth. Why? No mystery. Hurricane Katrina spending on rebuilding plus unlimited spending on our Iraq war fends off recession, just as the deficit spending by both Franklin Roosevelt and Adolph Hitler in 1933-1939 did end capitalism's worldwide Great Depression.
Mundell: The long run average of U.S. growth is 2.5%. This was raised structurally by the Supply-Side revolution in the U.S. which lowered tax rates from punitive levels and rejuvenated the US economy, helping to spark the Silicon-Valley IT revolution that nearly doubled growth rates in the late 1990s. There has been a period of over twenty years with only two mild recessions (1990-91 and 2001).
The 2001 recession was cut short by a combination of an accommodative monetary policy and the Bush tax cuts. The current expansion is balanced with no major bottlenecks or distortions. The investment boom is driven by rapid innovation, with the deepening of the IT revolution, high profits generated by strong demand and moderate wage settlements, and an accommodating inflow of capital and trade deficit that facilities growth without inflation or high interest rates.
Yong Tang: The US economy performed above expectations amid rising oil prices and unexpected developments including Hurricanes Katrina and Rita. Why is the US economy so resilient?
Samuelson: Cheap imports from low-wage workers abroad, who can be educated to imitate the advanced technologies of North America and Western Europe, have wiped out US trade union power. Therefore, with a cowed labor force, America, unlike France, Germany and Italy, has tamed substantially (but not completely) the historically violent business cycles of past capitalistic history.
Mundell: Oil prices are high in nominal dollars but not in real dollars. For example, oil prices are lower in real terms than in 1980. Katrina was a tragic devastation but its impact on the economy as a whole was neutral or even positive. The U.S. economy is the most flexible economy in the world.
Yong Tang: Some experts say the greatly enhanced productivity is the major reason behind the strong economic growth. To what extent does the productivity increase contribute to the economic growth? How has the productivity been enhanced tremendously?
Samuelson: After 1970, the rate of growth of total factor productivity declined almost everywhere to below what it had been during the global recovery following 1945's end of World War II. This is despite contemporaneous stellar high tech innovations in the field of computers and information technology. This puzzled top experts like MIT's Robert Solow.
However, by 1995 those innovations finally did accelerate productivity growth in America, Europe and the Pacific Rim. This explains in part the global stock market bubble of the 1995-2000 period. In this new century, the outlook for continued productivity innovations remains a hopeful one.
Mundell: Productivity growth, spurred by both the tax revolution and Silicon Valley, lies at the heart of the great expansion. Productivity growth lowers costs, increases profits and stimulates investment, which in turn stimulates both demand and greater productive capacity.
Yong Tang: American interest rate now is believed to be neutral. Do you think the interest rate will cross the neutral level and say goodbye to a loose and expansionary monetary policy and embrace a contractionary one?
Samuelson: No one in the US Federal Reserve or in the Bank of England knows what the desired "neutral interest rate" is. Greenspan's successor, Dr. Ben Bernanke will, from January 2006, make decisions on raising or lowering interest rates. It depends upon whether the Index of Consumer Price Levels is rising or falling.
Mundell: We are soon reaching the crossover point from an accommodating monetary policy to a more restrictive one. I believe the Fed can raise rates once or twice more before the policy threatens to become restrictive.
Yong Tang: It seems that the weak dollar is no longer weak in 2005. The dollar is climbing up all the time. What is the reason for this? Is the strong dollar policy of American government really dead?
Samuelson: In the short run the dollar appreciates relative to the Euro and Yen. That can last for as long as those countries recycle eagerly their trade surpluses with the US into holding dollar assets (Such as low-yielding American Treasury bonds). Be not misled. So strong and irreversible are America?s balance of payments deficits, we must accept that at some future date there will be a run against the dollar. Probably the kind of disorderly run that precipitates a global financial crisis.
President Bush is a reckless economist, leading a reckless crew of subordinates. Spending on a hopeless imperialist caper in Iraq, plus Bush's giving away to the rich much of America's tax base, will eventually depreciate the American dollar. Those abroad who now gladly hold dollar assets will then reap the capital losses that they are not now expecting.
Mundell: As always the dollar is driven by supply and demand. Demand is strong because the economy is booming and because interest rates have risen above European and Japanese (and Chinese!) rates, while the increase in supply of dollars, determined by the Fed, is shrinking.
Yong Tang: The real estate industry in America is cooling down after ten year of steady growth. Given the important role the real estate sector plays in American economy, how will this cooling down affect American and even the global economy?
Samuelson: Every speculative up-bubble, big or little, ends in a down-bubble. But no one knows when. The next collapse in home and office prices will be unlikely to cause mass bankruptcies. Why not? It is because banks and other lenders have shifted their loans onto the shoulders of pension funds and risk-taking investors.
The real and genuine future toll from our current real estate binge will fall on the millions of homeowners who were tempted by low interest rates to enlarge their mortgages and to spend on current consumption the proceeds from that enlargement. As baby-boomers now of age 50 to 60, just when they ought to have been saving mightily to support their retirement years, they were actually dis-saving mightily. Who?s to blame? Mostly the team of President Bush which reversed the prudent financial policies of President William Clinton's team.
Mundell: The real estate industry can stand a little cooling down but I do not believe it will go very far down at a time when nominal interest rates are still low by historical standards and real interest rates are very low.
Yong Tang: The bad news for the US economy is the large twin deficits (budget deficit and current account deficit). Do you think the situation will improve in 2006 or get worse? Since the huge twin deficit hampers the world economy, do you have any suggestions to reduce the deficit?
Mundell: The twin deficits are causes for concern in the long run but they are not too worrisome when account is taken of the relatively low level of Debt in relation to GDP compared to the situations in Europe and Japan. The huge deficit, far from hampering the world economy, may actually help it. The rest of the world, including China, would be put into a very awkward situation if it did not have the trade surpluses that are the counterparts of the US deficit.
Yong Tang: The current cycle of economic growth in America has lasted about four years. When will this cycle of growth be over? When will the recession come again?
Samuelson: NO one can predict future business cycles. Probably until Bush retires to his Texas ranch in 2008, America will not yet have experienced a drastic recession. Before the French Revolution of 1789, King Louis XV could say, Apres moi, le deluge. That may be cold comfort for George Bush when he reads in future economic history books how unmeritorious were his 2001-2008 policy programs.
Mundell: You have to ask a qualified soothsayer to get a correct answer to this question. Growth in the next year and half looks good to me.
Yong Tang: According to the estimate of the World Bank, Chinese economy will grow at 9.3% in 2005. How do you estimate the growth number of Chinese economy in 2005 and 2006?
Samuelson: I am not an expert on Chinese growth statistics. Because there are still so many hundreds of millions of Chinese still outside the highest prosperity regions inside the triangle of Hong-Kong-Shanghai-Beijing. I will not be surprised if 9% annual rates of real GDP will be reported during 2006-2010.Mundell: I would expect growth in China to be 8.5-9.0 % in 2006.
Yong Tang: China and America are two engines of world economy. Given the increasing degree of economic globalization, the interdependence of Sino-American economic relations has become a common sense. What are the major differences between China and the US in the way of their economic growth?
Samuelson: Nations are like people. Persons aged 20 develop faster than persons aged 40. If China has not already by now surpassed Japan as second to America?s first in total real GDP, soon that will happen. Later solely from the fact that China's population is more than five fold greater than America's, China will forge ahead of America in total GDP. However when that does happen, China's per capita real GDP will still be a lot poorer than America's. When later you move closer to US in per capita affluence, your annual growth rate will recede down closer to America's.
Mundell: The main difference is that China saves half its GDP, the U.S. saves almost nothing, as measured by current statistics.
Yong Tang: What China could learn from America in its approach to economic growth and vice versa?
Samuelson: America still has a lot to learn about striking the right balance between free markets and public government. The US political shift to the right since President Ronald Reagan's 1980 presidential victory, went too far in corporate deregulation. Zero government regulation would be pathological. In the optimal Mixed Economy there is an Aristotelian Golden Mean to aim for.
For China, Economics can be a fragile flower that wilts in the absence of uncorrupt courts and limited bureaucratic interferences.
Mundell: China can learn from the U.S. the usefulness of the market as a barometer of the health of companies and banks, which acts as an early warning signal that changes in policy or management are necessary; every major company that fails or gets in trouble provides a lesson to every other company.
America can learn again, what it used to know but has long forgotten, how useful it is to have a stable international monetary system based on fixed parities.
Yong Tang: The trade disputes between China and America are on the rapid increase. Someone claims that this is because China relies too much on export. Do you think so? How can China and America establish win-win relations in the trade area?
Samuelson:China in its own self interest will need to learn that there are limits to how much export-led growth can be tolerated. As China's geopolitical power grows, it had best learn to avoid America's isolationist hubris. When good Chinese policies succeed in building up a healthy home market, appreciation of the RMB will not be something to be feared.
Mundell: The U.S. has addressed the problem in textiles by re-imposed quotas for a provisional period. This in my view is a far better approach to the problem that emphasizing a large appreciation of its currency, which would do China irreparable harm.
The U.S and China are the two economies that combine to be the major locomotives for the world economy. My hope is that these two economies could evolve into a Free Trade Area and fixed exchange rate currency area.
Yong Tang: Some experts said China has become the world low cost manufacturing center. What does this mean for China and America?
Samuelson: If China has become the world low-cost manufacturing center, that could in part be explained by how low wages still are in China. Beyond this factor, some credit will have to be increasingly given to Made-in-China technological innovations. Only this factor will count most in the distant future.
Mundell: China will have a comparative advantage in a vast number of manufacturing products. But most of the world trade takes place in intermediate goods and there will be ample benefits for all countries even when China share of world trade rises toward 10%.
Yong Tang: Some experts say, due to the rising price of energy and international raw materials the profit of products made in China has fallen dramatically. In such case Chinese economic growth, though rapid and robust, is unsustainable. How do you think of this comment?
Mundell: A country could get into a situation where the cost of its inputs exceed the value of its outputs and that would be depressing to GDP in China, although there may be offsetting gains if new economies of scale can be exploited. The problem might have existed last year but I don't think it is sufficiently pervasive to be a great worry at the present time. The problem couldn't exist if companies were privatized and forced to compete on a level playing field.
Yong Tang: Do you think Chinese currency RMB should be appreciated further? Someone said forcing China to appreciate its currency is like making a little horse riding a big wagon. China would become exhausted finally. The further revalue of RMB will become too much a burden for China who feels unable to control the situation. Do you think so?
Samuelson: No one can force China to raise or lower its RMB currency parity. Language such as little horses riding big wagons is worthless and should be avoided in adult conversations. It is unrealistic to believe that dynamic China can be materially hurt or helped by ��10% changes in the dollar:RMB rate.
Mundell: The best policy for China, in my opinion, would be to fix the RMB at 8:1 to the dollar and leave it there, while taking steps to loosen exchange controls and bring the balance of payments back into equilibrium.
Yong Tang: Do you have any good suggestions for China to stimulate its domestic demand and for Americans to increase their savings?
Samuelson: People's decisions about saving and consuming cannot be made in either Beijing or Washington. In America, the most important and useful government action would be to cut down on both Iraq spending and tax give-aways to those already affluent. Achieved budget surpluses would elevate US-owned capital formation that can be drawn upon in 2016-2026 when US retirees have fewer US working-age taxpayers to support them.
For China, in its present fast-growing stages, high saving rates are to be expected. Best for these to be used to finance domestic capital formation rather than to get invested in 3% US Treasury bonds. At the least, China should recycle its trade surpluses into diversified indexes of US and world equity securities.
Yong Tang: What China should do in order to make its economic growth more sustainable?
Samuelson: Well regulated private markets plus a limited progressive tax system will help any economy anywhere to achieve a sustainable growth mode. What would hurt most is a central bank that stays ignorant of lean-against-the-wind money and credit policies.
Mundell: Work needs to be done in privatizing some SOES(state-owned enterprises), reducing non-performing loans of the banking system, establishing a credit-rating system in China, privatizing some banks to provide better capital facilities for the private sector , take stronger action to control pollution.
In addition, I think a better deal could be worked out for farm people in the rural sector by giving them longer leases on land and an improved educational system that makes greater use of distance learning and information technology.
By Yong Tang, People's Daily Online Washington-based correspondent