Speakers:
Gary Becker, Nobel Laureate, Economic Sciences, 1992; University Professor of Economics and Sociology, University of Chicago; FasterCures Board Member
Vaclav Klaus, President, Czech Republic
David Rubenstein, Co-Founder and Managing Director, The Carlyle Group

Moderator:
Paul Gigot, Editorial Page Editor, The Wall Street Journal

The world grew last year at pace of 4.8%, the third straight year of a growth rate over 4%; this growth is in spite of rising interest rates, security threats, and extraordinary oil prices. The highest sources of growth have been the US, China, India, Russia (which is a special case because of energy related growth), and Japan. However, Europe’s Big Three, France, Germany, and Italy, had anemic growth and high unemployment rates.

Other notable features of global expansion features have been extraordinary US import of capital and goods, which is unusual for a developed economy. Are we in the US living behind our means, or do we have policies that are inviting to foreign investors?

How sustainable is the expansion? What is driving growth? What are the main threats to this expansion?

Everything you ever wanted to know about global economic growth from the perspectives of economics, politics, and finance is right after the jump.

Vaclav Klaus was elected President of the Czech Republic in February 2003. He is an economist, began his career in 1989 as the Finance Minister, and founded the Civic Democratic party. He has been known for saying that Europe doesn’t need unification but liberal order. Of this conference, President Klaus says that it reminds him of the “old Communist days when it was not possible to openly discuss problems at home, but people were encouraged to criticize lives of Indian peasants, South African miners, and the miserable living conditions of American working class.” This is the net effect of interconnectedness that Klaus considers positive. We should not listen to anti-globalists and understand the importance of freedom and openness of ideas.

In the “New Europe,” many of us expected a bright future, the end of existing problems with the end of communism. However, the reality has been different.

Communism has gone, but liberty and openness have not become the guiding principle. There have been new attempts to restrain openness and liberty, which has been seen very clearly in Europe. Political and socioeconomic system is about statism, regulation, and new forms of protectionism.

For example, the EU summit decision guaranteed by the end of  2007 that every school graduate in any EU country will get a job offer within 6 months of graduating. The Presidents words: “Ridiculous!”

In another example, the Euro commissioner recently suggested that the EU create a fund for “victims” of globalization. This is absurd. Klaus suggests that the EU set up a fund for victims of EU protectionism in Africa. (Ha!)

Global warming, environmentalism, terrorism, insufficient use of the Intenet, improper allocation of public funds for education is not the problem. The main problem is in trade of ideas.

David Rubenstein is a private equity investor with $35 billion in investments. He has been a lawyer, a White House aide under Carter, and reads six books a week. During his term as Deputy Domestic Policy Advisor, he tried to fight inflation. (Was he successful? He’ll tell you)

David uses a quote: “This has been a golden age for our industry, but nothing continues to be golden forever.”

Both the US and global economies has experienced unbelievable growth over the last three years for many reasons. No one could have predicted the robustness of the growth, nor the fact that it has been sustainable.

The US was the principal engine for the global economy, but today, what happens outside US is as important to the global economy as what happens inside the US. The single greatest export from the US is capital. When we export capital, we need to do so in a more friendly, genteel way and be mindful of cultural sensitivity. Additionally, we need to recognize that it is just as important to let foreigners invest in the US.

We have to adapt the way we think about ourselves by letting foreigners invest here. The US lifestyle is the best in the world, but said lifestyle is financed by people overseas.

Gary Becker is a Nobel Laureate in Economics. His thoughts on all things economic and law-related) are on his blog, The Becker-Posner Blog.

There has been great productivity growth in the US economy. The boom in productivity has been the main driver of the US economy, and will continue as long as policies don’t get in the way.

What do China and India do? They have done simple things. China liberalized the agricultural sector in 1978, resulting in a boom. India has a democratic regime, but ideologically they are socialist. They enacted simple reform measures like cutting tariffs and cutting quotas. It resulted in modest change, 6-7% growth, and they continuing to experience that. With poorer countries, we know how to grow. Give the private sector the opportunity, a reasonable decent environment, and they will grow.

Economists and central bankers have learned how to keep things stable, i.e. how to keep low inflation, how to maintain an environment such that the private sector can perform efficiently. This has tamed the business cycle. It has not eliminated it but tamed it, nonetheless.

The global economy faces a few obstacles. Oil prices are less a force in affecting GDP, so it’s not oil prices. It is not rising interest rates, nor is it low savings. In fact, we take pretty good advantage of low savings.

The primary obstacle to growth is geopolitical and potential government policies. The real risk is that governments try to do too much , tries to do things it is not capable of doing, like promising employment (as President Klaus mentioned about the EU earlier).

We saw this problem in Japan in the 1990s. Japan implemented counterproductive policies to bring the country out of protracted economic stagnation. We need to avoid this mistake by keeping governments from messing up too much with their policies.

Question from the moderator: What about inflation?

Gary says that we have seen a rise in relative prices of commodities. That doesn’t mean the price level will move in the same direction. Inflation is determined by monetary policy. Shifting relative prices is very separate from inflation.

David also doesn’t see inflation as a major problem.

Question from the moderator: How do you assess the performance of the new Chairman of the Fed so far?

David states that we won’t know if the Chairman is up to the job until he is faced with a crisis, the way Greenspan was faced with Stock Market crash of 1987. Only when we see how the Chairman handles a crisis will be able to make a proper assessment of his performance.

Gary agrees, but he also mentions that the EU central bank has been doing well from the point of inflation. If the central bank’s policies depend on who the Chairman is, we’d be in trouble (not that Greenspan nor the new Chairman is “trouble”). However, the Central Bank is dependent on the tools that are available to the central banker. The tools matter, not the person.

President Klaus appreciates the personal achievement of Greenspan. A new Chairman will bring a shift in thinking, regardless of who the individual is. The EU problem in different. The US started its currency area in 1778 with the dollar. Europe introduced the euro only seven years ago, and it is far from being an optimum currency area. It was premature to introduce a single currency in EU and the countries are paying a heavy price for unifying its currency so soon. Price is visible in the very slow rate of growth in the EU currency area.

David sees central bankers as less important because markets are almost driving the bankers than vice versa. The markets have faster information. The bankers don’t have as much influence on interest rates anymore. The market does.

Question from the moderator about President Klaus’s pessimism about growth. Could a flat tax be a solution?

President Klaus is in favor of a flat tax as a partial solution to problem.

Gary also supports flat tax, but says we also have to consider what comes with the flat tax, like exemptions. A flat tax will not be the magic wand to solve the problems.

According to David, the 15% capital gains tax is essentially a back door flat tax. A flat tax has enormous impact on the economy and deserves credit. It the capital gains tax is not extended, it will have a dramatic effect on the stock market and the investment environment. Our society has been helped by a shift to the idea that we are all investors, i.e. in 401(k), etc. Our parents didn’t have a lot of excess capital, but we do. We just need to learn what to do with it. Invest it.

Gary also reminds us that every flat tax is not really a flat tax. Low tax rates are also important.

A question from the moderator: In 2008 the capital gains rate is supposed to expire. If that extension does not occur, will there be tangible damage right away?

David thinks that certainly, the expiration wouldn’t be helpful. Why did stock market go down 508 points in one day? Because there was a discussion about tax cuts. The link between tax rates and the stock market is very direct. The stock market will go down dramatically if the President doesn’t support the extension, or if Congress doesn’t extend it. History suggests that the President will lose 28 seats in the house. If that happens, the house will be under the Democrats’ control, who will use the Capital Gains Tax issue as a negotiating tool against Republicans who want the extension for the tax to go through.

A question from the Moderator: Are we seeing backlash against globalization? Or is it a temporary hiccup? How worried are you?

President Klaus definitely sees it as a problem.

Question from the Moderator: Strong presidential leadership is what drives trade liberalization. However, Bush’s approval rating is in the low 30s. How worried are you?

Gary is worried. Since the mid-1950s, the world has seen an enormous decline in tariffs, quotas, etc. What we see now are pin pricks on a huge development. Could they snowball into a major reaction? It is possible. But with the forces that have led to globalization and free trade, we won’t have a major world crisis like the Great Depression. We need to focus on trade in goods and people. We now have discussions in the US about illegal and legal immigration. We have been too restrictive on the import of highly skilled workers.

President Klaus sees that it is non-tariff barriers that have been growing.

David thinks people think globalization is Americanization, and we need to get away from that idea.

Question from the moderator regarding China. David has over $1 billion invested in China. What are you investing in?
David’s investments are in life insurance in China, since only 8% have life insurance. Also, he has money in heavy industrial manufacturing. However, business in China takes time. If you’re going to go to China, you have to physically be there, work with local partners and employees, and help China. You have to re-assure the Chinese that you’re not just helping yourself and plan to export profits back out.

Chinese banking, like any emerging market has problems in banking system. It is very attractive to put capital into China, provided you have patience.