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48–001PDF 2009

U.S. FOREIGN ECONOMIC POLICY IN THE

GLOBAL CRISIS

HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION AND TRADE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

MARCH 12, 2009

Serial No. 111–18

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

HOWARD L. BERMAN, California, Chairman 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

BILL DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

DIANE E. WATSON, California 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

MICHAEL E. MCMAHON, New York 

JOHN S. TANNER, Tennessee 

GENE GREEN, Texas 

LYNN WOOLSEY, California 

SHEILA JACKSON LEE, Texas 

BARBARA LEE, California 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

MIKE ROSS, Arkansas 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

JIM COSTA, California 

KEITH ELLISON, Minnesota 

GABRIELLE GIFFORDS, Arizona 

RON KLEIN, Florida 

ILEANA ROS-LEHTINEN, Florida 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

JOHN BOOZMAN, Arkansas 

J. GRESHAM BARRETT, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

BOB INGLIS, South Carolina 

GUS BILIRAKIS, Florida 

RICHARD J. KESSLER, Staff Director 

YLEEM POBLETE, Republican Staff Director 

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE

BRAD SHERMAN, California, Chairman 

GERALD E. CONNOLLY, Virginia 

DAVID SCOTT, Georgia 

DIANE E. WATSON, California 

MICHAEL E. MCMAHON, New York 

SHEILA JACKSON LEE, Texas 

RON KLEIN, Florida 

EDWARD R. ROYCE, California 

TED POE, Texas 

DONALD A. MANZULLO, Illinois 

JOHN BOOZMAN, Arkansas 

J. GRESHAM BARRETT, South Carolina 

DON MACDONALD, Subcommittee Staff Director 

JOHN BRODTKE, Subcommittee Professional Staff Member 

TOM SHEEHY, Republican Professional Staff Member 

ISIDRO MARISCAL, Subcommittee Staff Associate 

(III)

C O N T E N T S 

Page

WITNESSES 

Simon Johnson, Ph.D., Ronald A. Kurtz Professor of Entrepreneurship, Global 

Economics and Management (GEM), MIT Sloan School of Management 

(former Chief Economist of the International Monetary Fund) ....................... 8

Lori Wallach, Esq., Director, Global Trade Watch, Public Citizen ...................... 23

Philip I. Levy, Ph.D., Resident Scholar, American Enterprise Institute (former 

Senior Economist for Trade on the President’s Council of Economic Advisors) ....................................................................................................................... 36

C. Fred Bergsten, Ph.D., Director, Peterson Institute for International Economics (former Assistant Secretary for International Affairs of the U.S. 

Treasury) ............................................................................................................... 47

Peter Morici, Ph.D., Professor of Logistics, Business and Public Policy, Robert 

H. Smith School of Business, University of Maryland (former Director of 

Economics at the U.S. International Trade Commission) ................................ 61

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Simon Johnson, Ph.D.: Prepared statement .......................................................... 11

Lori Wallach, Esq.: Prepared statement ................................................................ 25

Philip I. Levy, Ph.D.: Prepared statement ............................................................ 39

C. Fred Bergsten, Ph.D.: Prepared statement ....................................................... 50

Peter Morici, Ph.D.: Prepared statement ............................................................... 63

APPENDIX 

Hearing notice .......................................................................................................... 102

Hearing minutes ...................................................................................................... 103

The Honorable Brad Sherman, a Representative in Congress from the State 

of California, and Chairman, Subcommittee on Terrorism, Nonproliferation 

and Trade: Article dated January 6, 2009, from the Christian Science 

Monitor .................................................................................................................. 104

The Honorable Gerald E. Connolly, a Representative in Congress from the 

State of Virginia: Prepared statement ............................................................... 105

The Honorable Sheila Jackson Lee, a Representative in Congress from the 

State of Texas: Prepared statement ................................................................... 106

The Honorable Donald A. Manzullo, a Representative in Congress from the 

State of Illinois: Prepared statement ................................................................. 111

(1)

U.S. FOREIGN ECONOMIC POLICY IN THE 

GLOBAL CRISIS 

THURSDAY, MARCH 12, 2009

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE, COMMITTEE ON FOREIGN AFFAIRS, Washington, DC. 

The subcommittee met, pursuant to notice, at 10:40 a.m. in room 

2172, Rayburn House Office Building, Hon. Brad Sherman (chairman of the subcommittee) presiding. 

Mr. SHERMAN. We will now bring the subcommittee to order. We 

will start, of course, with opening statements. I thank the witnesses for being here. But, I especially want to thank President 

Barack Obama for taking note of the timing of this hearing and coordinating the release of his international economic plan with the 

timing of this hearing. 

I just can’t voice my appreciation for that strongly enough. Today’s hearing aims to examine the effects of the global economic 

crisis on how the United States and international trading partners 

may adjust their economic policies in response. 

We know that early next month our President will be attending 

the G–20 summit in London. The administration has released an 

international plan, the provisions of which are just now coming 

into view. 

It involves the G–20 countries committing to a stimulus package 

of 2 percent of GDP, and that the countries should spend significant additional amounts on export promotion through their export 

credit agencies. In our case that would be the Export-Import Bank. 

While we don’t have all the details of the President’s plan, we 

have checked with Treasury. They are not going to be seeking 

budget authority for this effort, and the export financing will be 

short term, using the existing Ex-Im Bank facilities. 

OPIC, over which this subcommittee has legislative jurisdiction, 

is not anticipated to be involved in this plan. The countries are 

going to be urged to put in matching amounts to the World Bank, 

and also in other multilateral banks, to help less-developed countries finance exports. 

And, I do want to make a note about the use of the World Bank. 

The World Bank lends money to Iran. It is helping to keep the 

Mullahs in power. It is helping indirectly to finance nuclear weapons that will threaten the United States. 

The World Bank either needs to adopt a policy, not only of not 

making additional loans to Iran, but also of not making further disVerDate 0ct 09 2002 16:01 Jul 24, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\WORK\TNT\031209\48001.000 HFA PsN: SHIRL
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bursements on loans previously approved if it is to be regarded as 

a healthy agency with which the United States should continue to 

do business, and to make additional investments. 

Also, under the Obama proposal the United States would in- crease its line of credit to the IMF from $10 billion to $100 billion, 

with a view to increasing other countries to do likewise, so that the 

total increase would be $500 billion. 

Now obviously we need to see the President’s full proposal. I 

want to work with the administration to ensure an aid package is 

crafted that maximizes support for American economic and foreign 

policy goals, and this hearing is the beginning of that process. 

I do think that two things need to be more clear. First, how we 

are going to plan for dealing with the trade deficit. You just can’t 

sweep $.5–.75 trillion under the rug year, after year, after year. 

And the second thing that remains unclear is whether our commitment to increase a line of credit to the IMF is contingent upon 

similar commitments from Europe, Saudi Arabia, and China, or 

whether it is something that we are going to do in the hopes that 

it encourages these other nations to act. 

I would point out that it appears that Japan is already acting 

consistent with President Obama’s plan. This hearing will also 

focus on the big brouhaha of the Buy American provisions in the 

stimulus package, and compare them to the Buy France and Buy 

China provisions in the stimulus packages of other countries. 

The extent of the crisis is well known to all. On March 8, the 

World Bank announced that the world economy will actually shrink 

for the first time since the end of World War II. 

The International Labor Organization expects global unemployment to increase between 18 million and 30 million workers, and 

may increase by 50 million workers if the situation continues to deteriorate. 

By some estimates as much as 40 percent of the world’s wealth 

has evaporated. Most of those focusing on how we got here focus 

on the non-regulation of derivatives and absurd mortgage lending 

standards in the United States. 

But we cannot forget that the trade deficit of the United States 

has spiraled out of control, reaching $800 billion in 2007. This is 

a symbiotic malignancy in which the rest of the world becomes economically dependent on a malignant trade relationship with the 

United States, and Americans become dependent upon living a lifestyle where we consume far more than we produce. 

Things that cannot go on forever don’t, and one would expect 

that the United States’ trade deficit will either be straightened out 

by the current economic calamity or will result in the next economic calamity. 

Our trade deficit expense, I believe, comes from our faith-based 

trade policy. We have faith that if we open our markets others will 

do the same, and we have faith that since we are a country that 

believes in the rule of law, because we believe that the only way 

government can effect, should effect, or ever does effect private sector and economic decisions is through written regulations that 

other countries follow the same rule of law. 

And, that if we can simply get those countries to adjust their 

written regulations, we have thereby eliminated any governmental 

3

pressure or interference in decisions of private actors seeking to 

maximize their own utility by in many cases purchasing American 

goods. 

A faith-based trade policy works well as long as one does not look 

at the results. Now those who became rich and powerful in a system that led to our trade deficit are not going to roll over and move 

to any other system. 

They are using every technique possible to either avoid discussion of our trade deficit or to attack those who dare to mention it. 

Their favorite tactic is to talk about the Smoot-Hawley Tariff Act 

of the 1930s, while failing to mention that when that act was 

adopted the United States had a trade surplus, and continued to 

have a trade surplus in all the years relevant after it was adopted 

as well. 

So you can’t have a less similar circumstance to today, and when 

comparing today with the days of Smoot-Hawley. Second, SmootHawley involved tariffs on various goods. 

It is different from anything that anyone would propose, and accordingly when you mention Smoot-Hawley, therefore you are talking about a proposal radically different from anything that anybody 

is proposing today. 

And you are talking about circumstances radically different from 

those that pertain today, but aside from those things, it is directly 

relevant to the discussion of today’s trade policy. 

When the House set steel and iron procurement standards for 

Federal funds for mass transit and highway projects, there were 

cries that we were going to start a trade war. There were a number 

of ironies in this, the least of which is the fact that the United 

States specifically exempted several types of projects that were 

subject to our procurement obligations under the WTO agreement 

on government procurement. 

Who was crying most loudly? It was the Europeans and the Canadians. The EU Ambassador to the United States called the Buy 

American language a dangerous precedent. The Canadian Ambassador said that the Buy American provisions would fuel the economic crisis. 

This is particularly ironic because both Canada and Europe have 

retained essentially the same or greater procurement restrictions 

in their WTO commitments. Canada retains restrictive domestic 

procurement rights for aspects of its transportation sector, including some systems and components, and not just iron and steel. 

The EU has retained the right to restrict procurement in its 

WTO procurement commitments. Now to comfort these critics, the 

Senate included language that clarified what was already I think 

well understood, that the provision would be carried out consistent 

with the United States’ trade obligations. 

And the Senate simultaneously expanded the Buy American provisions to include United States manufactured goods. So, this expanded version of Buy-America became law. Did the world come to 

the end? No. In fact, after the bill became law, its critics have been 

relatively silenced. 

The importance of the subject of this hearing is illustrated by the 

fact that my statement has already gone on too long, but I will use 

my time during the questioning period to illustrate how the governVerDate 0ct 09 2002 16:01 Jul 24, 2009 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\WORK\TNT\031209\48001.000 HFA PsN: SHIRL
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ment procurement and stimulus efforts of our trading partners are 

far more restrictive to United States competition than anything 

imagined in the United States stimulus bill. 

I look forward to hearing from our witnesses, and I look forward 

with even greater anticipation to the opening statement of our 

ranking member, Mr. Royce, and our other colleagues. 

Mr. ROYCE. Thank you, Mr. Chairman. I look forward to working 

with you and cooperating as we did last year. I wanted to just 

make a few observations. 

The world is changing ever more rapidly, and unfortunately not 

for the better. Our Director of National Intelligence calls the global 

economic and financial crisis, today’s subject, our greatest threat. 

It is certainly near the top. 

As the United States economy sinks, so is the world’s. All over, 

growth is down, employment is up, and markets are sagging. 

Trade is a big concern. World trade, Mr. Chairman, has quadrupled since 1982. President Obama’s USTR-designate, testified 

last week that the world trading system has ‘‘expanded the economic pie.’’ This winning streak, unfortunately, is over. Trade is 

now declining for the first time since 1982, and it is declining very 

rapidly. Some have warned that the ‘‘golden era of trade’’ is over. 

That depends upon whether protectionism gains the upper hand in 

this argument. 

Ideas have consequences. The policies that spark trade’s growth 

were under attack well before this economic crisis began. United 

States exports were the biggest contributor frankly to economic 

growth last year. Yet, the last Congress blocked trade deals with 

Korea, with Colombia, with Panama, and with others. This Congress appears set to do the same. A key House Democrat reportedly 

warned colleagues this week not to refer to trade agreements as 

‘‘win-wins.’’ Don’t call them that. These agreements though amount 

to billions in ‘‘stimulus’’ that would not cost a dime. 

Now there has been a discussion of blocking trade in the 1930s 

with the Smoot-Hawley law. Of course Smoot-Hawley, with the 

200-percent increases in tariffs, is not identical to some of the initiatives being pushed today. 

But what we are talking about when we are talking about 

Smoot-Hawley is the blow back from our trade partners. The reaction in Europe, in terms of the trade barriers that went up; the reaction in Latin America, in Chile, and in other countries, that then 

impose trade barriers, and the fact that once that happened, economic decline put a very severe recession into a great national depression worldwide. 

I guess one difference is that when President Herbert Hoover 

signed that bill, reportedly beforehand, he said, you know, I know 

better. He said that I think the economic consequences of these are 

great, but to be honest, it was the most popular legislation that 

Congress probably ever passed. And certainly it was just as easy 

for the Canadians and the Europeans to follow in the footsteps of 

Smoot-Hawley, and it is just as easy today for those parliamentarians in Canada, and in France, to push for protectionist measures. 

I guarantee you it is a popular argument to make in those countries, but I also guarantee you that if we are successful in undoing 

liberalized trade, and if those forces in Canada and France, who 

5

would like to do the same, are just as successful that some would 

like to be here, the consequences will most assuredly not be an economic benefit to the people of the world in my opinion. There are 

very real trends that indicate that we are heading back that way. 

The World Bank reports that 17 of the G–20 countries have implemented trade restrictions. As the world’s largest exporter, many 

high-paying United States manufacturing and service jobs are at 

risk. Protectionism, combined with collapsed commodity prices, 

threatens to throw hundreds of millions into poverty worldwide. 

The implications of this for our national security are frankly beyond comprehension. 

Protectionism will infect other issues requiring international cooperation. It will be harder to work together on counterterrorism, 

on financial sector reform, or nuclear nonproliferation, if you are 

treating trade as a zero sum gain. 

One focus of this committee will be foreign aid reform. Nearly everyone agrees that our aid program is dysfunctional, incoherent 

with its hundreds of goals. The administration’s budget aims to 

double foreign aid. There is no justification for that given our aid 

program’s sorry state. Never mind our dire economy. Many types 

of aid are simply harmful. I saw that certainly with the impact 

that it had on Mobutu’s Zaire or Congo today. The administration’s 

plan announced yesterday to multiply United States spending 

through the IMF is ill-conceived. Where did this come from? Many 

Europeans are right to balk about this. 

Calls to increase development aid make no sense while we are 

denying developing countries market access, the most powerful developmental tool. That is the most powerful thing that can be used 

for development. The African Growth and Opportunity Act doubles 

trade between the United States and Africa. Encouraging is the administration’s indications that it will move against agricultural 

subsidies, which punish American consumers and the world’s poorest. 

Pakistan is a great concern. The country is a powder keg with 

a nuclear arsenal. Radicalism is spreading, and the economic crisis 

will weaken the remaining forces of moderation in that country. 

There is no reason to believe that the very large aid package for 

Pakistan being proposed will turn this around. 

Closer to home some have discussed Mexico as a ‘‘failed state.’’ 

Economic pressures are intensifying there. The Mexican Government’s battle with the drug cartels is a death match spilling into 

the United States. More so than ever, border security is national 

security. Yesterday I wrote President Obama asking that he resume Operation Jumpstart, which deployed National Guard troops 

along the Mexican border to great benefit. 

Authoritarian governments in Russia, China, Venezuela, and 

elsewhere already have blamed the United States, deflecting the 

tension from their own shortcomings. But as Venezuela and others 

nationalize companies and embrace stateism, their economic demise will intensify. 

The idea that a nation’s business can be well managed by its government, that politicians and government bureaucrats have the 

ability or inclination to manage business is a conceit and power 

6

grab that has made people poorer again and again. I hope that we 

understand that at home. Thank you, Mr. Chairman. 

Mr. SHERMAN. I thank the ranking member, and just one brief 

comment. There are, I think, three groups in trade at least that are 

protectionists associated with Smoot-Hawley. There are those who 

support generally our present policies, and there are those of us 

who believe in open markets with a sledge hammer. 

And so I am sure when he was talking about Smoot-Hawley, he 

knew that I was in that third group and not in the first group, and 

I now yield to our vice chairman, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. We have five very distinguished guests before us, and I want to move this along so we can 

get to their comments. It is very important. 

I think quite honestly that between you and Mr. Royce, who basically covered the waterfront. However, I do want to say that fear 

is just not an option for us. The world is in a state of uncertainty 

with many other countries economies in dire shape. 

And we need to be very, very careful how we approach this. We 

need to do it with a calmness and a confidence, and be very careful 

about how we view and how we are viewed, in terms of isolationism. 

It has not worked in the past. We have been at our greatest as 

a country. We have shown the way without fear, without trepidation, and we have in many ways set the standards, in terms of 

using our trade diplomatically, fairly, and understanding that that 

is the main way that we keep avenues open to countries by having 

economic relationships with them. 

And I come down on the side of wanting to keep those opportunities of trade open and not close our borders. With that, I will reserve for the rest of the questions so we can get to our panelists. 

Thank you, sir. 

Mr. SHERMAN. I now recognize the gentleman from Texas for any 

opening statement that he may have. 

Mr. POE. Thank you, Mr. Chairman, and thank you for being 

here. I am concerned about four countries: China, Russia, Iran, and 

Mexico, and our relationship with each of those. 

China, are they going to take advantage of this situation worldwide to expand their political influence through their economic programs. I am concerned about the debt that the United States owes 

China, and that growing interest on that debt. 

And Russia, are they going to use their global influence during 

this crisis to move into more former Soviet states, like they did in 

Georgia. Is Ukraine next, or who is next. 

Is the Russian bear going to come out of hibernation or are they 

just going to be complacent. I don’t know, but maybe you do. And, 

of course, Iran, with the energy prices being what they are, is that 

affecting the stability of the Iranian Government or it has no effect. 

I am mostly concerned about our neighbor to the south. I think 

that the United States needs to have a better neighborly relationship with Mexico, and the economic crisis there, and the drug war 

in Mexico has led some to warn that some of the ungoverned areas 

in that country may become sanctuaries for terrorists. 

Is that a valid concern or is that just some concern or fear. Is 

it time to renegotiate NAFTA or is it time to reinforce NAFTA. 

7

And, of course, the answer to the question, the question being what 

should the United States do to stabilize Mexico economically so 

that it is stabilized politically. 

And, lastly, I, too, am concerned about our foreign aid policy. We 

just write the check every year and maybe we need to figure out 

why we do that to so many countries all over the world. So, with 

that, Mr. Chairman, I will yield back my time. 

Mr. SHERMAN. I thank the gentleman from Texas. I recognize the 

Ambassador and Congresswoman from California. 

Ms. WATSON. Thank you so much, Mr. Chairman, and thank you 

for holding today’s very important hearing to examine the effects 

of the United States foreign economic policy and trade effects in 

this global financial crisis. 

It is important that the United States continue to work with our 

friends around the globe to carefully craft, manage, and redirect 

this crisis in order to restore confidence in the capital markets, consumers, and developing nations. 

As the recession began in December 2007, many foreign leaders 

around the world believe the economic downturn was isolated to 

the United States. However, as the situation snowballed into a 

global financial crisis, the most severe since the great depression, 

many people around the world began to fall into poverty. 

In November 2008, the World Bank reported that with each 1-

point percentage drop, 20 million people could be trapped into poverty. We know from past recessions that when people lose their 

jobs, no matter which country one lives in, that desperation often 

leads to increase crime rates. We see that here in our country. 

In emerging and developing nations desperation among unemployed youth can turn into acts of terrorism and retaliation against 

their own governments, and in some cases, this activity has 

spawned uprising and has been the cause of coup d’e ́tat in several 

states. 

It is my hope today that we can learn from our most distinguished panelists, and take away some information that will help 

us as the policymakers so that we can continue to navigate our way 

through this global financial crisis in a very positive and effective 

direction. 

So, Mr. Chairman, thank you, and I look forward to today’s testimony and I yield back my time. 

Mr. SHERMAN. I now recognize the gentlemen from New York. 

Mr. MCMAHON. Thank you, Chairman Sherman, and to your 

staff for putting together this very important hearing. Recently I 

met with the German Ambassador and members of the German 

Bundestag, and representatives of prominent transatlantic businesses, to celebrate the achievements of the transatlantic community. 

But we are faced with the unfortunate fact that the transatlantic 

community is falling into what could be perhaps its deepest recession since World War II, and has weighed heavily on everyone’s 

mind. 

But during our conversation the delegation did not take aim at 

the United States, and instead proceeded to discuss how the global 

economic crisis should be credited to the greed that crossed interVerDate 0ct 09 2002 16:01 Jul 24, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 F:\WORK\TNT\031209\48001.000 HFA PsN: SHIRL
8

national borders and infiltrated the practices of worldwide businesses. 

There are many who blame the United States for initiating this 

crisis, and many in our own country prefer to look inward for solutions to this crisis, but these seemingly divergent notions are actually one and the same. 

Although there can be no recovery in the global economy without 

recovery in the national economies, the current crisis is not uniquely an American phenomenon, and that is why this discussion today 

is so important. 

The United States must continue to look outward and look for 

ways to not only maintain, but increase its credibility on the world 

stage. With that in mind, I would like to hear the suggestions from 

our distinguished witnesses on how to do just that, while also successfully focusing on our crucial domestic responsibilities, and I 

look forward to your testimony, and I yield the remainder of my 

time. Thank you, Mr. Chairman. 

Mr. SHERMAN. I thank the gentleman from New York, and I will 

now introduce our five witnesses. First, I want to welcome Simon 

Johnson. He is the Kurtz Professor of Entrepreneurship at MIT 

Sloan School of Management. 

He is co-founder of a Web site on global economic and financial 

crisis, baseline scenario.com. From March 2007 through August 

2008, he was the chief economist for the International Monetary 

Fund. 

Second, we are honored to have Lori Wallach, who is the director 

of Public Citizen’s Global Trade Watch. She is also founder of the 

Citizen’s Trade Campaign, a national coalition of consumer, labor, 

environmental, family farm, religious, and civil rights groups representing over 11 million Americans. 

I also welcome Philip Levy, resident scholar at the American Enterprise Institute. Dr. Levy studies international trade and development. Before joining AEI, he was senior economist for trade on 

the President’s Council of Economic Advisors. 

Next we have C. Fred Bergsten, who is the director of the Peterson Institute of International Economics since its creation in 1981. 

He has also served as the assistant secretary for international affairs at the United States Department of Treasury from 1977 

through 1981. 

I hear that they have some empty space for you there, or for anybody who knows their ways around the halls of the Treasury. 

And finally I want to welcome Peter Morici, a professor of international business at the University of Maryland. Prior to joining 

that university, he served as director of economics at the United 

States International Trade Commission. With that, let us hear 

from Mr. Johnson. 

STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ 

PROFESSOR OF ENTREPRENEURSHIP, GLOBAL ECONOMICS 

AND MANAGEMENT (GEM), MIT SLOAN SCHOOL OF MANAGEMENT (FORMER CHIEF ECONOMIST OF THE INTERNATIONAL MONETARY FUND) 

Mr. JOHNSON. Thank you, Mr. Chairman, and let me start by 

saying a few things about the global economic outlook, which was 

9

the subject of my written testimony, and then link some of the 

broader points to the latest statements and policy strategy laid out 

by Secretary Geithner yesterday. 

First of all, in terms of the global outlook, I took note of all your 

opening statements, and I think that you are right to be concerned 

about the latest developments around the world. 

I would suggest that the situation is actually worst and considerably more dangerous than you currently think, and let me explain 

that briefly if I can. My view of the global economy in the short 

term is not very different from what appears to be coming out of 

the international official organizations that will release their full 

revised forecasts in April. 

I think that globally output will decline as the World Bank said 

in its March 8 statement for 2009. I am much more worried about 

2010 and what happens after that, because I think we are entering 

not only into a V-shaped recovery, or even a U-shaped slow recovery, but much of an L-shaped situation, where the world economy 

goes down, and then it stays down for quite a long time. 

And I think that is because at the global level again, we face 

very similar problems to those faced by Japan during the 1990s, 

the so-called balance sheet recession. 

When consumers, firms, and governments around the world have 

taken on a lot of debt, and when you have the kind of shock to our 

financial systems that we witnessed over the past 2 years, particularly over the past 6 months, you have problems with consumer 

confidence almost everywhere. 

You have firms that are trying to pay down their debt and save 

cash, and be very cautious almost everywhere, and you have governments that unfortunately, and quite inappropriate for the moment, find themselves pressed toward austerity rather than being 

in the position of what we would wish, and what we would try to 

impress on them, which would be to do some sort of stimulus like 

in the United States, and I will come back to some specific places 

in a moment. 

I do think in this context the relatively good news is that the 

United States can recover quicker than most other parts of the 

world. I think that we have a depth of technology creation and 

commercialization that will fill the gap left by the decline of financial services. 

And I think we also have a financial system, which while it has 

very deep problems, particularly in and around large banks, and I 

don’t think those can be resolved anytime soon, we also have a variety of sources of finance, and a much broader and deeper system 

of intermediation than most other countries. 

So I think the United States can pull out of this within 3 to 5 

years. The rest of the world I think is really going to struggle, and 

by struggling, I mean the kinds of pressures that I think you were 

flagging in some of your opening statements. 

In the best case, and where you have alternatives, you see increasing pressures toward protectionism, but certainly we see this 

in Europe, and we will start to see it more and more in emerging 

markets. 

I think we will see instability of governments, and of regimes, 

and I think what Ms. Watson said about people being pushed down 

10

into poverty is absolutely right, and I would emphasize how hard 

it is to predict the consequences of that. 

Mr. Poe raised the questions of what will happen to a number 

of countries. I think most of these countries will get weaker and 

be hurt by the economic situation, but exactly how that plays out 

politically I think is incredibly hard to predict. 

The problems particularly that I would stress right now that are 

evident around Eastern Europe, and East Central Europe, and I 

will comment on that in just a moment, and I would emphasize the 

importance obviously of Russia in that dynamic as an incredible 

wild card. 

Let me close by linking this view of the world to the statement 

issued by Mr. Geithner yesterday in the United States strategy toward the G–20. I will only say three things about that, regulation 

on Europe and about the fiscal issue. 

On regulation, I am sympathetic to the United States administration’s position. These are longer term issues that need to be 

dealt with, but I would also stress that there are bombs in our 

global financial systems that need to be defused. 

I don’t think our European partners are focused on that, and I 

think we need to push them much harder, and that leads into my 

second point, which is what we are facing now is—some politicians 

like to say it is a global problem and it needs global solutions, but 

it is not actually that much of a global problem. 

Right now it is a problem in the United States financial system 

and in Europe, throughout the Europe, and the inability of Western 

Europe in particular to take care of its weaker members, and 

weaker members of the Euro zone, and in that context, I support 

the moves toward greater resources for the IMF, and I will be 

happy to elaborate on that later. 

It is a very serious, dangerous situation in the emerging markets 

and in the industrial countries of Europe, and this a tsunami of 

new problems heading our way. 

Finally, on the fiscal point, I support the calls for greater fiscal 

stimulus where appropriate around the world, but I would emphasize that with these kinds of problems mounting, there is very limited room for this, and we should be pushing much harder toward 

monetary expansion, particularly on the part of the European Central Bank. Thank you. 

[The prepared statement of Mr. Johnson follows:]

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Mr. SHERMAN. I thank the witness. We enjoyed hearing him 

here, and we will enjoy watching him on the Colbert Report tonight. That will be interesting, and because it is relevant to Dr. 

Johnson’s statement, I will ask unanimous consent to put in the 

record my op ed for the Christian Science Monitor that urges much 

larger stimulus now in the United States, but also statutorily required austerity to go into effect when the unemployment rate 

comes down. With that, let us move on to Lori Wallach, our next 

witness. 

STATEMENT OF LORI WALLACH, ESQ., DIRECTOR, GLOBAL 

TRADE WATCH, PUBLIC CITIZEN 

Ms. WALLACH. On behalf of Public Citizens 100,000 members, I 

would like to thank the chairman and the committee members for 

the opportunity to testify. Unlike my co-panelist economists, I am 

a lawyer, an author of books on the WTO and the global trade regime. 

The devastation being caused by the global economic crisis to the 

lives and livelihoods of millions of people around the world is not 

merely the result of bad practices by a handful of mega financial 

service firms, but the foreseeable outcome of one particular system 

of global governance, or perhaps more accurately anti-governance. 

Over the last decade the United States foreign economic policy 

has been systematically the implementation worldwide of a package of deregulation, liberalization and privatization, and new limits 

on government policy space often dubbed the Washington consensus, or the neoliberal agenda. 

Trade agreements, such as those enforced by the World Trade 

Organization, and international agencies, such as the IMF and the 

World Bank, have been the delivery mechanism for this global experiment. 

I am no fan of tariffs, but I am a fan of power space. The issue 

here is not trade rules, but rather the other rules to regulate finance and other elements of our economies. 

The current regime of deregulation was put into place with 

intentionality, and now the evidence is pretty clear that this system is a failure and that it needs to be replaced. 

Thus, for instance, while the United States has a responsibility 

to help those countries that are not responsible for the crisis get 

out of it, more funds for the IMF must be, for instance, conditioned 

on changes in that agency’s rules. 

The right for other countries to be able to stimulate their economies, versus the IMF’s typical budget austerity. The ability to do 

currency controls to avoid raids on currency. The ability, for instance, to regulate foreign investors. 

Congress is increasingly becoming aware of the overreach of socalled trade agreements, such as the WTO, when you are being told 

that auto industry rescues, by America conditions and stimulus 

packages, the TARP system, unless it is made available also to foreign banks, are all violations of trade agreements. 

Some of this is true, and some of it is exaggerated. In the body 

of my testimony, which I request be put into the record, I go into 

detail about one little known aspect of the current sale of economic 

governance system. 

24

That is the radical financial services deregulation program of the 

WTO’s financial service agreement. That aspect of the WTO, which 

has gotten very little attention, but is at the core of the problem, 

exports worldwide, the extreme financial service deregulation that 

triggered this crisis. 

And more urgently it imposes barriers on the re-regulation of financial services domestically and globally that many agree is key 

to remedy the crisis. Agreeing to review and renegotiate these 

WTO financial service deregulation terms must be a key element 

of the G–20 process, and in addressing the crisis. 

Simply putting more stimulus money into operation under the 

current rules is not the solution. But even as Congress and the G–

20, and other international configuration, are struggling to figure 

out how to re-regulate finance, many of the same people in governments are currently pushing for expansion of the WTO financial 

service deregulation regime. 

For instance, the G–20 summit in Washington, DC, in November 

of last year was supposedly convened to lay out a coordinated response and re-regulation. Instead, the communique ́ called for completion of the WTO’s Doha Round. 

Yes, the Doha Round has one of its three pillars further financial 

service deregulation. Let me repeat. The current Doha Round agenda has as one of its three main elements more financial service deregulation. Calling for completion of that agenda has no place in 

the G–20 agenda. 

Again, I am not discussing passing tariffs. I am not discussing 

trade, but rather undoing a system that limits Congress’s and 

other legislature’s policy space to put into place the array of policies needed. 

This is a practical matter. Not an ideological assertion. In addition to these financial service issues, we have the limits that the 

chairman discussed on Buy America, made more egregious by the 

fact that the United States, in scheduling its trade commitments, 

has frequently focused on etiology and not the national interests. 

As a result, we have taken on more responsibilities under the 

current model than other countries. So, the EU and Canada wisely 

chose to exclude some of their procurement. It has nothing to do 

with trade, but rather how governments can spend their tax dollars 

to stimulate their economies. 

To conclude, for a few years a few brave economists reviewed the 

massive persistent United States trade deficit the chairman mentioned as it began to exceed 5 percent of GDP, and they warned 

that such imbalances were not sustainable, and they called for an 

array of urgent policy responses so as to avoid a devastating and 

painful market correction, and massive contraction in trade. 

The absence of the policy responses has resulted in the undesirable outcome. Remedying the current prices and avoiding future 

such crisis, and achieving economic stability at home and abroad, 

will require a new system of global economic governance that harnesses the benefits of trade, while removing the many non-trade 

policy constraints that are now obstacles to ensuring markets operate in a stable and productive manner. Thank you. 

[The prepared statement of Ms. Wallach follows:]

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Mr. SHERMAN. Thank you. Now we will move on to Philip Levy. 

STATEMENT OF PHILIP I. LEVY, PH.D., RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE (FORMER SENIOR 

ECONOMIST FOR TRADE ON THE PRESIDENT’S COUNCIL OF 

ECONOMIC ADVISORS) 

Mr. LEVY. Chairman Sherman, and members of the subcommittee, thank you very much for the opportunity to testify 

today on the international economic policy challenges facing the 

United States in this time of global crisis. 

You are to be applauded for holding this hearing, and recognizing 

that in this time of domestic distress our foreign economic policies 

will have important and long lasting ramifications. 

Mr. Chairman, with your permission, I would like to offer just a 

brief summary of some of the key elements in my testimony, particularly with a focus on international trade, and submit the extended version of the testimony for the record. 

I also hope to say a word about some of the important points that 

you have raised on the trade deficit. The first point that I would 

like to make is that the trading system is less sturdy than it appears, and it is heavily dependent on United States leadership. It 

may not survive a sledge hammer. 

The propensity to turn inwards at the time of economic crisis is 

not new. One of the perpetual challenges for trade liberalization is 

that the benefits tend to be diffuse, lower prices for consumers, 

market access for exporters; while the costs of import competition 

tend to be concentrated. 

These costs are felt even more acutely in times of economic distress. As you have already mentioned, the misguided attempts to 

protect domestic producers by raising trade barriers in the 1930s 

were a major problem, and then served as the motivation for the 

creation of the post-war trading system. 

Despite the creation of the World Trade Organization in the last 

completed trade round, the global trading system is more feeble 

than it appears. The WTO has no real enforcement power. 

Contrary to some of the testimony today, the WTO does not force 

anyone to do anything. It cannot. Instead, dispute settlement panels determine whether a member country has reneged on a commitment. 

The trading system largely relies upon the willingness of its 

major members to honor the letter and spirit of agreements. If they 

do not, there is little to hold the system together. 

The United States plays a special role at the WTO. It has pushed 

for liberalization and it has led by example. Even if the United 

States continues its vigorous support of liberalization of the WTO, 

the system faces tremendous challenges. 

Without such support, progress is hard to imagine, and the prospect of decay is very real. Even before the recent economic shocks 

hit, the WTO was suffering a crisis of its own. It repeatedly failed 

to conclude the last round of talks began in 2001 in Doha. 

Which leads me to my next point, which is that litigation without 

negotiation will do great harm to the global trading system. 

37

A failure of the trade talks threatens to drive members to enforcement actions in lieu of bargaining just at the moment when 

the willingness to honor past agreements may be at a low ebb. 

To the extent the United States forsakes constructive engagement of the WTO in favor of enforcement action, it will be adding 

strains that the system is ill-equipped to bear. 

The leading governments of the world seem to have recognized 

the twin perils of faltering negotiations and protectionist temptation. At the G–20 meeting in Washington in November, leaders 

warned against protectionism and called for progress in the trade 

talks. That progress never came. 

My third point: The United States’ move toward protectionism, 

even if they honor existing obligation, can have a devastating impact. You chided critics for being silent on Buy American and so 

I will follow your lead. 

It was against this backdrop that the Buy American provision of 

the recent American Recovery and Reinvestment Act was so ill-received. I understand that there are any number of arguments that 

have been made in defense of this provision. 

It addresses spending, not trade barriers. There are similar provisions in United States law. It was amended so as to honor United 

States obligations under international agreements. 

Yet the signal that it sent to the world was that the United 

States was turning toward protectionism. Even in the early days 

of a much heralded new administration, this provision drew strong 

complaints from major trading allies, such as Europe and Canada 

as you mentioned, but also Japan and Australia. 

The intent of the provision to divert demand away from foreign 

producers and protect domestic producers from competition was an 

old and familiar one. The sentiment is by no means unique to the 

United States as you note, but by succumbing to it, we seem to be 

abdicating our long-held position of global leadership in international trade. 

If I may also then take a moment. I would applaud your remarks 

about the trade deficit, and your focus on the trade deficit, the multilateral trade deficit, and in particular I would note the very interesting developments that we have had in recent months, where we 

have seen major movements in trade balances and current account 

balances around the world. 

Those movements are very, very difficult to explain if we have 

the hypothesis that it is trade policy that is the primary driver of 

trade balances. They make much more sense under the widely accepted economic approaches which link trade balances to macroeconomic factors, such as nations’ spending and investment. 

In that light, I would say that your suggestion that you mentioned about after the crisis turning toward fiscal responsibility 

and national savings is exactly on point, and I would applaud you 

for it. 

I think that this is the appropriate means to address current account deficits, which as you rightly note are unsustainable. 

And as my last point, please let me state that there is no conflict 

between playing a global leadership role on trade, and helping average Americans. Public concerns about growing inequality are perfectly legitimate. 

38

Economic studies have shown though that the primary drivers of 

inequality and wage stagnation are different returns to education 

and the changes brought by new technology. 

We do the country a disservice if we ignore the economic evidence and falsely attribute all of these ills to international trade. 

If the United States leads the way toward open markets and goods 

and services through its words and its actions, it will help restore 

confidence in the global economy, and it will help create future 

prosperity at home. Thank you again for the opportunity to speak. 

I look forward to answering questions. 

[The prepared statement of Mr. Levy follows:]

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Mr. SHERMAN. Thank you, Mr. Levy. In order to lead by example, 

when you have a $700-billion trade deficit, it is hard to know how 

many would follow you, except the country of Lenin, and with the 

exception of that one country, I don’t know of any others that want 

to follow our trade results. With that, let us go to C. Fred Bergsten. 

STATEMENT OF C. FRED BERGSTEN, PH.D., DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (FORMER 

ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS OF 

THE U.S. TREASURY) 

Mr. BERGSTEN. Let me start by congratulating you, Mr. Chairman. You are absolutely correct that at the start the administration obviously did lay out its foreign economic policy to preempt 

your hearing today, and/or to give us something to talk about, and 

I appreciate the opportunity to do that. 

I want to make one conceptual point, which is essential to this 

debate, and then talk about three operational issues surrounding 

the upcoming G–20 summit in London in early April. 

The conceptual point is to argue that this is a global economic 

crisis. Virtually every country is being affected by it, some to a 

greater or lesser degree, but everybody has been hit. 

That being the case, we have to conceptualize our response as a 

global economic strategy. So when we talk about getting others to 

join the fiscal stimulus program, or avoiding restrictions on trade, 

or adding trade finance, or helping finance developing countries 

through the IMF, that is all part of the global macroeconomic strategy. 

Only if we think of it in that context will we come to correct answers in terms of individual policy responses. It is not just the 

United States operating within its own national boundaries. We 

have to see ourselves as part of a global strategy. I want to stress 

that at the outset, because it is very important for all the specifics 

we talk about. 

Let me talk about three specifics. First, on fiscal stimulus. There 

has been a consensus—it has not been agreed to by the countries 

but has been pushed by the IMF and others—that all the major 

countries should undertake fiscal stimulus programs equal to about 

2 percent of their GDP for each of the next 2 years. 

Again, Mr. Chairman, I am with you. That is not enough. That 

goal was set several months ago, and as my colleague Dr. Johnson 

laid out, the global outlook is much worse than we thought at that 

time. 

If a 2-percent stimulus was right 3 to 6 months ago, we clearly 

need more now. My proposal is that the G–20 countries at London 

in 2 weeks commit to adopting a fiscal stimulus program equal to 

about 3 percent of each of their GDPs for each of the next 2 years. 

There obviously has to be national variance on that theme. Some 

maybe can’t afford it because of their budget situations, but on the 

whole that should be the strategy. It would require additional stimulus measures even here in the United States and in China, which 

have so far taken the lead. 

It would require lots more in Europe and some of the other key 

emerging markets, but I think without that, we are not going to 

48

get anything like the need of recovery, and we may be in Dr. Johnson’s L-shaped problem for a long time. 

Second, on trade policy, and the discussion of Buy American and 

others that you have led, and I won’t get into its detail, but I want 

to make one broad point. I think there is an important distinction 

between countries legal obligations and proper policy in the face of 

a global recession or worse. 

Lori Wallach, you, and others are correct. There is lots of scope 

for government procurement preferences within the current rules, 

but I think to increase our use of those buy national provisions is 

a policy mistake because it can lead to emulation and retaliation 

by other countries. 

I think the last thing we want to do within my concept of a global recovery strategy is to encourage others to raise barriers to 

trade, even though lots of other countries can also do it within 

their legal rights within the WTO. 

All of the big emerging markets can double their tariffs from 

where they are now within the WTO rules, and we don’t want to 

encourage that. It would dampen our exports and hurt our recovery 

strategy. 

On the trade deficit, I am also with you, but I want to make an 

important point just to make sure that you and your colleagues are 

aware of it. The United States trade deficit this year will be less 

than half what it was at its peak in 2006. 

A lot of that is the reduction in the world oil price, cutting our 

oil import costs, but a lot of it is the strong improvement in the 

United States competitive position. The exchange rate of the dollar 

came down 25 percent over the last 6 years. 

Our exports grew over the year 2008 as Mr. Royce said. It was 

the main driver of our economic growth, and you are absolutely 

right. We don’t want to let that deficit go back up, but keep in 

mind that it is now a lot lower than it was even 2 or 3 years ago. 

We certainly want to keep it there, but it is not the big boogie that 

it was in the recent past. In order to help keep it there, we do want 

to expand our export finance capability. We want to expand and 

straighten the programs of the Export-Import Bank in order to support in any way we can our export opportunity. 

Finally, on the IMF. I am delighted that Secretary Geithner 

adopted my proposal in my testimony to you of seeking expansion 

of $500 billion for IMF programs. 

I think they need to do that in his way through the new arrangements to borrow. They also need to create special drawing rights 

and they also need to increase their quotas. The point that I want 

to flag for you is, and you are probably aware of it, that you will 

face legislation on that this year. 

The Treasury has now indicated that it will be submitting legislation to the Congress to authorize increased United States participation in these various IMF programs. 

One is obviously going to have to look at the details. You will 

have to study that carefully. But I think the broad strategic point 

is that these IMF programs help deal with one-half of the world 

economy, which is now emerging and developing countries, and 

have to be viewed as part of the global recovery strategy. 

49

It is critically important for our own economy. It is critically important for this global recovery approach. The international institutions surely are not perfect. I have criticized them lots myself, but 

they do play an absolutely vital role, and I will hope when you get 

to that hearing we can talk about that in more detail. 

[The prepared statement of Mr. Bergsten follows:]

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Mr. SHERMAN. Thank you for your testimony. Without objection, 

the full opening statements of all witnesses will be put into the 

record, and the full opening statements of members who submit 

them for the record will be included in the record of the hearing. 

We will now go on to our last, but certainly not least witness, 

Peter Morici. 

STATEMENT OF PETER MORICI, PH.D., PROFESSOR OF LOGISTICS, BUSINESS AND PUBLIC POLICY, ROBERT H. SMITH 

SCHOOL OF BUSINESS, UNIVERSITY OF MARYLAND 

(FORMER DIRECTOR OF ECONOMICS AT THE U.S. INTERNATIONAL TRADE COMMISSION) 

Mr. MORICI. Well, thank you, Mr. Chairman, and to the members 

of the committee for the opportunity to be with you today. In my 

mind the global economic crisis has two origins. One is imbalances 

in production and consumption, which you heard about. 

Mr. SHERMAN. Do you want to turn on our mike? Do you see a 

green light? 

Mr. MORICI. Can I start again? 

Mr. SHERMAN. Yes. 

Mr. MORICI. Okay. I thank you for the opportunity to be with you 

today, and in any case, in my view the global economic crisis has 

two sets of origins. 

One is the imbalance in trade, or in production and consumption 

between China and other countries in Asia and western nations, 

and also the oil nations, and the banks, which have to do with 

changes that took place in our banking system over the last several 

decades, beginning with the end of Regulation Q, and ending with 

the end of Glass-Steagall, which gave rise to lots of interesting opportunities for creative financial engineers. 

In the United States the current trading situation gives rise to 

a very huge trade deficit when our economy is operating at anywhere near full employment. I don’t view the recent reduction in 

our trade deficit as particularly comforting. 

That gives rise to huge capital flows into the United States, 

which somehow or other have to be accommodated, and they have 

been accommodated by frankly less than prudent borrowing and 

lending decisions. 

They distort capital markets, and they gave rise to a consumption led expansion that caused us to increase our debt to the rest 

of the world rather dramatically. There really is no solution to this 

mess short of fixing those structural problems. 

A stimulus package is helpful, and it is nice, but we are going 

to need ever larger stimulus packages to keep our economy going, 

because if you stimulate the economy with 2, or 3, or 11 percent, 

or whatever Fred wants—I mean, you can mortgage the whole universe if you like. 

Once you stop spending the money, you will come back down, but 

while you are spending, your trade deficit will go all the way up 

again. 

Mr. SHERMAN. Would you repeat that last phrase? 

Mr. MORICI. Your trade deficit will go all the way up again. 

Mr. BERGSTEN. Not if others are spending. 

62

Mr. MORICI. I don’t agree with you, Fred. You had your turn. Let 

me have mine. [Laughter.] 

Now in order to fix the problem, we are going to have to fix our 

domestic energy policy and our trade policy. Domestic oil imports 

net and our trade with China are 90 to 95 percent of the trade deficit. So you don’t have to look far for the problem. 

We can and should dramatically reduce our imports of oil by dramatically changing the cars that we drive. We have that within our 

grasp and have chosen not to do it, and we should. 

With regard to trade, we already are in a trade war, gentlemen, 

and ladies. China’s manipulation of its currency, its export subsidiaries—you realize that it has frozen its currency more or less since 

last July in response to the recession, and it is increasing its exports subsidiaries. 

All of us that have studied economics, and those of us who have 

only been spending time with economists over recent years would 

know that an export subsidiary is as protectionist as a tariff. 

You are in the middle of a trade war, and China is undertaking 

Smoot-Hawley already, and with the advocates of no protectionism, 

please, no trade policy, please, are telling you is unilateral disarmament so the Chinese can export their recession to the rest of the 

world. 

If you stimulate the global economy, China’s exports will grow 

unless something fundamental is happening inside of China right 

now that we are not aware of. 

To resolve the problem with China, I simply think we should recognize we are not dealing with a market economy as we know it, 

and we should basically tell the Chinese you fix your trade surplus 

so we can fix our trade deficit. If you don’t fix it, we will fix it for 

you. 

The current imbalance of trade with China and on oil has created such destabilization in global financial markets as so to eradicate the benefits of free trade. If we are going to go to 10, 11, or 

12 percent unemployment, it is hard to imagine that free trade is 

doing us much good. 

However, I don’t believe we should repeal 100 years of neoclassical economics if we can get the Chinese trading reasonably, and 

allow them or to have them adjust their currency so they are not 

engaged in continuous one-way intervention in times of full employment, then I believe that a program of open trades and competition best serves us, and it would give rise to the most efficient 

allocation of resources. 

With regard to the banks, I will just leave it to you to look at 

that in my written submission. Essentially, we do need some major 

restructuring. We don’t need a return to the days of Glass-Steagall, 

but we need something, and I think I have outlined it adequately 

there, and I will quit at that point with 13 seconds remaining. 

[The prepared statement of Peter Morici follows:]

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Mr. SHERMAN. Amazing. Let us see if I can be equally brief in 

my questions. First is kind of a question for the whole panel. I 

would like you to—and it is a simple yes/no question. I will ask you 

to raise your hands. 

China has an economic stimulus package of close to $600 billion 

in progress now. Raise your hands if you think that the United 

States workers will get 1 percent of that money. 

Mr. BERGSTEN. 1 percent? 

Mr. SHERMAN. 1 percent. 

Mr. BERGSTEN. $6 billion? 

Mr. SHERMAN. $6 billion. 

Mr. BERGSTEN. Over 2 years? 

Mr. SHERMAN. Yes. Now I am not talking about United States 

firms, and I see Dr. Levy as well. So you think that—and I am not 

talking about the secondary economic impact. I am saying the government buys—well, apples and oranges. 

You could have a 100-percent Buy America stimulus, and say not 

1 penny could be spent on anything built abroad, no matter what 

it is, and the foreign countries would still benefit because my sister 

would get a job, and she would buy a flat-screen TV. 

But we are going to spend $800 billion, and some of it will go 

abroad and some of it stays here. The Chinese Government is going 

to spend $600 billion. In terms of contracts to be performed by 

American workers of that $600 billion, and not multiplier effect, 

does anybody think we are going to get 1 percent? 

Mr. BERGSTEN. I honestly don’t know because—I honestly don’t 

know and no one can, because they have not announced how they 

are going to spend the money. But I really think——

Mr. SHERMAN. Come on. China is not going to give us—if they 

give us a penny, it will be a mistake. Every billion people are entitled to one or two mistakes, but clearly the Chinese stimulus package is designed to go exclusively to Chinese workers and not to go 

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Mr. BERGSTEN. The important point, Mr. Chairman, is your 

premise. They are trying to stimulate their overall growth rate by 

2 to 4 percentage points per year. 

It is up to 5 or 6 percent, and they want to get it back to at least 

8 percent, and they might do better. Out of that increased Chinese 

growth, we will clearly get much more than $6 billion of exports. 

Mr. SHERMAN. Doctor, I am trying to compare apples to apples. 

You didn’t have the European Union Ambassador praising the 

American stimulus package on the theory that it would increase 

our growth rate, and thereby benefit the entire world. 

Instead, we had Dr. Levy particularly attacking the Buy America 

provisions. My question is to illustrate that if you compare apples 

to apples, they have got a Buy China 100 percent stimulus package. We have some Buy America provisions. Let me go to Dr. 

Morici. 

Mr. MORICI. I want to encourage you not to take Canadian Ambassadors too seriously. Having been the director of Canadian 

Studies at the University of Maine in my prior life, and before that 

the director of the Canadian-American Committee, and having 

written accounts on foreign relations book on the Canada-United 

States Free Trade Agreement, I have some credentials. 

And I would say to you that the Canadians read the same book 

of economics that the French do, and that is that the Americans 

cause all of the economic problems, and forgive me for saying this 

to you, but when the Republicans are in, then they cause nothing 

but problems. 

So right now you have only caused 80 percent of the problems 

of the world. So I really wouldn’t take that very seriously. It is 

quite disingenuous for them to say things like that, and I think you 

have raised a valid point. 

I would not have phrased the question as 1 percent. We probably 

or we might get 1 percent, but who cares. The point of the matter 

is that we are not going to get very much out of their stimulus 

package, and it is absolutely absurd in a world where the Chinese 

are so manipulating trade and causing so many disruptions in the 

world financially to not pursue a policy that requires them to give 

us some measure of reciprocity. 

Mr. SHERMAN. I am going to go on to one more question. That 

is that Warren Buffett has suggested a cap and trade system. That 

is to say if you want to import $1 dollar’s worth of goods, you need 

a voucher from somebody who has exported $1 dollar’s worth of 

goods. 

That would be a result oriented free trade system. Instead, we 

have a process oriented system, where we negotiate with other 

countries as to what they put in their written regulations on the 

basis that anybody in China feels that the sole influence on decision makers is what is in the written regulations. 

And we spend endless discussions about what is or is not in the 

written regulations and laws of a country that is not a rule of law 

society. Dr. Morici, what do you think of the idea—and I am going 

to apply it just to China—that we can reach if we choose to, and 

we want to phase this in, a balanced trade relationship, a nonmalignant trade relationship with China, with a cap and trade system? 

74

Mr. MORICI. I don’t believe that we can. I think it is ludicrous 

for the United States either to have cap and trade or a CO2 tax 

in the absence of——

Mr. SHERMAN. No, no, this is cap—I am talking cap and trade 

for exports. This has nothing to do with carbon. 

Mr. MORICI. I think it is—wait, I am sorry. When you say cap 

and trade——

Mr. SHERMAN. What I mean by cap and trade is a voucher sys- tem where if you want to import $1 million worth of tennis shoes 

from China, you have to go to somebody who exported $1 million 

worth of goods to China, get their vouchers, and then, and only 

then, you are allowed to bring in the goods. 

Mr. MORICI. I would prefer an alternative approach to China 

which is equally radical, and that is that if the Chinese don’t want 

to find a way to balance the trade on their own because of its highly managed economy, then we put a tax on their exports equal to 

the value of their currency market, intervention, divided by the 

value of their exports, and we see how that works out for a while. 

And if they want to reduce their intervention, then we will reduce the tax. 

Mr. SHERMAN. I think your approach is slightly less radical, but 

perhaps better than Warren Buffett’s. It is interesting to see at 

least two radical ideas out there. 

Mr. MORICI. Well, the thing about it is that if you think about 

it, if we were to do that—you know, you have stimulus, and you 

get the economy going, and then you spend 11 percent of GDP, or 

whatever it takes, to get yourself there. 

And your deficit goes up and the Chinese are intervening, then 

by us taxing that intervention the benefit of higher prices on Chinese exports to the United States, or our imports would go to the 

United States Treasury. 

Whereas, if they stopped their intervention, then the benefits of 

a higher price for Chinese exports would go to their businesses. So 

they would have a strong incentive to capture that rent. 

So my feeling is while that might violate half-a-dozen laws—and 

I don’t know that it would, but people argue that it does, and have 

called me a protectionist for recommending that, I think it might 

help China reconsider its regime and move in a direction that was 

more oriented toward free trade. 

Mr. SHERMAN. I have gone a little bit over, but I do want to hear 

from Ms. Wallach. 

Ms. WALLACH. I think that one benefit of that Warren Buffett 

proposal, which would create a secondary market for those permits, 

is it lets the market decide, versus picking out winners and losers, 

and what is worth importing and what value in that secondary 

market is worth obtaining that certificate. 

And the way he does it is to phase it in over 5–10 years so that 

it is not an abrupt disaster in supply chains, but rather that it 

forces a balance, and also creates incentives for exporting, while simultaneously creating a balance. 

Mr. SHERMAN. I think my time has expired. We will go on to our 

ranking member, Mr. Royce. It is my intention to do a second 

round, and I know that a number of the other witnesses are anxious to make theirs. 

75

Mr. ROYCE. Thank you, Mr. Chairman. Ms. Wallach, I would ask 

you, you strongly reject the ‘‘CAFTA model.’’ Some might say that 

it has shown itself to be a pretty good deal for the American worker 

in the sense that since its implementation in 2005, I think then the 

United States trade deficit, where the region was over 1.2 billion. 

Since its implementation the United States has swung to a surplus, and it has grown every year, and I would just add that an 

analysis by the USITC says passing the three pending FTAs would 

spur at least 12 billion in new exports. 

Let me ask you another question here in concert with that. You 

severely criticized the World Bank and the IMF, which have distributed trillions of dollars made over the years. 

If these institutions can’t be reformed as you recommended 

should they be closed? And because if your answer to that is yes, 

then you might have an ally here, in terms of what I have seen 

in a lot of that spending. 

I assume that you oppose the plan announced yesterday by the Obama administration to funnel some $.5 trillion through the IMF, 

and the United States contribution to that would be another $100 

billion. Let me ask you about that proposal. 

Ms. WALLACH. I will try to answer all three questions. On the 

CAFTA issue, the matter that I find most concerning is when you 

look across all of our FTAs and look at export growth—and the balance I will get to, but the export growth issue, if you look across 

all of our FTAs, which are premised largely on the same model of 

NAFTA and CAFTA, our export growth with our FTA partners is 

6 percent. 

But export growth with our non-FTA trade partners is 14.4 percent. There is something deeply wrong——

Mr. ROYCE. That is China, I guess, principally. 

Ms. WALLACH. Not exclusively. 

Mr. ROYCE. Our non-FTA partner. 

Ms. WALLACH. To everyone else. 

Mr. ROYCE. Yes, and that is the weighted balance. 

Ms. WALLACH. It is all 153 WTO partners. 

Mr. ROYCE. Right. 

Ms. WALLACH. Minus the 14 FTA countries. 

Mr. ROYCE. Right, the lion’s share of it though, in terms of the 

weight of it. 

Ms. WALLACH. No, export wise actually, we have larger exports 

obviously to other parts of the world. So if you do a weighted share, 

it is our exports to countries such as the European Union countries, et cetera. 

Our export growth is doing better to countries we haven’t made 

special FTA arrangements with, than with the countries with 

whom we have, which is a serious indictment of the underlying 

model. 

Now the fact that we have gone from a $1.2-billion deficit with 

all the CAFTA countries to a $3-billion surplus is more or less a 

rounding area in the trade deficit that we have. 

Though it is a trend in the right direction, our export growth to 

those countries still lags behind the countries with whom we don’t 

have FTAs. So it will be interesting to see over time what happens 

with the CAFTA balances, but the trend of export growth, and then 

76

when you look at the larger FTAs, such as NAFTA, or if you look 

at our trade balancing with Israel, we have enormous deficits with 

all of our large FTA trade partners. 

So that overall the entire body of the 14 FTAs, we have about 

a $60-billion deficit net with the whole package of them, not exactly in the right direction. 

Mr. ROYCE. And let us go to the issue of the World Bank and 

IMF, and your thoughts on that that I asked. 

Ms. WALLACH. My expertise is in the structures and operations 

of the WTO from the scholars who I have read regarding the IMF 

and World Bank reform. My support is with various scholars who 

have noted that absent major reforms those organizations should 

be shut down. 

But I think where we might differ is that other institutions to 

play similar functions in global governance are needed, and that 

the rules of the current regime of IMF and World Bank are so off 

that that is the issue, and not the existence of global economic governance. 

Mr. SHERMAN. Let me ask you. You reject trade agreements with 

allied countries of Colombia, South Korea. How will this impact 

other areas in which we might want international cooperation 

should we reject——

Ms. WALLACH. Well, I think there are a lot of different ways to 

cooperate with countries. For instance, I am a supporter of the Indian Trade Preference Drug Eradication Act. 

So to the extent that we want to actually have relationships with 

some of the countries that we are having troubled relationships 

with in the region, including Bolivia and Ecuador, I think that is 

an interesting piece of leverage and partnership to offer them. 

The free trade agreements were set up as sort of foreign investor 

rights that allow the right of new privileges and rights by companies operating in those countries, so that the model of those agreements is extremely problematic and needs to be altered. 

It is the same model question that I was discussing vis-a-vis the 

WTO. 

Mr. ROYCE. Colombians though want the agreement, and let me 

ask you can trade have national security implications? You know, 

for example, further opening United States textile markets with respect to Pakistan to fight an economic collapse in that country, 

which is rather critical. 

I mean, there are ties between trade liberalization where it occurs, and the economic growth that is a consequence of that in stabilizing some of these countries. Colombia comes to mind. 

Ms. WALLACH. I think trade agreements can have economic security implications, and so I was extremely worried by the report by 

the Department of Agriculture of Colombia that described the Colombia free trade agreement agriculture provision as destablizing 

the rural society by displacing so many farmers, and thus resulting 

in three options, and only three options. 

The theme, growth of paramilitary, more undocumented immigration to the United States. You will note that after NAFTA immigration from Mexico has increased 60 percent because of this displacement. 

77

And, three, more cultivation of illegal crops, i.e., narcotics. So, 

yes, having a free trade agreement like the one posed with Colombia can be extremely hazardous to our national security. 

Mr. ROYCE. And trade liberalization with Pakistan, which is 

rather critical in terms of some of our concerns on the committee 

right now, allowing textile imports, and creating more employment, 

let us say, as a result of the synergy between trade between the 

United States and Pakistan? 

Ms. WALLACH. I think the model there, for instance, the Cambodia-United States Textile Agreement, is a very promising one. 

That was an agreement that set out various democratic governance 

requirements, and helped set up labor unions, and had a role for 

the International Labor Organization to make sure that the benefits actually went broadly to the people, which is the goal in this 

case, to bill people who have some wealth and security in a democratic market system. 

And so that kind of a model for other countries, including Pakistan, I think is a promising one. 

Mr. ROYCE. Let me ask Dr. Morici a question. You testified that 

96 percent of the trade deficit is oil imports and imbalanced trade 

with China, which you find very problematic, as we do. 

Does this observation suggest that you find our trading relationship with other countries than China and oil producers generally 

satisfactory? 

Mr. MORICI. That is the sort of thing that you view on a continuum from one to——

Mr. ROYCE. Well, yes, but you said 96 percent. 

Mr. MORICI. No, no, I understand, but whether our trading relationship with Canada is satisfactory, or with Europe is satisfactory, 

or with Uruguay, or Panama, or whatever, just because we don’t 

have a trade surplus—well, we have trade surpluses and deficits 

around the world. 

That doesn’t mean that our trading relationships are satisfactory 

or unsatisfactory. Our trade problem with oil is largely something 

we have done to ourselves. We have pursued a flawed energy policy. 

With regard to China, that is something that China has done to 

us. We have opened our markets to them, and they have not done 

the same in reverse, and we have this problem on our hands. 

With regard to other countries in the world, I think that by and 

large, we can work those problems through the normal processes 

that we have. Not all, but many. I don’t know that we can work 

them through, for example, with India through normal processes, 

but I think we can with the Canadians as much as they blame 

even their cold weather on us. I think that we can always work 

with——

Mr. SHERMAN. I think the time of the gentleman has expired. We 

will move on to our vice chairman, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. I would like for us to 

focus for a moment if we may on this issue of Buy American, and 

it is especially timely because next month the President will attend 

a G–20 summit. 

It will be his first global opportunity on the world stage to set 

the vision for the United States position as well, and there has 

78

been some thought that the Buy America and Buy American provisions fall out of the normal scope of our international trade, and 

there has been some thoughts that it could trigger a trade war. 

And I would like to get each of your thoughts on that right quick, 

please. Yes, Mr. Bergsten. 

Mr. BERGSTEN. There is a distinction between our legal obligations and what I would think is correct policy. In terms of legal obligations, there is a government procurement agreement as part of 

the World Trade Organization. 

That is not adhered to by all members of the World Trade Organization. Only about 40 member countries have participated. So we 

as a signatory, and in fact the proponent of it, have obligations in 

our Government procurement policies only toward other countries 

that are a part of that agreement. 

China is not part of that agreement. India is not. We have no 

legal obligation under our Government procurement rules to a 

China, India, or other countries that are not members of that 

agreement. I repeat, no obligation. 

Likewise, and that is what the chairman said, they have no legal 

obligations to us. China does not have to give us a penny of procurement under its government procurement rules because it is not 

a signatory to that agreement. 

The only add-on to what I just said is where we have particular 

trade agreements with countries, like NAFTA, where then our obligations, and theirs to us, go beyond the general procurement agreements in the WTO. 

So that is the legality of it. We can do anything that we want 

to China and India. We are constrained to some extent with Canada, Mexico, and other trade agreement partners. 

But even where there are those agreements, there are lots of exceptions. Somebody mentioned earlier that China has exempted all 

sorts of things, and Europe has exempted. The United States has 

exempted lots of sectors of our own Government, including lots of 

State and local government spending, that are not subject to those 

legal requirements. 

So there are lots of areas where we can prefer American producers. That is the legality of it. If you want to do that, you can 

do it. My argument, if you just add one sentence, is that for us to 

increase our buy national preferences at this point in time would 

be a policy mistake, because it would for sure encourage others to 

do the same thing. 

Not only incidentally under their government procurement apples to apples, but in their trade policies more broadly, where there 

is lots of pressure to move that direction, and I think it would be 

a mistake to encourage global movement in that direction at this 

time. 

But under the law of the land and the law of the universe, there 

is lots you can do. 

Mr. SCOTT. Okay. Let me just follow up that with do you feel 

that Congress should require that no additional procurement commitments be offered in future trade negotiations? 

Mr. BERGSTEN. No, our interests are in maximizing the commitments we can get from other countries in those kinds of negotiations. We should do it on a fully reciprocal basis. We should offer 

79

to open up additional parts of United States procurement only 

where we can get them to open up under theirs. 

But if we could get back to what the chairman said, if we could get China to commit to open to us under its $600-billion procurement program, I assure you that we would gain lots more that we 

would lose to them by opening up to them. 

Mr. SCOTT. Yes, Mr. Morici. 

Mr. MORICI. I am sorry, I didn’t want to interrupt your train of 

thought at this time. 

Mr. SCOTT. You may. 

Mr. SHERMAN. Microphone, please. 

Mr. MORICI. All right. The procurement codes list those entities 

for which there will be national treatment, and not the exceptions, 

would be correct; and second, is given the current tenor of international trade, I don’t see a particular problem with the Buy America provisions that were included in the stimulus package. 

If we expect to ever obtain reciprocity from the bad actors in the 

system, unilateral free trade has been shown by practical experience doesn’t work. So my feeling is that I guess while I support free 

trade as much as Fred does, in the present context of policy, we 

have to deal with the world as we find it, and not what we think 

it should be on our blackboards. 

Mr. BERGSTEN. Just to be clear, a factual point. We now give Buy 

American preferences under all of our Government procurement 

programs. There is nothing new. And as Peter said, we commit 

under the WTO agreement only to components of government procurement that we explicitly specify. 

We have exempted mass transit and a lot of other things. So 

there is nothing new about this. The policy question is whether you 

increase protection in the teeth of a global recession headed toward 

a depression, which can encourage others to go down the route and 

spiral the whole thing downward. 

Mr. MORICI. I take exception. It is not increasing protection. It 

is whether you liberalize further without an adequate response 

from your trading partners. I am perfectly happy to increase our 

commitments under the procurement code as soon as China signs 

up and actually lives with those commitments. 

But I am not willing to give them access to our procurement as 

long as they behave as they do. Fred, you are not talking about increasing protection. You are talking about liberalizing further. 

We are already in a trade war. Do you now deny that China’s 

mercantilism policies are a source of disruption in the global trading system? And one of the reasons that we are seeing the reactions that we are having——

Mr. BERGSTEN. Mr. Chairman——

Mr. SHERMAN. Usually the question and answer—you know, you 

have got to work hard to get elected to Congress to be allowed to 

ask questions to panelists here. 

Mr. MORICI. But could I say one thing here? 

Mr. SHERMAN. But I will let the gentleman from Georgia allocate 

as he will the next 40 seconds, and then we will move on to the 

next gentleman. 

Mr. SCOTT. All right. I will give 20 to you and 20 to you. [Laughter.] 

80

Mr. BERGSTEN. I was one of the first people in 2003 to call attention to China’s currency manipulation as the substantial undervaluation of its currency, and the need to react strongly to it, and 

I continue to take that view. I am delighted that Secretary 

Geithner did so in his confirmation hearing. 

Mr. SCOTT. All right. Ms. Wallach. 

Ms. WALLACH. Congressman, in regards to your question about 

the procurement provisions being in future agreements, and also 

relating back to what you said about isolationism and the United 

States relationship with countries. Most of the world’s governments 

do not consider procurement to be an appropriate topic in a trade 

agreement. 

So originally the Doha round had procurement in it, and the developing countries—but also some of the developed countries 

walked away from that provision, and that was one of the main 

causes of the breakup of the entire round in Cancun. It got chucked 

off the wagon. It is so objectionable. 

It is also procurement being in the free trade agreement is the 

reason that South Africa and Malaysia explicitly walked away from 

our free trade negotiations. We said basically it is either the 

NAFTA–CAFTA model or nothing, and they said if it has the procurement rules, forget it, because those governments see procurement as a matter of government appropriations policy, a government stimulus policy totally separate from trade. 

Mr. SCOTT. Thank you very much. 

Mr. SHERMAN. Thank you. We will now move on to the gentleman from Virginia, and I promise you, Dr. Johnson, if my colleagues don’t ask you questions, we haven’t forgotten that you are 

here. If they don’t, I will. 

Mr. CONNOLLY. Well, you took the words right out of my mouth, 

Mr. Chairman. I have a limited amount of time, so I am going to 

ask a question and ask you each to try to be concise, and I am putting two questions to the entire panel. 

The first one is as Mr. Scott indicated, this is in a sense President Obama’s first stepping out on to the international stage in a 

major way in attending the G–20 meeting. What is a success for 

him? What do we come out of G–20 with? Dr. Johnson. 

Mr. JOHNSON. I think he needs, and I think he is aiming to, reestablish American leadership in terms of fighting the recession. 

Immediate policy responses, and I think Secretary Geithner wants 

to pursue a fiscal stimulus. 

I would suggest that also be framed in terms of the Europeans 

putting together a stabilization fund for their weaker members. 

That is really very important. And as a backup to that, I think Mr. 

Geithner is outlining $500 billion to the IMF. 

That is a huge amount of money if you think the IMF is only 

going to lend to emerging markets. If you think the IMF is going 

to have to step in to lend to weaker European countries, because 

the Europeans are going to drop the ball, then $500 billion makes 

a lot of sense. 

So I think that both of these measures, particularly the $500 billion, and certainly the administration is taking this very seriously, 

and they are going to, I think, shake up the Europeans, and tell 

them that they have to really act to deal with their own problems. 

81

And if they don’t, then it will fall to the IMF, and that is not a 

good outcome for anyone. I don’t advise any country ever go to the 

IMF if they have an option. 

Mr. CONNOLLY. Ms. Wallach, what is a success for the United 

States coming out of the G–20 meeting? 

Ms. WALLACH. To have a commitment amongst the countries to 

review and repair the existing WTO and other international economic governance rules so that we, for instance, have the policy 

space to be able to re-regulate financial services. 

That the WTO is not promoting further financial service deregulation given there are 105 countries now signed up to an agreement 

that requires that, and then finally to figure out what structural 

changes are needed in an institution such as the IMF and the 

World Bank to allow for those policy flexibilities. 

That we are able to re-establish domestically, but also internationally, global governance rules that actually promote productive investment and stability, as compared to promote this casino 

economy that we are living with. 

Mr. CONNOLLY. Dr. Levy. 

Mr. LEVY. Congressman, I think a success would be for the 

United States to persuade the rest of the world that we are committed to taking our traditional leadership role, and that we are 

committed to fixing our financial sector, and working with others 

to do the same, and to preserving open markets. 

If I may beg your indulgence for one point, and this is on the repeated attacks on the financial services agreement. Let me just 

note that the WTO financial services agreement has an unusually 

strong carve-out for prudential regulation. 

Now this can be done for all manner of excuses, including to ensure the integrity and stability of the financial system, regardless 

of any other provisions of the GATS, and that is the General Agreement on Trade and Services, and I am citing paragraph two there. 

And so I know that time is short, and I won’t beg further, but 

I wanted to put that on the record. 

Mr. CONNOLLY. Thank you. Dr. Bergsten. 

Mr. BERGSTEN. It is a pleasure to see you again here today, and 

in your previous incarnations, as well as your——

Mr. CONNOLLY. And, Fred, it is good to see you again, because 

if you remember, over 30 years ago, I was on the other side of the 

capital, and it was great to see you again here today. 

Mr. BERGSTEN. Absolutely. I think the big win for President 

Obama will be if he can get the rest of the G–20 to get with his 

program, which is stimulating an economic recovery and creating 

jobs—getting that done in a way that will inspire confidence in 

markets around the world rather than undermine it. 

It is unfortunate that central banks are independent and are not 

participating in this meeting. So you can’t really do much in terms 

of monetary policy or increasing their support for financial restructuring in this context. 

That being the case, fiscal stimulus is it. I suggest in my statement upping the ante, seeking countries to commit to stand by a 

3-percent of their respective GDPs each year. 

That would require additional stimulus here. I think we are 

going to need it. I think if we can get the rest of the world to join, 

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we could get a compelling and confidence-inspiring global recovery 

strategy, without which this situation may continue to spiral. 

Mr. CONNOLLY. Dr. Morici. 

Mr. MORICI. Well, I am hoping that we can get——

Mr. CONNOLLY. Can you press your button? 

Mr. MORICI. I did. I am sorry, there we go. I am hoping that we 

get something on stimulus. I think that Fred is correct that we 

need more of that. We need the Europeans to pull along, and I 

think we can get that. 

However, that is really a big Band-Aid. I would like to see recognition of the fact that the imbalances in production and consumption between the Asian nations and the oil nations, versus the 

west, are a source of instability and must be corrected if we are 

going to permanently pull out. 

And I would like to see more reasonable expectations about the 

notion of global financial regulation. I think those solutions still lie 

predominantly in domestic solutions with cooperation. 

And the Europeans continue to obfuscate issues in that matter. 

We are not going to regulate our banks through some sort of international entity. 

Mr. CONNOLLY. Thank you. Mr. Chairman, my time is up, but I 

just want to note that what struck me about the answers here is 

that there is a real opportunity for the United States at the G–20 

to reinstill some confidence in the global system, and I hope that 

we will take advantage of it. Thank you, Mr. Chairman. 

Mr. SHERMAN. I thank you, and I thank you for your excellent 

questions, and for sticking to the time limit as a few of us have not. 

And I now recognize the gentlewoman from California. 

Ms. WATSON. Thank you so much, Mr. Chairman, and this is a 

question for all of you. While the first world countries have been 

hit hard by the crises, poor countries and poor people are suffering 

as much or more. 

And according to the IMF’s most recent forecast, low income 

country growth in 2009 is projected at just over 4 percent, more 

than 2 percentage points lower than expected a year ago, with high 

risk that the situation could get worse. 

In per capita terms, this means that many of the world’s poorest 

countries will at best see income stagnate this year, and possibly 

even contract, and this is of critical importance to us here in America. 

The National Intelligence Director, Admiral Blair, has told Congress that the primary near-term security concern of the United 

States is the global economic crisis, and its geopolitical implications. 

Yet, we are stuck confronting this 21st century poverty challenge 

with a foreign assistance apparatus that was designed for the Cold 

War. So to all of you, what do you think are some of the key challenges to the United States Government being able to address how 

this crisis impacts the poorest countries, and people around the 

world? And let us start over with Dr. Johnson. 

Mr. JOHNSON. Thank you, Ms. Watson. I think you are putting 

your finger on an incredibly important and difficult issue. I absolutely agree that this is going to impact the poorest people in a terVerDate 0ct 09 2002 16:01 Jul 24, 2009 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 F:\WORK\TNT\031209\48001.000 HFA PsN: SHIRL
83

rible way, and I think you are right that our mechanisms for dealing with this are outmoded and probably far too small in scale. 

But first and foremost, I think we have to get the global economy 

back on some reasonable trajectory, and so that is why that should 

be the emphasis, the right emphasis of the G–20 meeting, and I 

think, and I believe that President Obama and Secretary Geithner 

are going to focus on that, and that has big effects everywhere else. 

In terms of additional assistance for the poorest people, as you 

know that is a complicated question. It is not an easy thing to provide additional financing in a way that is effective, and that it really reaches poor people. Too much of it can get siphoned off one way 

or another. 

But I think that is something that is worth a considerable 

amount of attention, and hopefully further resources from rich 

countries to the extent that it is possible in this difficult environment, because it will come back to haunt us one way or another 

if we neglect these people. 

Ms. WATSON. Ms. Wallach. 

Ms. WALLACH. Thank you for your question. The crisis is exacerbating what are already very troubling trends, in that the countries 

in the developing world who most closely followed the package of 

policies of the IMF World Bank and World Trade Organization 

have actually seen their growth rates declining. 

And the countries who haven’t, like for instance, China and Vietnam, have seen their growth rates expand much more quickly. So 

in a variety of regions, you have seen since the adoption of the current global economic governance regime drops in per capita income 

growth in sub-Saharan in Africa, also with other issues, such as 

the AIDS epidemic. 

You have actually seen literally net declines, versus in Latin 

America, slowdowns in growth rates relative to the period before 

these policies were adopted. So now with the crisis exacerbating 

that, the policy states having been removed for those countries to 

respond, part of the overall remedy is to fix the underlying rules. 

The majority of the developing countries were against the Doha 

round agenda. It was cynically dubbed the development agenda by 

then USTR Wallach. Actually, the developing countries had a different agenda. It was called the Implementation Agenda, and it 

was a review and repair agenda for the existing WTO rules. 

And that is where I am arguing is also part of the response that 

is needed and appropriate in this crisis, and I apologize for having 

no expertise in foreign aid issues. 

Ms. WATSON. Dr. Levy. 

Mr. LEVY. Thank you, Congresswoman. I would agree with Dr. 

Johnson that first and foremost it is going to be very difficult for 

these countries to prosper in a world economy that is having the 

kind of difficulties that it is. So there are those measures. 

I think we can do far better than we do with foreign assistance. 

This is an issue that I spent 11⁄2 years working on when I was at 

the State Department. I think it is important to work through multilateral organizations, despite some of their failings. 

But I think we can also be much more focused and effective in 

our foreign assistance policy by trying to set goals and be very 

84

clear in what we are doing, and try to get better management implementation from the executive branch. 

Mr. BERGSTEN. Let me give you a slightly dissonant answer. You 

mentioned the developing countries are looking at 4 percent growth 

this year. In today’s global economy, 4 percent growth looks very 

good. There is no industrial country, and I repeat, no industrial 

country that is expecting positive growth of any number this year. 

We have done an analysis in my institute that looks at each of 

the G–20 countries to see what is their relative decline, and it may 

surprise you that the smallest relative declines by far are in the 

developing countries in the G–20: Brazil, China, and India. 

They have all suffered substantial reductions in growth in absolute terms, but relative to where they started, it is not so bad. This 

is important for your question, because remember the largest cohorts of poor people in the world are still in China, India, Brazil, 

and Mexico—big developing countries that we think of as advancing, and indeed they are. 

They are in the G–20 but still house by far the biggest cohorts 

of poor people, and since they are doing less badly, their situation 

relatively speaking is not so dire. 

Having said that, I fully agree with my colleague that poor people in those countries are going to be hurt badly by the global 

downturn. The answer is to get global economic growth back up 

and keep global trade open, as a couple of your colleagues on the 

panel have said, because it is still true that no country has 

achieved sustained economic development without integrating into 

the world economy. 

Ms. WATSON. Thank you. Dr. Morici. 

Mr. MORICI. I would like to build on and align myself with what 

Fred has just said. Most of the poor people are in countries that 

are doing relatively well, and they don’t require any particular special assistance from us. 

That said, I think it is important for us to remember that many 

of the poorest people are in very small countries, who are really 

swept up by the events of the heavyweights, and I think we need 

to be cautious about how we deal with those very small countries, 

who are caught in the great sea of combat between the United 

States and China, and the intellectual combat between the United 

States and the EU, and all the rest of that stuff. 

So I do believe that if we could find some way to assist them that 

would be appropriate, but I am skeptical of how you get that done 

without just getting the engine going again. 

Ms. WATSON. Thank you. 

Mr. SHERMAN. Thank you. The time of the gentlelady from California has expired, and we will now recognize the gentlelady from 

Texas. 

Ms. JACKSON LEE. Mr. Chairman, thank you very much for this 

hearing, and particularly I am delighted to be on a committee that 

gets it, terrorism, nonproliferation, and trade, and I think there 

was some mindset that understood that these are all interrelated. 

It seems that I am following this track today. I started out with 

a border security hearing on the crisis of drug cartels at the southern border, and the enormity, and the fearlessness of what I think 

really has slipped the minds of Members of Congress. 

85

And obviously we are just beginning in the new leadership, but 

it is a wakeup call, and the reason why I mention that, of course, 

is that we are in the question of trade, but also the falling economy 

lends itself to the crisis in the social fabric. 

And so my questions will be along those lines, and I want to go 

to Dr. Bergsten and Dr. Morici. Those huge numbers of impoverished, and I have just come back from Pakistan and India, are 

there. 

I think the question that we have to ask is are they doing anything about it, even though they have certainly a much sizeable 

poverty in India, even though they may have the resources. 

So I want us to continue to believe that it is important to fight 

against world poverty, and to even in this economic crisis be part 

of the warriors to extinguish some of the huge depths of poverty 

that really fuel terrorism and dissent. So that should not be off the 

table for the G–20. 

But what I would like to ask both is as we move to the G–20, 

I think Dr. Morici has mentioned, and forgive me for not hearing 

all of your testimony, but the awkwardness of our relationship with 

China, I would like you to comment on that further. 

But, Dr. Bergsten, I would like you to tell us how pushy our 

President should be at the G–20. My understanding is that we are 

making our own sacrifices and our heads are getting battered on 

the stimulus. 

All the talk shows that build up their credits on bashing Washington is all about how much money we are wasting. Maybe the G–

20 is listening to Rush Limbaugh, and has indicated that they don’t 

want us to go any stimulus. So where does that put us? 

So if I could ask the question to Dr. Bergsten, and I am glad that 

Ms. Wallach is here. I just want her to be satisfied that what her 

organization has spoken about maybe years ago, deregulation is 

now falling on top of our heads, and we are smothered up, and she 

might just want to comment on how we get out of that, if you will, 

debris of deregulation. So let me go to Dr. Bergsten. 

Mr. BERGSTEN. President Obama should be very aggressive at 

the London summit. I think he comes with a strong hand, because 

you and the Congress have voted for a major stimulus program. 

I hope that nobody is listening to Rush Limbaugh’s appraisal of 

it. There sure are flaws. You all know it. But it has put the United 

States out front in leading the concerted policy effort to get the 

world economy back on track. 

We may need another stimulus. I think we probably will have to 

do more, but right now we are out front. Now it may shock you 

when I tell you the other country that I think is out front and that 

we should join arms with in leading the effort at London is China, 

because China has also taken a huge stimulus program. 

The chairman and I had a little debate about how you count it, 

in terms of United States effects. I think it is going to help the 

United States, as well as help the world economy. I think the 

United States and China on that front, the fiscal stimulus, the 

macroeconomic impulse, lead the league. 

And President Obama should certainly be aggressive in pushing 

particularly the Europeans, but also some of the other emerging 

markets who have not yet gotten with the program. The Germans 

86

and the French, for all their talk, have done very little. They in 

fact have tried to deflect the agenda. They say we should worry 

about financial regulation. It is very important, but at a time when 

we are trying to get the banks to lend more money and unfreeze 

the financial system, it is unhelpful, to put it mildly, to talk about 

increased financial regulation. 

It confuses the public and the banks, and it is a bad idea. The 

focus has to be on avoiding a global depression, and on that the 

President needs to be quite aggressive and is in a strong position 

to assert leadership. 

Ms. JACKSON LEE. Dr. Morici, Dr. Bergsten has just put my hair 

on fire. He has some good points, but he has talked about 

China——

Mr. SHERMAN. If he put your hair on fire, you may end up looking like me. [Laughter.] 

Ms. JACKSON LEE. Chairman, I am going to ask for your indulgence. I would ask for unanimous consent for a minute so that Ms. 

Wallach could finish her answer, and Dr. Morici, on his response 

on the China issue. 

But I would also say that if our President is not aggressive, it 

impacts trade. Americans are not interested in a sort of trading situation if they can’t get their pocketbooks back together. Dr. Morici, 

what about China and what about some of the ills and problems 

that they have? 

Mr. MORICI. Well, I think there is a tendency with regard to 

China for policymakers to view it as a tactical problem. You know, 

if we get them to reform their financial markets, then everything 

will be fine. 

In reality, this is an issue of systemic competition. We offer the 

world the notion that democracy and markets best serve the 

progress of mankind, and best can help people fulfill their dreams. 

The Chinese offer the world a very different model, and are pursuing tactics which abuse the international trading system and 

their opportunities within it to make us look foolish. 

It is very difficult for us to tell the world that they should adopt 

our prescriptions. Rather, they offer people order and stability with 

an autocratic government. So I think we need to start to see China 

for what it is, and to start to craft our trade policy in an appropriate way, rather than one that views them with as sympathetic 

an eye as we have. 

That doesn’t mean at the G–20 that we can’t pursue what Fred 

just described. We want to get the Europeans to stimulate their 

economies, but I think at some point, we are going to have to reckon with what China really means for the west, and I don’t believe 

that this administration or the last administration has been ready 

for that question, except when they are trying to get confirmed in 

the Senate, or running for President in Ohio. 

Once those goals are accomplished, they seem to fall back. Vice 

President Biden quickly said right after Mr. Geithner was confirmed, that we need to determine whether China is manipulating 

its currency. 

I don’t want to say in this chamber what I thought of that statement, but I will say it on the Lou Dobbs Show tonight if I am given 

the opportunity. If Lou——

87

Ms. JACKSON LEE. But you will say that we are all interested in 

working through your issues, and we are, too, concerned. 

Mr. SHERMAN. The time of the gentlelady from Texas has expired. 

Ms. JACKSON LEE. Does Ms. Wallach have a simple answer? 

Mr. SHERMAN. If she has a simple answer, out of respect for her, 

we will give her some time. 

Ms. JACKSON LEE. And, Mr. Chairman, thank you, and I will 

yield back as Ms. Wallach answers the questions. Thank you, witnesses, very much for your answers. 

Ms. WALLACH. Thank you, Congresswoman. The short term answer is regarding the G–20 communique ́ next month, one, it should 

not include a commitment to push for the completion of the current 

WTO Doha round agenda, because that explicitly contains as one 

of its three main pillars financial service deregulation. 

Number two, it should contain a commitment for the G–20 countries to review the existing constraints imposed worldwide through 

the WTO on an array of different regulatory and non-trade policies 

that undermine the policy space that Congress and other legislatures, and different world configurations need to create the policies 

of global governance to restabilize our economy. 

And given the WTO is strongly enforced, and given that there 

have been 150 cases, in 90 percent of the cases the domestic laws 

have been ruled against, and every single one has been changed 

but for one, where Europe is paying $100 million in sanctions a 

year. We need to strongly enforce global governance of a balanced 

sort, and not the current system. Thank you. 

Ms. JACKSON LEE. Thank you. 

Mr. SHERMAN. At this point, I will start the second round. I will 

have to leave for a few minutes after my questioning, and our vice 

chair will take over. I will try to return before the end of the hearing. 

Dr. Bergsten, you are correct to point out that even if not one 

penny of China’s stimulus money goes to a United States contractor, that Americans will benefit to some degree by the general 

acceleration of the Chinese economy. 

Just as I would point out that if we had provided that not one 

penny of our stimulus package had gone to China, that they would 

get an enormous benefit because the goal here is to get people back 

in the malls, and whose products are sold in those malls. 

The fact though is that China will get both the direct and the 

indirect benefit of our stimulus package because a lot of the money 

that we spend on manufactured goods as part of that will come 

from China. 

I think that we have made the case that most of you agree with 

that we need more stimulus worldwide, and the President goes to 

London leading by example, leading by force of personality, leading 

with great oratorical skill. 

What can he do other than encourage? What can he do in terms 

of bargaining, in terms of demanding, in terms of saying we are not 

going to do this unless you do that, top encourage other countries 

to have a stimulus package hopefully above, but at least at a 2-percent level? Dr. Johnson, our forgotten, but very eloquent, witness. 

88

Mr. JOHNSON. This is a problem, the fiscal stimulus. It encourages free riding. If you do a bigger fiscal stimulus, maybe I will just 

sit back and you build the roads, and I will sell you the BMWs, 

and the construction equipment to build those roads. 

Honestly, this is the problem. The main answer, in terms of global policy coordination, is to push harder with easy monetary policy, 

which of course is limited in terms of cutting interest rates. 

But moving toward quantitative easing and expressing support 

for the kinds of policies now being used by the Bank of England, 

for example, which is trying to expand the money supply in a way 

that Mr. Bernanke has talked about in the past, but hasn’t actually 

gotten to. 

That will focus the Europeans attention, because if they have the 

prospect before them, with the dollar potentially depreciating, and 

therefore you can’t sell BMWs to the United States because the 

Euro is appreciating, they will be much more likely to take the 

cause of the fiscal stimulus seriously. 

Mr. SHERMAN. So we should seek stimulus measures that coincidentally bring the dollar down in value, versus other currencies. I 

know that is an anathema to many Americans, of course. 

Can you name a single country in the world that doesn’t—a 

major industrialized country in the world that doesn’t try often to 

have a lower currency so that it can compete? 

I mean, we live in this world where testosterone and the strong 

dollar are our pride, and I know that we run up the biggest trade 

deficit. What do other countries think of having a strong versus 

weak currency? 

Mr. JOHNSON. Well, every country has the same sort of testosterone issues that you are discussing. No one else goes quite as far 

as the United States, and it is interesting right now in Europe, in 

the Euro zone, where the interest rate and the monetary policies 

are controlled by the European Central Bank, they are rather turning toward a tighter monetary policy than many people would suggest is appropriate given the economic circumstances. 

And that would tend to push the Euro toward appreciating. So 

you are right. Most other industrial countries, many industrial 

countries, for example, the United Kingdom, and for example, the 

Canadians, for example, the Australians, have a tendency to depreciate——

Mr. SHERMAN. And the Asian giants, Japan and China, I think 

work very explicitly to lower their currencies don’t they? 

Mr. JOHNSON. Well, as has already been discussed, China manages its exchange rate and that is a particular issue, and that absolutely needs to be addressed. I couldn’t agree more with that topic. 

Japan’s exchange rate obviously has been undervalued for a considerable period of time, and there it is a little bit more complex 

with the aftermath of their—the fact that they had this massive 

bubble burst 20 years ago, and they never properly dealt with it, 

has caused all kinds of other pathologies. 

Mr. SHERMAN. One last question, and I don’t know who will indicate an interest to answer it. In October 2008, we helped the Swiss 

with a relatively routine currency swap. Now we find out that the 

Swiss are hiding 50,000 American tax evaders. 

89

What can we do to make the Swiss uncomfortable enough that 

they tell us who these 50,000 tax evaders are? Does anybody have 

a strategy? Dr. Bergsten. 

Mr. BERGSTEN. What makes the Swiss uncomfortable would be 

the threat of abrogating the bilateral tax treaty between the United 

States and Switzerland. 

Mr. SHERMAN. So that would be interesting, having a policy toward our tax treaties that was relevant to collecting tax revenue. 

Good idea. Finally, Ms. Wallach, we have had this idea that we will 

lead by example, that our markets will be open, more open than 

any other countries. 

And more importantly perhaps that we will be a rule of law society so that the degree to which our markets are open or closed can 

be read in the statute books that we won’t have Commissars call 

business people and tell them to buy domestic goods. 

How is that working out for us, and have other countries looked 

at the results of our trading policy and said, by god, we want to 

do it just like Uncle Sam? 

Ms. WALLACH. Well, I think you have answered your own question. It is rather evident that in fact the countries that are doing 

well under the current regime are not following the current rules, 

and in fact are baffled probably by why we have so unilaterally 

signed up by example on an ideological basis, versus maybe negotiations on the basis of national interests. 

And I think that in the procurement area is one of the most 

stark examples, and I know that it is an issue of special interest 

to the chairman, and in fact there are not many carve outs that 

the United States has. 

There are now of the U.S. States, 12 States that haven’t signed 

on to the agreement, but otherwise the United States has signed 

on its entire service sector, and all goods, but for some of which are 

taken for exceptions, such as iron and steel in transit projects. 

We didn’t carve out all transit projects. So, for instance, right 

now while the rest of the world, and not just Europe and the EU, 

but all of the countries of the WTO, but for the 39 who signed on 

to that extremely controversial agreement that most countries 

wanted nothing to do with, have the right to set their procurement 

policies and their stimulus policies according to their best needs. The United States, for instance, we just put $20 billion into the 

electronic medical recordkeeping business. Almost all of that certainly is going to go offshore. We are not allowed to have contracts 

on services that have Buy America because of our crazed, expansive, no one else did it like this, and the WTOs lack of exception 

for services. 

That is a service contract, and it is the transcription of medical 

records. We can’t say that work must be done by United States 

workers. 

Mr. SHERMAN. I thank you for your answer. 

Mr. MORICI. May I give a fact? 

Mr. SHERMAN. My time has expired, and when facts don’t fit our 

theory, by god, we have got to change the facts. My time is so expired that I am going to see whether one of my colleagues allows 

you to bring up your fact. We will now yield to our ranking member, Mr. Royce. 

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Mr. ROYCE. Thank you, Mr. Chairman. I want to go to Dr. Johnson. You commented about the Japanese troubles and probably half 

of that equation or more is not dealing with those toxic assets. 

But part of it might be the eight separate stimulus bills passed, 

which doubled the GDP here, or doubled that to GDP in the country over that lost decade. Also, you warned of the danger of the European push to re-regulate, suggesting that it could lead to potentially dangerous procyclical policies that can exacerbate the downturn and prolong the recovery. 

I would just like your commentary on that, and would you elaborate on your observation that governments have only a limited ability to offset increased private demand through a fiscal stimulus. I 

think that is what we are hearing from the Europeans, and I would 

like your view on that as well. 

Mr. JOHNSON. I am happy to take those points in order. I think 

on the experience, my reading of experience from Japan is that you 

need—and not that fiscal stimulus is irrelevant or unhelpful, and 

not that the fiscal stimulus is the entire story, but you need to address both problems together. 

And if you have as the root of the issue is in housing, as it was 

for them in commercial real estate and housing obviously here, 

then you need to have some direct measures to take that on. 

And to my way of looking at it, if you just pursue fiscal stimulus, 

or if you overweight the strategy toward physical stimulus, you will 

end up running up more debt, and it will take you longer to get 

out of it. 

Mr. ROYCE. Until you get rid of the toxic assets. 

Mr. JOHNSON. Well, you have to address the problems of the financial system, which involve a strategy for recapitalization, and 

that enables you to keep the financial sector private, and I would 

say privatize it given the extent of state control you now have over 

United States banks. 

And also clean up the balance sheets one way or another. It is 

an inexpensive proposition. It is not politically popular, and major 

bankers, powerful bankers in Japan, opposed it. They have opposed 

it in every single country where these kinds of issues have come 

up. 

They always want a way of dealing with it that is better for 

them, and much more expensive for the taxpayer, and perhaps it 

is no surprise that the United States finds itself in a remarkably 

similar position. 

On the procylicality of regulation, I do think this is an important 

point which has been lost in the broader discussion. If you go to 

banks, or you go to regulators, and you say you have really got to 

tighten up on credit standards, you will get a great depression. 

You will further have contractions in credit. This is a very tough 

problem. We want banks to be careful in their lending. We have 

to recognize that it was excessive credit, and so some deleveraging 

or reduction in credit around the world should be expected. 

And also many creditworthy people, both individuals, families, 

and firms, don’t particularly want to borrow right now because it 

is too darn scary. We should save cash, and we should hunger 

down, and spend less, and see what happens, and that is happening globally. That is happening in a very synchronized way. 

91

So I don’t think piling on in terms of the kinds of regulations 

that Europeans have in mind is particularly helpful. I do think 

defusing the bombs in the financial systems, which is the point 

about the toxic assets and the lack of capital, that is absolutely and 

critically important. 

And I do think down the road to forestall the next bubble, we 

have to think hard about a proper regulated structure, and in particular I would emphasize any big bank that is too big to fail, is 

too big to exist. 

We have a problem in the United States with banks that are 10 

or 20 percent of GDP. In Europe, they have banks that are two 

times GDP, in terms of bank assets to GDP. 

That is an automatic bigger problem than we have here, and if 

we don’t fix our problems, we are going to be looking at the kinds 

of issues that Europe is going to grapple with this year, which are 

absolutely terrible and terrifying. 

Some of their banks are too big to rescue, let alone left to fail. 

So it becomes a fiscal issue of the first order. 

Mr. ROYCE. And governments have only limited ability to offset 

decreased private demand. 

Mr. JOHNSON. And this is the problem of limited debt capacity, 

even though in the United States, we are relatively in a good position compared to other industrialized countries. 

We start the whole crisis with debt and GDP around 40 percent, 

and you have to expect given the experiences between other countries that the total increase in debt GDP, privately held debt and 

GDP, will be at least 30 percentage points, and could well be 50 

percentage points. 

So we will end up with 70–80 percentage points, and that is with 

the kind of limited fiscal stimulus that you have already implemented and that is assuming that there is a couple of more tries 

in that same way. 

That is a high level of debt. You can go further. You can go as 

far as Japan. You can go to 150 percent of GDP, or 180 percent. 

That is not a good idea. That becomes very expensive, and if you 

start to undermine the credibility of the United States Government, and if people around the world start to worry about the creditworthiness of the United States Government, which I would emphasize is not the current situation, and I don’t see that in the immediate future, but if you get there, then it is a whole different 

kind of global economy we are looking at, where we no longer issue 

reserve currency, and we no longer have the kind of position with 

regard to power around the world. 

Mr. ROYCE. The last question to Dr. Levy. You made the point 

that the WTO is more feeble than it appears, lacking any enforcement powers. Ms. Wallach’s view is that it is all powerful, and 

would you just care to comment on that, Dr. Levy. 

Mr. LEVY. Yes, sir. I think what has often been very useful for 

governments around the world when they have abrogated an agreement or have acted inconsistently with an agreement, is to point 

to the WTO and say—and we could say this here, it is like our Supreme Court. They made us to do it. They issued an edict. 

But there is no Federal Marshal Service for the WTO in the 

same way, and we have seen countries—and what happens is that 

92

you have two countries that reach an agreement, but every time a 

dispute settlement panel simply renders a judgment that says you 

have either acted in accord with your agreements or you haven’t. 

After that a country can retaliate or not retaliate. If it does, it 

is essentially an unwinding of the agreement. There is no Marshal 

Service that forces you to act. 

Mr. SCOTT. Thank you. Thank you very much. Let me just shift 

for a second, because this G–20 economic summit presents our 

country with an extraordinary opportunity, and we talked about 

having this happen as our President is being placed at least in a 

relative position of strength given the fact that we passed the economic stimulus and providing leadership. 

But there is some sobering things out here as well that we need 

to examine, and particularly as it relates to three problematic 

areas that I think are certainly problems. One is China, and the 

other, Russia, and of course the situation in Pakistan which certainly would involve taking another look at our trade issues. 

And if we undergird all of this with the fact that that economic 

stimulus money is based upon money we are borrowing from 

China, from Russia, from these very same countries that we are 

having a problem with, grappling with. 

Secondly, of the 15 major manufacturing nations that account for 

80 percent of the world’s manufacturing, the United States ranks 

the lowest for the proportion of production goods that are exported. 

And I think I would like to get your response from these two 

basic phenomenons. We are leveraged beyond our debt. What 

strength of position are we in to bow up to China to tell them what 

they should and should not do when they are holding over $1 trillion of our debt, and I think that puts us in a very vernal position. 

Dr. Levy, and Dr. Bergsten. 

Mr. LEVY. Thank you, and you raise an excellent question, and 

I guess I don’t think the concern that sometimes is expressed that 

China has got this stock, and they are going to use this as a cudgel 

to beat us with is our concern, but I do think that we have to think 

very carefully about attacking China over issues, such as trade balances, because it is fundamentally inconsistent with trying to borrow a great deal from them. 

If we were to borrow a great deal, to slip into jargon, current account surplus and capital accounts deficits are related. You simply 

cannot be borrowing a great deal from the rest of the world and 

say we also want to run a current account surplus, or even balanced trade. 

So this will—we saw this with Secretary Clinton’s trip to China 

most recently. We can say, Thou shalt not manipulate your currency, but we cannot at the same time say, And also please buy 

lots and lots of Treasury bonds. 

Mr. SCOTT. Dr. Bergsten, and then Dr. Morici. 

Mr. BERGSTEN. Well, no, actually I slightly disagree with that. 

We can and should take a much tougher line toward China on currency manipulation, and we are probably within our rights to do 

that. 

They are violating the most fundamental rules of the international economic system. The IMF has very clear strictures 

93

against competitive undervaluation. We are perfectly within our 

rights to hit them. 

Even if we succeed beyond our wildest dreams and get them to 

let the currency go up 20 or 30 percent, which I think it still needs 

to do, they will still be running trade surpluses. 

They will still be adding to their reserves and for their own reasons will continue to put most of that into dollar assets. So I really 

don’t worry about that too much. They are not going to dump the 

dollar. 

However, there is a more fundamental reason if your concern is 

correct. China is the second largest economy in the world. It is now 

the biggest exporter in the world. It has 1.3 billion people. 

We are not going to order China around, and it is much more 

fundamental than whether they hold Treasury bills. So we have to 

get used to the fact. I have published two books on this topic in 

the last 3 years and have studied it very carefully. 

We have to find new ways to work with China: Hitting them 

hard where they are violating the rules of the game, like on currency, but working with them where they are with the program, 

like on fiscal stimulus. 

Can I say one word on Pakistan? It has come up two or three 

times. As I think Mr. Royce said at the outset, the best thing we 

can do for Pakistan is to reduce barriers to their exports to the 

United States, particularly of textile products. 

We did a study at my institute of a possible free trade agreement 

between the United States and Pakistan. We showed how it would 

actually support the United States economy and not hurt it. But 

just as a marker, if you want to do something serious on Pakistan, 

we have done a very comprehensive analysis of how that could be 

done through the trade instrument. 

Mr. SCOTT. So you agree then, because while you are on Pakistan, I wanted to get to that, and then I will get to you, Dr. Morici. 

But right now all of our trade basically with Pakistan is military; 

military equipment, military procurement. 

Are you saying that our trade should be more balanced by decreasing the military end and increasing economic——

Mr. BERGSTEN. No, increasing the civilian, economic end. 

Mr. SCOTT. Increasing economic? 

Mr. BERGSTEN. Yes. You and several of the other members have 

asked about how to stabilize Pakistan. 

Mr. SCOTT. Yes. 

Mr. BERGSTEN. An essential part of that has got to be to create 

jobs in Pakistan so people aren’t out on the streets and becoming 

Jihadists. 

Mr. SCOTT. Right. 

Mr. BERGSTEN. Again, no country has ever been able to achieve 

sustainable development without integrating with the world economy and expanding their trade. We have it within our power to 

support Pakistan moving in that direction, and we should take a 

very hard look at that. 

Mr. SCOTT. Now let me ask you, number one, you definitely feel 

they are keeping their currency artificially low? 

Mr. BERGSTEN. Absolutely. 

94

Mr. SCOTT. And do you also agree that they are depressing their 

domestic consumption? 

Mr. BERGSTEN. Yes, through a bunch of policy errors. I don’t 

think it is quite as devious as Dr. Morici does. I think they would 

actually like to get their consumption up, but they have moved 

painfully slowly to do so. I am very critical of that too. 

Mr. SCOTT. And do you believe that this is a consciously concerted effort for them to grow their economy by exploiting, exporting to targeted markets in the United States and Europe? 

Mr. BERGSTEN. That is part of their development strategy, but 

remember that 80–90 percent of their growth over this 30-year period, including the last 5 years, has come from the domestic economy. 

Ninety percent of their investment is domestic. Ninety percent of 

the growth and demand in the economy is domestic demand. It 

should be 110 percent, because their trade surplus should go down. 

So it is not the bulk of their economic success story but it is an 

element that disrupts internationally, and yes, we have to worry 

about it very, very greatly. 

Mr. SCOTT. Right. Thank you. I am going to go to Dr. Watson. 

I think you wanted to comment on this? 

Mr. MORICI. Yes. It is important to recognize that we have two 

distinct sets of problems; the problems with the banks, which we 

could discuss how to fix, and a deficit in aggregate demand, a 

structural deficit. 

If we reinflate the economy with a stimulus package, we will get 

back to the point, and because we have a large trade deficit, we 

have a deficit in aggregate demand, and unless we encourage people to borrow out against their homes, we could have another bubble, or the Federal Government keeps having more and more stimulus packages. 

The only way this can be addressed is by changing the trade deficit so that you are not spending 5 percent of what you earn 

abroad, and the only way in the end that can be changed is 

through oil, and through trade with China. 

With regard to China, while we cannot bully them and determine 

what they will do if they don’t do what we suggest, just as it is a 

sovereign nation, it can set its exchange rate wherever it wants. 

And since it is doing so in a way that violates international law, 

then the thing is that we can’t reset the exchange rate, because we 

are the reserve currency. But we can tax dollar on conversion to 

the point to provide the same relative prices within the economy 

that an equilibrium exchange rate as thought about by international economists would be. 

So we have that, and if we keep going down the path that we 

are going, and instead we keeping borrowing, then the problem 

that you worried about gets worse and worse. From the rest of the 

world, we have borrowed about $7 trillion as near as I can figure, 

or sold off stock. You know, securities. 

And that is about what this all publicly traded stock in the 

United States is worth right now. So we have gotten ourselves to 

the point where we could get bought up. 

Mr. SCOTT. That is right. 

Mr. MORICI. It is not very smart. 

95

Mr. SCOTT. Thank you. Dr. Watson. 

Ms. WATSON. Let me see if we can come to some agreement. 

When our President goes to the G–20, and they have been discussing this creation of a new framework for regulating, and several of you have mentioned regulating the international financial 

system so that we can present and anticipate a crisis like this from 

reoccurring, what would a new super, super, international institution or framework be like to stop, or to shorten a future global recession? 

What would you suggest? And anyone that wants to take a bite 

of that apple, please do. Dr. Johnson. 

Mr. JOHNSON. I think pursuing such an international structure 

is an illusion. I think it is a distraction put forward by politicians 

who want to hide the fact that their domestic regulatory structure 

has failed completely. 

And I think they failed for a very simple reason. Their banks became too big and too powerful. I think that is true in the United 

States regrettably, and it is much more true in other countries as 

I mentioned before. 

In Europe, the banks are much larger relative to the size of the 

economy, and they are actually more powerful if you can believe 

that than in the States, and I think unless and until you address 

that issue, the power of the big banks, your infrastructure is always going to be overwhelmed. 

Maybe it will look good for a while, but the next time the bubble 

or the boom comes along, you will have repetition of these same 

problems in a slightly different format. I think that certainly the 

key issue is breaking up of the big banks. Banks that are too big 

to fail, and some of them are too big to rescue, are too big. 

Ms. WATSON. Are creating the failure, right? 

Mr. JOHNSON. Absolutely. Look, they are holding the entire world 

economy hostage right now. They are saying if you take measures 

that are contrary to our interests, and we are the only ones who 

know what could go wrong because we are the only ones who understand the complexity of our banks—and I think by the way that 

they don’t understand it, and that is how we got into this mess. 

But leaving that to one side, they are saying that unless you do 

what we say, and unless you hand over a large amount of taxpayer 

money, that we will be a major problem for the financial system, 

and for the global economy. 

And I think they are right, unfortunately. I think we have gotten 

ourselves into a situation where they are right, and we can’t allow 

that to continue into the future. I think you have to consider ways 

to break up these banks, and so you have to consider size restrictions on them, which is a very crude way to do it, but I can’t think 

of any other way to prevent this problem from reoccurring, perhaps 

in an even worse and more spectacular fashion. 

Ms. WATSON. Dr. Bergsten. 

Mr. BERGSTEN. I want to put one caveat on the question you 

raised about the role of international participation in financial regulation. It is clear that serious regulation has to occur at the national level. I fully agree with Dr. Johnson on that. 

96

But I think there is a role for international cooperation—that is 

in trying to set consistent internationally agreed standards against 

which to benchmark national financial regulation. 

This was done with great success after the Asian crisis 10 years 

ago, one root cause of which was weak banking systems throughout 

those emerging markets. Out of the crisis came agreement on an 

international banking standard that was worked out by regulators 

of national governments together. 

It was then embodied in IMF surveillance of national systems. So 

what you got was an international agreement on best practices 

template. National governments then tried to approximate that as 

best they could, and then the international system monitored and 

pushed and prodded to get the standards up to snuff. 

It has been a big success over the last 10 years. One reason the 

Asians have not been hurt more by the current crisis is that their 

banking systems are enormously better than they were 10 years 

ago. 

It is tougher now for the United States, who thought its financial 

regulation was the gold standard, which turned out not to be the 

case, we have to be subjected to that now. 

But trying to get international agreement on the objectives of financial regulation, and then as national governments implement 

that monitoring internationally and try to bring everybody up to 

speed, is a useful part of the process, but regulation still takes 

place almost totally at the national level. 

Ms. WATSON. Dr. Morici. 

Mr. MORICI. To begin again, I agree largely with what has been 

said about international regulation. The Europeans for cultural 

reasons are inclined to always recommend an international body, 

and I think it should be accepted as for what it is. 

The real problem lies in domestic regulation. We need to revisit 

some of the things that we have done. For example, permitting 

large financial supermarkets to emerge and for commercial banks 

to be part of investment banks, has created a lot of cultural compensation and incentive problems. 

There are things constructively that we could do in the derivatives market without creating the nightmare of over regulating the 

systems, and simply providing that derivatives have adequate posted collateral by the ultimate party that is going to have to pay out 

when the value of the asset goes down, and that requiring that if 

those guarantees are provided by international entities that their 

central banking authorities guarantee that those writers of the 

swaps can put out just as well as ours can. Things of that nature. 

There are other things that we should look at, but it is largely 

a problem of domestic regulation and the fact that frankly the 

bankers view regulation the way that most of us view the tax code. 

And they are very good at it, and so we are going to have to start 

to consider whether there needs to be changes enforced in the way 

that the bankers view lobbying and regulatory structures, and 

things of that nature. 

Ms. WALLACH. Regarding what structure, I have no expertise, 

but as regards the actual rules that need to be in such a system 

of regulation, on the point of the importance of having domestic 

rules correct, and having banks broken up, part of the issue for the 

97

G–20 again is to review the existing WTO rules regarding financial 

services, because, for instance, the market access obligations now 

in those agreements will limit the standstill in new regulations, for 

instance, make clear obstacles to those kind of domestic policy 

goals. 

And just to make it very concrete, for instance, in the United 

States commitment to this particular agreement, one of the things 

that we agreed to do to meet these obligations was to get rid of 

Glass-Steagall. 

It is actually in the footnote of the United States GATS commitment, because the market access rules don’t allow you to have firewalls between the different kinds of businesses within the bank. 

You are not allowed to limit the size of a bank quite explicitly 

in the Article 16 GATS market access rules. So these are very concrete changes that need to be put into place, and the carve out that 

Dr. Levy mentioned doesn’t really fix the problem, because the 

carve out says that you can only—shall not be used as a means of 

avoiding the members’ commitments or obligations under the 

agreement, which is to say you can only use the exception as long 

as the exception doesn’t apply to things that violate the agreement, 

which is the only reason that you would need the exception. 

Mr. SHERMAN. I thank the gentlelady from California. Since the 

discussion of waterboarding, President Obama announced that 

America does not torture. He was wrong. We are going to do a 

third round of questioning. [Laughter.] 

There may be only one person doing the torturing, and I know, 

Dr. Johnson, that you have to catch a train pretty soon. Now, one 

quick comment about Glass-Steagall, and that is the big investment houses—Bear Stearns, Lehman Brothers, Merrill-Lynch, and 

Goldman-Sachs—did not engage in commercial banking until very 

recently. 

And their nonregulation is much a part of the problem. MerrillLynch, the fact that we had repealed Glass-Steagall is the only reason why we were able to walk away from Merrill-Lynch without a 

huge amount of taxpayer money. 

So speaking as a member of the Financial Services Committee, 

it is not the fact that we reduced some of the 1930s regulation. The 

problem is that we failed to create any new regulation for the new 

financial instruments. 

It is as if somebody said there was a spike in automobile accidents and it is because we abolished some of the 1910 buggy whip 

rules. It is not whether you kept the buggy whip rules or repealed 

them. If you don’t have a vehicle code for automobiles, you cannot 

run a transportation system based on them. 

Dr. Johnson, you intrigued me a bit on how we could stimulate 

our economy without a freeloader problem. Were you basically talking about the TALF program, where the Fed goes out and buys 

various debt instruments, or perhaps you could just add to your 

ideas on how we could accomplish that goal? 

Mr. JOHNSON. Certainly. Well, the TALF program is of course designed to support the credit market, and the problem as you know 

very well is the breakdown of securitization distribution, and the 

Fed is essentially stepping in and becoming part of the commercial 

funding for that market. 

98

I think that is regrettable, but probably unavoidable under these 

circumstances, and I support it. But it is not enough, or it is not 

the complete part of what I was talking about, which is quantitative easing. 

Quantitative easing is when central banks actually go out, and 

for example, in the case of the Bank of England right now, they 

buy long treasuries. So instead of limiting their operations to short 

term government obligations, which is their bread and butter, they 

actually try and operate further down the yield curve. 

And basically they don’t like to use this term, but in the 

vernacular they are printing money. They are issuing money, and 

they are trying to fight off deflation. They are trying to push inflation back up toward 2 percent, which is informally what they were 

aiming for before. 

And this kind of action and demonstrating this would tend to 

cause the United States dollar to depreciate, just like the British 

pound has depreciated by 20–30 percent since these kinds of policies were put into place, and that concentrates the minds of your 

trading partners considerably. 

Mr. SHERMAN. Now why is it printing money to issue currency 

to buy long term treasuries if it is not also printing money to issue 

currency to buy short term treasuries? Why is one ‘‘printing 

money’’—and I guess a third way to go—I mean, the Fed can do 

three things. 

You can print money for long term treasuries. You could print 

money in return for short term treasuries, or you could just print 

money, and go buy whatever you want to buy with it. 

Now that is really printing money, and is not being seriously discussed, except by crazy bald Members of Congress. Now, why is it 

considered more printing money to buy the long term treasuries? 

Mr. JOHNSON. Well, that is a mechanism of policy, but you are 

absolutely right. They could print money to buy things in your 

basement that you no longer want for example. 

Mr. SHERMAN. Because as I understand the TALF program, they 

are going to use cash to buy these various debt instruments, but 

they are going to get the cash by selling treasuries. So the private 

market is getting all the cash that the Federal Government or the 

Fed is spending on the student loan paper, and the Small Business 

Administration paper, the credit card paper. 

But the private sector is giving the Fed a bunch of greenbacks 

for the Treasuries that it is selling. Instead of doing that, they 

could just do half of it. That is to say, buy the paper by printing 

paper money, and not selling any of their treasuries. 

Mr. JOHNSON. Yes. 

Mr. SHERMAN. But going back to my question, why is it considered more printing money for the Fed to sell treasuring, or rather 

buy long term treasuries versus short term treasuries? Why is one 

thought to be more inflationary than the other? 

Mr. JOHNSON. Well, I don’t think we actually know enough about 

quantitative easing to make that determination since this is a relatively new program, and a relatively new idea. 

Ben Bernanke actually flagged it as a possibility back in 2002 in 

a speech, and he was regarded and earned the reputation of the 

99

name of Helicopter Ben. His nickname was Helicopter Ben after 

that speech for having even floated this possibility. 

Mr. SHERMAN. Helicopter meaning an illusion to the idea of dropping currency from a helicopter? 

Mr. JOHNSON. No, he said that ultimately what you might need 

to do is tax cuts that are financed by printing money. 

Mr. SHERMAN. Tax cuts what? 

Mr. JOHNSON. Tax cuts that are financed by printing money, and 

so basically help people with taxes, and you send everybody a 

check, and that check is—obviously you are drawing on the Federal 

Reserve, and that is an issue of money. 

Now that is a fairly drastic step to take, and this is the kind of 

program that the Bank of England has right now, is a step in that 

direction. But the central banks I think are rightly—don’t want to 

go crazy with the printing of money because you don’t want inflation expectations. 

You don’t want people to suddenly start expecting 20 or 30 percent inflation next year. You want them to go back to expecting 2 

percent inflation next year, which is what they were expecting 

more or less for a long time, and now those inflation expectations 

have come down. 

Mr. SHERMAN. I would rather them anticipate 4 percent inflation 

than anticipate 4 percent deflation. 

Mr. JOHNSON. Well, l think that is also my position, and I think 

that is where the central banks of course would never say that in 

public, but I think that is increasingly where they are learning 

with this, too. 

But it is to error on the side of a little bit too much inflation, 

and then deal with those consequences, than to have 4 percent, or 

even a 1-percent deflation, which would be absolutely devastating 

given the debt levels and the structure of debt in this country. 

Mr. SHERMAN. Yes. 

Mr. MORICI. I would point out to you that there is a parallel 

issue with regard to whether you buy short term paper versus long, 

and that is by buying long term paper, you can—or selling it, or 

whatever, you can reassert your sovereignty over your monetary 

policy. 

We have lost the ability of the Fed to influence long term rates 

because of China’s investing in our capital markets and so forth, 

which we have had decoupling, and if the Fed had an active policy 

of not just targeting the Federal funds rate, but with targeting the 

10-year Treasury rate, and the 20-year Treasury rate, that sort of 

thing, that would give it an ability to determine the slope of the 

yield curve in a very nice way, which would be very useful for regulating the economy. 

Mr. SHERMAN. Because right now long term treasuries are yielding 50 times the interest rate of short term treasuries because——

Mr. MORICI. Well, it is not hard. I mean, if we take it to zero, 

we can get infinity, okay? 

Mr. SHERMAN. Right. 

Mr. MORICI. But the point is that if we raise them back up again 

the long rates aren’t going to change very much. We have established that, because we essentially have a fixed rate of exchange 

rate system with China, and it buys and it fixes the exchange rate. 

100

Mr. SHERMAN. And also if we buy long term treasuries, the Fed 

gets a better yield, and turns that money back over to us. 

Mr. MORICI. Yes. 

Mr. SHERMAN. When you can borrow short term at zero, borrowing long term doesn’t seem like such a good deal. Then of 

course you get the quantitative yield. So the slightly radical approach is buy long term treasuries. 

The truly radical approach is just print money, and do something 

with it that the Federal Government wants to do with it. 

Mr. MORICI. Well, where would you like to create your jobs? If 

you just print money and give it to the Federal Government, you 

will create your jobs in very different places than if you buy long 

term bonds, because that will put money into the capital market 

where it might actually get used to build houses and things of that 

nature. 

So the money will go to different places, and it is important to 

recognize who gets the first round of money, just like whether or 

not we have Buy America or not, and where the benefits go. 

Mr. SHERMAN. Yes, I mean, you can buy that commercial paper, 

which we are being told is worth 100 cents on the dollar, and you 

can buy the long term. You really can’t buy the short term treasuries in effect much because the interest rate is already at zero. 

Mr. MORICI. Right. 

Mr. SHERMAN. Let us see. You know, I could keep you guys here 

for a long time. I am not going to run out of questions, but I think 

we have run out of time, and the President is right. There is a 

limit to the amount of torture that America will engage in. Thank 

you very much for coming. 

[Whereupon, at 1:10 p.m., the subcommittee was adjourned.]

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