[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                  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/

                                 ______


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                      COMMITTEE ON FOREIGN AFFAIRS

                 HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York           ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American      CHRISTOPHER H. SMITH, New Jersey
    Samoa                            DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey          ELTON GALLEGLY, California
BRAD SHERMAN, California             DANA ROHRABACHER, California
ROBERT WEXLER, Florida               DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York             EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts         RON PAUL, Texas
GREGORY W. MEEKS, New York           JEFF FLAKE, Arizona
DIANE E. WATSON, California          MIKE PENCE, Indiana
RUSS CARNAHAN, Missouri              JOE WILSON, South Carolina
ALBIO SIRES, New Jersey              JOHN BOOZMAN, Arkansas
GERALD E. CONNOLLY, Virginia         J. GRESHAM BARRETT, South Carolina
MICHAEL E. McMAHON, New York         CONNIE MACK, Florida
JOHN S. TANNER, Tennessee            JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas                    MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, CaliforniaAs  TED POE, Texas
    of 3/12/09 deg.                  BOB INGLIS, South Carolina
SHEILA JACKSON LEE, Texas            GUS BILIRAKIS, Florida
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
                   Richard J. Kessler, Staff Director
                Yleem Poblete, Republican Staff Director
                                 ------                                

         Subcommittee on Terrorism, Nonproliferation and Trade

                   BRAD SHERMAN, California, Chairman
GERALD E. CONNOLLY, Virginia         EDWARD R. ROYCE, California
DAVID SCOTT, Georgia                 TED POE, Texas
DIANE E. WATSON, California          DONALD A. MANZULLO, Illinois
MICHAEL E. McMAHON, New York         JOHN BOOZMAN, Arkansas
SHEILA JACKSON LEE, Texas            J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida
               Don MacDonald, Subcommittee Staff Director
          John Brodtke, Subcommittee Professional Staff Member
            Tom Sheehy, Republican Professional Staff Member
             Isidro Mariscal, Subcommittee Staff Associate


                            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


           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 disbursements 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 
increase 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 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, 
Smoot-Hawley 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 government 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 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 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. 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'etat 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 international 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 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 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:]Simon Johnson deg.

























    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 
so-called 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.
    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:]Lori Wallach deg.























    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.
    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.
    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:]Philip Levy deg.

















    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 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.
    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:]C. Fred Bergsten deg.























    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.
    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:]Peter morici deg.





















    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 to American workers.
    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?
    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 
system 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.
    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 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.
    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 
through  deg.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 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 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.]
    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, 
re-establish 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.
    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, 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 obfuscates deg. 
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 terrible 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 1\1/2\ 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 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.
    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 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----
    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.
    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.
    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 records deg.keeping 
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.
    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 of  deg.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.
    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 
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 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.
    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.
    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.
    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 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. 
Merrill-Lynch, 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.
    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 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.
    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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