IIE Celebrates Twenty-Five: Founded in 1981, the Institute for International Economics Quickly Came to Dominate Global Economic Policy Research. TIE Sat Down with Director Fred Bergsten, Who Started It All and Today Remains the Dominant Force in an Important Washington, D.C., Institution

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An Exclusive TIE Interview

TIE: Despite all the talk about the transformative effects of globalization, some things do not change. Looking back on 1981 when the Institute for International Economics was founded, what policy challenges in the international economy remain the same today?

Bergsten: Three big challenges remain the same: global imbalances, energy price pressures, and trade protectionism. In fact, one of the things that led to our creation was the emergence of all three of those challenges in the 1970s. Many felt that the country was not well equipped to handle them and so we ought to create a think tank devoted to that set of issues. A quarter of a century later, have we learned anything? The answer is that we clearly haven't yet learned enough to keep them off the radar screen.

TIE: So how's the policy world performed on these three challenges if you had to give a grade?

Bergsten: The policy world dealt pretty well with the imbalances in the 1980s and even into the 1990s. The United States finally started to get its budget deficit under control and the imbalances--particularly through major changes in exchange rates--were pretty much eliminated by 1990. But then people forgot and imbalances started to rise again in the late 1990s.

Trade protection achieved the second best performance in my view. People bought into the bicycle theory--if you stop liberalizing, you fall back into protectionism--and kept liberalizing negotiations going forward. The reduction in barriers to trade has had a huge impact. Gary Hufbauer from our team quantified it about a year and a half ago and found that the United States is a trillion dollars a year richer as a result of trade globalization in the last fifty years. At the moment, the collapse of the Doha Round may represent a recrudescence of all that risk.

We've seen relatively little improvement in energy policy. The markets did respond a fair amount to the 1970s oil shocks and the United States has experienced a big reduction in energy usage as a share of the economy. That was also partly a triumph of policy. President Carter, helped by the 1978 Bonn Summit, finally did decontrol oil prices, a measure Congress had blocked for five years after the first oil shock. But I'd say the lack of an effective energy policy for the last twenty years is the biggest single threat to global economic stability.

TIE: Does it bother you that while the imbalances always could lead to disaster down the road, so many of the usual rules don't seem to be working? We have a president who's been in office for six years, and he took a surplus and turned it into a significant deficit. If you'd had a crystal ball in 2000 and known this fact, you would have said the ten-year bond would be at 12 percent by now. Yet the long bond has stayed below 6 percent, and for a while was at 3 percent. By the same token, U.S. current account imbalances are such that you've had so many investors--the latest being Warren Buffett--lose their shirts betting on the dollar collapse. There seems to be some temporary revision of the rules on how we interpret these imbalances. How has the Institute come to terms with what is at least temporarily a source of frustration among economists?

Bergsten: I'd stress "temporarily" because, when the Institute was created in 1981, I was already saying the trade deficit is going to rise to $100 billion. People scoffed. I predicted protectionism would erupt. People scoffed. I said the dollar was way overvalued. People scoffed. Well, I was early then too. And in 1983 1 was saying it even more assuredly and I was still premature. It wasn't until early 1985 onward that the dollar dropped over 30 percent on average in two years and by over 50 percent against the deutschemark and yen. Perhaps temporarily the usual rules aren't holding. But Buffett just made a big timing mistake. If he'd sold dollars in 2002, he'd have been an even richer man. …