Untapped Resource: World Bank President Robert Zoellick Knows More about International Governmental Institutional Arrangements Than Anyone in the World. He Should Lead the Effort for a New Global Growth Agenda. an Exclusive Interview
TIE: Is the developed world becoming like Japan--in other words, mired in debt and unable to grow at more than mediocre levels? For 2012, Japan is expected to grow at a higher rate than the rate achieved by both the eurozone and the United States. Do you agree with this "We're all becoming Japan" scenario?
Zoellick: The core issue for growth is to go back to the fundamentals. I'm not sure how much more can be done with monetary policy one way or the other. Federal Reserve Chairman Bernanke's Jackson Hole speech did a service because he pointed out that most fundamental decisions now lie with Congress and the executive branch.
Beyond fiscal policy, the real answer to your question about Japan is whether countries are willing to address the structural elements of growth to free private sector potential. When I talk about growth, I'm not talking about Keynesian macroeconomic management. I'm talking about the fundamentals of growth and productivity, for example the work of Robert Solow. At the World Bank, I see many developing countries working in this structural growth framework. As a striking example, when early in the crisis I attended a G-20 finance ministers meeting in Scotland, the mood was as dour as the sky. Then I flew to Singapore for an APEC session, and the Asian countries were more upbeat, saying, "We've seen versions of this movie before, and we're going to have to focus more on how we deregulate, expand opportunities for private-sector dynamism such as in services, and invest to create fundamentals of growth."
TIE: How would you improve the fundamentals of growth in the industrialized world?
Zoellick: The moods and coalitions of democratic politics matter, so one needs to look beyond textbook economics. For example, one can sense that across constituencies and political groups, there's a movement for broad-based tax reform: broadening the base and cutting the rates, as in the tax reform enacted when I was at Treasury in 1986. Discussions and interest--like earlier in the 1980s--is a long way from enacting major legislation. But tax reform could be a very good signal to drive investment and productivity growth. That would be high on my agenda.
Second, you can't ignore spending, debt, and deficits, but so far the United States government has been focused on discretionary spending. That's a start, but not fundamentally where the real bucks are. The challenge for policymakers is entitlements. Social Security is one area where by now people know the variables quite clearly. Social Security reform would send one beck of a confidence signal to businesses that are sitting on cash and to the world that the United States can fix its problems.
An odd political dynamic has been created by both parties. Democrats don't want to see so-called "cuts" in Social Security--it's part of their political base strategy. Republicans want to show that they're disciplined on spending so they want to emphasize the size of "cuts." People in a fast-paced media world will turn off very quickly if one talks about "cuts."
But you can start by saying you'll protect people who retire by guaranteeing what they're getting from Social Security today plus cost of living increases. That's not a cut. That's a respectable way to secure Social Security. The government would use the CPI for increases as opposed to a wage index. Then add a year or two to the retirement age. That just reflects the changed demographics and years of life. If you want to make Social Security more progressive, add means testing to limit increases. Social Security is just sitting there on the table waiting to get done.
First, we should do broad-based tax reform for growth, then Social Security reform. The third element--one of the best drivers of structural change--is free trade in an open economy. Our trade policy has been stagnant.
TIE: Is that it?
Zoellick: There are other good possibilities out there. …