Lisa M. Lynch:
Good evening, everyone. I'm Lisa Lynch, the Provost at Brandeis University. I'd like to officially welcome you to what I'm sure will be a memorable event, hosted by the Brandeis International Business School's Perlmutter Institute for Global Business Leadership and the Rosenberg Institute of Global Finance. The Perlmutter Institute is led by Professor Aldo Musacchio, and the Rosenberg Institute is led by co-directors, Professors Debarshi Nandy and Dan Bergstresser. Thank you, Aldo, Debarshi, and Dan, for your leadership and for organizing tonight's terrific event.
Lisa M. Lynch:
It's now my great pleasure to introduce this evening's speaker, Dr. John Lipsky. After completing his PhD in economics from Stanford University, John joined the IMF where he worked for 10 years, including a tour of duty as resident representative in Chile. He then made a transition to the private sector where he worked at Salomon Brothers, Chase Manhattan Bank, and ultimately he was the vice chairman of JPMorgan Investment Bank. I first met John in 1999 when he was chief economist at JPMorgan. He co-chaired with Jessica Einhorn a council on foreign relations study group on the impact of globalization and on inequality that I had an opportunity to contribute to. I am struck by how different and yet the same the current debate on globalization and inequality is today from what it was 20 years ago.
Lisa M. Lynch:
In 2006, John was appointed as first deputy managing director of the IMF, a role he served in through 2011. As the second in command at the fund, John was the person who guided the real day to day work of the fund; its monitoring, surveillance and assessment of fiscal, monetary and financial policies of 189 IMF member countries, its lending programs and its research. Importantly, from that perch, John played a key role in the international response to the great financial crisis. John even became interim managing director of the fund for a brief time prior to the appointment of Christine Lagarde.
Lisa M. Lynch:
After his second tour of duty at the IMF, John joined the School of Advanced International Studies at Johns Hopkins University, where he's the Peter J. Peterson Distinguished Scholar at the Henry A. Kissinger Center for Global Affairs. For the better half of a half of a century, John has been both a keen observer and a guiding light in global economic and financial policy. It's our great privilege to have him here this evening to speak with us, especially given the unsettled nature of the economy today.
Lisa M. Lynch:
I'm also pleased to introduce Professor Steve Cecchetti, holder of the Rosen Family Chair in International Finance at Brandeis International Business School, who will moderate this evening's discussion. Steve is also a research associate at the National Bureau of Economic Research, and a research fellow at the Center for Economic Policy Research. From 2008 to 2013, he served as economic adviser and head of the monetary and economics department at the Bank for International Settlements in Basel. And in the late 1990s, Steve served as Executive Vice President and Director of Research at the Federal Reserve Bank of New York.
Lisa M. Lynch:
As we try to manage our way through an unprecedented global public health crisis and its associated political uncertainty and economic upheaval, what will be the new reality of our post pandemic world? Will we return to the normal of the past? Or will there be fundamental changes in our economic and financial structures? Is globalization and international cooperation going into reverse? Will we be better prepared to face other global challenges such as climate change and global warming after our pandemic experience? John and Steve, these are not easy questions to answer, but we are all looking forward to hearing your views on these and other policy challenges for the post pandemic global economy. Steve, I turn it over to you.
Stephen Cecchetti:
Thanks very much, Lisa. Thanks for that lovely introduction. And, John, thank you so much for taking the time to be with us this evening. John and I met also in about 20 years ago, and we met while I was in New York, but we actually worked together in 1999 and 2000. And I just went and checked and the thing that we wrote together is the most cited thing that I've written or been involved in. And the interesting thing about it was that we wrote a little book, a little monograph that was about the impact of equity and property price booms on economies and what policy responses should look like. And I guess I'm not sure people really listened to us, but we were out there doing it. So anyway, thanks very much for being here.
Stephen Cecchetti:
I have one housekeeping detail before I start. We'll start with a bunch of questions, but if you have questions that you would like to raise, please put them into the Q&A. There should be a Q&A button. Depending on which version of Zoom you're using, it'll be at the bottom of your screen. I'm sure most of you are used to that. And that brings me to the first thing that I'd like to raise, which is about the issues associated with the pandemic. Of course, we couldn't be doing this if we weren't doing it by Zoom. We wouldn't have the attendance, we wouldn't be sitting in the comforts of our house, possibly a little bit more than we would like, but we wouldn't be sitting there. So as you look out around the world, where do you see the biggest surprises in the management of the pandemic?
John P. Lipsky:
Thanks, Stephen. And before I start, thanks to Brandeis. Thanks to Lisa for the very kind introduction. And Steve, it's always fun to talk about stuff, and we always had fun working together. So I'm very happy to be here. Okay, on to the questions. Positive surprises, I would say this speed and scale of the policy response to the pandemic has been a positive surprise. I compare it to the global financial crisis, back at the IMF, we thought the crisis was inevitable beginning, and we'd reached that conclusion in August 2007. But it wasn't till the collapse of Lehman in September 2008 that the authorities really got an action. So the response was faster.
John P. Lipsky:
Second, the amount of global cooperation in medicine has been extraordinary. Whenever you speak with the professionals in this area in terms of testing, in terms of developing treatments, in terms of developing vaccine, the level of cooperation is very striking. And of course, it's invisible at the political level, but at the technical level, it's really happening. Another positive surprise comes after a negative, if you will. There was a huge outflow of capital from emerging markets in March and April on a scale that was even huge by comparison with the financial crisis. The surprise has been the degree of reflow of capital back to these economies, which has been a pleasant surprise. And I would say, compared to the global financial crisis, once again, final good surprise, apparent relatively limited impact so far of the pandemic in Africa. And fingers crossed that that just continues.
John P. Lipsky:
Negatives? Well, one, despite what I've been saying, the lack of G20 cooperation and coordination. Everybody was acting big and acting quickly but not acting together in terms of fiscal policy. Everybody was acting on their own. Secondly, I thought a negative surprise was the initial European disarray, the closing of borders, the same we're going to ban export of medical goods to other EU countries. That was a surprise. And I think it's produced already a response.
John P. Lipsky:
And finally, the affliction that has descended upon the Latin America has been a negative surprise. Brazil's very poorest... Brazil and Mexico's poor response to the pandemic which is producing very negative effects. But a negative surprise is even where the response policy response was much more positive, in Chile and Peru, they have had a big trouble, and I fear we're looking at a Latin American lost decade. Anyway, that's my quick total.
Stephen Cecchetti:
Yeah, we'll come back to some of those issues. Thanks. If we look for at least a minute at the financial system this time around, last time it was the financial system that hurt the real economy. This time, it looks like it might go the other direction. What do see there that concerns you?
John P. Lipsky:
I guess there's some obvious things to think about. So, to this point, it's really been so far, so good. And in fact, some folks have worried that it's been too good, that credit spreads are too low, that equity prices in general have been doing too well. But I would say the real concerns are down the road. An obvious one is credit exposure, especially to small and medium sized businesses. We just, as we all know, we don't know how many are going to survive this period. We don't know what's going to happen to real estate values, especially urban commercial real estate, office buildings. This could end up causing some credit problems and challenges for financial institutions.
John P. Lipsky:
Also, there's been a big shift toward, let's call them non-bank financial institutions, and away from public corporations toward private equity and other forms of credit provision that really haven't been stress tests so well and are not so clearly regulated. These are things we're going to have to watch. One other thought, investors are relying on expectations, on market expectations of historically low interest rates that are going to remain this low far into the future. And that's underpinned by a sense of optimism, and I hope, not unrealistic optimism about the course of inflation. If inflation were to prove to be more of a problem, for example, because of damage to supply side of economies and we ended up with unexpected rises in long-term interest rates, this would cause some problems. But right now, that's certainly not what we're worried about.
Stephen Cecchetti:
Thanks. On the, I guess, related to the point that you made at least in part about small businesses and in the like, the IMF, published, as it does every October, a whole slew of things-
John P. Lipsky:
The wonderful publications, I know.
Stephen Cecchetti:
Well, yeah, for the inside crowd, there's basically three publications that come out that you have to look at. There's the Fiscal Monitor, the Global Financial Stability Report, and then there's the World Economic Outlook. The last one of those seem to, my reading of it at least is that they're anticipating significant scarring in advanced economies coming from COVID. Do you share that concern or feeling about that?
John P. Lipsky:
Well, of course, it's a risk and it's a legitimate concern. Scarring, that's a simple, conversely to what is typical, that's a common sensical term that has replaced hysteresis, right? Economists used to like to use a highfalutin term for this, but in any case, the idea that there's going to be scarring seems like a reasonable one. But I must say, remember in the wake of the global financial crisis here in the U.S., there was great pessimism about the prospects for the long-term unemployed, it was they were never going to be employed again, et cetera, et cetera. In the event the economy started growing, people went back to work. It turned out to be an awful lot of hand-wringing that didn't turn out to be such sustained problem as we get down to the lowest unemployment rates in 50 years.
John P. Lipsky:
But you can read, for instance, Tom Friedman's column today in the New York Times about how the labor market is about to undergo radical changes everywhere, not just in the U.S. And as usual, Tom may be a little tech happy, but it's a bit hard to think that the real challenge isn't scarring. The challenge is, are we going to be able to show the flexibility, economic flexibility to accommodate the changes that are that seem to be inevitable? And I'd rather worry about that.
Stephen Cecchetti:
Right. I guess another way of putting scarring I guess rather than hysteresis would be whether or not there's going to be more destruction than there is creation. And I think that that's maybe another way of putting what you said, is that the concern is that we won't make those adjustments as quickly as we might.
John P. Lipsky:
That's well said.
Stephen Cecchetti:
If we look at a lot of the responses we've seen, not just monetary policy responses, which I think we'll probably leave best left for another day, but fiscal responses, what is your view of the fiscal responses both looking backwards and looking forwards? And also if you would comment on, this is creating not only enormous deficits, but enormous public debts in lots of the world.
John P. Lipsky:
Yeah, absolutely. Well, look, let's start with the, how have we done so far? First of all, I want to make the point that it's clear that the lessons of the H1N1 near pandemic really weren't heated. We didn't produce the kind of stock... We could have seen this coming. In fact, many people saw something like this as a real possibility. And it's clear, it's just very hard to get political authorities to reduce current spending in favor of taking out costly insurance policies. In the end, are we going to spend it on tens of thousands of ventilators that are going to sit in a warehouse just in case? Or are we going to spend it on something that we can show to our constituencies today? So we're going to have to... Hopefully there will be a reassessment of that.
John P. Lipsky:
Here in the U.S., it was hugely disturbing to me that the CDC failed in its tasks to provide accurate testing material at a critical time. And when they eventually turn to the private sector, the FDA acted in a way to slow things down. I mean, you've got to take a hard look at these kind of things. And there was a widespread reluctance on political authorities to undertake the lockdowns that were needed initially to limit the spread of the disease, even though we've seen the medical sector react rather rapidly, as I've said.
John P. Lipsky:
So as for the fiscal authorities, it seems clear that they relied very heavily once again on the willingness of the monetary authorities to take dramatic and unprecedented action to support financial markets and economic activity. It seems everywhere there's been uncertainty about the correct scope and scale of fiscal action and everywhere action has been uncertain, it's been ad hoc. And even in places like China, I'd say they're using old playbooks because they can't think of what else to do. And in the end, the scale has been unprecedented, but it's been rather ad hoc. And we'll see how well it's been done. As I put it, this is going to launch thousands of PhD theses to look back.
John P. Lipsky:
But the result is that okay, now we've done it, here we are. I think if we had thought it through with a little bit more clarity, and it wasn't impossible to have done so, we could have done better. But we are where we are. But the result is that no one has any clear idea of when or how to exit their current expansionary policies. And the easy answer today is, "Well, we've got to cure the disease before we can think about reducing support." But this is going to be a tremendous challenge for the reasons that you've already referenced. Will scarring reflect fiscal policy induced distortions in economies that politicians will be loathed to reduce for fear of being blamed for a new downturn?
John P. Lipsky:
And the deep challenge is to help promote the structural changes in our economies that seem to be inevitable in any case but that have been brought forward by the crisis. I'm talking about educational reforms, healthcare reforms, unemployment insurance that provides incentives for acquiring skills in shortening periods of unemployment. Boy, there's going to be a lot of work to do. But now let me-
Stephen Cecchetti:
Stop on that one. We had a question from the audience. Someone was asking whether or not you thought there was an income replacement overshoot in some of the programs that's related directly to what you just said about unemployment incentives.
John P. Lipsky:
Yes, but in the sense that my understanding from the data is that about 40% of the recipients of unemployment benefits had their income actually increase from those benefits relative to what they were earning before the crisis. Now, in the end, whether that's bad or good, I would say well, and now look what's happened. Now there's a lot of uncertainty about whether this is going to be renewed or where this is going. That result is actually in the near term, it supported that overshoot, certainly supported a quick response or a quick recovery in consumer spending, but not necessarily in the areas you would have necessarily wanted or expected. Namely, it wasn't increasing spending on services where the demand had dropped.
John P. Lipsky:
But an increase in spending on consumer durables, where there were never the kind of unemployment problems. So it certainly hasn't been as effective as it should have been, but I wouldn't want to call it an overshoot. I would say it's partly a design problem. But now if we want to come back to your question, looking forward question about sovereign debt?
Stephen Cecchetti:
Sure. I think that'd be great.
John P. Lipsky:
And I'd say, look, unless we've seriously underestimated inflation risks, and hence we've underestimated the likely course of nominal interest rates, this isn't really going to be a near term problem. And in fact, prior to the pandemic, as I'm sure you know, that most people didn't seem aware of it. The percentage of tax revenues required to service public debt in advanced economies had been declining, not rising, despite the huge deficits, because everyone was rolling over an old debt with incredibly cheap financing. And of course, in Europe where the public was paying you, the government, to take their money for 10 years. But pretty much everyone has made social safety net promises they almost certainly can't keep under current prospects. And we've all pretty much decided that it's a very admirable decision to kick the can down the road to our children and grandchildren to sort out.
John P. Lipsky:
But when I was last at the IMF, in fact, I had something to do with the creation of that Fiscal Monitor publication, and my admonition was that whereas for the fund for many years had been known for its preoccupation with the fiscal challenges of emerging markets in developing countries, the coming decades, we were going to be focused on the fiscal problems of also the advanced economies. I think this is so. This is going to be a problem coming with this. But for the emerging and developing countries, the debt crisis is just around the corner. It's already surfacing, and it's going to be a very big near term challenge, which we can talk about, if you like.
Stephen Cecchetti:
We'll come to that. I'll just mention that around the time that you were creating the Fiscal Monitor, I was trying to get some people to look at long run paths under current policy of sovereign debt to GDP ratios for advanced economies. And they were going to 300, 400%. I mean, it obviously wouldn't happen because there would be a crisis before that. So I'm afraid I agree with you because we actually haven't done anything.
John P. Lipsky:
Yeah, exactly.
Stephen Cecchetti:
But yeah, why don't we turn to emerging market countries, and of course, there, as you point out, the crisis is now, for those of our listeners and colleagues that are again not reading all the details of this, the IMF has recently estimated that the pandemic could easily drive about 100 million people into extreme poverty.
John P. Lipsky:
Back into extreme poverty.
Stephen Cecchetti:
Back into extreme poverty, right. And this is the first time in at least 30, at least 40 years, actually, at least 40 years, when we've seen an increase in the fraction of the population in extreme poverty. It'd been falling pretty much continuously since then. How is it that we should think about that problem, and about the sovereign debt problem that, as you pointed out, is really here now?
John P. Lipsky:
Well, the challenges are so wide ranging. And of course, here, and in other advanced economies, I worry that we've become so focused on our own problems and our own challenges and that we don't have the bandwidth, let's call it, to give the potential problems or the emerging problems of the especially developing economies, the poorest economies, the attention that they really need. And it's from the beginning from the supply of medical help, which is a problem that we know is a problem, from providing near term financial support. The fund has acted, but we could make a talk about this in some detail because it's going to lead to a need for debt restructuring. And as you know, the IMF and the World Bank have led the call for what they call a debt service suspension initiative which now is to be extended at least through middle of next year, and I think probably through the end of next year, which says the poorest countries shouldn't have to make any debt service payments at all.
John P. Lipsky:
But the problem has been that the structure of debt to the emerging to the poorest countries and especially also emerging countries has changed substantially since the financial crisis in which China has become the largest single creditor to these countries. And even though it's clear that these debts need to be restructured, we can go into this at greater length. But suffice it to say that China plays by different rules in this regard. And their position implicitly is, "We didn't make the rules, so why should we feel compelled to abide by those rules that were made by others?" But what is happening, quite frankly, as I think everyone can understand that there is a reluctance on the part of the members for shorthand, I'll say the members of the Paris Club, the traditional bilateral official lenders to the poorest countries, they're saying, "We're not going to restructure our debts unless it's on the same terms as the debt being restructured to the Chinese." And this is leading to problems. Hopefully, the problems will lead to progress. But that's another issue.
John P. Lipsky:
But just to continue down the litany of what the poorest countries need, among other things, they need a restoration and growth in the G20 countries to increased global demand, but they still need policy reforms and they need trade liberalization in a world in which the tendency has been to move in the other direction. And, Steve, I don't know if I'm still a believer in our mutual friend Mike Spence's commission on development, in which as that study noted, there is no case of a country sustaining rapid income growth that did not run open economy policies. I think it's still the truth.
Stephen Cecchetti:
Thanks. That's great. Just to continue for a minute on the issue of sovereign debt, there are a lot of proposals that have been running around out there for structuring this debt to make restructuring it easier. And you were involved in a number of those during your time at the fund, as were your predecessors and your successors. And so I'm just wondering-
Stephen Cecchetti:
Well, that may be telling. But I guess the question is, is there something that we can... This is going to keep happening, is my view.
John P. Lipsky:
It's going to happen big time.
Stephen Cecchetti:
Right. And then it's going to happen again and again. Is there something that we should be doing structurally to manage this?
John P. Lipsky:
Of course, that discussion is heating up again. You remember proposals back in the... It began in the 1980s. Not to cast... Why not? My good friend, and your good friend, Jeff Sachs, on the one hand, professor now at Columbia, well-known expert, he loved to excoriate the incompetence of the fund staff in understanding what was going on. And at the same time, proposed a bankruptcy court for sovereign debt that would have given the IMF staff astonishingly discretionary powers. And I always loved to ask him, how did he reconcile those two views? But that morphed eventually into as you know the sovereign debt restructuring mechanism proposal, which was a kind of a bankruptcy court. But it forgets why bankruptcy courts work so well.
John P. Lipsky:
The bankruptcy court works because the judge can essentially do whatever they wish. And so that's a tremendous incentive for the two parties to settle, the creditors and debtors to settle before they get to court, because once they get to court, it's in the hands of the judge and the judge can do anything. So it seems that not only is that a problem with a sovereign court, or a court that could rule on sovereign debt, a supranational court for these kind of issues, but how do you take possession of collateral in a situation like this? How would you enforce a decision?
John P. Lipsky:
So I was part of a group that helped to design the collective action clauses, the idea that there should be a well defined structure or process for restructuring debt. And I still think that there are a lot of improvements that are needed to make that system work better. But I suspect that is the best way to go rather than to try to produce excessively bureaucratic kind of solutions. But the bottom line is, this is going to be a big problem in the next few years and we need to make the system work better.
Stephen Cecchetti:
Right. No, I agree. The bankruptcy court idea, I would ask people, "What are you going to do? Send the Marines?"
John P. Lipsky:
Yeah, exactly.
Stephen Cecchetti:
"Exactly how is this going to work?" I think this feeds nicely. I think we do have a little bit of time. So let me turn to the question about multilateral institutions more generally in the global system. We're 75 years or so, I guess 76 from the creation of the Bretton Woods Institutions, of which the fund is obviously one although the institution that I used to work for in Basel is not. These seem to have served us quite well in the last three quarters of the century, at least, that's my reading of it. And I think you'll likely share that. But they're now coming under some significant stress, some of which you alluded to a minute ago. What do you see is the future of these multilateral institutions and the global system that they support?
John P. Lipsky:
It's a great question and a complicated one in many ways, but let me define it the following way. The essence of the multilateral system was a series of institutions that were multilateral, therefore, they're designed to be universal meaning and representative that were rules based and treaty based, which meant that their decisions had the force of international law. So there was a logic to how they were constructed. Well, a new system has emerged, a kind of ad hoc system has emerged in the wake of the global financial crisis that is not multilateral, that is not representative, that is not rules based, and is not treaty based, and I would say, has not been terribly well thought through, and as a result is leading to a lot of problems.
John P. Lipsky:
What is this new system? The G20 leaders, of course, they're the big guys in the system, they represent about 65% of the world population, about 75% of world trade, and about 85% of world GDP. So if they say, "This is it," then they can issue orders to the multilateral institutions. And they have anointed themselves the premier forum for discussion of economic and financial issues. Their initial meeting upon their formation they had four agenda items; growth, finance, trade, and IFI reform. And for growth, they formed a new semi-
Stephen Cecchetti:
That's international financial institutions for the-
John P. Lipsky:
I'm sorry. Yes, international financial institution, thank you. Got to stay away from jargon. For growth, they created something new called the Framework for Strong, Sustainable, Balanced, and Inclusive Growth made up of basically finance deputies and central bank deputies from the G20 countries to meet on an ongoing basis to examine the coherence and appropriateness of macro economic policy.
John P. Lipsky:
For finance, they created a new institution called the Financial Stability Board, which was itself an outgrowth of a institution called the Financial Stability Forum. Those institutions were formed expressly to keep issues of financial sector regulation out of the IMF. In other words, ironically, the Financial Stability Board was explicitly formed in the wake of the Asian crisis to make sure that these annoying little countries didn't get in the way of the big boys and girls making the decisions on this. After the global financial crisis, they decided that it be expanded to the G20 members. But again, it's a voluntary organization with incomplete coverage.
John P. Lipsky:
On trade, they assign that to the WTO at a time in which the WTO has become a bit, let's just say it's a ship that's run aground and is need of repair and reform. And for the international financial institutions, surprisingly, contrary to what people say, even the Trump administration has been very supportive of the World Bank, of the IMF. There hasn't been any sense that they had lost any kind of confidence in those institutions. On the other hand, new institutions have emerged who's like the Asian Infrastructure Investment Bank and the New Development Bank. And so the coherence of that system is uncertain.
John P. Lipsky:
And moreover, the other thing that's happened, Steve, as you know very well, is the cross border capital flows that have been driven by private sector institutions now dwarf the multilateral system. So we've ended up in a bit of uncertainty. I can talk some more about the IMF if you wanted but I'll leave that to you.
Stephen Cecchetti:
We may come back to that, and I will fight the urge to give the Basel response to some of what you said. Let's just say that we had a slightly different view of a few of those things. Although I think that I was very sensitive at one point as we were creating the Financial Stability Board and writing its charter to the fact that the IMF was... This looked like something that should have been done at the IMF. And why was it being done in this non representative way? The BIS in a lot of ways was bad enough because the BIS is pretty bad about representation, but the Financial Stability Board looked worse.
Stephen Cecchetti:
Let me see, I'm going go back. There's a question in from the audience from one of my colleagues, if we just go back for a moment to sovereign debt if we could. My colleague, Aldo Musacchio was asking whether or not you have any view on countries that are specifically vulnerable, he says, besides Argentina. And what sort of situations... He says, "Are we in a situation in which the search for returns has made the yields on EM bonds so attractive that investors just don't care and are willing to roll over debt and extend maturities so they actually won't end up having problems as a-?"
John P. Lipsky:
Well, that would be great. But I think we ought to prepare... That's a version of the greater fool theory, that there's always going to be somebody willing to ignore the risks. And you always want to remember the old definition of emerging markets. Emerging markets are markets from which it's difficult to emerge in an emergency. So you don't want to... Everything's fine until all of a sudden it's not fine. On the other hand, it's hard to explain Argentina as the repetitive perpetual triumph of hope over experience. But let me say a word on this, the IMF in the following in way. The IMF, despite the fact that it is widely viewed as responsible for crisis prevention has no crisis prevention tools available to it. Moreover, recent changes have pretty much relegated the IMF to dealing with the little guys, the developing countries, the poorest countries.
John P. Lipsky:
Post the global financial crisis, we have a four tiered financial system globally. We have first class, the folks who fly first class. Those are the key central banks that have permanent unlimited swap lines among them. They're the folks you all know. Then there's a business class created by, I call them the favorite friends of the fed. These are the 12 countries that had access on occasion under circumstances that are not specified in advance to Federal Reserve funding. The IMF has just created a premium economy class namely the very limited number of countries who might be available or eligible for their new short term liquidity line but will probably never be used. And then everybody else is relegated to steerage, namely to the IMF, that has no crisis prevention financing tools.
John P. Lipsky:
And what's surprising is that system seems to relegate some of the big emerging market G20 countries to steerage. Turkey, Indonesia, South Africa, and who knows what will happen with Argentina? But other non G20 countries as well. So we have a very, very, if anything, the post global financial system has become baroque and needs to be straightened out.
Stephen Cecchetti:
I think, again, for those... Let me just make a side comment for some of you. I think that it's important to understand that there are huge numbers of dollar denominated liabilities outside of the United States issued by financial intermediaries, and so the lack of access to dollars in the Fed is an important thing. And the people that have that access then are what I think, John, you're referring to as the preferred.
John P. Lipsky:
Favorite friends of the Fed.
Stephen Cecchetti:
The favorite friends. Well, first of all, they're the ones who get the perpetual unlimited lines.
John P. Lipsky:
Those are the big... That's first class.
Stephen Cecchetti:
That's first class. But the problem is that most of the world is actually in steerage, and that's a problem. And especially if you're going to run a dollar based global financial and trade system, which seems to be what we're doing. Let me shift to a question about climate change. There's concern, obviously, that continues to grow. This is evident nearly everywhere that we look, at least outside of the United States, certainly.
Stephen Cecchetti:
I'm sure that we both have the experience in all of our interactions with people outside of the United States that at some point in the conversation, in some point in the meeting, in some point in a seminar there's a reference to climate change. That is if the entire event isn't focused on some aspect of climate change. What do you see as the role of national authorities and international institutions? Again, the World Economic Outlook has a chapter over this time on climate change policy. What should we be doing, and who should be doing it, I think is how I would put it?
John P. Lipsky:
Excellent. Well, first of all, one quick clarifying remark. On this topic, I feel pretty deeply, but I'm a simple minded economist. I start with the... Since I just was on a meeting with Nick Stern this morning. Nick Stern, Lord Stern as he's now known, led the Stern Review on the Economics of Climate Change back in 2006. And the key idea there was even if you have doubts, you ought to take out an insurance policy. And the sooner you do it, the cheaper the policy will be. That still strikes me as a good place to begin. Then, of course, we talk about the Paris accord, which is under the United Nations Framework Convention on Climate Change which original and goes back to '94. But my understanding, forgive me, let me tell us a quick vignette.
John P. Lipsky:
In the run up to the Copenhagen, what they call COPs, the Committee of the Parties of the UNFCCC, this was in December '09. If you've been paying attention to this issue, you will remember that, the Copenhagen COP. I attended a G20 finance ministers meeting in advance of the London Summit, this is in March 2009. The question came up, should the G20 finance ministers get engaged in climate change policy? The emerging market countries in the G20 were adamant, adamant that the G20 finance ministers stay away. And I said, "I got it. I got it. We're going to have a meeting of climate change folks who are going to set a bunch of goals without any reference to the costs or any notion of what the available finance is. We're going to develop a bunch of standards and the folks, the activists are going to be able to say every year we're a trillion, two trillion, three trillion dollars short," et cetera.
John P. Lipsky:
And I thought, "This is nowhere near as productive as it should be." My simple minded answer, we need a carbon tax. And without a carbon tax, it's all just blah, blah, blah. And in practice, Steve, my view, the G20 has got to take the lead on this. And for this to happen the U.S. has to get on board. But one thing I learned in Washington, if the U.S. isn't engaged, nothing much happens. But if only the U.S. is engaged, nothing much happens. And we got to get engaged, the G20s got to get engaged, and we got to get moving on this before the insurance becomes way too expensive.
Stephen Cecchetti:
Thanks. Yeah, well, to say that I'm worried is-
John P. Lipsky:
Yep.
Stephen Cecchetti:
Let me see if I can find us... I'm happy to go back to some of my questions, but let me see if we can find some questions from the audience. Please put your questions into the Q&A. See, I think that... Well, that's not a question. Okay. Well, let me go back. I can go back to one of mine. Maybe we'll go back for a minute to the issue of the policies that have been put in place for the pandemic around the world and how they differ. And we saw very different policies in the U.S., the EU, and in China, for example. We're also seeing now, we're getting more information every day about this. And how do you think about that?
John P. Lipsky:
Of course, it's always good to remind yourself that we tend to view this as an economic challenge, or call it an economic crisis like no other. But we have to remember the source of this problem is the pandemic, and the economic downturn has been a result of a government decree shut down that has no precedent. Let me start with China, which is where the Coronavirus originated, and they seem to have controlled the spread of the disease very well, but it's been via very severe lockdowns and other form of controls. I've been reading the excellent chronicles about daily life in China during this period written by Peter Hessler, an excellent writer who publishes in the New Yorker, and I recommend if you haven't read it. And what it describes is a degree of detailed controls, micro level the controls on everyday behavior that are just hard to imagine being implemented in either the U.S. or in Europe, in fact, in many other places.
John P. Lipsky:
And it's clear, it's not just a matter of, "Oh, it's an authoritarian government." No, it's a populace that is very tuned to accepting this kind of direction and to living up to it. It's just hard to imagine here. Now in both the U.S. and Europe, there's been ultimately there's on the fiscal side and whatever it takes approach to providing support to the economy. But the important difference is in the EU, especially in Germany and France, for example. The lockdowns have been compensated with support to businesses, the preexisting mechanism that enabled them to keep paying furloughed employees. And this keeps the employees connected to their employer.
John P. Lipsky:
And in the U.S., this sort of approach was improvised ad hoc through this PPP program that we know had lots of problems because it was stood up in a matter of days or weeks. But more broadly, exceptionally generous extra unemployment benefits were granted, as we talked about earlier, that meant that, as I said previously, my understanding is about 40% of the recipients who receive benefits that exceeded their prior pay.
John P. Lipsky:
By the way, your audience may be aware, and I know you are of our colleague Raj Chetty at Harvard who has a fantastic website called Opportunity Insights that is scraping incredible data, real time data and displaying it in... If you're interested in the subject matter, take a look at that Opportunity Insights website.
Stephen Cecchetti:
He has something called tracktherecovery.org which is really easy to remember for me. And then once you get to tracktherecovery.org, you can see in some cases daily data on closings and revenues and the like. And it shows a... Anyway, I'm really glad that you brought that up. That's a tremendous service that he's providing.
John P. Lipsky:
Yes, indeed. However, look, if business, if especially small, medium business failure rates are similar in the medium term in both Europe and the U.S., isn't clear how much difference there is between these approaches. And the U.S. system may in fact make structural adjustment more rapid, but the social cost has to be considered as well. So this is not an easy one to know in advance, which is the best way other than you feel like once again, big picture, it wasn't impossible to imagine a pandemic occurring, and we just weren't prepared at almost any level and we're left making it up as we go along. It's a shame.
Stephen Cecchetti:
So I have a question from someone in the audience, a alumni about the election. So I think we've danced around this a little bit. We're less than two weeks away now. We did schedule this so people who do want to watch the debate tomorrow can still do that. I will be watching the baseball game, the World Series, but what do you-
John P. Lipsky:
I'll probably do the same.
Stephen Cecchetti:
Yeah, well, the question, which I think is a really interesting one is how you see things... Which of the things that you've mentioned that you're concerned about do you see changing in positive directions if it were the case that there would be a new president in January?
John P. Lipsky:
Well, look, it's not just the U.S. I think back to the global financial crisis that was viewed as pretty dramatic. The G20 was thrown together in a matter of weeks. The first G20 leaders summit was announced at the IMF meetings in 2008 and the first summit occurred five weeks later, with an agenda, with bullet, with action plants. It was quite remarkable. And then move forward to the April 2009 London Summit that produced big time action across the board on all of the agenda items, including, for example, a trillion dollars in new resources to the international financial institutions. We could go on, but the point was, there was no sense of great power conflict at that time. The sense was, we're all in this together, we're all pulling together, there was no finger pointing, there was no blaming, there was the, what can we do to get out of this together?
John P. Lipsky:
That sense, we're in a different world now. And one conclusion is, as I've said, in terms of capital flows, the role of China is just fundamentally different. We have to arrive at a modus vivendi to make the international system work in a more cooperative way. One way or another, we're going to have to get along. And I think the Cold War just doesn't provide a useful analogy whatsoever. Yesterday I heard a talk I don't recall being told, it was Chatham House, from the U.S. Trade Representative, and special Trade Representative. And essentially explaining why it was in the U.S. interest to pursue trade issues on a bilateral basis because the U.S. is the big guy and implicitly, we get better results for ourselves if we can muscle folks around.
John P. Lipsky:
And trade diversion is not our problem. We're happy to negotiate, you buy X billions of tons of soybeans from us without thought of it. Well, that means you're not going to be from the other guy. This is called trade diversion. And this is why you created the WTO to stop things like that. We were told that the goal was to defend U.S. manufacturing. You say last I looked manufacturing jobs were about 8% of the total. We got to have a broader view of these things. So it strikes me that it's not the U.S.'s sole fault. It's much broader.
John P. Lipsky:
But it strikes me that right now we have an international system that is not working well on any of the key agenda points that were set by the G20 in November of 2008. And it's time to get serious about trying to make progress. And that, among other things requires U.S. leadership. And I have to say, one thing I'm not happy about is you haven't heard any of that kind of rhetoric other than we need to work with our allies. But specifics, bigger view, achieving a constructive modus vivendi with China, et cetera, I wish that was a higher priority and I could have more confidence that there was going to be progress on that regard.
Stephen Cecchetti:
I think I certainly share your hope that we can get people working together more. I think what you're describing is not just it's not just destructive of the multilateral order, but it's also short sighted. And I'm just going to ask you one last question. We have students and alumni in the audience, they're obviously thinking about their careers. You have a long and illustrious career, both in the private and the public sector. What are your suggestions? What suggestions do you have for people who are starting out in business careers today?
John P. Lipsky:
Well, first of all, thank you for calling it illustrious, but I think that's only flattery will get you somewhere, start talking principle. I think my advice here I worry is going to sound, or my comments are going to sound like a cliche. But where I start is, I can assure you, I've moved between, from as you heard from the provost, I started in the first job was at the IMF, then 23 years in the private sector, and then back to the IMF. I can assure you it was not planned out. It was serendipitous. And if there was a principle behind, it was to follow your passions. Do what you're interested in and you think is important.
John P. Lipsky:
Obvious, as I say, I know it probably sounds like a cliché, but if you're just cynical, if it's remuneration you're after, chances are that you won't excel, and you're going to end up frustrated and not very proud of what you've done. So I've never seen anyone succeed at a high level who didn't give it their all. And I think it's very hard to give it your all if you're not passionate about it. And if you think that giving it your all means all for me and me for me, I think that tends to get noticed, too. And it's generally not a good way to become appreciated by your peers or get along. So I just was always interested in these things and had no problem in throwing a lot of effort at it.
Stephen Cecchetti:
Well, that's great. The fact that you followed your passion certainly shows. Let me thank you. Let me just take a second to thank all the people who sent in questions. I tried to get to some of them. I didn't do a very good job. I apologize for that. They were great questions and they all deserve answers. I'm not sure we know the answers to a lot of them, but I apologize for that. But, John, thank you very much for taking some time out of your evening to speak with us and to talk to all of the various people from the Brandeis community. I'm going to turn it over to Dean Katy Graddy. Thanks.
John P. Lipsky:
Thanks, Steve.
Katy Graddy:
Hi. I'm Katy Graddy. I'm the Dean of the Brandeis International Business School and the Fred and Rita Richman Distinguished Professor of Economics. I'd like to thank Provost Lisa Lynch for joining us this evening, and especially our presenters, Dr. John Lipsky and Professor Steve Cecchetti for their illuminating discussion. I would also like to thank the Rosenberg Institute of Global Finance and the Perlmutter Institute for Global Business Leadership for sponsoring this event. We are indebted to the Rosenbergs for their vision and support of finance programming at Brandeis University, and to the Perlmutters for their deep interest in creating opportunities for our students to prepare for careers in global business leadership.
Katy Graddy:
Lastly, I very much want to thank all of you for attending. We will be sending you a link to the recording of this event within a few days, along with a short survey. Please do take a few minutes to respond. And on behalf of the Brandeis International Business School and Brandeis University, thank you very much for joining us today. Have a very good evening.