Adam Posen takes the stage: just back from his three-year stint on the Monetary Policy Committee of the Bank of England, the new president of the Peterson Institute for International Economics sat down with TIE founder and editor David Smick.

• Author: Smick, David
• Position: AN EXCLUSIVE INTERVIEW - Interview

Smick: Congratulations on becoming president of the Peterson Institute for International Economics. This appointment will go down in history as proof that nice guys actually do finish first. What changes do you have in store for the Institute at this point?

Posen: In the search to replace the retiring Fred Bergsten, I was in a sense the Board's continuity candidate. I promised them there would be no New Coke change for change's sake. We would stay the same size and be committed to the same values--pro-globalization, and intellectual honesty about globalization. Still, since Fred Bergsten and Pete Peterson founded the place over thirty years ago, we do need to adapt to a changing world. Let me list three ways I plan for us to do that. First, we have to reorient more globally. The Institute was always focused on Washington decisions, the actions of the U.S. government, and the United States talking to other governments. The action now is not just in Washington and not just happening in government. Markets matter. Non-governmental organizations matter. Part of my mission is to make the Peterson Institute more engaged both with stakeholders and with issues beyond just those that interest Washington.

The second adaptation is generational change. We have some wonderful scholars who make Peterson among the very top research institutions, but for a variety of reasons a number of them are retiring soon. This gives us an opportunity to refresh and restock. We've already hired a couple of exciting new people and promoted others. I'm hoping over the next three years to continue refreshing the senior staff.

The third way we need to adapt is to face the growing competition. Fred and Pete had the vision to create a specialized think tank back when nobody else was in this space. We're now one of many, including organizations that work directly on our issues. Our unique brand is intellectual quality while being relevant, but quality doesn't always come across in a blog or an op-ed. A big challenge will be to figure out what modes of publication and communication we should be using in the years ahead to get our research out. We can't just write a book and hope people read it the way perhaps we once could.

Smick: The Institute enjoys a well-deserved reputation for its fine analysis, but if there's one criticism--and it may be unfair--it is the relative lack of market experience on the part of the Institute's scholars.

Posen: It is fair to say it would be useful for us to have more market input. But I think the number of people who were both working in markets and being economically literate was much smaller when the place was started than it is now. So it's a little unfair to say that Fred and Pete missed the boat on that. I am hiring a couple of people who have direct market experience. Perhaps as importantly, I'm increasing the number of smaller meetings, forums, and interactions with market people--not just in pursuit of support, but also in pursuit of ideas and insights.

Smick: Did the Institute as a whole ring the alarm bell that the Great Financial Crisis was coming? I don't recall that being the case, but I could be wrong.

Posen: Our people, ranging in views on banks from Simon Johnson to Bill Cline, got some things fight and some things wrong. I think Jacob Kirkegaard in particular deserves credit for correctly calling a lot of what happened in Europe. Joe Gagnon and I deserve credit for getting a lot of the monetary policy analysis correct in real time during the crisis. The broad optimism of our trade people--notably Gary Hufbauer and Jeff Schott--that significant protectionism wasn't going to result from the crisis, was borne out. And Fred, Anders Aslund, Nick Lardy, and Arvind Subramanian all called the at least temporary decoupling of Eastern Europe and Greater China from North American developments.

But that said, like almost everybody else, we were certainly too confident that something as bad as the global financial crisis wouldn't happen to the Western powers including the United States. We were too confident that financial liberalization was a good thing. Certainly financial liberalization versus the way things were in the 1980s was a good thing. But the extreme forms it got to by the early 2000s? Probably not. Give some credit to economists Joe Stiglitz and Raghuram Rajan and others who questioned the limits of excessive financial liberalization starting in the late 1990s. Like most, we took it for granted that more liberalization was better, or at least didn't question that assumption enough.

Smick: Since the financial crisis, analysts have estimated that in response to the crisis, the world has collectively produced roughly $15 trillion in various forms of fiscal stimulus. In addition, the world's central banks have expanded their balance sheets by an estimated $5 trillion. Yet the global economy can't seem to get out of its own way. Witness the fourth quarter of last year for the United States, which may not be quite as bad as the headlines, but indicates the U.S. economic vehicle, if not moving in reverse, is moving at a painfully slow speed. Does this lack of a response to stimulus trouble you? There's always the argument that things might have been worse without the stimulus, but that's a pathetically weak fallback position for policymakers at a time of huge joblessness when average folks are suffering.

Posen: You raise several issues. First, in economic terms, did the stimulus have the desired impact, which is another way of asking how much worse would the crisis have been if we hadn't done it? To me the evidence is clear. We would have been much worse off in both the short term and long term if we hadn't enacted various forms of fiscal and monetary stimulus, and perhaps would have courted disaster.

The second issue is at least as important. Politically, are our system and globalization sustainable given how miserable the recovery has been? That's a very troubling question. For unemployed youth, whether in the United States or Spain or for that matter in North Africa, recession and unemployment do lifelong damage to their incomes. We can agree that unemployment, particularly youth unemployment, is a really bad thing in ethical and political as well as economic terms, but there is a limit to how much it can be reduced using the macro tools of stimulus. It's a real challenge. If one wanted to be pessimistic about the United States, that's the place to start.

Smick: If you go back to 1973 when energy prices quadrupled, since then the real wages and salaries of Americans have stagnated. In the past decade or so, both Presidents Bush and 0bama pushed through enormous amounts of fiscal stimulus, yet wage and salary growth has remained relatively stagnant. The situation has been helped along by more ample government support. Yet you get the feeling something's fundamentally wrong with the U.S. economy. Is the problem that technological breakthroughs have not been as economically transforming as perhaps they were for previous generations?

Posen: I completely agree that the income development for most Americans has been dispiriting and unsatisfactory. But a number of countries that were supposedly not like the United States have ended up in this state. In Germany, real wages stagnated for a decade and inequality rose, too. There are a couple of exceptions. Until the crisis, the situation was actually getting much better in Spain. But that was an exception, and maybe part of the problem was they couldn't sustain being an exception.

Smick: One argument too is that the political/economic system's response to this wage and salary stagnation has in effect been to tolerate a series of bubbles. First came the dotcom bubble, then the real estate bubble of the financial crisis. We may now be facing a monetary bubble as another means of trying to bring about a more dramatic improvement in incomes. In the end, don't bubbles burst because the underlying fundamentals are not strong enough to support asset prices?

Posen: I push back against that claim because not all bubbles are created equal. The internet bubble had much different effects than the real estate bubble. And the bubble in the United States had much different effects than the bubble in Ireland. This idea that everything that happened, not just the crisis, was because of a macro bubble flies in the face of the evidence that there were long periods for a lot of countries with no bubble, and yet income stagnated there, too.

You have to look at other causes. One is that the size of the world labor force doubled at the low-skill, low-wage end by bringing China, Eastern Europe, and parts of India into the global economy. This put huge downward pressure on some wages. I believe strongly that having five hundred million Chinese and a couple hundred million Indians and Latin Americans rise out of abject poverty over the last twenty years while the vast majority of Americans are probably slightly better off than they were, in real terms, is a triumph for humanity. But that does not allow us to deny the wage impact of the process.

The second cause is there basically was a corrupt capture of a big chunk of our political and financial system where a lot of legislation, regulation, and corporate decisions were directed toward maximizing the benefits for the few people in charge of financial firms at that particular time. We used to lecture other countries about that, yet the United States, United Kingdom, and Japan have all shown evidence of such capture in recent years. That's not the full story, but you can't...