The Clarida view: in an exclusive interview, TIE sat down with the Bush Treasury's chief macroeconomic strategist, Dr. Richard Clarida.

TIE: Your recent article on the U.S. trade deficit and the sustainability of capital flows in the Financial Times received some interesting feedback.

Clarida: That article [October 22, 2002] grew out of work I did preparing a briefing last spring on the current account deficit. With this particular issue of the sustainability of international capital flows, I felt that what was missing from the discussion in the press was an understanding of the causes and the implications: that the U.S. current account deficit is caused, in large part, by a deficit of growth in the rest of the world.

TIE: Do you find it ironic that not that long ago, Japanese and European policymakers were regularly lecturing U.S. officials about the "American disease"--spending and consuming at all costs. Yet today some of the same people arrive at G7, IMF, and World Bank gatherings essentially expressing the hope that the American "disease" will continue for a little while longer because it's propping up the world economy. Particularly in the context of autos and housing, do you think the "disease" will continue?

Clarida: One of the points I made in that article is that it's incumbent to ask what the policy implications are. I have not found anyone who has recommended any change in the current stance of U.S. policy. There are discussions about U.S. policy in the years 2006 and 2008, but in terms of what we should be doing differently now about the current account of the capital flow, there's no serious discussion about it. The way the debate has played out is unhelpful, and fails to examine the root cause of the capital flow--that there is a pool of portfolio capital in the world that has fewer places in which to invest than several years ago and that capital is seeking safety and acceptable returns in the United States. Even when Europe is growing its unemployment rate is higher than ours, and the Europeans are not happy about that. And obviously for Japan challenges are well documented, and it's not good for Japan or the world economy to go through a second decade like the last one. Really, the answer is for the rest of the world to grow more rapidly, not for the United States to arbitrarily try to slow economic activity.

TIE: In reality, of course, no one wants to slow the growth of the U.S. economy. One argument that they would probably make, though, is the mix. There is always this argument that the United States needs to rely on international sources of savings to fund our consumption. In an open global economy that may not be a problem, but are you concerned that the situation is out of balance--that it would be useful if we had a higher saving rates particularly in the United States?

1. I have two observations. The first is that looking ahead at the path the U.S. economy will grow along over the next several years, we would expect that over time, the baton would be passed from a consumption-led recovery to one in which business investment and exports are more of the source of growth in demand. We believe the most likely outcome is for continued economic growth, but at a pace that is not so much being driven by the consumption but by those other components, namely investment and exports.

Second, with regard to saving, President Bush feels it is very important for individuals to keep more of their own money, and we think the tax cuts were very well timed, given the weakness in the economy that we inherited. While some of the extra after-tax income will be consumed, some will be saved. Regarding a particular path for saving, we do think it's important that households make their own decisions.

TIE: What about capital spending? How do you size up the situation right now? There are a number of theories for the stagnation of business investment. One is that the corporate CEO is unsure about the current geopolitical situation, so therefore he or she is holding back on making decisions. Another is that the CEO is unsure about the regulatory environment post-Enron. A third theory is that Washington has not produced a big game plan for the economy. In the 1980s, the Reagan agenda produced a vision and the same occurred with the Rubin agenda in the 1990s. Like it or no, the existence of a big idea in both decades provided a sense of investor predictability. As chief macroeconomist in this Administration, what big idea or vision is likely to influence the investment climate in the future?

Clarida: Well, those are all obviously important factors. I believe the record shows--and the passage of time will only reinforce--that when this President took office, the Administration inherited a very challenging situation. The economy was already contracting, as we now know from the Bureau of Economic Analysis data. Obviously the excesses of the 1990s in terms of equity valuations were only beginning to have their repercussions felt at that time. In addition, we had September 11, which was not only a tragedy in terms of loss of life, but also impacted the way firms and individuals both here and abroad had to recalculate risk and evaluate risk. I sometimes use the distinction between risk and uncertainty of the late economist Frank Knight: Risk is when you know the distribution but you don't know the outcome, and uncertainty is when you don't even know what distribution...