I don't want to belabor it, but coming from someone of your influence and status, this is fairly new. I've covered this fairly closely and I regard it as significant for that reason.

As long as I was in Wall Street and I was very involved with markets and economics and from that perspective, I wasn't much involved with that [inequality] from a policy point of view. I only started dealing with these distributional issues once I was involved in a policy type of job. For me at least, that only became part of my perspective once I got down to Washington....

I think another thing that changed, and I give President Clinton a lot of credit for this, is that people used to think of distributional issues in terms of transfer payments.... What President Clinton said is it's not a transfer-payment kind of issue. I think he used the phrase "empowering people." It's investing in education, healthcare, infrastructure or whatever it takes to enable people to be more productive economically. Then you have your transfer payments for people who for whatever reason can't function effectively in the mainstream economy....

But I think you're right. Look, I do a lot of public speaking and, since I left Treasury, I've never charged anyone one nickel for public speaking. I've made that my rule since I left Treasury. And I most often in my remarks say that we have to focus not only on growth but on distribution. It's not something people tend to hear. So I think you're right about that.

In the aftermath of the '90s and continuing today, is the outcome of the trading system quite different from what you and other members of the Clinton Administration expected...? We wound up not just with a trade deficit with Mexico and the job effects of that, but the trade deficits with China are huge and ballooning.

Well, I mean, certainly people didn't think we were going to have the kind of deficits we've had.... I don't think the deficits are quite the point because, after all, probably to a large extent, exchange rates wouldn't be where they are if you had had flexible exchange rates all along the way. I mean the renmimbi and the dollar and not only the RMB but Asian exchange rates in general. You know, Asian countries don't want to get too far away from the RMB for obvious reasons. It's really a competitive system.... What's happened is not a function of something to do with the nature of trade.

Yeah, but that was all known before the trade agreement with China.

No. Well, maybe. But I don't think people thought--I'll speak for myself--I surely never thought, if you have the kinds of imbalances you have today, you'd have the kinds of exchange rates we have today, that exchange rates would have substantial adjustments. To put it differently, I never thought in the face of very substantial trade imbalances, you would have inflexible exchange rates. I don't think that was part of anybody's anticipation. Another thing I don't think anyone anticipated, though it's a related thing, is that you would have these very large influxes of capital, which is what's happening in this decade--it didn't happen in the '90s--that were designed to support the dollar in order to subsidize exports [from China and other Asian nations].

So all of that has occurred. I don't think I expected the exchange rate system to work that way--I don't think anybody did. If they did, I never heard anybody say it.

Well, leave aside what people thought.... We've now got a situation that you yourself describe as quite serious in both trade and current-account deficits.

Yep.

Does that suggest something else should have happened in the design running up to the current situation?

I don't think that's a design issue. I don't think that's actually a trade issue. I think it's a foreign exchange issue.... If you had had fully flexible exchange rates. Though I'm not advocating, by the way, that China go to that immediately because I think it might create a lot of chaos.... But I don't think it's anything in the design in the system. Maybe I'm missing something, but I don't think there's anything in the design of the system we would have done differently....

I don't think it's the trade deficits that are the issue. Yeah, it's a big issue and it's got to be remedied over time. But if we had higher savings rate, we'd have a lower trade deficit. But, of course, nobody in our term thought we would go back from substantial [federal budget] surpluses to substantial deficits. Nor should we have. Nor do we have to.

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