Were you surprised when the trade deficits took off and were ballooning at the very moment the Clinton Administration succeeded in achieving virtually balance in the federal budget, which is contradictory to what you and others have assumed?

Well. I think you have two different kinds of situations. You have trade deficits and the dollar exchange rates in the late '90s that were driven by very large influxes of capital that was actually going into investment in our country. It wasn't going to support fiscal deficits because you didn't have fiscal deficits. It was going to sustain a pretty high investment rate and that actually can work out pretty well over time. The problem is when you have large inflows of capital to support either fiscal deficits or consumption, both of which we have now.

Right, but you spent eight rather tough years getting the budget deficit down to zero, then went into surplus. But the very moment those things were happening, the trade deficit itself expands ferociously. That's got nothing to do with any structural problems in the trading system? It doesn't refute your assumption that a balanced budget reduces the trade deficit?

No, because the trade deficit, by definition, is going to be the fiscal position, which as you say went to balance or actually surplus, plus investment, which got to be very high, minus your savings rate. So what we had was a fiscal surplus toward the end, very high levels of investment, which is good, and we had very low levels of personal savings. And all that worked because we had a lot of foreign investors who were investing in our economy because they thought they'd get better returns there. That's very different from the inflows of capital that have occurred during this decade.

It left you with large trade deficits but those you could work out of through subsequent currency adjustments and by virtue of the heavy levels of investment we had in the late '90s we had very rapid growth in productivity which was good.

You don't attribute any of the trade deficits ballooning to the behavior of our trading partners or the industrial condition of the United States versus China or versus Japan, versus Europe? This is the essential difference, I think, in the way some of us look at it from the way you and others look at it. All those things [like currency differences or savings] are present and functioning factors, but underneath all that are different industrial policies and approaches by all these different countries and the United States is distinctively, even uniquely, vulnerable to the trade deficits because of our policies.

Well, you say vulnerable to the [trade] deficits. Our policies have resulted in having very good GDP growth for a long period of time and very low unemployment. In Europe today, you have unemployment give or take 10 percent. You have very low levels of growth. They're cheering in Germany this year because they think they can grow 1.8 percent. We would consider growth that's 1.8 percent as calamitous.

So, no, I think the evidence suggests our theory of the case is a pretty good case. But, right, it has a lot of problems associated with it. And there's one problem you haven't even discussed yet....

Which is?

That it-all-falls-in argument.

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