Fareed Zakaria at 2011 PhRMA Annual Meeting

 

Fareed Zakaria
delivered these remarks
at the 2011 PhRMA Annual Meeting
April 15, 2011

Hi there.  Thank you so much.  That was a very generous introduction.  My mother would have believed every word of it.  It's a real pleasure to be here, especially with a group like this.  I'm hoping that we can get to the interactive part of the conversation very quickly, because I want to lay out some themes, but then I really do want to hear how you would respond to them.

So what I'm stuck by, looking at the world today, and looking at the United States in particular, is how public sentiment and elite sentiment is not really ‑‑ has not caught up with the reality, by which I mean if you were to ask people what they think of the United States right now, what they think of the American economy, there is an enormous amount of caution, pessimism, a sense of wariness. 

And yet the data basically show that the United States is coming out of this recovery quite robustly, not robustly by historical Bush war standards, but certainly by the standards of the aftermath of a financial recession, a financial collapse, which is always a much longer process, because you have the deleveraging cycle that has to work its way through.

The United States will grow faster than any large industrialized country in the world this year.  The United States will, in effect, be once again the engine of global growth this year. 

American consumers are in pretty good shape ‑‑ a five percent savings rate, which is the highest it has been in 20 years.  Corporations, I don't need to tell you, are brimming with cash, $2 trillion by some calculations, all cash on balance sheets.  And you are beginning to even see some shift in the employment numbers, but I will get back to that later.

And what is striking to me about this is it is a recovery that has been largely unpredicted, underpredicted, or unnoticed.  And it feels to me a lot like a pattern I have seen for a while.  Let me take you back.  I came to this country from India in the early 1980s, middle of the ‑‑ beginning of the Reagan boom, and people were fretting and worrying. 

In 1987, the Dow Jones Industrial Average collapses.  Do you remember this?  Twenty-two percentage points in one day.  It's still the largest percentage point collapse of the Dow in one day.  And the next day The New York Times asked the leading economist in the world at the time, John Kenneth Galbraith, to write a long article.  And he wrote a piece saying, "This is it.  This is our generation's version of the Great Depression.  The crash of '29 has come again.  I only hope it won't be as bad as the 1930s."

Well, two weeks later the market was back to normal, the economy actually had barely budged, and we moved on.  But we moved to the early 1990s when you had a pretty tough recession if you remember.  This was the recession that elected Bill Clinton, and it was rough because some people would argue it was a white collar recession. 

So even though it was not as deep, members of the media knew people who were out of work for the first time.  And as a result, it was reported on, shall we say, with a certain amount of extra care. 

It was so ‑‑ there was enormous public anxiety, though, to be fair, because it felt different.  You know, this was the end of the Cold War, the demobilization of the Defense Department.  One indication of it is, of course, you had a populist candidate presented as a third party alternative to major parties, which happens very rarely. 

Of course, the only-in-America phenomenon is that the populist was a billionaire, which is, of course, repeating itself in our current electoral cycle ‑‑ Donald Trump playing the role of Ross Perot.  But such with the public anxiety that Ross Perot got a higher percentage of the vote than any third party candidate has gotten since 1912, since Woodrow Wilson, William Howard Taft, and Theodore Roosevelt ran against each other.

So a huge amount of public anxiety, all centered around the economy.  You remember Perot's great line, "The great sucking sound of jobs leaving America," and presumably going to Mexico.  He didn't quite tell us the destination.  And that was '92.

By the end of 1993, economists were puzzling over a different problem.  American unemployment was going down so fast that they literally did not have models to account for it.  You'll remember there used to be something called NAIRU.  For any of you who took Economics 101, the non-accelerating rate of unemployment.  It was the rate at which, when unemployment fell to a certain point, it would start triggering rampant inflation.

And for I think it's 36 quarters, the unemployment figure fell below what every model told you was possible.  So here we are ‑‑ one minute ago we were worried about the great sucking sound of American jobs leaving, and now we are worried about how on earth is unemployment falling so low.

But never mind.  By 1994, '95, and '96, we experienced a series of crises ‑‑ Mexican crisis, Asian crisis, and at that point everyone says, "These emerging markets, this was a bubble, this was a mistake.  I don't know how people thought this was going to go on."  And now this seems a kind of quaint view, and you don't really believe anyone felt this way.

But I was editing Foreign Affairs magazine at the time, and I ran an article, a cover piece, by a very prominent economist at the time who later went on to win the Nobel Prize, and perhaps even more importantly get a column in The New York Times, Paul Krugman.             Paul wrote an article for me called The Myth of Asia's Miracle, and it was a piece basically saying Asia has had a couple of good decades, but it's over.  They are going to go into a long period of stagnation, so get prepared for it. 

He subsequently popularized the piece into a cover story for Fortune magazine in which he argued, "The only question we have to wonder about," he says at the close of this article, "is the Great Depression in Europe led to war.  And will the Great Depression in Asia similarly lead to political conflict and war?"  But there was no question in his mind that there was a Great Depression on its way in Asia.

Well, a year and a half later, every Asian market was booming again, no sign of an Asian world war.  But, of course, that just got ‑‑ took us to 1998, Russian default, long-term capital collapses, and Robert Rubin, the Secretary of the Treasury says, "This is the worst financial crisis since" ‑‑ you guessed it ‑‑ "the 1930s."  We can't get rid of that analogy.

And, of course, everyone was concerned the whole system was going to unwind.  Two weeks later, the Fed had organized a bailout, which it insisted was not a bailout, and things went back to normal.  But, of course, that gets us to March 2000 when the NASDAQ collapses, $3 trillion wiped off American stock exchanges, largest number ever, and people said, "This whole technology boom, this was a craze, this was a phase, and it is never going to happen again."

And, of course, serious technology companies like Hewlett Packard and Microsoft will be fine, but this whole idea of B to C companies ‑‑ you remember that phrase ‑‑ business to consumer companies, you are talking about websites that kids use, nobody understands the business model, and these are going to be companies?  That's all over.  Forget about it.  Right?

Well, since then, we have had the introduction of companies like Myspace, Facebook, Twitter, Tumblr ‑‑ I could go on ‑‑ and as far as I can tell, they all started out as websites that kids used when nobody understood the business model. 

So that gets us to our current crisis and recession.  The point I am now trying to make is that we did not go through a serious crisis. We went through a very serious crisis.  It was a super-credit bubble.  It exploded in a particularly dramatic way.

The point I am making is that when we think about the world, and we think about these trends, we tend to straight line project.  Everyone realizes we do that in the good times.

My point is we also do that in the bad times.  When things are going badly, we assume that, you know, things will continue to be like this.  It's going to be miserable.  We are in the Great Depression.  And we don't catch the recovery, because it is much easier to predict change than it is to predict ‑‑ continuity than it is to predict discontinuity.  Right?

If I were to ask you guys, "What do you think the economy is going to look like going forward?" you would all say to me, "Sort of where it is, plus or minus 10 percent."  Right?  That's the safest thing to say.

To predict any kind of significant discontinuity is very unsettling.  Companies say they like out-of-the-box thinking.  Nobody likes out-of-the-box thinking.

(Laughter.)

You don't know what to do with out-of-the-box thinking, right?  I mean, particularly ‑‑ my brother runs a hedge fund.  He says, "You know, in my business, nobody likes that kind of thinking, because," he said, "you have a bubble.  The professional incentives for you are to buy the bubble."

Because if the bubble bursts, everyone is down 30 percent.  Nobody is going to blame you.  But if you don't buy the bubble, and it inflates for a year, if it inflates for the second year, by the end of the second year you don't need to worry, because you don't have any money to manage.  Everyone has taken their money away, because they are saying, "Wait a minute.  You are sitting on the sidelines while everyone is making money?" 

So you see there is a kind of personal-professional incentive to go with the herd, to predict continuity.  And it is difficult at moments like that to say, "Yes, I know it looks very bad, but actually there is a possibility of an uptick.  There is a possibility of a discontinuity on the up side."

So I leave you ‑‑ I mean, I just want you to think about this process psychologically, but then I am going to tell you why I think the good news here is that the system that we exist in is much more stable than we realize.  And then, there is some bad news as well.

The system is more stable than we think, because we have created a new global, international, economic and political order, which is, frankly, a lot better and a lot more stable than any previous one we have had before. And I know one is not supposed to say things like this, because, you know, the world is supposed to be just cycles of continuity and discontinuity.

But look at the world I grew up in, the world of the Cold War, sharp division between the world, and, most importantly, a very small number of countries playing our game ‑‑ the capitalist, free trade, free market game.  I mean, if you think about it, when I was growing it, it was an article of faith that the number of countries practicing free trade and capitalism was a tiny aberration.  Right?  I mean, think about it.  The United States, Canada, Western Europe, Singapore, Hong Kong, Japan, Korea, Taiwan.  That's it.  One hundred fifty countries in the world at the time.

The largest number of countries were all, in some way or the other, locked out of that system practically socialism, mixed economy, import substitutions of some kind or the other.  And then, 1989, that all collapses, and the political conflict begins to wind down, and the economic divergence turns into an economic convergence.

To give you just one sense, you have political violence, war, civil war, and, yes, terrorism.  If plotted by simply the number of people who die, it has declined dramatically over the last 30 years.  There is actually good data on this.  The University of Maryland collects it.

Three million people died in Indo-China in the 1970s.  One million people died in the Iran-Iraq War in the 1980s.  Four million people died in Congo in the late '80s, early '90s.  Nothing like that is happening today.

You know, there are tragedies, and they are real, but the numbers of people dying are much, much lower, because you don't have superpowers involved.  You see, you don't have endless supply chains that supply these civil wars and turn them into much worse things.  Political stability.

The second thing is economic stability and a certain kind of price stability.  When I was growing up, the biggest problem every country in the Third World was facing was inflation.  It was also the biggest problem every country in the developed world was facing.  Think about the 1970s in the United States, right? 

And this was ‑‑ the United States had high inflation rates, but Turkey had 200 percent inflation, Peru had 2,000 percent inflation, Brazil had 1,000 percent inflation.  And inflation is deeply destabilizing politically, because it destroys the middle class.  It destroys your savings.  And so you see the political effects of it almost everywhere.

In 1979, Paul Volcker enters the Federal Reserve, decides he is going to break the back of inflation, and he does so.  He does something no American public figure has done since, which is he does something very unpopular in the short term that is good for the country.

And he was hanged in effigies during that period, but the result was he broke the back of inflation.  And in a copycat fashion, you saw inflation decline in country after country as they adopted tight monetary policies in the same way.

In 1979, the number of countries that had hyperinflation was about 34.  The number of countries that have hyperinflation today is zero.  Six months ago it was one, but Zimbabwe dollarized, and so right now you do not actually have a single country that on record has hyperinflation.

Think about that.  Political stability, economic stability, pushing in the same direction as it were, and then you have this extraordinary information revolution that has taken place, that have connected the world in a way that simply was inconceivable before.  You know, people talk about globalization and things like that before World War I.  That was all trade.

The Brits made stuff; they sold it to the Germans.  The Germans made stuff; they sold it.  Today, when you talk about globalization, you are talking about interpenetrated supply chains that are so deep that it is actually impossible to even separate them. 

When GE makes a jet engine today, it is made in 14 different countries.  You know, I'm sure if you look at Eli Lilly's supply chain, you would see something similar.  And there is an interesting question, actually, about whose GDP numbers this stuff should go on anyway.  Right?  I mean, we are using 19th century national income accounting to describe this very complex new phenomenon.

And so when you have manufacturing done in China by American companies, many of the parts made in other countries, final assembly takes place in China, shipped to the United States, whose GDP is that?  Right?  Nobody really understands, and yet we have these simple clunky measures to describe it.

The reality is much more complex, and the world is much more interconnected as a result of it.  So that technological factor has just been so powerful, and you can see it at the political level, but you have to remember that all of these things have primarily economic effects. 

You know, when you think about instantaneous news, the fact that you can get news everywhere, and the minute something happens in Egypt or Libya you see it, well, the most important effect of that has, of course, been prices.  Prices are now instantaneously available everywhere.  This was not true. 

There used to be a business called arbitrage.  It was a very good business.  You buy in New York and sell in Chicago.  You can't do that anymore, because you go to Google and you have all the prices there.  Right?  That simple fact has collapsed the possibility of those kind of arbitrage.

And that's just one example of so many different things that have changed as a result of this information revolution.

So if you think about it, political stability, economic stability, technological connectivity, all pushing in the same direction, and what you are seeing as a result of it is this phenomenon that I call The Rise of the Rest.  Countries around the world, using the political stability, using the economic stability, using the technological connectivity, to plug and play in the global economy, and results you know and you see them.

Just give you a statistical reality check on that.  1979, Mr. Volcker's year, the number of countries that were growing at three percent a year was about 31, 32, depending on how you measure it.  Number of countries that were growing at three percent a year or more this year, in the aftermath of the greatest recession since the 1930s, is 85.  The number of countries that were growing at three percent a year or more in 2007 was 124.

So you have tripled or quadrupled the number of countries that are successfully participating in the system.  So it is no wonder that when we were going through these crises we didn't realize that, because we were looking backwards, but we had created a whole new world.  It was much more resilient, much larger, many more players. 

Give you a simple example.  Without the cash that came in from other centers of growth in the world, by which I mean the Middle East and East Asia, almost every American bank would have collapsed during this recession.  One of the things people ask is why the banks didn't collapse.  Well, there are many reasons for it.  In my opinion, good government policy is one of them.

But a huge part of the story is the vast amounts of cash that came in from the rest of the world and recapitalized these companies.  I mean, think about, you know, Al-Waleed putting money into Citigroup, the Qataris, the UAE, the Taiwanese, the Singaporeans, all that money that came in during crisis periods and stabilized these countries.  That is a huge part of the story, and it is new.  Right? 

So it has provided an enormous sense of stability to the global economy, and it has also, obviously, provided growth.  For the first time in history, by which I mean recorded history, 2- or 300 years ‑‑ in 2008, 100 percent of global growth came out of the emerging markets.  One hundred percent of global growth came out of the emerging markets.  And that is, in a sense, a shift that you have already seen, and it is accelerating.

And, as I said, there is a huge up side to this.  The system is more stable, it is more resilient, it is more productive, it is more prosperous.  And you see that reflected, of course, in the profits of American companies.  Forty-six percent of the profits of the S&P 500 now come from outside of the United States.

But now we are going into a world that is more uncharted than we have ever seen, and this is now the ‑‑ I don't know if I should call it the bad news, but certainly the challenge.  And the challenge is that you are getting a world in which countries are getting richer, more powerful, and more assertive.  You know the numbers, so I'm not going to tell you.  Growth is all taking place in the emerging markets.

But the important thing to remember is the effect of the financial crisis has been to accelerate the forces that I describe in my book, The Rise of the Rest, the transfer power, because, of course, growth rates in the West have slowed and are likely to stay slow because of a combination of deleveraging and large debt burdens that have accumulated.

Growth in the emerging markets, particularly China, but India and Indonesia as well, Brazil as well, have not changed at all.  In fact, the term "global financial crisis" is a misnomer.  There was no financial crisis for China or for India or for Indonesia or for Brazil.  You know?  They did not have overextended consumers.  They did not have banks with bad loans.  They did not have subprime mortgages.  They had a temporary psychological shock to the system because of the collapse of the Western financial system, and in four months they were all back to normal.

So when you look at the Goldman Sachs BRIC Report, which predicts that the Chinese economy will overtake the American economy in X year ‑‑ pick the year ‑‑ what I am struck by is it has now been revised once to bring that date closer. 

And if you look at the data, it is almost certain to be revised again.  And that date is probably going to be in about 10 years now.  If you look at the new data, you would have to conclude that on a PPP basis, purchasing power basis, China will overtake the United States in about 10 years.

But the point I want to make is about the mentality.  A Chinese official said to me, "We look at how we handled the economy and you handled the economy over the last 10 years.  Here is what we conclude.  We had strong growth, so we raised interest rates."

"We did three things," he said, "we raised interest rates, we tightened consumer credit, and we accumulated a budget surplus, because we realized that when the wheel turned we would need ammunition.  So when the wheel turned, we lowered interest rates, we eased upon consumer credit, and we spent a lot of money."  The Chinese stimulus program was 10 times the size of the American stimulus program as a percentage of GDP.  Our stimulus program was 1.5 percent of GDP.  Theirs was 12.5 percent of GDP.

He says, "When we look at what you did, we saw that when things were going well, you lowered interest rates because you were trying to goose growth.  You eased up on consumer credit, and particularly you went crazy on housing credit."  Right?  Frannie Mae and Freddie Mac basically trying to forcefeed Americans loans mortgages for houses they couldn't afford.  "And finally you described your federal budget."

He said, "The tax cuts, prescription drugs for the elderly, two wars, none of it paid.  You take a budget that was in surplus, and you have a four percent structural deficit."  When the crisis hits, the four percent goes to nine percent.

So he says, "And yet every time Treasury officials come to our country, every time investment bankers come to our country, they lecture us on economics."

(Laughter.)

And I think that the point is this is a feeling not just felt in China, but felt in India and Brazil and Indonesia.  Right or wrong, I mean, I think you have ‑‑ in all those cases, by the way, those countries handled things better than we did.  Not every ‑‑ the Chinese are really the gold standard on this, but they all manage things pretty well.         

Indonesia, for example, I mean, it's a country that people thought wouldn't even exist in 1995 after Suharto left.  Remember, everyone thought the whole country is going to collapse.  You know, it is going to go Islamic, fundamentalist.  And this year it has gone from a debt-to-GDP ratio of 100 percent to 30 percent in the last seven years, while the United States has gone from 30 percent to 70 percent, on its way to 100 percent.

So you can understand this feeling of, you know, our time has come.  What does it mean for the United States and for growth?  Now, this is where I get to the part that I think we should spend some time on.

Obviously, it presents huge competitive challenges.  It presents huge competitive challenges at all kinds of levels.  American companies have been able to not just withstand these, but adapt to them rather extraordinarily.  I don't worry about American companies so much.  I don't worry about the great American pharmaceutical companies so much.

What I worry more about is the problem of employment in the United States.  This is going to be a challenge not so much to American companies, not so much to even American GDP levels or growth rates, but it is going to be a problem for American employment.  Let me explain what I mean.

The United States has now gotten back to its ‑‑ the same GDP level, the same output level, as before the crisis.  We are at 2007 levels of GDP, with eight million fewer workers working.  That was with eight million more unemployed.  Right?  And that is the story of every company in America.  They have all managed to do more with less.  Right?  And you see that everywhere.

Now, the question is, what is going to spur employment?  Everyone says it was going to be innovation.  Well, innovation is a funny thing.  You know, it is not clear what people mean by "innovation," for example.  It is not clear how you get it.

Let me give you a simple example.  People would say Apple is the most innovative company in America, right?  Well, if you look at money spent on innovation, MicroSoft spends I think ‑‑ I mean, MicroSoft is like number three or four in terms of what it spends on innovation.

Apple is 85, something like that, because Apple's innovation is not, you know, about PhDs in computer science coming up with new codes.  It is innovation about how consumers use technology and how they ‑‑ and about design and about ease of use and user interface.  Is that innovation, or is that not innovation, right?

So when you just say, "Well, we just need innovation," it's not clear exactly what that means.  Well, do you mean, okay, you need scientific innovation, you need new products, you  need new processes?  And this is something you folks know very well.  Perhaps.

But the thing about that kind of innovation is it may be very good for companies.  Is it very good for the American people? 

So Apple again, let's say, is the most innovative company in America, or at least one of the most innovative companies.  Apple has revenues of about $63 billion.  There is a company called Foxconn in China that makes Apple's products.  It also has revenues of about $63 billion.

Only here is the difference:  Apple incorporated in Cupertino, California, employs 49,000 people.  Foxconn employs 900,000 people.

I was telling this story about six months ago, and I was checking up on my data, which I usually do to just always make sure that I haven't ‑‑ you know, the mind does strange things.  I used to tell this story, and Foxconn had 600,000 employees.  And then, one day I read something and it said 900,000.  I thought, that's a pretty large typo or error, so let me make sure what is going on here.

Well, it turned out the 2008 number was $600,000.  The 2010 number was $900,000.  To give you some sense of what that means, the entire United States economy last year added 900,000 jobs in the private sector.  Foxconn added 300,000. 

So when you think about innovation, you have to ask yourself, so you can innovate all you want ‑‑ look at solar technology.  The United States has been the leading innovator in solar technology. 

Every solar panel in the world is now made in Germany or China, most of it in China.  Why?  Because solar panels are actually simple manufactured products.  Wherever you may invent them, the truth of the matter is that from a cost perspective, it is going to be cheaper to manufacture them in China than anywhere else.  And so you haven't figured out how to deal with that problem, which is how to link innovation to broader growth, to broader employment.

Facebook is a $50 billion company.  It is changing the face of the world, changing the face of technology.  I think it employs something like 2,500 people.  Okay?

When the Ford Motor Company started, in about five to seven years ‑‑ I think I have this right ‑‑ it was employing two million people.  Right?  I mean, if you think about that, two million people, you are taking care of several states, because this is, you know, back in the early part of the 20th century.  I mean, Facebook could get hidden in a building in New York and you wouldn't notice.  Right?  And yet it is probably the most important new company to have been created in the United States.

So to my mind, this is one of the crucial problems of innovation today, which is, how do you link innovation to broader economic growth, to broader employment?  And I bring this up, you know, because it's an important question to ask about technology.  It's an important question about business processes. 

It's an important question at all those levels, but it is also a political question, because if you cannot take innovation and translate it into growth and employment, what is going to happen to those 20 million Americans who are still unemployed?  20, 25 million, right?

And if you can't come up with a solution to that, and if we end up with structural unemployment, the kind that Europe has gotten used to ‑‑ well, we are not Europe.  The United States and the U.S. political system is not Europe.  And I think you will see an angrier and angrier political system, and you will see perhaps a great deal of closing down of this political system.

You see some of it already, flashes of it in terms of attitudes toward immigration, attitudes towards foreign trade.  You know, the most interesting statistic I have seen in recent years is support for trade and trade treaties among registered Republicans, which used to be in the 60 to 65 percent range, is now down to the low 30s.  Right?  This is among Republicans.  It has always been lower among Democrats, and among Democrats now it is I think in the teens.

So, you know, these are slow trends, but at some point they have a critical mass.  So I close just by asking us to think about this great challenge that this new world produces for the United States.  There is a benefit, though.

Let me just close with that, which is we are the most innovative country in the world.  We are the most dynamic economy in the world, and we are going to find many, many solutions to things that people don't think we'll find.

I was listening to the panel on medical costs, and it's clear to me when listening to that discussion nobody has an answer right now.  Right?  Because everyone is trying something or the other, and, frankly, we should be trying everything. 

In my view, this whole idea that you either have the consumer pay more, or Medicare tries to get better prices, or you have fee for outcome rather than fee for service, these are not ors.  I think the truth is you are going to have to try a whole bunch of stuff.  It is going to be trial and error.  Some of it is going to work, some of it is not. 

 But the most important thing that we are not factoring into this is the huge impact on radical new technological breakthroughs that can have an impact on cost and can have an impact on treatment and can have an impact on the health of people.  That is the X factor that always has an impact that we don't think about, and that's something that we do very, very well.

 So there is a huge up side here, if we are optimistic, stay open, remain dynamic, remain committed to the idea that the United States can do things.  But we have to do it in a way that brings the whole country along and that in some way or the other invests everybody in the success of this economy, because, if we don't do that, I think we will not be able to have islands of success in a pool of stagnancy and envy. 

We will become a European or, even worse, a Latin American country.  And I am using caricatures now to describe it.  My point is:  we do not have a political system that will be fatalistic about this and simply accept it.  So we need to start thinking about solutions that work for everybody.

Thank you very much.

(Applause.)

All right.  Questions, comments, disagreements?  Particularly interested in the last.  Sir?

AUDIENCE PARTICIPANT:  (Inaudible comment from an unmiked location.)

MR. ZAKARIA:  Right.  So if you look at innovation in health care and biomedical research, everyone is trying to do it.  I mean, I was in Singapore three months ago, and I'm sure some of you have been to their Biopolis center where they are ‑‑ I mean, they are basically putting huge amounts of money in there.  They have thousands of scientists working there.  All of it is state-funded. 

You know, to me, there is a kind of funny paradox, and I say this as somebody who is generally, on economic issues, pretty right of center, and I obviously don't like taxes.  But I am struck by the degree to which we talk about the free market in this completely idealized, abstract way, and meanwhile you go to these places and the government is pouring massive amounts of money into education, massive amounts of money into research, and it's as if we're not noticing.  You know?

In six years, China is going to overtake the United States in the number of citations in scientific journals.  This is a lead the United States has held for 75 years.  All science in China is state-funded.  There is not a single non-science, right?  And so we are sitting there thinking ‑‑ we said but, you know, you can't have government involved in anything.

So you look at the Singapore model.  I mean, by some logic, it shouldn't work.  The government should be misallocating resources.  They should be wasting money.  They should ‑‑ and, you know, of course as in all these systems, there is a lot of waste. 

But there is a lot of stuff that comes out of it, so that you look at Singapore, you look at South Korea, which are the two most important ones, I would argue, in this area ‑‑ correct me if I'm wrong ‑‑ just in terms of the level of research they have been able to achieve, because they have a pretty strong scientific base to go on.

But the Chinese are catching up very, very fast.  You are seeing big, big new stuff in India, and in India it is public-private.  There is a lot of private money, but, still, a large amount of government funding.

I think that ‑‑ I still think that the United States has a more creative environment to do a lot of the most interesting stuff, the most cutting edge stuff.  But a lot of routine research has already been done in these countries, and I think that when you have to choose between hiring researchers in Beijing and hiring researchers in the United States, there is a huge wage differential that you can't pretend doesn't exist anymore.

I mean, I have talked to CEOs at pharmaceutical companies who say, "We have, you know, labs in Beijing, labs in Cambridge, England, and they do the same thing.  The only difference is the lab in Cambridge costs us four times as much because of labor costs."

So, you know, I don't think that it is going to be as easy, particularly in biomedical research, to make the case that there are some unique advantages that the West, and the United States in particular, have, because countries are very, very quickly trying to move up this value chain, and they are, you know, trying ‑‑ they are still ‑‑ when people look at it and they say, "Well, but they are still not there," yes, but look at the trajectory.  Just ask yourself, where was South Korea 10 years ago?  Where was China 10 years ago?  Where was India 10 years ago?

And even if you don't get a straight line projection, 10 years from now the picture is going to look quite different.

 AUDIENCE PARTICIPANT:  You wanted some disagreement, so let me ‑‑

MR. ZAKARIA:  Sure.

AUDIENCE PARTICIPANT:  ‑‑ offer two or three areas.  Number one is on employment.  I believe personally that our problem is a short-term problem.  When you look at the 73 million baby boomers who are going to be retiring in the next 15 years or so, I think our problem will be that we won't have enough manpower for the jobs that will exist.  And I think productivity increases, continued productivity increases like we have enjoyed in the last few years, will be absolutely necessary for the economy to continue to grow.

Second point, you mentioned that we are very good at, you know, breakthrough discoveries in America.  And I think that's true historically.  But as we discussed yesterday in the panel, I am very concerned that we are seeing the National Science Foundation and the NIH move more and more away from basic research and more into applied research.  And that is for economic reasons, basically.

So this short term is ‑‑ I think it bodes bad for the long-term breakthrough innovation that this country has been so successful on.

And, finally, a third point also of disagreement ‑‑ small disagreement ‑‑ is regarding past arbitrage in terms of manpower.  You know, when you look at wage inflation in India and in China, 20, 25 percent, especially in the high-tech sectors, I think the huge difference or arbitrage that exists today will disappear over the next 20 years.

MR. ZAKARIA:  A great set of points.  So on the first one, I think you are going to see, of course, the retirement of the baby boomers.  It does not strike me that that is going to change the problem, which is, what are these people going to do, right?  I mean, you need to be able to find things that working Americans of a certain level of education can do.  People who have fancy college degrees or post-graduate degrees, they are going to be fine.

But an article in The New York Times a couple of ‑‑ I think a month ago talked about computer programs that now do the job that entry-level lawyers used to do.  So you have these two forces.  One is technology, and the other is globalization. 

Take the auto parts industry, which was a huge employer in middle America, right?  You have seen this ‑‑ you have read about this car, the Nano, in India.  Basically, it is a Mercedes Smart car.  It's a four-door Mercedes Smart car.  The Mercedes Smart car costs $22,000.  This costs $2,400.  It's going to come onto the American market for $6,500.

Now, forget about the car and the pressure that places on the price point.  Think about the auto parts.  So every auto part manufacturer in India can now make parts to global specifications.  So when Ford makes ‑‑ buys new auto parts, is it going to buy them from Michigan, or is it going to buy them from India?

They don't even have to outsource anymore, right, because everyone ‑‑ all these companies have global operations; the question is where you invest money.  They are all investing ‑‑ and you can see this.  They are all investing money in their emerging market operations ‑‑ in other words, increasing employment there.  They are not increasing employment here.

So I think, you know, you have a structural problem which I hope resolves itself because of what you are describing, but I fear it won't. 

When I look at the wage inflation issue in the Third World, in India, I think that particularly, you know, because I go back to India a lot, I visit China every year, I think that people focus in on the places they go to.  You are absolutely right.  Wage inflation and the high-tech sector in India and China is rampant.

India has 800 million people who make less than $2 a day.  So when you think about the broader issue of wage inflation, as these people come on-stream, as they come into the urban markets, as they start going through the educational system, I don't see how you are going to get wage inflation.  I mean, look, this is why for 25 years you haven't had wage inflation.

There are two global deflation machines at work here ‑‑ China and manufactured goods, India and services, and they have been pumping and pumping and pumping.  China ‑‑ even China has 300 million people who are still in the rural parts, still haven't worked their way through. 

So while you do see some wage inflation, it does not seem to me large enough to change that basic arbitrage model, right?  Because Chinese wages ‑‑ even Chinese wages in a manufacturing plant are about 20 percent of U.S. wages at ‑‑ I mean, those are good, high-paying Chinese jobs, so they are going to 25 percent, 26 percent.  Is Walmart really going to say, "Oh, you know, forget it.  We will buy the stuff made in Michigan instead."

You know, you are still talking about a 75 percent discount to buy from China.  Go down to 60 percent ‑‑ by the way, there will also be goods made in Bangladesh and in Vietnam and in places that are lower cost than China.  So the numbers are too great for me to be convinced that you will not have that problem.

The real issue that I would argue that you have to think about is there is clearly going to be some convergence.  Everyone is noticing and talking about the convergence because of Chinese and Indian wages going up.  But convergence doesn't work in one way alone.

The other way is we have to talk about whether Western wages are going to have to go down, right?  That's the real question.  You cannot have 400 million skilled workers enter the global marketplace in a globalized environment with open supply chains and say it is going to have no impact on Western wages.  It is just not ‑‑ I mean, the math doesn't work.

What was your middle point?  I'm sorry, I forgot.

AUDIENCE PARTICIPANT:  (Inaudible comment from an unmiked location.)

MR. ZAKARIA:  Oh, yes.  I agree with you there, and I think that my own view is we should probably be doing both, that the NIH should not be trying to have to choose.  I think we should be spending probably twice as much as we are spending right now on basic, you know, government-funded research. 

There is no ‑‑ you know, in the context of budgets that we are talking about, nobody thinks that it's important.  But I would argue the three percent number, which has been the goal of the Obama administration, to return to three percent GDP, which is what we spent in the 1950s, is a very low baseline, because in the 1950s we had a steel industry, you know? 

What I mean is we had thousands ‑‑ millions of people who were employed in basic brawn work.  We don't have that.  The only place we are going to employ people is knowledge industries, and so if that's the case, you need to make large expenditures in science and research and large expenditures in job retraining.  And I think you need a job retraining program on the scale of the GI Bill, if you are going to do something,

Think about all of those auto parts people I am talking about  These are 45-, 50-year old people.  They are not going to get jobs making auto parts at the same price ‑‑ you know, at the same wages that they had then.  What do you do with that?  So, you know, investment in research, investment in retraining, it seems to me this is the way you reindustrialize the country.

Sir at the back.

MR. NICOLI:  Yes, hi.  David Nicoli from AstraZeneca.  First, thank you for a tour de force across the globe.  If I could just kind of have my mine personal channel where you could come into my house, I would be very happy.

MR. ZAKARIA:  You are very kind.

MR. NICOLI:  I would worry much less.

Two big things that people worry about, but it's so hard to get your hands on.  Number one, the euro and whether ‑‑ I mean, I loved what you said about continuity versus discontinuity, right?  So is the euro going to be politically and economically feasible with all of these other pressures going on?

And then, the second thing we read about is really, when does the bond market start turning ‑‑ you know, it has turned on Greece, turned on Portugal ‑‑

MR. ZAKARIA:  Right.

MR. NICOLI:  ‑‑ when does it start turning on the United States, if at all?

MR. ZAKARIA:  Yes.

MR. NICOLI:  And, you know, kind of, again, is there a discontinuity coming there?  Or is that line going to keep going?

MR. ZAKARIA:  Right.  Great questions.  On the euro, my view is this.  If you were to centralize Europe's debts, they are completely affordable.  They are a little high, but they are quite affordable, because, if you take them all together, Greece is one percent of European GDP.  You know, these are all nano-states from an economic point of view.

Germany is the 800-pound gorilla.  Germany can afford to pay all of these checks.  The debate that is going on right now, the Germans are saying, "If we are going to take on all these liabilities, we need you to fix your economy along German lines."  That is, take the pain, raise retirement ages, do all of that.  And in a sense, it is a debate about whether Europe wants deeper integration, which is what that would imply. 

My gut is it will happen.  It will muddle through.  It will not look perfect.  The Germans will cut the checks.  They will do it kicking and screaming, but ‑‑ and they will get ‑‑ they will extract something.  What Merkel understands quite correctly is this is her moment of leverage.  Once she writes the checks, she loses all leverage, so she is trying as hard as she can to wait until the last possible moment before she writes the check.

But, you know, again, think back over 20 years.  Every five years, every three years, people have said the euro is going to collapse.  The European, you know, system is going to collapse, and somehow every two or three years, if you were to look at it you would notice that Europe has become more integrated.

And it's really an amazing story of these countries that used to go to war for 400 years, that have pooled sovereignty, that are cooperating, and that are now ceding even more sovereignty.  And, yes, they've got a lot of hiccups along the way, and, yes, you know, once the euro zone was created it meant the Greeks could borrow at German interest rates, and they went wild. 

You know, by the way, when the cost of capital collapses, everybody does stupid things.  That's a simple rule.  I think the only people in the world who did not do stupid things were the Germans, as far as I can tell.  But when the cost of capital collapses, everybody does stupid things.

So, you know, the Europeans did, and they are paying a price for it.  But I think they will muddle through.  It won't look perfect, but there will be no collapse of the euro.

The bond market ‑‑ I think that we are in a very different state than Ireland, Greece, and Portugal, and people really don't understand, in my opinion, you know, our situation.  For example, do you know that the United States' interest payments on its debt are lower today than they were in 1996 at the height of the Clinton boom?  This is true.  Because interest rates are lower.

The United States' borrowing costs have gone down over the last three years, as the hysteria in the United States about our deficits and debts have gone up.  Our borrowing costs have actually gone down, so the market is saying, "We will lend you money at lower and lower interest rates."  This is the time, frankly, to take loans and rebuild our infrastructure and put ‑‑ you know, make some investments in the future.

The United States does not have a short-term debt crisis.  It has a long-term debt crisis.  We are addressing our ‑‑ you know, if you look at the debate in Congress, it is nuts.  We are trying to find this ‑‑ you know, savage these programs for short-term cuts while doing nothing about the long-term.  It is backwards.  I'm not going to use the word I was going to use, you know, but it is completely backwards.

(Laughter.)

What we do right now is irrelevant.  We can borrow easily.  We can borrow cheaply.  What we need to do is fix entitlement programs, and we need to figure out particularly health care costs, but also Social Security, means test it, index it differently, and things like that.

And I think the reason markets are not going to be as punitive as ‑‑ it's really a simple thing.  If we were to repeal the Bush tax cuts, and if we were to, let's say, put a one and a half to two percent value added tax in the United States, which would have the enormous advantage of slowing down America's rampant overconsumption, you'd solve the problem.  Right?

That's not true of any of these European countries we are talking about.  The United States has a $15 trillion economy that is fundamentally very dynamic.  We have the lowest tax share, you know, as a percentage of GDP of any country in the industrialized world.  Our tax levels are the lowest in 40 or 50 years at a federal level, not so much at a state level.

So this whole idea that we have no solution is simply not true.  And it's true if you theologically say that you will simply never accept any form of tax increases.  Yes, then you have a buy-in, because you are spending at 23 percent of GDP, and you are taxing at 19 percent of GDP. 

And, you know, your cutting four percent of GDP out on a $15 trillion economy proves to be very hard, as the congressional Republicans found, you know.  They discovered that $63 billion of cuts weren't $63 billion of cuts, because, guess what, it ain't that easy.

You know, so if you look at Paul Ryan's budget, and you look at where domestic discretionary spending is in the years that his ‑‑ these numbers actually kick in, you know, because for 10 years nothing happens, the domestic discretionary spending has to go down to a level lower than it was under Calvin Coolidge, right? 

So that means you would not have a Defense Department.  I mean, it really is impossible to sustain a modern government with the revenue levels we have now.  There are hundreds of ways you could do this.  There is ‑‑ the Simpson-Bowles Commission shows that there is one and a half trillion dollars of tax expenditures, tax credits, tax deductions, you know, things that you can close, without raising rates.

I mean, obviously, that is the first place to go.  There are all kinds of other places you can go.  But don't kid yourself, you are raising taxes.  People talk about eliminating deductions and loopholes as though it is some magical way to get more revenue without raising taxes.  Somebody's taxes have gone up.

(Laughter.)

Otherwise, you don't have revenue, right?  So you can call it what you want, but you are going to have to raise taxes.  And the adult discussion in this country should be:  how do we raise taxes, you know, over the long period?  How do we fix entitlements so that we are on a better trajectory?  How do we make massive investments in science and research and technology, so that we get the game-changing effect on medical costs?

We want game-changing effects in two areas ‑‑ energy and medicine.  Those are the two areas where existing trends projected forward are just going to kill us.  We need much more and much cheaper technology, and we need much more and much better medical care and much ‑‑ in both cases, a dramatically lower cost. 

Both of those only happen with technological revolutions.  We can do it, but you have to make big, big expenditures, you know?  We made huge expenditures in semi-conductors and computers and what was ‑‑ then became the internet, because of the Cold War in the 1950s and '60s.  There is no reason we shouldn't do it today.  In fact, you could argue that it is even more vital.  But that is going to be the solution, ultimately, to the problem.

Thank you.  Thank you so much.

(Applause.)