Paul Gigot of the WSJ moderates a panel on the future of the world economy.

First to speak: Václav Klaus, the Czech president. He was reluctant to accept the invitation to talk about topics as indefinable as the global economy because it is a distraction from the real problems and from actually doing anything. He focuses on Europe. It is an tightly interconnected world, he says. Some in Europe have proposed establishing a fund to compensate the “victims of globalization,” by which they mean Europeans. Instead, they should create a fund for the African victims of European protectionism. The real problems, he says, are in the realm of ideas, e.g., government intervention, paternalistic income redistribution, political correctness, those who think they’re better than us and would regulate us…

David Rubinstein, a co-founder of the Carlyle Group (see this), speaks. He begins by trashing the Carter administration, in which he served. [I’d take Carter-style incompetence over Bush’s any day.] He says the US used to be the economic driver. Now what happens outside the US is more important to our economy than what happens inside. We have to change if we’re going to join a vibrant global economy. We need to encourage investing overseas and let non-US investments here. If we don’t change, we’ll become second class citizens.

Nobelist Gary Becker (blog). Factors that have driven this amazing global economy: 1. Remarkable productivity growth, particularly in the US. Productivity determines whether people are better off. It will continue unless policies intrude. (Gigot nods vigorously.) 2. Developing economies (China, India) where governments have gotten out of the way.

Risks: Not oil prices or inflation rates. Not low savings. The danger is geo-political and government involvement. The risk is that the governments will try to do things they can’t really do, such as provide full employment. Overall, he says, the economies look good.

Gigot: We have a world of liquidity. [Is that like Water World?] It hasn’t been this liquid since inflation was high. Should we be worried?

Becker: Relative prices change, but that doesn’t mean the price level will rise. Inflation is mainly determined by monetary policy, and central banks are providing stability.

Rubinstein: Fuel prices went up faster during the oil shock of the ’70s. We’re better at managing the change now.

Gigot: We have a new Fed chairman. How’s he doing so far?

Rubinstein: Until there’s a crisis, we won’t know if he’s up to the job.

Becker: I agree. But it doesn’t all rest on the individual. The tools are in place…

Klaus: I share the optimism. I wrote my doctoral dissertation 40 yrs ago on “The Problem of Inflation in the Capitalist Countries,” so I know something about inflation. (Laughter).

Rubinstein: Central bankers aren’t as important as they were 50 yrs ago. Markets drive them. (Klaus rocks his head in considered disagreement.)

Gigot: Mr. President, you’re pessimistic about Europe. Eastern Europe has been adopting the flat tax…

Klaus: The longer term statistics show that EU growth rates have been going down decade by decade, from 5% in the 1950s to less than 1% now. As far as the flat tax, I campaigned for it 10 yrs ago but didn’t win. It’s on the ballot in 5 wks. I’m in favor of it, but I don’t think it’s a panacea.

Rubinstein: The 15% capital gains tax hasn’t been given the credit it deserves. And, everyone is an investor now. [Well, except the huge number of people who are in debt.]

Becker: Flat taxes aren’t flat; the poor don’t pay anything. What you really want is a low tax rate; it doesn’t have to be flat.

Gigot: If Congress doesn’t extend the capital gains rate, will the damage be immediate?

Rubinstein: It won’t help.

Becker: Barriers will continue to fall.

Klaus: Tariffs will continue to come down, but non-tariff barriers will continue to be erected.

Gigot: The Carlyle Group invests in China. What’s up there?

Rubinstein: We’ve invested in life insurance there; only 8% of the China have life insurance. We’re buying the Catepillar of China. Each deal took about 3 yrs. I kept going to what were billed as closing dinners. If you think you’re going to make a quick dollar in a year or two, that’s not the place for you. You have to make it clear that you’re going to help China, and not just help yourself. They don’t see Western capital as essential to their economy, although they’re glad to have it. [Tags: milken economics]

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