Jeffrey E. Garten: So much has been said about the issues of stimulus and economic growth and bank restructuring. There has been a lot less discussion about the polit­ical ramifications of this enormous crisis. We’re very early in 2009, but I think it’s not too early to start thinking about the broader political fallout. The economic and financial situation has been deteriorating and virtually all the projections I’ve seen show that, if there is a light at the end of the tunnel, it’s very, very hard to see. What worries you most about the political situation in the world over, let’s say, the next 12 to 18 months?

Fareed Zakaria: I would distinguish between two kinds of consequences. The first are the immediate economic, political, and social consequences as a result of this economic slowdown. Everyone is going to be hurt. Governments and countries that are highly indebted or in other ways are in fragile circumstances will be affected the most. It is a strange mix of countries in this category, including very large ones like Russia — Russia now has the third-worst-performing currency in the world, after Zimbabwe and Belarus.

We’ve gone through, broadly speaking, 10 years of global growth and economic boom. We’ve had a remarkable degree of political stability, in historical terms. One wonders what five years of bad economic times will do to bring problems such as social unrest to the fore.

But the broader, long-term set of consequences that honestly worries me the most is in the realm of ideas. For the last 20 years there has been a broad consensus around the world around certain ideas that one could call “democracy plus capitalism” or “liberalism” or “the Washington consensus.” That hegemony of ideas has been seriously damaged and eroded by this crisis, because the crisis took place at the heart of capitalism, at the heart of the most advanced economy’s most advanced sector. And it seems a problem in some ways inherent in capitalism.

I look at what is happening and I think of all those people in all those countries who have been valiantly trying to reform their economies, their politics. I think at the end of the day, while there are many problems with it, this set of ideas has been profoundly helpful for the world. It has taken countries which had rapacious, predatory, and dictatorial states and moved them toward a greater sense of openness, a greater institutionalization of liberty and opportunity for people.

Now these reformers are all on the defensive, every one of them. The people who I worry will get empowered are the populists, the nationalists, the people who want to blame their problems on outside forces, who want to empower the state in ways which might have some virtues, but could also be abused and misused, and have historically been abused and misused in the Third World a great deal.

To put it in technical terms, the good guys are on defense and the bad guys are crowing.

Amy Chua: Three broad issues worry me. One is the swing to extremes. In the 1990s, free markets, privatization, and deregulation were implemented, often hastily and naively, all over the world without particular attention to the context. Today, I worry that we’re swinging broadly to the opposite extreme — that regulation is the panacea. There’s a demand for quick fixes that’s very worrisome. Second, like Fareed, I also worry about spreading social unrest and backlashes globally. Third, I worry that Americans will lose confidence and faith in the new administration if they don’t see a turnaround fast enough. But things are going to take time, even in the best of worlds.

From the longer-term economic perspective, I think laissez faire “cowboy capitalism” is clearly going to be out of vogue for a while and that may not be the worst thing. Fareed mentioned Russia; I think that we might see the rise of populism and backlash against capitalism and global markets even in countries like China.

Finally, on the political side, I’m guessing that you’re going to see less of the United States pushing democratization abroad. People in the United States have a real sense that we have our own massive problems to solve. They’re less interested in redressing — or even thinking about — global poverty. At the same time, I think more and more Americans are realizing that democracy is not that easy to install and that the results of democratization, or at least of elections, are not always pro-market, pro-America. In Venezuela, relatively free and fair elections brought in Hugo Chavez.

Paul Kennedy: Here would be my two cents — or my two worries. One is narrower or specific and one is broader. The broader one would be that just as the Obama administration moves into power and large numbers of people across the world and their governments look forward to cooperating, the extent of this crisis, leading, as both of you have said, to a sort of narrowing of minds and inward turning, probably is going to push to the bottom of the agenda a number of priorities — on economic development, on reforming international institutions, on the environment, on human rights — because they will start to look like second-degree problems. I even think that nuclear proliferation and terrorism might be regarded as second-degree problems by certain political leaderships. It’s worrying that things one hopes would be tackled by the international community with an Obama administration might be put on the back burner.

My more specific concern is the impact of this on China in its domestic, political, and social fabric. I’m picking up a set of data on the plunge in Chinese electricity production in the past two months and the collapse of Japanese and Korean exports to China, which is suggesting that the turndown there is amazingly fast and probably destabilizing.

Zakaria: Both of Paul’s points are very important. I want to weigh in on the first one. You have a crisis that is by nature global — it has spread as fast as it has precisely because of the reality of a global system — but it is producing a pull inward and a kind of return of nationalism, not just at the level of bad guys who spout anti-globalization rhetoric, but at the level of governments. This is no longer a prospect; you already are seeing the turn-back of globalization — or you can call it very simply free trade. First of all, every government has announced plans for these massive fiscal stimuli, often totally uncoordinated with other governments. Fine, all well and good. But if you look inside these fiscal stimuli, all of them are basically subsidies to local industries. Subsidies to local banks, of course. But within every stimulus package is basically a massive subsidy to often inefficient local industries because they are the ones in danger of going under. That is entirely contrary to the spirit of greater global cooperation, globalization, free trade.

Many countries like China, like India, like those in Europe, like the United States are also raising tariffs. They’re raising them within the band you are allowed to under the WTO, so they are not busting out of the global free trade system, but they are raising them substantially. All this is actually producing a turn toward protectionism.

Garten: This is a fairly gloomy picture. What political options are available, given the fact that national leaders, whether it’s Obama or Gordon Brown or even the leadership of China, are all under excruciating pressure? They all know at one level that if everyone turns inward — if the ideas gravitate back towards very heavy, state-dominated economies — ultimately everybody’s going to be worse off.

What is the nature of leadership in a situation like this, where the lessons of the Depression are discussed ad nauseam? Let’s start with Obama and the U.S. What realistically could he do?

Kennedy: I see the leadership needs here in two different dimensions. One is the leadership to be able to articulate to your own people in a better way than most have done what is going on and what the limits of government are. Somebody has to be able to tell the almost wrecked Irish people what happened. So, leadership internally — a sort of FDR leadership — in trying to explain and trying to encourage, is terribly important. Obama will do a very good job of that. Whether the others will, I’m not quite sure, because there’s a tendency, say, with Berlusconi and Sarkozy to push the explanation almost completely onto the foreigner or the international system.

The other level of leadership that I see is not vertical, that is, explaining to your own people, but horizontal. There is a really pressing need for that leading group of economies, the political leaders and the central bankers, to try to do something to keep in step with each other. If we could get them understanding that, that would be one ray of hope for me.

Chua: On the brighter side, Obama definitely stands for more cosmopolitanism. He’s clearly rejected an “us against them” approach. That can only help.

But he must face one of the tensions inherent in the democratic system. Obama must do his best to explain that it’s a global crisis and stress the importance of remaining engaged with the global system. But in the end, an elected government does have to be responsive to its citizens. The problem is that in a recession large sectors of the American population will, for example, associate the term “globalization” with foreigners taking U.S. jobs or foreign goods replacing U.S. goods. Meaningful democracy should be more than just popular, instantaneous majoritarianism, but you still do have to respond to the citizens. I think it’s a tricky problem.

Garten: Fareed, if President Obama turned out to be the kind of leader that so many people hope, not only a great communicator, but a very wise leader with an understanding of all the global connections, is it possible for the U.S. alone to pull the world out?

Zakaria: There’s no question that the U.S. could do the single most important thing to get the world out of this crisis in the long run. The most dangerous element of the global economy for the last 20 years has been the massive and sustained American over-consumption and its reliance on borrowing to fuel that consumption. To the extent that that is going to end and to the extent that the American household is going to rebuild its balance sheet, that is probably the single most effective thing that anyone could do that will bring greater stability to the global financial system and economic system.

In terms of political leadership, the United States remains the most important country in the world. It will still be the place where an agenda can be set. But it is going to have to want to do that. The trick is that it’s going to have to be done by a leader who is necessarily more responsive to his domestic constituents than his G-20 constituents. Is it possible to do that balancing act of actually being popular at home, while at the same time being engaged, cooperative, and cosmopolitan abroad? Gordon Brown is certainly very engaged on the global issues, but so far, unfortunately, is unable to persuade his own public that that is the right course.

Garten: I’d like to shift to the role of international institutions. One big difference between the setting today and the setting in the ’30s is that we actually have a web of international institutions. One might say that this provides some kind of a floor below which the erosion of international cooperation won’t go. More optimistically, maybe the IMF and the WTO and parts of the UN can do some good. Beyond the leadership possibilities of heads of state and their entourages, Paul, how do you think about international institutions in this prolonged crisis situation?

Kennedy: I would say, first of all, that we can’t look past the attitudes and policies of the top 20 states’ leaderships, because they are the states which breathe the life and the power and efficacy into international institutions. But assuming, and it’s a big assumption, that there would be a general consensus among world leaders that we should use these institutions to try to help our common problems, then we are in a much better position institutionally and theoretically than we were in the ’30s.

I see three instruments here. We have a World Bank under Robert Zoellick which is now pretty well dedicated to trying to help the poorest 60 countries. Let’s give them more resources if we can, but that’s their bailiwick and probably nobody else can do it.

An enhanced IMF is also a very good idea, because they will be dealing with the mid­level crises — the Romania or Iceland crises. What’s more, because of the nature of the voting rights in those institutions, they will reflect the growing economic power of Asian states like India and China much more significantly and swiftly than any alterations in, say, the UN Security Council.

The third instrument is, I think, the beginnings of what looks like a club of the top 15 central bankers moving toward greater coordination. That for me is not a sinister thing, as it probably would have been seen in the ’30s. We have instruments, if the political will from the leadership of the nations wants to breathe more authority and capacity into them.

Garten: One strategy that could take a little bit of the stress off the domestic versus international considerations is actually to focus more on these institutions. In the trade arena, I think it’s inevitable that countries will subsidize their own industries, and the public wouldn’t understand it if they didn’t. Whereas people could understand that the IMF or the World Trade Organization or the World Bank can act to improve the global situation.

I want to go back to something that all of you touched on: the U.S. and China. I don’t think it’s an exaggeration to say that if you are looking at longer-term necessity, the relationship between the U.S. and China is really at the core of a lot of these problems. If the U.S. is going to be a bigger saver, China has to be a bigger consumer from its own domestic sources. We have had over the last generation a different kind of deal with China, where they produce and we consume. They lend to us and we borrow. There is, in theory at least, a need for a new grand bargain between the U.S. and China. How do you think about that possibility and how that would come about?

Zakaria: This is the central relationship and it is going to be the central relationship that gets us out of this global crisis. Just to look back at the origins for a minute: I don’t agree that there is equal responsibility in the dynamic where the Chinese over-save and we overspend. I think that’s nonsense. We in the United States of America engaged in absolutely reckless over-consumption. The U.S. household debt in the 1970s was around $1 trillion; it is now $14 trillion. U.S. household equity was $5 trillion in 1990; it is now negative $3 trillion. This is a massive spending binge that we engaged in. I don’t quite understand when senior Treasury officials talk about the Chinese incentivizing this consumption. Nobody forced us to do this. The idea of blaming the Chinese for American over-consumption is silly.

By the way, if we had consumed less, the Chinese would have had to find something to do with their money and might well have used it in some ways to stimulate domestic consumption. As it is, Chinese over-saving is not as irrational as it sounds. They don’t have a welfare state. They’ve gone through 100 years of social revolution and turmoil. So, keeping a certain amount of money in the bank isn’t crazy.

There is certainly the question of their exchange rate. They kept their exchange rate artificially low to prevent domestic consumption, and there I think they do deserve some blame. They were in effect trying to privilege their exports over domestic consumption.

But going forward, which is the more important question, I think the Chinese are actually doing things that will help in the long run. They are trying to stimulate domestic demand — more governmental demand than personal demand, but let us hope that they do both.

The trickier part of this rebalancing is going to be the United States saving more. For that to happen in the short term is not difficult because American consumers are so over-extended that naturally they’re all pulling back right now. The savings rate has shot up in the United States in the last three or four months.

Garten: Which is a controversial trend at a time when so many of the policies are designed to get the U.S. to consume again.

Zakaria: Right. We’re in Keynes’s classic paradox of thrift. But going forward, the only sustainable solution for a new bargain to be built would be for us to ask the Chinese to take sustained, institutionalized measures to encourage more consumption on their side. But we would simultane­ously take institutionalized measures to discourage consumption a little bit in the United States, which would mean we would institute some kind of national sales tax. We’re the only advanced industrial country in the world that doesn’t have a national sales tax. Perhaps we should think about this massive subsidy that we give to housing in the form of the interest deductibility of mortgages. Now, you tell me what American president, no matter how brave, is going to institute those measures?

But if you don’t do that, I worry that while we will get through this very painful turn of the cycle, five years from now we might well be in the same situation with the United States over-consuming and the Chinese over-saving.

How do you get out of that? I think that you would need this to happen at the level of Obama and Hu Jintao. This would have to be a very serious strategic dialog undertaken by the two heads of state, who would then try to deliver in their respective countries.

Kennedy: Two points. One is, getting back to the China-America either mutuality or imbalance: for a long time, international economists have said, “Yes, this is an imbalance, but we can explain it by the mutual needs of each side. And over time there will be convergence.” That may be the case, but for the change to occur suddenly as opposed to over a decade or two is pretty troubling.

The second remark I wanted to make is about paradox. I’m struck at the difficulty Obama and anybody else is going to have in persuading frightened people to dig into their pockets. This is the Keynesian paradox that Fareed mentioned. But the other paradox is that governments seem to be capable of and very willing to go into massive, massive debt, and yet, they’re wanting their own peoples to increase their savings rate.

Garten: People say we got into this mess because we became so over-indebted, and the government is about to put the country into the stratosphere of debt with no plan for how it will be handled. That is going to be a problem in the not-too-distant future. It’ll come much sooner than we think because, when you’re a debtor, your creditors tell you what your policies are going to have to be. Amy, do you have a thought on the U.S.-China relationship?

Chua: When I think about the U.S. and China, I think about the rivalry and the larger economic competition.

Maybe the immediate credit crisis will trump everything, but my view is that although China may continue to do very well — it’s done a lot of things right — when it comes to technological innovation and economic dynamism, China is inherently disadvantaged relative to the United States. The only way for a nation to be at the very cutting edge of technology, which fuels economic dynamism and even military dominance, is to be able to pull in and motivate the world’s best human capital.

Obviously, the United States is an immigrant society. China, for all the things it’s done correctly, is the opposite. It’s a quintessentially ethnically defined nation. In terms of the bigger picture, until China is able to pull in the best mathematician from Israel or the best engineer from Jamaica or the best thinker from Palo Alto, it’s actually not going to be able to do as well as it could in terms of innovation and economic dynamism.

Zakaria: This may be the time to bring in Paul’s initial concern about the political stability in China. I’m more bullish on China, and let me tell you why, but I say this very provisionally because I think it’s an incredibly difficult and complicated subject.

When I go to China, I get the feeling that there is a sense that they’re aligned toward a national purpose and they are very proud of the success that they have achieved in moving toward national goals, which is why the Olympics ended up being an event that the whole country shared in.

A lot of Chinese, remember, have gone through the Cultural Revolution and the Great Leap Forward, and for them 30 years of peace, in which the average income quadrupled, isn’t so bad. They are going to feel the pain, but I think they’re also quite confident that their government will try to improve things. The government is extraordinarily well positioned. Who knows what will work, but if you had to have a set of cards to play, starting out with a budget surplus and $2 trillion in foreign exchange reserves isn’t a bad place to start. They have announced one massive fiscal stimulus, which is 15% of GDP. Contrast that with ours, which will be about 2% or 3% of GDP.

Secondly, I think everything Amy says is true, but China is still at roughly $4,000 per capita GDP. It’s not trying to become an advanced industrial country yet. It’s trying to become a middle-income country. For the next 10 to 15 years, the question will be, does it have the capacity to become a middle-income country — a Brazil or an Argentina?

I think it does. It’s just the law of numbers. Out of 1.5 billion people there are a bunch of smart software programmers and a bunch of smart movie directors and a bunch of smart inventors. This is also true of India. And if they get even to $6,000 or $7,000 per capita GDP, they have a massive impact on the world system because you take any number and you multiply it by 1.5 billion and it becomes a very large number.

Chua: Another powerful unifier is Chinese nationalism. One of the brilliant things that China has done for better or worse is to harness ethno-nationalism. They’ve used this nationalism over the last 20 years to significantly dampen the demand for democratization, painting human rights and elections as Western imperialist impositions.

Kennedy: What are the implications of the Chinese feeling they need to spend an awful lot of money — we’re talking about hundreds of billions here — on infrastructure, education, and perhaps raising the minimum wage? We look at calculations that essentially about 20 governments in the world are looking for up to $2 to $3 trillion to buy their float of government bonds. If the biggest purchaser is turning around and using its surpluses to invest — as I think it should — in domestic social repair, improvement, infrastructure, then one could be looking at another worrisome mismatch developing between China and the United States.

Garten: Final question. I may have heard this from you, Paul, but history is a series of drafts. If historians, say, 25 years from now were looking back, what would they compare this crisis to? What other events were of the same order of magnitude in terms of impact on the global system, that really tested political leadership, and that lasted quite a while resulting in some rearrangement of the international order? Besides the 1930s, is there an analogy that would illuminate what we’re going through?

Kennedy: I see where you’re going. I can also see the historians of 25 years’ time saying, “Boy. That was a troubled period. But the political leadership realized what was happening and managed to push ahead with a set of reforms, which then led to the 20 years of relative stability and growth we are now enjoying.” The other group of historians would be saying, “This was just a harbinger of things to come. The ripple political effects were such that five, ten years down the line from this 2008 credit crisis, there was a broad and widespread set of political disasters.”

If you’re looking for analogies, I would think somewhere in the late 1840s, early 1850s, where a lot of more traditional, northern societies were grappling with the coming of the industrial revolution, the mobilization of workers, the spread of Marxism. In 1848, you had revolution right across Europe. In some places there’s repression — Russia. In other cases, there’s a push to reform. After that, the specter of revolution across the U.S. and continental Europe fades away. People would look back and say, “Phew. We were on the brink in 1848 of possibly a second French Revolution, and we managed to get out of it and go into the prosperity of the second half of the 19th century.”

Zakaria: I would stress, actually, the degree to which we’re really in uncharted waters here. We haven’t been to this movie before, because this is the first time you have a genuinely global system. In earlier periods, China was dormant, India was dormant, Latin America was largely dormant. What we are now talking about is a world in which every corner is participating, is active, is empowered.

And the global economic system is so tightly wound — the idea that you could have banks in Poland that would go out of business because of subprime mortgages or banks in Ireland that have bought derivatives based on East European debt. Information travels so fast, and everyone feels a part of it. I was talking to an Indian banker recently who said, “You know, our banks have no problems, yet we’re all uneasy lending because we see the data everyday. We watch CNBC and CNN, and it just makes us a little more conservative than we would be, which is turning the Indian economy down.”

Any solution is going to have to involve all these countries and all these actors. I don’t know that I have a specific explanation for why, but it feels very different from anything I’ve read in the history books.

Chua: I guess I have always been an optimist. I just spent the last five years studying past hyperpowers, so I would point out that the golden age of the Roman Empire lasted, what, 100 years, and during that time the Empire experienced disastrous, abyss-like downturns, plagues, and invasions. England, too. In 1825, right after the British Empire moved into its heyday, England suffered a stock market crash and a bank panic and recession. Then it recovered and went on to enjoy 70 more years of dominance.

Fareed may well be right, but this global interconnectedness could also turn out to be a positive thing. Yes, we’re in uncharted waters, and that means we’re not sure what’s ahead of us, for good or for ill.