Podcast: The COVID-damaged global economy surprised Adam Tooze

TRANSCRIPT: The COVID-damaged global economy surprised Adam Tooze

Adam Tooze:

The scale of fiscal and monetary stimulus that we've seen is as unprecedented as the shock of the spring of last year, so we have seen a remarkable countervailing force put in play.

Ian Bremmer:

Hello and welcome to the GZERO World podcast. This is where you can find extended versions of my interviews on public television. I'm Ian Bremmer, and today a look at where things stand with the global economy as it slowly wakes up from the darkest days of COVID lockdown. Was the cure worse than the disease, or did swift action helped set the gears in motion for a quick recovery. I speak to economic historian Adam Tooze, he's a professor at Columbia University. And his new book, Shutdown: How Covid Shook the World's Economy, tries to make sense of the last 18 months. Let's get right to it.

Announcer:

GZERO World podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company understands the value of service, safety and stability in today's uncertain world. Visit firstrepublic.com to learn more. This podcast is also brought to you by Walmart. Walmart is committed to supporting jobs in the communities we serve, that's why we're investing an additional $350 billion in products made, grown or assembled in the United States supporting 750,000 new jobs. Learn more at walmart.com/america.

Ian Bremmer:

Adam Tooze economic historian. So glad that you're joining me on GZERO World, thanks.

Adam Tooze:

A pleasure to be here.

Ian Bremmer:

So last time we spoke, if I remember correctly, you said that it wouldn't be implausible if by the end of 2021 US unemployment could be close to 20%, certainly in the teens. That is not where we are right now. Now, I am not orienting this interview to do gotcha politics with Adam Tooze, but I do want to ask why you think the recovery has been so much more robust than you might've expected?

Adam Tooze:

No, I mean it's a fair question. I mean, I think the last time we spoke we were really in the middle of the economic meltdown, spring, early summer of last year, and I don't think any of us anticipated in our lifetime seeing the kind of headlines that we were seeing out of the American labor market at that time. I mean, those Thursday morning 8:30 AM releases of the numbers of Americans signing up for unemployment benefit were harrowing. They were extraordinarily stressful. Even for somebody who has secure employment is just worried about the state of the world. I think there was a state of panic at that moment, and I think it was well merited and well justified and we know unemployment did indeed surge into the high teens and in many communities well above that. So there was good reason I think to be as concerned as we were.

What I don't think we anticipated were basically two things. The first is the vaccine. I mean that's the turnaround event, right? It's the fact that we were able basically to get a grip on this disease in some of the advanced economies through the vaccine and we simply didn't have any reason to expect the vaccine to be as effective as it is and to come as quickly as it did. And the second thing of course is that we were still beginning to flex our muscles with regard to economic policy and the scale of fiscal and monetary stimulus that we've seen is as unprecedented as the shock of the spring of last year. So we have seen a remarkable countervailing force put in play on a scale that I, again, I mean I'm a historian of 2008, and nevertheless it took me as it did other people by surprise how large the fiscal and monetary mass was that was mobilized across the world to prevent the worst.

Ian Bremmer:

Yes, across the world, indeed. And I mean certainly not in any way coordinated but nonetheless felt like everyone was reading from the same playbook, both from a fiscal and a monetary perspective. Do you think, I mean were lessons learned from 2008 that carry over constructively for the ministers of finance, the secretary of treasury, the central bank heads today?

Adam Tooze:

Absolutely there were. I think when we learned from history, we should recognize the fact, the cliche is, of course you can't, and it's even dangerous to do so, but I think in this case we can say that lessons were learned. And in fact some of the key staff at the central banks are veterans of 2008. So when the order comes to buy assets, to do QE, they really know how to do it and they do it on a scale which is literally an order of magnitude 10x larger than what we saw in 2008. There was coordination in the way it works in the global monetary system, which is it doesn't have to be a sit down meeting of the G20 finance ministers, what you need is for the Fed to lead. And if the Fed leads, it signals to the markets and by way of the markets to even emerging market central banks that it's okay despite the hemorrhage of foreign capital that was happening last year to lower your interest rates.

I mean a combination we never thought we'd see, that Indonesia would be cutting its interest rate in the face of a loss of foreign capital. Indonesia being at the heart of the Asian financial crisis of the late 1990s suffering a huge legitimacy hit, regime change, fully able to ride out this storm and that is enabled by the Fed's actions. More locally in the United States, I mean the learning on the part of the leadership of the Democratic Party is palpable, it's manifest. I mean they are trying not to repeat some of the mistakes they in retrospect accused themselves of having made in 2009, they went too small, they didn't go big enough in that first, the only stimulus, the Obama administration got to fire off.

Ian Bremmer:

And they also went for industry, they went for the banks, they went for the automotive companies. They did not go for the social contract. They didn't go for the average American worker. Occupy Wall Street, not withstanding. Is that also a lesson that is being learned today in the United States?

Adam Tooze:

Well, I think there's two phases to this. The CARES Act was a bodged together compromise and a lot of very affluent Americans got a lot of money out of that. But the really telling moment is the Rescue Plan that Biden administration launched and its first stimulus and that was very targeted money, that went to middle America, it went to work in class Americans, it went to those who needed it most and that is clearly a lesson learned, reinforced by, incorporated by the Democratic Party, driven by the voices of the left. I mean this is learning in a sense by struggle where the Sanders campaign and AOC in the Senate and the House respectively genuinely have exercised leverage over policy thinking.

Ian Bremmer:

The United States isn't offering many lessons these days, but economically, when you look at the latest numbers coming out from the IMF World Bank, the US 2020, '21 looks a hell of a lot more robust and resilient than the EU or the UK or of course Japan or Canada. I mean you are the economist here, tell us where you think the league tables look right now and why.

Adam Tooze:

It's important not to confuse growth rates with levels here. So it is true that the US economy is bouncing back at a remarkable rate, what we are doing though is achieving the not slight achievement of returning to the trend we were on before, even going slightly above it. So when you see the United States is now growing back towards the trend level that you would've expected before 2019, that is the achievement of economic policy in the US right now, not to have permanently slumped below that trend, which is what we saw after 2008/'09. Compared to the Europeans, this is a remarkable achievement. Europe is not expected to attain its pre-2020 level of GDP, let alone the trend of as it were, it hypothetically should have been, until the end of this year or beginning of next. It has not fundamentally changed the balance in the sense that China rebounded much more rapidly and using the familiar formula of heavy industrial investment is powering ahead.

So the gap between China and the United States, despite America's impressive growth rates right now, will continue to widen because China is not just clawing its way back to where it should have been, it's actually powering ahead on that growth trend to levels we've not seen before. The worries about China's growth are of course real and will continue to be real and they did go back to the old playbook of heavy investment and we're seeing that in their demand for iron ore and their demand for steel, for coal right now. But that is I think the fundamental continuity. Where the real hit is going to come, the world changing hit is in the situation of the emerging markets and particularly Latin America because the emerging markets came through 2008/'09 relatively well, Latin America leading that charge because it was a commodity driven boom with China sustaining their growth. Latin America right now are still in the midst of a terrible pandemic there, it's looking at a lost decade.

Ian Bremmer:

And indeed the situation on the ground in so many of these countries right now, the political divide, the social instability, we have a big contested election that the Peruvians have just gone through, we've got one that the Brazilians are coming up to. We have massive problems in Colombia in terms of opposition to anything that looks like reform, and those are countries that were governed comparatively well in South America. It does feel, while the United States is now powering ahead, that the developing world is further and further behind, not the globalization story that we were hoping for.

Adam Tooze:

I think that's right. And as far as the US is concerned, you would hope that all eyes really are on the rest of the Western hemisphere. This has got to be a matter I would say of absolutely urgent concern in Washington. Mexico, I mean our immediate neighbor coming through the crisis, very hard hit. In fact, one of the big beneficiaries of America's stimulus is Mexico's export sector, but the Mexican economy, per se has taken a huge hit.

And the other of course, giant piece of the Latin American puzzle is Brazil where the crisis has been profound. And how in the hugely polarized politics of Brazil, Bolsonaro's future plays out against an increasingly worrying, I think one has to say, financial backdrop. Brazil, one of the players who in 2020 did a big fiscal action on the scale of an advanced economy, 10% of GDP roughly, also quite progressive as a result of pressure from Congress in Brazil, trickling down, spending down very substantial amounts of cash to the tens of millions of people who scrape by. How any of that can be continued into '21 and '22 should really I think be a fundamental concern of American policy. That's the crisis that's closest to home for the US.

Ian Bremmer:

I mean these are countries that don't have anywhere near the level of vaccine access, they don't have anywhere near the level of capability of funding continued shutdowns and disruptions to their economy. I mean, if you want to play that out, I mean Africa would seem to be where you'd have an even bigger problem from that perspective. What is the mechanism that you see out there over the coming years? If Latin America is losing a decade, how does it get addressed? What happens? I mean this is not just a job for the IMF.

Adam Tooze:

Well, this I think is the challenge which the G7 began to lay out with what they call the B3W, Build Back Better World campaign, which is supposed to be the West's answer, Japan, Europe, United States' answer to One Belt One Road and that is where a policy should be, I think one should say squarely. Whether or not there will be a policy there is really the big question of the moment, and whether it will be scaled to the adequate scale. To be in this game seriously, you need to be talking trillions of dollars. I mean those seemed like crazy numbers, but if you think about the development needs with the extraordinary demographic surge running through sub-Saharan Africa now, or you think about the development needs of the poor parts of Latin America, that's just the opening bid to get seriously in this game, and the question is how that kind of funding is mobilized.

The talk of course immediately then turns to financial engineering, various types of complex leverage mechanism where maybe a couple of hundred million dollars from the Europeans, the Japanese and the Americans leverage out to be trillions of dollars from the private sector. But that agenda has been on the book since 2015, this is the billions into trillions agenda of the World Bank. It has not gathered the momentum that we would expect and we urgently need, if this priority, not just of recovery from the pandemic, but of sustainable development going forward is really going to be met because we have after all to think of this as a conjoined problem of development, recovery and this creation of a sustainable basis for long run growth into the era of climate change that lies ahead. That was the challenge laid down in 2015 at the double resolution of the Paris Conference on the one hand and the formulation of the sustainable development agenda on the other. And we are still a long way away from I think in the West being ready to really mobilize to the scale that will be necessary to address those problems.

Ian Bremmer:

Yeah, it's hard to imagine. I mean, given how limited COVAX has been on the vaccine front, which would be a comparatively small amount of money that would unlock far greater investment and growth. If you can't do that, if you can't begin to do that in a significant way for these countries, it's hard to get very excited about the broader and much larger needs long-term for infrastructure.

Adam Tooze:

I mean, it's one of the fundamental puzzles I think for a political scientist like yourself or an economically minded historian like me. I mean, we have certain basic premises. The dollar bills aren't left lying around on the street. That just shouldn't happen. And yet everything tells us, indeed, the major financial authorities, the IMF, the World Bank tell us that there are trillions of dollars lying around in the street.

Ian Bremmer:

Lying on the street, yeah.

Adam Tooze:

In the form of the option of a joint sustained, truly globally orientated vaccine campaign. If we put tens of billions in, we would achieve benefits running into potentially the tens of trillions. And frankly, any member of the G20 with the possible exception of South Africa could fund this domestically and it will be a worthwhile investment. Think of the political payoff if Germany had taken the lead and said-

Ian Bremmer:

I don't know about Argentina, Adam. I mean, I don't know man.

Adam Tooze:

Fine, so let's take Argentina and South Africa off, but the large credible members of the G20, if you come in with a bid, an opening bid of saying, "No, we're not coming with 500 million euros, we're coming with 20 billion because we actually want this problem, because we are Germany and we are an export dependent economy and we need this to go quickly." And why those kind of bids have not piled in and instead we're piecing, puzzling together as they did at the G7 in Cornwall, the necessary one trillion, so it's one billion doses so as to be able to announce those kinds of figures. It's a failure of political imagination, I think

Ian Bremmer:

So much discussion now about recent inflation numbers, particularly in the United States, higher than people expected. Larry Summers, of course you know, raised alarms on this early and was pushed back really hard by the Biden administration, most economists. I've got you, you're an economist, what do you think?

Adam Tooze:

I think we shouldn't exaggerate our fears around this. I mean, the bounce back in prices is real, there are a variety of different effects. Some of them statistical, if prices went down last year, they're bound to go up this year by larger percentage points. There are real shortages. If you've tried to build a house or do any repairs this year, you'll know that lumber was literally just short, you couldn't get it. But I think most people agree that these are transient effects. And when I say most people, I mean the best informed decision makers in central banks globally, on both sides of the Atlantic, and also the markets have stuck with the Fed in its assessment that this is transient. And we again should just have a sort of check on ourselves, why are we panicking and what does that panic relate to?

And to my mind, it still is a sort of undigested legacy of the trauma of the 1970s, that's the last time there was any inflation in Western Europe and in the United States. And if we are still, as it we're working off the hangover from 50 years ago, I think we do need to update our priors, we need to update our economic vision. The problem, and it remains the problem, is in fact deflation, lowflation, the fact that we aren't able to push long run inflation expectations well above 2%. And why that matters, well just look at our debt pile. I mean, if you've got the kind of debt pile that we have, historically speaking, the general way to deal with that is have inflation just a little bit higher than interest rates and bite away it at year by year. That's how Britain and America did it after World War II. That's the comfortable way to work your way out from underneath a debt mountain.

Ian Bremmer:

I mean, this is the quite extraordinary thing is on the one hand you have seen literally trillions of dollars in fiscal stimulus, in monetary easing that almost every major government around the world has engaged in with almost reckless abandon. And as soon as you turn open the aperture to talk about the rest of the world, it goes almost immediately to nothing.

Adam Tooze:

Yeah, it's absolutely mind-blowing. And then we start talking about something like climate change, which is a fundamental challenge for humanity over the next decades which has to be addressed and all of the focus goes there, and we've literally lived through what most of us regard as an anthropogenically generated shock, which cost us 20% of global GDP last April. I mean, that's a shock we've never before experienced in history, and we can't summon up the couple of 10 billion that will be necessary to provide the first best fix for this problem. And we aren't, to my mind, sufficiently focused on building resilience going forward.

We should be really ramping up the scale of our biomedical research, building standing capacity on a much larger scale than we currently have. It was a miracle what happened last year with the vaccine development programs, but we need to be in a position to do those routinely. Everything tells us we need to have the capacity to do that routinely going forward, and yet that's regarded as a temporary shop from which we recover so that we face the structural challenges of the future going forward. We're not even out of this one yet. We don't even know what variant might be in the pipeline in some of the heavily infected places where the caseload is building up and so the possibilities of viral mutation are really mounting. It's a staggering... I mean, truly difficult to comprehend.

Ian Bremmer:

Let me move you to China, because I mean, there's a lot going on in China right now that's very interesting for the future of the global economy. They're saying that they're expected growth of 8% this year. How, as an economist, how credible are the numbers that the Chinese government put out as to the state of their economy?

Adam Tooze:

I think this is a fair question. I think you could ask that as somebody who's actually worked hard on the history of the economic statistics, you can really ask that about all societies. Last year we had a hard time interpreting GDP decline, it wasn't clear what it really meant, but I think there are good reasons to be skeptical about the Chinese numbers in particular. There are good reasons why people resort to a variety of physical metrics, but those physical metrics tend to tell us that the recovery is real in China right now, the damage is probably in the soft tissue parts of the Chinese economy, the service sector, the small business sector, which though it doesn't make the headlines, is where the vast majority of Chinese are employed. And I think around the edges, you see anxieties on the part of the Beijing regime which indicate how seriously they take this problem.

And I think that's another way of reading their recent crackdown on platform businesses and tech businesses in China, is they actually regard them as a threat to stability, not just as it were, liberal political opinion being disseminated or oligarchic challenges, but also in the sense that those kind of businesses, as we know only too well from the West, actually destroy small businesses, they undermine local economies. And the Chinese regime for its longer run future needs stability at that level too. There is only so much of the gig economy that the CCP's authoritarian regime really wants to tolerate. And I think that's part of their balancing act, that we, of course, in the West also in some sense are going through as well as our dependence on the platform businesses was profoundly revealed last year, and there is something deeply unsettling about that.

Ian Bremmer:

It may be unsettling, but in the United States, at least thus far, we are still leaning into that dependence, those companies are doing better and they're certainly not experiencing regulatory blowback. Where in China, the private sector had been driving the bigger part of the expansion of their economy for an increasingly long time, and now the Chinese Communist Party seems to be leaning back on them pretty hard. The changes in regulatory environment, the leaning into companies that have IPOed outside of China and saying, "We're not really happy about that." I mean that's a very different kind of growth model than the one that we had expected China was moving towards. We all knew that China wasn't going to become a liberal democracy anytime soon, but there was a sense that they were really trying to be a hybrid global economy, and that was what was going to allow them to become the largest economy in the world. When you look at what the Chinese government has been doing towards their private sector, how does it change the way you feel about your economic expectations for that country and their power going forward?

Adam Tooze:

I think we have to check our prejudices here because I think there's an easy move to make, which is to say, look, we assume all the entrepreneurialism, all the dynamism, all the innovation's going to come from the private sector. The private sector will be motivated that way if property rights are secure. They've always been fragile in China, we are now seeing exactly how fragile they are, and it follows therefore that this kind of intervention, rough and ready, heavy-handed, terrifying, it must be, if you are actually in the crosshairs of it in China itself, must cause in the long run a slowdown of the Chinese economy. I think that's not an unreasonable-

Ian Bremmer:

Yeah, that's my question to you.

Adam Tooze:

That's not an unreasonable hypothesis. The truth of course is we don't know the answer to these questions yet. I think we should be open to the possibility of another option, which is that the regime actually understands some of what our progressive economists are telling us in the West as well, which is that those type of oligopolies are not good for growth and productivity growth in the long run and that a aggressive antitrust action, a surveillance and breakup if necessary of those kind of units could in fact in the long run be not just good for the regime in the sense it preserves a monopoly of power, but actually potentially better for the Chinese economy and its long run growth.

And that I think is presumably the wager they're making. There is an interpretation which says that Xi's all about politics and all about power and just doesn't care about the economy. That's not what the impression you get if you read the Chinese regulators who actually have rather strong arguments for the sorts of interventions they're making. And with regard to finance, you've got to say where they've been practicing a similar interventionist policy with regard to the shadow banking sector, so far so good. I mean, they saw crises coming intervened and stopped them in a way that we didn't manage to in the West. So I think we should, we should force ourselves to stay as open minded we can with regard to these sorts of systemic management issues.

Ian Bremmer:

So I guess the question I would ask is to what extent we think that China's interventions increasingly indeed heavy-handed, are effectively against the private sector in service of creating more competition, because they think that it's becoming too oligopolistic? Or, I mean, and you could make that argument in their moves against Jack Ma, for example, from Alibaba who's been fundamentally defenestrated. Or is it in service of greater state control and greater national champions that are themselves monopolies in their space, but monopolies in service of the Chinese Communist Party as opposed to individual private sector driven oligopolies? Do you have a view on that yet?

Adam Tooze:

I mean, one thing we're clearly seeing is that the regime wants to avoid becoming dependent on, entangled with, too big to fail oligarchic business groups, that is clear. Whether the purpose of that is driven by, in some sense, a more general interest in the autonomy of the regime and the ability of the regime to size up the interest of Chinese society as a whole and steer in a concerted way towards those, which after all is what we have grounds to fear we've lost in the West, our political institutions may be too captured by these sorts of businesses, and we may fundamentally feel that they're too big to fail. Too many people have too much invested in their 401ks in the success of the American tech story for it to be viable for any administration in the US to really go after them hard, even if all the economics and all the sociology and all the political science told us we should.

That I think is clear they want to avoid in China. They want to avoid that, whether that as it were ultimately is fundamentally in the interest of preserving the hegemony of the CCP, that seems completely plausible to me. I'm sure that's the case, but I don't think in their minds they make any distinction. It's not as though they imagined that somehow here's what's good for China and then they pursue their separate interests, they are fundamentally wedded to the idea that only under the control of their party and with its guiding intelligence can China prosper and has China prospered. This is what they see vindicated by the history of the regime since, well, all the way back to the revolutionary victory of 1949.

Ian Bremmer:

So as an economic historian and one of the world's preeminent in your field, having now gone through almost a couple of years of pandemic, what do you think is the biggest lesson, longer-term lesson that you've learned as we've experienced all of this?

Adam Tooze:

That we need to take the Cassandra seriously. Looking back on this, the emerging infectious diseases paradigm, the emerging infectious diseases paradigm, so-called, appeared in the 1980s. It ran in parallel with a climate change diagnosis. Both of these were predicted to be the consequence of modernity, of globalization, and we did not take that risk seriously enough. And we are in a sense, I think still not taking it seriously enough in believing that we are done with this crisis or that it's over and that therefore the world doesn't fundamentally change and we grow back to where we were before. Surely what's happened is a window has opened for us on huge risks which are inherent to the system, from which we prosper, from which we will benefit, to which we are committed to irrevocably, I take it, that we will have to manage in future.

And those risks are not slow moving, not gradual, not measured in a percentage point of GDP here or there, or in a thousand lives, 10,000 lives here or there. They're measured in millions of lives, and 20% of GDP loss occurring in a matter of weeks and months, that's the sort of scale. It's not trench warfare, it turns out, it's blitzkrieg. It's something that comes at you with lightning speed, and if you do not have the capacity to react quickly, you can be looking at the largest economic disaster in recorded history.

That's, I think for me, the lesson of 2020, I mean, it's sort of appalling to digest it, but we at least do have a clear indication of one of the minimal things that we need to provide ourselves with insurance, which is a huge science apparatus. I mean, we're obviously terrible at the sociopolitical economic digesting of this. We've got some welfare state apparatuses that work not so badly, and the central banks do their job, but to address this problem, we're really hopelessly under equipped. But we do have a magic wand, we do have a silver bullet, and we should be doubling down on that. I mean, technology, if it is, it's perhaps not as it were the most holistic answer, but if it's an answer and it's our strong card we really should be doubling down on it. I think that's the same basic approach also to climate change, given the likelihood that we are not going to be able to address it in a holistic fashion, you would think that we would be making enormously larger investments in technologies in that area.

Ian Bremmer:

Adam Tooze, economic historian and Columbia University professor, great to be with you, sir.

Adam Tooze:

Pleasure to be here.

Ian Bremmer:

That's it for today's edition of the GZERO World Podcast. Like what you've heard, come check us out at gzeromedia.com and sign up for our newsletter, Signal.

Announcer:

The GZERO World Podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company understands the value of service, safety, and stability in today's uncertain world. Visit firstrepublic.com to learn more. This podcast is also brought to you by Walmart. Walmart is committed to supporting jobs in the communities we serve, that's why we're investing an additional 350 billion dollars in products made, grown, or assembled in the United States, supporting 750,000 new jobs. Learn more at walmart.com/america.

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