World Economy Like a Patient on Experimental Drugs, Says Tooze

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The turbulence of the pandemic is likely just the curtain-raiser for a coming age of upheaval in the global economy, as climate change and the rise of China upend the established order, according to one of the world’s bestselling financial historians. 

Columbia University professor Adam Tooze’s last book explored the long aftermath of the 2008 financial crisis. His new one “Shutdown: How Covid Shook the World’s Economy,” published this past week, is a rapid-response history of the economic disruptions caused by the pandemic –- and how policy makers responded. 

In an interview, Tooze talked about the book’s portrayal of an unprecedented crisis, what governments and investors learned from it, and how economies are being reshaped as a result. 

Following are extracts from that conversation, lightly edited for clarity.


What is the virus’s legacy for policy making, given what we’ve seen governments and the central banks do?

I’m not a debt alarmist in any way whatsoever, but there’s no doubt that the scale of balance-sheet shift that we’ve seen poses questions about who services those obligations and under what terms and to whose benefit and over what kind of time horizon. 

And obviously, central bank policy comes into play because of its crucial role in manipulating interest rates. We’ve figured out how a certain sort of central bank intervention works to stabilize market-based financial mechanisms when they’re in crisis. 

We don’t know what the longer-term consequences of the degree of stimulus are that we’ve been administering. So it’s as though we’re testing drugs on a patient and we know that they work in the short run to mitigate pain and see us through the crisis.
But we don’t really know what the long-term effects on the overall financial organism are going to be. There are deep concerns about the stability of some of the key markets, most notably the Treasury market, and I think there will be an ongoing and very important and interesting discussion.

How has the thinking around welfare states developed? What does that mean when it comes to climate change?

We’ve learned simple lessons about welfare states. If you want to alleviate acute poverty, you send people checks. It works. Does that alleviate the structural long-term causes of poverty? Evidently not.

The book is an extended dialog around the Green New Deal program in the United States, which, to my mind, is the one vision of economic and social policy that — like it or not, and agree with the details or not — actually joined the pieces up. And that is the kind of policy that we need and we desperately need conservatives to come along with their version of what this is going to be. 

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The time is certainly running so short that we need to think of everything now in medium- and short-term time horizons. The age in which we could think of climate as a long-term problem is gone. 

One of the sobering lessons that we learned in 2020 is that really our collective abilities to manage things through social discipline and collective action is very restricted in the West. Science is our best bet and the next immediate question that follows on, if that’s the case, why on earth aren’t we more serious about it? 

How can we justify a state of affairs when the annual spend of American households on pet food and treats exceeds by some margin the expenditure on energy research by the federal government? This is an absurd betrayal of this generation and future generations.

Is it important to start repaying pandemic debts now, or can they be left on the backburner?

I don’t have any problem with raising taxes in general if the macroeconomic situation is balanced right and it seems like a sensible thing to do. But to raise taxes, to balance a budget per se in a situation in which you’ve still got serious macroeconomic slack and there’s very little evidence of bond market pressure is gratuitous.

The sort of MMT which is essentially functional finance, which says let’s just part the financing thing as a technical matter to be resolved among adults in a technical way and focus on the fundamental questions of what are our capacity constraints, what are the supply constraints which are real, and what are our priorities for spending — that just seems common sense, to be honest. And I’m puzzled by the rationale for something that says, at this moment, budget balance is our priority.

What do you see central banks doing next? Could they tighten too soon?

We have this painfully, delicately balanced central bank situation, but we’re not seeing the signs so far, and this is rather impressive.
I don’t see the imminent risk of any kind of unhappy news.
In the U.S., the commitment is to keep the financial markets in general bubbling along. It’s very difficult to see [Federal Reserve Chairman Jerome] Powell and his cohorts engaging in any kind of moves that would destabilize that. 

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This is all premised on my assumption that the inflation symptoms really are transient. If that isn’t the case, then I think the trade-offs become much more difficult for them.

Could high inflation in the U.S. discredit fiscal policy? 

That’s one of the reasons I really hope it’s transient. Because if it isn’t, then I agree with that kind of diagnosis. But I’m also a historian deeply interested in the events of the 70s. And if that’s our benchmark as to the nightmare scenario of seriously entrenched inflation expectations, I just don’t really see the mechanisms through which that gets built in. 

It may be a little bit simplistic to focus on the wage-price spiral, but I just don’t see that there. That isn’t to say that wages don’t respond. They do respond in the U.S. But what you’re not seeing is organized labor, cost-of-living adjustments, you’re not seeing that entire corporatist apparatus which in the end I think is key to understanding the 70s inflation. 

We’ve not been here before. We’ve not seen this kind of spike, we’ve not seen this kind of supply chain disruptions. But I don’t really see the mechanisms through which we could see an entrenched inflationary dynamic.

Because labor power has been so eroded?

A framing parameter for the activism of monetary policy in this moment has been that no one had to worry about the kind of things that Rudiger Dornbusch was worrying about in the 70s, 80s and 90s. 

I was stunned to come across this collection of his papers that started circulating on the web about a year ago, and they are so explicit about the trade-offs between what he calls “democratic money” and “sound money.” And it’s just crass in its formulation. We don’t have that problem right now. Democracy does not, in its current form, pose a problem for price stability. 

And so that changes the entire game for independent central bankers in a world where there isn’t really the risk of getting caught up in a corporatist power battle between capital and labor. 

You have this weird situation of [ECB President Christine] Lagarde and Powell outdoing each other in their kind of gestures toward issues of social justice and the climate and so on. [Lagarde] is a conservative politician, fundamentally. But in this space, in this moment, free to act in ways that take on a progressive aspect.

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That news conference [Powell] gave, I think it was in April, where all of a sudden we had the chair of the Fed lecturing the journalists on the fact that he had seen the collapse in employment and incomes among those in the bottom half of the American income distribution — I never thought I’d see the like. It was an extraordinary moment. 

How will future economic historians view the Trump presidency?

The interesting thing about the Trump era is, we’ve had a natural experiment. Trump was such a populist right-winger. He just didn’t have a fiscal conservative bone in his body. And so he would boast about metrics which left-wingers used to cite. 

The black unemployment rate used to be a hammer the left would attack the Fed with — and there we have Donald Trump of all presidents saying he’s been the best president for black people in America since Abraham Lincoln, because the unemployment rate for black men is at a record low. This is a dizzying inversion of the fronts. 

He really was a Latin American-style populist — but without the social base. It isn’t as though there was some sort of insurgent working-class trade-union movement driving Trump. It was the S&P 500 and the Reddit investment crowd. But it’s not a huge fraction of the American population. He doesn’t actually in any meaningful way represent blue collar America.

‘Shutdown’ is not an anti-Trump book in any simple sense of the word. He’s obviously terrible for the American constitution in many ways, a figure who’s profoundly disagreeable, but not on economic policy. I think the confusion for the left and liberals in general is precisely that the only people seriously outraged will be the sort of Rubinite centrist conservative Democrats of the 1990s. But they’re a dying breed anyway, you’ve had all of them recanting. Saying we didn’t do enough in 2009. 

And if you’re an MMTer — if there’s ever been a president more suited and just agreeable to the fiat money concept, there’s never been one better than Trump. As long as the checks had his name on them, it was all good.

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