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- [00:01]
A
Economic growth is important. You know, you only hear de growth ideas from citizens of rich countries. You know, you don't hear that in India or in Africa or in Brazil. People want to grow.
- [00:10]
B
And now the good fight with Jasia Monk. Well, for the last few days I've been finding myself thinking about the world economy. I'm thinking about its state at the moment. Is the war in the Middle east leading to a permanent increase in energy prices that might lead to a new kind of oil shock? Is this the beginning of a new recession? How dire is the state of the world economy? And are we going to remember this as the beginning of a different world order? Are we seeing the death throes of an economic world order marked by free trade, by globalization and by American dominance in these days? I've also been thinking about what the right policy approaches to making sure that we have global prosperity in the coming years and decades. For a long time, the so called Washington Consensus gave a playbook to people at the International Monetary Fund and other international organizations like that, telling them what they should press different countries on. And it's had a mixed record, a quite positive record in some ways. A lot of the world is a lot richer, a lot than it was when the Washington Consensus was born. But clearly also some downsides. A lot of citizens around the world do not seem to be very happy with the state of their countries and the state of their economies. Do we need to amend perhaps to replace the Washington Consensus with something new? Well, the person who can speak to this better than anybody else I can think of is Andres Velasco. Andres is the Dean of the School of Public Policy at the London School of Economics and he was also the Finance Minister of Chile from 2006 to 2010. He is the co editor alongside Tim Besley and Irene Bocelli of a new book called the London Economic principles for the 21st century. In the last part of today's episode, we go a little bit deeper into what exactly the London Consensus would be. What kind of policies does it actually recommend for areas from artificial intelligence to monetary policy? How is it that we can aim for a world in which private enterprise is strong, but so is the state? And why are those two things mutually supportive rather than mutually exclusive? To listen to that part of the conversation, to support the work we do here to make it possible for us to, to keep bringing you the kinds of interviews that we offer you twice a week, Please go to writing.jaschamon.com and become a paying subscriber. That's writing.yashamung.com Please become a paying subscriber to help us do the work we do. Anders Velasco, welcome to a podcast.
- [03:14]
A
Thank you, Jasiah. Very happy to be here.
- [03:16]
B
So I really look forward to talking about the big questions of principle, about what we should be trying to achieve with economic policy. But it's hard not to start by talking about the current economic situation. The war in the Middle east has led to the closing of the Strait of Hormuz, to the destruction of a lot of oil and gas infrastructure in the Middle East. Energy prices are up and some people are starting to say that the shock that this will cause will turn out to be equivalent to the oil price shock of the 1970s. How permanent and how bad do you think the impacts of this war are likely to be at this stage?
- [03:57]
A
Clearly, the picture is not pretty and we need to worry for several reasons. First, one is that the economy hates uncertainty and today we're facing uncertainty on so many fronts. Tariff policy, the war, pretty much everything that the United States does today. So, you know, the headline is terrible. Secondly, I think the war has revealed something we should have known all along, but we hadn't really, which is that Iran can impose a massive cost on the world by simply controlling that one point. And many people, as I'm sure you know, worry that this may be a playbook, of course, for China and Taiwan. And that is not a pretty picture. So the bad news, the good news I think, is that per unit of gdp, we depend less on oil than we used to. So oil remains very important, of course, and it's politically very important because people hate to go to the gas station and find that prices are up. But to produce the stuff that we need to produce oil is less necessary. And the other reason why I don't think that we're quite back in the 70s mode yet is that back then you had really bad monetary policies. You didn't have autonomous central banks, you didn't have a track record of low inflation. And, you know, central banks are easy to hate, but they've done a pretty good job. And I think they will be a stabilizing forward, I mean, a stabilizing force going forward even if the price of oil remains high.
- [05:27]
B
That's really interesting. So in a lot of the debate, there's sort of a question of there's obviously a temporary spike in oil prices. You know, is that spike going to prove very long lasting? And the assumption in the background seems to be if the spike in oil prices proves long lasting, then we're back in the 1970s. And what you're saying is that we're not going to be back in the 1970s because oil was just much more important to an economy that still was in very large parts, industrial and so on, than it is to an economy where a lot of what people do is white collar work and service sector jobs and so on, all of which rely on electricity and energy in indirect ways as well. But they're much less reliant on energy than a kind of manufacturing job. The other thing to note here is that the United States in particular, which is a huge share of a global economy, has just become virtually independent and autonomous on oil and gas. That the fracking revolution really means that most of the energy consumed in the United States today does not come from the Middle east and therefore the American economy is less exposed to those effects.
- [06:32]
A
I think that's right. But let me add two caveats. One caveat is that we need to be precise about what it is that we mean by being back in the 70s. In the 70s, the crucial word was stagflation, I.e. stagnation and inflation. Stagnation could be an issue. I mean, the world economy outside the US hasn't been growing a lot. China grows a lot less than it used to. India does pretty well, but of course Europe doesn't grow very much. Latin America doesn't grow very much. Much of Africa doesn't grow very much. So slow growth is a danger. The other component of stagflation, of course, is inflation. And there I think we are on safer ground. I mean, you're going to have a one time spike in prices and that means higher inflation over a month or two or three. But a return to high inflation, I think it's pretty unlikely. And the reason is that we have these institutions called central banks and they showed us, for instance in the inflationary episode after Covid, that you can have a spike in inflation. We had a year of very high inflation. The US, the UK, other countries at 10, 11%, but without a big cost. Inflation went down and it's not guaranteed they can pull it off again and again and again. But I think monetary policy is much better run and we have many more monetary policy tools than we did a generation ago. So on that account I think we are in reasonably good shape. The other thing I was going to say is that I think the real danger is not so much inflation. The real danger is that this moment of craziness from the point of view of American policymaking could trigger other things that today are under the rug, but which can blow up in a big time, and that is finance. I mean, ultimately these crises become crises. Not if you have a little bit more inflation or not, if you have half a point less of growth, is when the financial sector implodes. And I don't think we're quite there yet, but there is a list of things that people worry about and that we should worry about. One of them was, of course, AI. Nobody doubts that AI will be good for productivity, but it's not clear that the current valuations of AI stocks and technology stocks are reasonable. It's also not clear that the investment boom in data centers is justified. And it's also not clear that other areas of the financial picture, particularly what Wall street calls the private credit market, that's not banks, but other people providing private credit, one can tell a story in which a lot of those institutions are vulnerable and they could take a hit. So I think the real danger, and again, we're not quite there yet, but we should be thinking about it, is a financial multiplier. When finance gets out of whack, as it did in 2008, 9, 10, then we really have to worry.
- [09:25]
B
So we're trying to read tea leaves and I think you've set out really nicely sort of what the factors of stability are, why perhaps the oil price shock is not going to be as bad as the 1970s, but also what the tail end risks are, right? What the kinds of things are that could get us into a recession that could in theory spiral out of control. And of course the old joke is that economists have successfully predicted 17 out of the last three recessions and also that sometimes they fail to predict the recession that's around the corner.
- [09:51]
A
Mo, I, I should point out that I'm recording this from the London School of Economics where the late Queen Elizabeth came to cut the ribbon on a building in the middle of a financial crisis and asked one of my colleagues here was two doors down from me, how come you didn't see it coming? You know, the Queen wondered, you know, this is in 2008, how was it that so many economists had missed, you know, the big financial crisis? And the answer is, you know, ex post, we can tell you what went on. But ex ante, we're not so good at predicting these things. So could it be that around the corner we are going to face another financial blow up? Yes. I mean, as an academic, I specialize in financial crisis. One thing I can tell you is that somewhere in the world there is one every five years and we haven't really had one for about 15 now. So maybe it's time for one.
- [10:42]
B
That's very interesting. And just since it is your academic specialty, what are the science to look for in advance of a financial crisis and why is it so hard to predict them?
- [10:52]
A
Well, you know, the great Stan Fisher, who was the vice chair of the Federal Reserve and the governor of the bank of Israel and a professor at MIT, used to say, you know, all my students are writing papers on the last crisis, nobody's writing papers on the future crisis. And the reason for that, of course, is that we don't know what it will look like. You know, finance is a many headed monster. So nobody would have predicted that the crisis of 2007 and 8 would begin in the mortgage market. Mortgages are supposed to be boring, we're supposed to be safe. But there was an innovation in mortgage markets and mortgage markets became something called asset backed securities. And suddenly that very safe asset became unsafe. The first large institution to go under in 2008 was AIG, an insurance company. And people thought insurance companies were big and boring. They cannot go under. But you know, AIG came very close to the edge. So where will the thing blow up next time around? You know, if I knew, I'd be rich. But I'm not the obvious two candidates are. I mentioned them already, but I will, I will repeat it. One is, one is everything connected to technology and particularly people who have made bets on these massive valuations of technology companies. Let me put it this way. And Ricardo Hausman from Harvard and I have just written an article on this. If in fact the stock price of every major technology company, including Nvidia and including Apple and Alphabet and everybody else, if they are right, the increase in GDP in the US and the increase in exports by the US is humongous. So 10 years from now, the question will not be about the US trade deficit, it will be about the US trade surplus. That is if these valuations are right. But the truth is we have no idea if they're right.
- [12:49]
B
So the idea here, just to spell this out for non economists, is that the valuations of these companies are so enormous and valuations of course are based in large part on the expectations of future returns that effectively, when you look at how much Nvidia is worth, how much some of these other tech companies are worth today, but these are bets that they're going to be selling, you know, enormous amounts of chips, in the case of Nvidia, for example. And so that can't just be domestically in the United States, given the size of those, of those, of those bets that they have to be to countries around the world. And so even for the United States for a long time has had this huge trade deficit, either the relation of Nvidia just crashes down to levels that are much lower than they are today, or it basically implies arithmetic, arithmetically, that the United States is suddenly going to have a trade surplus. Which of those two things do you think is going to happen?
- [13:38]
A
Again? It's very, very hard to say. But let me spell it out in a bit more detail because the point you're making is very important here. You know, the, the, the price of a stock today, as you pointed out, is, you know, dependent on our guesses about how much that company will make, what the return on that company will be next year and the following year into the indefinite future. So if I look at the price of the stock of any large tech company today, and this includes, you know, not just the AI companies but, you know, Amazon for instance, and others, you know, they are suggesting humongous profits. So one of the two things must be right. If the people pricing these stocks today are correct in what they're doing, the boom in productivity and in output and in US exports is going to be gigantic. And the issue of the 2000 and 30s will be how does the world accommodate that? How can the rest of the world pay for these massive American AI led services? But there's an alternative scenario that the calculations are wrong, or I shouldn't say calculations. They're guesses, these are educated guesses, but ultimately guesses they are wrong. And that one day we will wake up and realize that this stock is not worth 100, it's only worth 50. And at that point a lot of things could go wrong because people have borrowed against these stocks, they've used them as collateral, they've made investments based on these guesses. At that point, the stress on the financial system would be huge. Which one of the two will be? I have no idea. As usual, something in between, but I couldn't tell you exactly where in between.
- [15:19]
B
What about fears of an AI bubble more broadly? One company whose valuation is now very high is OpenAI. They have gigantic expenditures to keep training new models. Some people think that their revenues actually so far are relatively modest. So, you know, in order for OpenAI to keep going, they need to either keep raising, you know, unprecedented sums from private investors over and over and over again, or they eventually need to, you know, vastly increase the revenue, you know, beyond levels or anything close to what they have at the moment. So I take it that there is actually a reasonable possibility that OpenAI will prove to be unsustainable. Now, I've heard different arguments about this, with some people saying that if that happens, that could be a systemic shock to the economy. That could be the sort of bursting of the AI bubble, could really be the beginning of the next financial meltdown. And other people saying, no, that's a problem for OpenAI. It's a problem for some of the people who've invested in OpenAI, some of the sovereign wealth funds, some of the VC firms. But, you know, most likely the valuable remains of his company would be taken over by Microsoft or Google or one of the other tech giants, and it's not going to be a systematic shock to the economy. Do you have any way of helping us think more intelligently through what the consequences of a bursting of the AI bubble might be?
- [16:40]
A
2 thoughts on that. The first one is that I wouldn't focus on a particular company because if in fact AI is not as productive as some people are claiming it will be, that will not affect one company, it'll affect all of them. And so my first point is that if you look at the seven big tech companies, they are a humongous share of the valuation of the American stock market.
- [17:07]
B
And since the US Stock market is a majority of the valuation of all of the world's stock markets, it means that they're a humongous share of the world economy.
- [17:15]
A
What's happened in the last three or four years? It's changed slightly in the last month or two. But let's take the trend. Over the last five years, two things have changed. A, tech is a much larger share of the US Stock market, and B, the US Stock market is a much larger share of the world. So we're all more exposed to American risk. Now. That's the financial bit. But let's go to the core question. It's a very hard question. How large will the productivity increase be linked to AI? I don't know the answer to that, but we can look at history when big revolutions in technology happened. So think of the arrival of electricity and the electrification of factories a century ago. Or think about the arrival of the personal computer and the Internet 30, 35 years ago. The gains are eventually arrived. But we know two things. It took companies a long time to figure out how to use these techniques. And secondly, and as a result of that fact, the productivity numbers took a decade sometimes to reflect the technological innovations. I mean, I'm sure you've Heard the quip by a famous American economist who said, you, you know, computers are everywhere, but not in the productivity statistics. Right? When, you know, the personal computer arrived, we all had it, we all used it, we were all thrilled. It wasn't showing up in the numbers. So my guess is that AI will show up in the numbers, but it's not going to be tomorrow. And we don't quite know which companies will use it in which way and where the productivity gains will pop up. So anything that we do today is based on the belief, but at this point it's no more than our belief. It's going to be big, big when, big where, you know, how soon? I think the honest answer is, you know, nobody can be sure.
- [19:19]
B
Recently I realized something about my wardrobe, which is that I have some nice clothes to wear to keynotes and panels or if I have to go on television, you know, suits and shirts and that kind of stuff. And you know, I have T shirts or athletic wear if I'm going to the gym. But I really don't have a lot of nice, elegant looking clothes for the everyday. And since the weather is getting nicer and I hope to get out a little bit more in the coming weeks and months, I thought I should really spruce up my wardrobe a little bit. So looking around, I came across Quince, which is an online retail store which offers really high quality material at a very nice price. One of the first things I bought, for example, was a very nice cotton mesh stitch sweater, polo, for a little less than 40 bucks. I'm wearing it right now. It's super comfortable and I have to say it looks quite elegant. It looks quite nice on me. The reason why Quince is able to offer such a good price is that they work directly with ethical factories, cutting out the middlemen. So if you also want to refresh your wardrobe, try out quince. Go to quince.com Good fight for free shipping and 365 day returns. Now available in Canada too. Go to quincy.com Good fight for Free shipping and 365 day returns. Quinns.com Good fight help me think more broadly about how much of a turning point in economic history this historical juncture is. I think there has started to be consensus. We'll see whether that turns out to be right. That we are at a turning point in the political order, that the actions of Donald Trump as president, but also a bunch of other developments that have been happening over the last years really mark the end of the, what we want to call it the international liberal order. Or whatever it was, that the world is much less predictable, that a lot of the rules that seem to govern the international sphere no longer hold, that we can no longer be sure that NATO is a effective organization that can provide deterrence to enemies of Western Europe and North America, that even the survival of a transatlantic relationship is in many ways in doubt. On the economic front, you could make a parallel argument. The United States, one of the architect of the World Trade Organization and a growth of free trade over the last decades, has now put up enormous tariffs, at least until a recent Supreme Court ruling, which is complicating that question somehow. The country that is the wealthiest large country in the world, that, you know, whose companies represent, as we just said, I think something like 60% of the world's stock market valuation seems to have decided that all of this order is not in its interest and is tearing key parts down on it. And so you could proclaim the end of globalization as some people have. At the same time, we see that other countries are rallying to sustain free trade as best they can. Global trade has not declined significantly over the last years. You know, parts of the economic order clearly are proving resilient to the attacks that Donald Trump is making on them. So, you know, in the annals of, you know, this is an impossible question to answer, of course, but, you know, when people are going to write the economic history of the 20th and 21st century, is what we're living through going to be an interesting little chapter, a sort of fascinating side note, or is it going to be a major turning point?
- [23:02]
A
That's a huge question. So let me chop it up into little pieces to see if I can say something semi useful. First, on globalization. Globalization is not going away. And I think it is not going to go away for one very simple reason. Because in much of the world, working class people can walk into a supermarket and get themselves a pair of sneakers, or trainers call them what you wish, depending on your side of The Atlantic, for $10, when a generation ago the same pair of sneakers cost $30 or $40. And therefore the benefits to the average consumer in any country, whether it be in Asia and Latin America and Europe, are tremendous. I don't think any politician is going to drive us away from that. And as you pointed out in passing, but I want to underscore it, in spite of all the crazy stuff being done by the United States and in spite of the fact that China doesn't always play a constructive role either, world trade hasn't shrunken. There's a recent report by McKinsey that shows that in fact American exports are up, Chinese exports are up. Trade among countries in the rest of the world without China and the United States is also up. So globalization is not going away. Globalization is morphing and it's changing. You're getting more trade among countries that are politically similar and less trade among countries that are political rivals like China and the U.S. is this good or bad? I think in many dimensions it is bad, but globalization is not finishing. Now, what is changing? And again you mention it, but let me expand on it. Every period of history and every international economic arrangement needs an anchor country. Shopping malls have an anchor shop or an anchor store, an anchored apartment store. The post1945 world economic order has had the United States as the anchor country. Not only because the United States was large and rich, but because the United States stood for a set of rules and helped enforce those rules. And also because the United States provided something very important, a financial system and the US Dollar. Okay? And what I think is true, even if globalization is not ending, that the set of rules has been rubbished and it's not going to come back anytime soon and that those financial arrangements are not disappearing, but they're clearly under attack. I'll give you one example. In every crisis that I have ever seen in my lifetime as an economist, whenever people got scared, the dollar rose. You know, the old joke is that an emerging country currency is one from which you cannot emerge in an emergency. And when you try to emerge in an emergency, what do you do? You buy US Dollars. The one moment when this rule was broken was Liberation Day a year ago, almost exactly a year ago, when the United States said, we're going to increase tariffs. The standard textbook says an increase in US Tariffs should cause the dollar to strengthen. And instead the dollar weakened. Why is that? Because people in Beijing and in Johannesburg and in Brasilia said, oh my God, the Americans have gone crazy. And therefore the United States is no longer an anchor of stability. The dollar is not going to be dethroned as the world reigning currency simply because there are not that many alternatives. China is a much bigger country. But I don't think you, Yasha, are about to put all of your life savings into Chinese rmb. I know China does not have a liquid capital market and more importantly, China does not have a trustworthy judicial system. If you ever end up in a fight, you're not going to go to a Chinese judge to settle it. And as a result, China does not provide an alternative. But increasingly, other currencies like the Canadian dollar, the Australian dollar, the Swiss franc are stepping into the breach. And the big question is whether the Euro will really step onto the breach. I mean, I live in the uk, not in Contin, but I keep thinking this is the moment for the euro to really leave adolescence and come into adulthood. But this requires a European Union to really want that. And there are a bunch of reforms that you need. I will not bore you with the technical details, but you need to make the euro more readily tradeable. You need to have a very liquid market in European bonds, not in German bonds or Italian bonds or French bonds, European bonds. That can be done. And it's not that difficult to imagine a world in which the Euro rivals the dollar not tomorrow, but in five or ten years time. But this will require political will. Last but not least, there's the security issue. You mentioned NATO. You were born in Germany. You know perfectly well that. You know, if you're in Germany or in the UK today, you look to one side you see America is not a reliable partner. On the other side you see an aggressive and criminal regime in Russia. You know Kyiv is what, two hours away by plane from Berlin. So this is not an imaginary threat. It's a very real threat that is very close. And therefore from a security point of view for people living in Europe, the world's very, very different. And I think a massive question is whether Europe will get its act together when it comes to defense and really become autonomous from the security point of view. Europe is not autonomous from a security point of view today, but it needs to be. Ryan Reynolds here from Mint Mobile. I don't know if you knew this, but anyone can get the same Premium Wireless for $15 a month plan that I've been enjoying. It's not just for celebrities. So do like I did and have one of your assistant's assistants switch you to Mint Mobile today. I'm told it's super easy to do@mintmobile.com Switch upfront payment of $45 for 3 month plan equivalent to $15 per month Required intro rate first 3 months only, then full price plan options available, taxes and fees extra.
- [29:08]
B
See full terms@mintmobile.com great answers and really interesting points. Let me dig a little bit deeper into this question of reserve currency because there's some stuff in there that I don't fully know and therefore understand. So I'd love to understand a little bit better. So I guess the first general question to ask is what are the advantages and disadvantages of effectively being the world's reserve currency? Because I think that's part of a political debate in the United States. Obviously, one of the advantages is that it makes it much easier to issue debt and it means that you can borrow at much lower cost. Those are significant advantages. Is there a disadvantage, especially when you're talking about smaller countries like Canada or Switzerland, partially stepping into the role of reserve currency, are that appreciating the local currency in ways that can have negative consequences for citizens of those countries, or am I making a wrong economic assumption here?
- [29:58]
A
Well, let's start with the US because today in the US There are many people mostly linked to the Trump administration, who claim erroneously in my view, that the US Pays for being the world's reserve currency. And that makes absolutely no sense. Money is a bunch of pieces of paper that costs nothing to produce. And there's an amazing fact that these little pieces of paper that cost nothing to produce, the world wants to hold, right? So the United States collects a tax on the rest of the world. It's not an explicit tax, it's not legislated or mandated anywhere. But every time, you know, I will take a green piece of paper in exchange for a good that I made, I am giving the United States a break. So that's one big advantage. The second big advantage is that the United States borrows massively internationally in its own currency. And whenever things get tough for the US the dollar depreciates and therefore the real value of the outstanding debt goes down and Americans get get a benefit. That happened, for instance, you know, after World War II. It happened during the Vietnam War. At points of stress, when the US Economy is in trouble, the dollar depreciates. And therefore, if I'm holding American debt, I, as a resident of Europe or as a resident of Asia, lose. So this is really a pretty win win situation for the U.S. some people say, well, this means that the dollar is too strong. First of all, it's not clear what it means for the dollar to be too strong. And if that is a problem, there are ways of dealing with that. One reason why the dollar has been strong is maybe that the US As a fiscal policy doesn't make a lot of sense. And the United States could correct that. But bottom line, the idea that the world is ripping off America because we all hold dollars, that makes absolutely no sense. That's simply MAGA nonsense.
- [31:57]
B
What about smaller countries, though? Part of this is that the United States is such a big country and such a big economy that people from around the world wanting to hold US Dollars may not have as big a distorting impact on the currency. If the whole world suddenly flooded into Canadian dollars, presumably that would make a much bigger difference to the valuation of that currency. Could that distort that currency in ways that would actually be a problem to the Canadian economy? Or is that not a serious concern to have either?
- [32:28]
A
Look, yes, maybe, but let me qualify it in ways that are important. Most countries, in fact, worry about the opposite problem. Most countries worry that they issue currency and nobody wants to hold it. So having the rest of the world want to hold your own currency is 99% of the time a great thing. Why does a country like Argentina often get into trouble? Because nobody wants to hold the Argentine currency. Not even Argentine. Right. So when people say, I want to hold Swiss francs or Canadian dollars, you know, the first line of argument must be, what a great thing. Now, there is a danger in what economists call sudden sort of surges of capital inflow. Yes. It could well happen that interest rates in the US are suddenly low and people are looking for some other place to park their money. So a lot of money comes into your country and all of a sudden your currency appreciates. Yeah, you can find episodes in history, not only in Canada or in Switzerland, even in emerging markets. Emerging markets sometimes worry that people are getting out of the US because interest rates are too low in the US and they come to your country and they appreciate the currency. That can be a problem. But look, it's a nice problem to have. First of all, it means that people trust your currency and trust your country. And secondly, there are tools for dealing with it. You know, you can. You can cut your own interest rates. You can, you know, in the limit, impose some disincentive to capital inflows. Countries have done that. Countries have taxed capital inflows. So if that is a problem, you can deal with it. But believe me, 99% of the time, it's a problem you really want to have. The more serious problem is the opposite. People dump your currency. People don't want your currency. That's bad for your currency, for inflation, for domestic residents. That's not the problem of Canada today. That's not the problem of Australia today, not the problem for Switzerland today.
- [34:29]
B
All right, let's get to the book that you've just published, which is really interesting. It's called the London Consensus. That, of course, is a play on the Washington Consensus. What was the Washington Consensus? What's wrong with the Washington Consensus? Why do we need to supplant the Washington Consensus?
- [34:46]
A
Well, first of all, for listeners what was it? And then I'll tell you what may have been wrong with it. The Washington Consensus was a set of ideas that emerged predictably out of Washington around 1989, 1990. There was a big conference at a place called the Institute for International Economics, which is still around under a slightly different name. And a big fat book came out edited by a guy called John Williamson, a British economist living in Washington. And it became a bit of a blueprint for a certain kind of economics. Some people like to call it neoliberal. I don't particularly like that label because neoliberal has become really a bit of an insult. So if you call somebody neoliberal, it's bad.
- [35:31]
B
And it's not just that, it's an evaluative term. There's many evaluative terms that are fine. I think, you know, fascist is in my mind, in evaluative terms. I think that anything that is rightly called fascist is bad. But it does, even though it's often overused, have a core meaning that actually makes sense. I think the problem to me with how people use neoliberal is that it's just to say it's something I don't like. And beyond that, I don't think there's a clear meaning.
- [35:56]
A
No, that's exactly right. If you say fascism, you're thinking concentration camps. This is. But when you say neoliberal, it's not clear what the hell you're talking about. Right? So let us go back in history. This, you know, people forget. Allow me a 30 second digression into history. The conference was held in Washington. The book was presumably about the world, not about Washington, but it was mostly in response to the Latin American debt and financial crisis, which mattered to the US at the time because the people holding that debt were American banks. So the big American banks were in trouble. And people around Washington were wondering, okay, what's wrong? Why did this happen? Why do we, what do we do to make sure it doesn't happen again? So predictably, at a time when the problems were high debt, weak banks, high inflation, big government deficits, the medicine was stabilize the public finances, increase interest rates, bring down inflation, maybe shrink the government a little bit, liberalize prices at the same time. This happened more or less coincidentally with the collapse of the Berlin Wall and the liberalization on reform of countries in Eastern Europe and the former Soviet UN Union. And there, obviously the problem was too many controls, a state that was too large. In some countries like Poland, high inflation, high debt. So if that was a problem, the solution was the obvious solution. And people like Ronald Reagan and Margaret Thatcher, of course, took these ideas and applied them. And the World bank and the IMF also took these ideas and applied them around the world. And in some places they made sense. Clearly, in Latin America in the 1980s, government deficits were too large, public debt was too high. Something had to be done about it. The problem was that this set of commandments and Williamson really came up with a list of 10 things to do, and it looked like the 10 Commandments were not universally applicable. So all the criticisms about one size fits all economics really were relevant. Secondly, the problems of 35 years ago are not necessarily the problems of today. So what did we do? Let me move on to what we try to do. An LSE colleague, Tim Besley, a very influential British economist, and I and another colleague called Irene Bocelli, we asked ourselves, well, what is it that we have learned in the last 35 years? We as in the world at large, and we as in the economics profession. And we invited a bunch of colleagues, most of whom are LSE based or studied here or have taught here. Some today are based in the US and we said, look, tell us, in your subfield, whether it's international trade or finance or fiscal policy or whatever, what do we know today that we didn't know 35 years ago, and what is it that we should do differently? Which bits of the Washington Consensus merit keeping around and which bits of the Washington Consensus were completely wrong and we need to throw them out the window? And Tim and I wrote sort of an introduction which doesn't try to summarize the book because the book is huge. It has 670 pages, but tries to sort of extract some themes. Let me give you just two ideas broadly, and then we can dig deeper. One idea is that certain things in Washington Consensus remain true. I mentioned one already. You want to be careful when it comes to fiscal deficits and debt, because you don't want to end up like Argentina. You don't want to be a country in which you're always teetering on the verge of collapse. It is also true, and there's a very nice paper by a Canadian economist based at mit. It is also true, and a lot of research has shown that international trade does bring benefits. The gains from trade, to use the phrase by David Ricardo, the gains from trade remain large. So overall, it's a good idea to trade. The idea that you're going to become Cuba, North Korea, and close your economy and become prosperous, that makes absolutely no sense. But the gains from trade are unequally distributed. And those gains also mean that some people lose. And one big mistake that we made back in the 80s and 90s is that many countries, especially the United States, did nothing or close to nothing to address the plight of people who lost. And many of those policies are simply not credible. That's one idea. Let me mention another one and I will hand it back to you because I don't want to monopolize the microphone. Some people say that economic growth is a bad thing, that we should go into degrowth. We don't think that. Certainly if you come from a developing country, you want to grow. Economic growth is important. You only hear de growth ideas from citizens of rich countries. You don't hear that in India or in Africa or in Brazil. People want to grow. But what we have learned is that growth is a lot more complicated than the Washington Consensus suggested. The sort of cliche from the 1980s, the Ronald Reagan bit, the Margaret Thatcher bit, was get the government out of my way. And you know, we. Private businesses will get the economy to grow. We know today that many countries followed the Washington Consensus, liberalized, open up, and they didn't grow very much. And you know, colleagues like Philippe Aguillon, the French economist who won the Nobel Prize last year, he's a colleague here at the London School of Economics, have explained why. Because growth is all about productivity, and productivity is all about innovation. And to innovate, you need to invest. In order to invest, you need a very delicate ecosystem in which the private sector has to do its bit, but universities and researchers have to do their bit. And the government has to provide some key inputs for that research to be fruitful and for those bets to take place because they're risky. And not every country has this ecosystem. The United States has Europe, remarkably, even though Europe is a rich region, doesn't have much of one, and there are countries, for instance, Mexico, as an example. Mexico followed the Washington Consensus to the letter. And Washington Mexico has low inflation today, but doesn't grow very much. So we need to be less ideological about growth and think about what are the kinds of collaboration between the government and the private sector that get innovation going. That's a very relevant debate, not just for the Mexicos of the world, but for the country in which you were born, Germany, and much of Europe today.
- [42:39]
B
So what I think is really interesting about this project is that you're clearly trying to replace an old framework with a new framework. I mean, that's implicitly and I guess explicitly the goal of this project. But you're not trying to throw the baby out of the bathwater. Right. You're not saying that everything about that old project was wrong or that we didn't get anything right in the last 30 years. So you're replacing a framework in a way that's still building on some of the enduring wisdom in it. So I'd love to get an overview of sort of where this new framework would differ and then I'd love to sort of double click into some of the specific points. Right. You know, a very, very simplistic summary of the Washington consensus is that it has kind of 10 points. It wants you to have fiscal discipline, to reorder your priorities in public spending, shifting spending away from subsidies towards more broadly beneficial investments like education and healthcare and so on. You want to reform the tax system to broaden the tax base. You want to liberalize interest rates. You want to reduce competitive exchange rates rather than protecting your currency. You want to liberalize trade. You want to make it easier for foreigners to come in and invest in your country. You want more foreign direct investment. You want to privatize a lot of state owned enterprises that aren't very efficient. You want to deregulate sectors like telecommunications, for example, that used to be highly regulated and many countries. And finally, you want to secure property rights, making sure that there's better legal protections for them. So I imagine that a whole bunch of these you still agree with. Right? Securing property rights, fiscal discipline. You mentioned even probably some of the tax reforms that are talked about here makes sense. Some of this stuff has sort of become a victim of its own success. It probably was right in the late 80s and early 90s for many countries to deregulate. But of course, just as I'm skeptical of the idea of the ever closer union in the context of the European Union, because it has no logical endpoint. Right. Surely there's a right level of closeness. You don't want it to be ever, ever, ever, ever closer. The same is true about deregulation. Right? Some deregulation was good. Perhaps in some ways we went too far. But clearly we don't want to always keep deregulating. Some things need to be regulated. Where do disagreements lie in terms of saying, hey, this perhaps was wrong all along. Now that we know a little bit more, where is it that we've done a lot of the right steps? And, you know, emphasizing this today just isn't helpful because most of this has been done. Where do you think? No, no, no, actually we really need a new departure. We really need just a completely different set of principles to guide our actions.
- [45:19]
A
Great. I think you set it up very well. This is not black and white, is not Washington, all bad, London all good. And, you know, pessimism is fashionable, but we have to recognize that the world did certain things reasonably well over the last 30 years. For instance, you know, I'm old enough to remember in the 70s or 80s when inflation was high pretty much everywhere. Right. Today, you know, leave Venezuela and a couple of other countries aside and inflation is mostly low everywhere. That's a big achievement. So, you know, there are things about the Washington consensus that of course have to be right.
- [45:51]
B
Well, one thing, by the way, is I remember that when I was in college, the big debates about the World Trade Organization, where this is going to screw poor countries because of World Trade Organization. This is just a way to exploit India and China to make sure that they stay poor forever. Today, when you hear criticisms about the World Trade Organizations, including from the progressive left, it's they screwed over steel workers in Michigan. And that is a very real concern. As we were talking about the inability to compensate some of the losers of free trade, we had David Artur on the podcast recently who spoke about this. Very interesting. That's a serious topic. But it's very different from what my friends back in college were saying when they're saying this is going to screw over those countries that actually have grown enormously over the last 25 years, significantly reducing poverty in them.
- [46:37]
A
Well, you know, I was saying a couple of minutes ago that the paper that we have in the volume makes exactly that point, that, you know, the benefits from free trade today, we know how to measure them better than we did before, and they're humongous. And you're making a very interesting political point, which I agree with and not many people make. So I want to underscore it here because free trade or free air trade has become controversial in the American Midwest or in the north of England. Many people jump to the conclusion that free trade today is controversial everywhere. And that is not true. The people calling for a more closed economy are not in India, are not in South Africa, they're not in Nigeria, they're not in Turkey, they're not in Brazil, they're not in the emerging or developing world. They're mostly in the US and the UK and bits of Europe. Right. So the idea that free trade is bad for the poor is one idea that simply did not resist very well. The test of time, of course, when you liberalize. I said it already, but I want to repeat it. There are winners and Losers, and you need to address that. But a more open economy, and you know, Ricardo could have told you this a couple centuries ago, is going to be good for the people making products that you can export. You know, if you're a farmer in Africa or a farmer in Latin America, you couldn't export that product before and you can now are going to be better off. And we've seen a lot of that. I mean, the last generation, the last 35 years brought hundreds of millions out of poverty in India and China. And that's a massive increase in human well being. So that's the past. Let's now move to the present. Where do we think that the Washington Consensus got it wrong? Let me mention two or three areas. One is that precisely in having that set of Ten Commandments, it oversimplified reality and sometimes provided the wrong medicine. Yes, privatization is justified much of the time, but it is not justified all the time. For instance, we learned during the world financial crisis that having state banks can be a stabilizing force because state banks can do the things that private banks don't do in the middle of a panic. Yes, deregulation of many over regulated industries was probably called for in the 1970s. But having a well regulated financial sector is absolutely crucial. And if you don't have a well regulated financial sector, you're going to have crises like the one the world had 15, 20 years ago. Right. So the 10 commandment approach, do this regardless of who you are, where you are in the world, what your level of development is, that's bad economics, period. Second thing, where I think the Washington Consensus got it wrong, it underestimated or no, let me put it a different way. It misunderstood the sources of human well being and human frustration because it said, look, what really matters is financial payoffs. If there are no jobs in your town or in your province or in your part of the world, just move elsewhere. What have we learned in the last 35 years? That when people leave places like the American Midwest or the north of England or bits of Spain or bits of India, what is left behind are regions that go into a tailspin of decay and crime sets in and deaths of despair set in. And of course, politically, these are the people who end up voting for Trump or voting for Brexit. So we know today something we should have known all along, which is that people care about their paycheck, but people care about belonging to a community that feels respected and care about identifying with a group that is felt to be respected. And we care about belonging and we care about the well being of the people around us. And in our rush to decentralize and open up and deregulate, we forgot that. And we paid a price economically and we paid a huge price politically because this is one of the sources, not the only source, of populism and rising authoritarianism around the world. So that's idea two. I mentioned growth already. The Washington Consensus got growth wrong. Growth is not simply about getting the government out of the way. Yes, government sometimes can overdo it, but this is a very important point. Government needs to provide lots of very crucial inputs. I'll give you a very concrete example from my own experience. I was the finance minister of Chile when Chile signed a trade deal with the European Union, which is still in force today. And you know, part of Chile is in Patagonia. And Patagonia has a lot of sheep. So, you know, people were very happy because they could export mutton to the European Union. And what did Chilean farmers who produced mutton learn very quickly? That yes, you know, our mutton was very high quality. But before you could export to the European Union, you needed slaughterhouses that were up to European Union standards. And you had to guarantee that the animals had not been given medicines that were not within European codes. And you had to guarantee that in fact the transport was saved so that, you know, the meat would arrive in Europe without rotting or without being affected. So who provides those guarantees? Who certifies the quality of the vaccines that the animals are given? Who certifies that the slaughterhouse is up to a certain standard? Who provides the roads and the ports and the airports through which that product gets exported? Well, that's the government, right? So if you don't have a state that is working with the private sector to identify those needs and to identify those regulatory structures that you need, well, you're never going to export anything, right? So countries that export a lot and which really had an exporting revolution. Think of Ireland in the last generation, think of Singapore, think of Uruguay. In my part of the world, these are governments that have able states. Which takes me to my last point, which I want to emphasize, because the Washington consensus felt that the state really has to be gotten out of the way. It forgot that an able state is at the root of everything. You don't have a thriving financial sector like the City of London four blocks away from where I am. Unless you have the best regulation in the world. You don't invest in a market which is not well regulated, you're going to lose your search. You don't invest in A country where the judicial system is not up to par because they're going to steal your money and you can't get it back. Let me give you an example from the pandemic. What do we learn in the pandemic? Many countries spent a lot of money on vaccines and people died. There were hundreds of thousands of excess deaths because they didn't have the state capacity to reach the last town in their territory and vaccinate the last person who needed it. Right. And this is not rich versus poor in my part of the world. In Latin America, some countries vaccinated everybody very, very quickly because they had the state capacity to do that, because they have been vaccinating people for the last 50 years. The country next door, maybe a richer country, didn't have that state capacity and people died as a result. So it is not that we want to go back to the 50s and argue big state against small state. This is not Thatcher against Marx. The question is, how do we get states to be able to do things that states need to do? Guarantee private property, regulate finance, build good bridges and good airports, get people vaccinated before a pandemic. And that requires a certain kind of policy, a certain kind of attention that the Washington Consensus entirely missed.
- [54:18]
B
Thank you so much for listening to this episode of the Good Fight and the rest of this conversation. Andres and I go a little bit deeper into what exactly the London Consensus would mean for public policy. How would it change what governments actually do and why would it increase prosperity around the world? I also press him a little bit on how we should govern artificial intelligence, an enormously productive technology, mostly privately held today, but also has very significant risks, potentially existential risks to humanity, but also huge risks to how it'll transform the labor market, how it might allow private individuals to engage in acts of terrorism, and so on. How should we think about the role of a state in facilitating and governing this technology? To listen to that part of the conversation, to support the work we do here, to make it possible for us to bring two of these in depth conversations to you every single week, Please go to writing.jashamung.com and become a paying subscriber. That's writing.yashamonk.com.
- [55:28]
A
Sam.