October 10, 2020


Change the Furniture

Mark Blyth is William R. Rhodes Professor of International Political Economy at Brown University and a Faculty Fellow at Brown’s Watson Institute for International Studies. His research examines how the interests of states and economic actors shape ideological consensus and institutional development at the global scale. He is the author and editor of many books, including Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (2002), The Future of the Euro (2015), and Austerity: The History of a Dangerous Idea (2013).

His latest is Angrynomics, published this year, in which he and co-author Eric Lonergan argue that the rising tide of anger dominating global politics has its roots in decades of macroeconomic policymaking. Earlier in the pandemic, I spoke with Blyth about the economics of the Covid-19 crisis, the various approaches that governments and central banks across the globe have followed in order to tame it, and what an alternative program for the global economy might look like.

An Interview with Mark Blyth

Álvaro Guzmán Bastida: Let’s start with Angrynomics, which you co-authored with Eric Lonergan. You address the economic roots underlying the deep discontent and rage that have characterized the Western electorate over the last decade. What are some ways in which that anger is perpetuated by economic policy?

Mark Blyth: In the book, we use the analogy of the macroeconomy as being like a computer. All capitalist economies have relatively similar hardware: they all have a labor market and a capital market, which vary in scope, depth, and regulation. And all economies have software: a set of economic ideas, or a dominant script dictating how you do things in the economy. Historically, we’ve had three different capitalist “computers.”

The first was globalization under the gold standard, where capital and people were able to move freely between countries, and the system adjusted using the trade balance through exports and imports. The problem with this was structural: because everyone wanted to be an exporter, the system was biased towards deflation. That meant that wages were squeezed relative to profits, which resulted in a lot of pissed off labor. The first attempts at nationalism in the early 1900s, such as Joseph Chamberlain’s social imperialism, were meant to solve that. World War I was the culmination, after which the system fell apart.

Version 2.0 had much more restrictive national economies and an international monetary system based on the dollar, somewhat tied to gold—the Bretton Woods system. We had national economies with national labor markets, and countries that made the same stuff occasionally traded with each other. Given the trauma of the previous period, the policy target was full employment. Now the problem with making full employment your policy target is the Kaleckian one. If you run a fully employed labor market for thirty years, given static technology, you’re ultimately going to bid up wages ahead of productivity. That’s going to hurt profits and profit expectations via inflation in the system. This is exactly what undid that order in the seventies.

After versions 1.0 and 2.0, there was a fundamental reset and rebuild of the hardware of capitalism and a rewriting of its software. The rebuild was the rise of independent central banks, and price stability became the policy target. We reopened the global economy, this time with 700 million new people joining the global labor market and China rising from indigence to relative affluence. And, as Branko Milanović showed with his famous elephant chart in 2015, this squeezed the incomes of those between the fiftieth and the eighty-fifth percentiles in the OECD economies, particularly in the Anglo American economies.

Now add to this the financial crisis in 2008, the costs of which were distributed asymmetrically. Capital owners were bailed out, the cost of doing so was put on the public balance sheet, and the public sector was squeezed through austerity. Ultimately, we had a decade in which real income losses and wage stagnation were compounded by an effective depression, particularly in southern Europe and the Anglo-peripheries. The political anger we’re witnessing now has been a long time in the making.

The center and center-left parties who hived off responsibility to technocrats in the central banks and the WTO were the ones who were completely unprepared for the crisis. Since Covid-19 struck, we’ve seen more of the same. Governments have devolved political responsibility towards central banks, who know how to get money to business, but not how to give money to people. That, of course, leads to a backlash, which is weaponized in different ways, in part through the generation of what in the book we call public anger.

ágb: Your main proposals to tackle this wave of anger are the institution of a national wealth fund and a data dividend. How would these policies solve our problems?

mb: If you have a bunch of angry people, and you invite them in for dinner and sit them all at a table facing each other in rows according to which side they’re on, it’s going to be a very unpleasant experience. But if you break up the room with couches and beanbags and mood lighting, you’re going to change the dynamics. In order to get out of this mess, we need to change the furniture in the room.

We don’t just want to think about ameliorative policies, we want to think about building things into the economy that restructure political and economic interactions. A citizens’ wealth fund would do exactly that. Right now, the Federal Reserve has effectively put a floor under asset prices, which means that equity prices will not be allowed to fall beyond a certain point. That encourages growth in the stock market despite the fact that the economy has taken a massive hit such that there’s a near divorce between the market and the economy. This is a wasted opportunity. When the coronavirus panic hit, investors dumped thirty to fifty percent of their equity holdings. Everyone wanted to buy government debt because it’s the safest asset. That meant, given current inflation rates, government debt over the ten to fifteen year period trades negative. Investors are basically paying you to borrow.

With that type of demand and cost of funding, the Fed could have issued an extra twenty percent or more of GDP, bought up all of those equities that were just dumped across all those stock markets, and put them in a professionally managed passive fund. They could manage it like a big hedge fund with a low risk profile and allow the magic of the six percent premium you get in equities to manifest over a decade. Six percent a year compounded for ten years on twenty percent of American GDP would give them trillions of dollars.

We could use that to pay back our debt, if that bothered you, or better, we could fully fund decarbonization efforts. For example, one of the biggest causes of carbon leakage are buildings. They’re thirty percent of all emissions. We could retrofit every building in the United States over a twenty year period. Or think of it from the point of view of a small, well-off country like Denmark. You’re already doing good stuff, just imagine what you could do with an extra twenty percent of GDP. There are huge possibilities here.

As for the data dividend, twenty percent of the US stock market is composed of six firms, the so-called FAANGs (Facebook, Apple, Amazon, Netflix, and Google/Alphabet). They are what some people call a zero marginal cost business. They have huge markups over costs, and they also have monopoly status in many sectors. That means they’re fantastically profitable. It also means that, because they’re able to play one country off another, they pay pretty much no taxes.

But all of these companies only work because you use the product and give them your data. Facebook is simply a platform. You give them the data, which they then harvest and sell. So why are we giving it away for free? You have a property right to your data and the data that you will generate in the future for them. Why don’t we put that into a national trust, which you can opt into or opt out of, then license that data to these companies for a very hefty fee in lieu of taxation. If they start to abuse it, we call it back. That way, we could bring some transparency and democracy to these very important but unaccountable platforms, and also raise valuable revenue in the process.

ágb: Many of the trends that you lay out in the new book have been exacerbated during this crisis. Unemployment has gone through the roof globally, with half a billion people at risk of being pushed into poverty, while American billionaires have grown 565 billion dollars richer as of June. In New York City, where I live, the luxury condos in Manhattan emptied out while the ICUs in Queens and the Bronx were over capacity. It made me think of a phrase of yours: “the Hamptons is not a defensible position.” What do you mean by that?

mb: All revolutions preceded by inequality involved this fact: we know where the rich people are. Currently, they’re partying in the Hamptons. If you have capital, exits, and properties—or, to be sympathetic, if you have kids and you’re worried about Covid—of course you’re going to go to your nice big beach house. This isn’t really that interesting, but it’s emblematic of how the mantra at the beginning of the Covid-19 crisis—“we’re all in this together”—isn’t true. There are groups that have exit options, and they will exercise those exit options. And when they do, the racialized distinctions, gender distinctions, class distinctions, and the illnesses in our society become ever more stark.

I’m sitting in the richest part of Providence. The last time I checked, the infection rate from my neighborhood was in the order of one to two percent. If I go to Central Falls or Pawtucket, or some of the poorer parts of Providence, it’s something like fourteen percent. Is the Hamptons a defensible position? Maybe in the short term, but in the long term, it’s a vulnerability.

ágb: The crisis that emerged following the global lockdown seems very different from a typical recession. What makes this crisis different?

mb: Unlike financial crises, this didn’t start with a private sector debt bubble, where underlying valuations could not be supported by the income streams that the assets were based upon. We told the workforce to go home, but all of the capital is still there. Now we have to ask, can we go back to it?

If someone asks you whether the Yankees have been doing well recently, it’s pretty easy to answer that. You just look up the last game they played, check the score, and make a judgment based on that game. But in this crisis, we can’t judge who is doing well because we don’t quite know what the game is. Is it to make sure that nobody is unemployed during a lockdown? That makes sense if you think the economy will reopen in a few months. But what if it’s two years? What if it becomes part of the furniture?

Look at Boeing. It’s a hugely important part of the American economy and a major plane builder for the world, but it was so obsessed with C-suite enrichment and buybacks that it didn’t bother to update any of its designs. We’ve got the 737 Max, which we all know had problems. That’s going to come back to a market in which there are far too many planes already. Then there’s the 777 X. Nobody wants it. Nobody needs it. That’s what’s happening at one of the biggest firms in the US due to enrichment and overinvestment.

There’s been much discussion about commercial real estate. Let’s say that offices become problematic going forward in a way that is different from where we’ve been before. What happens to the real estate investment trusts that rely upon the income from rents coming from commercial customers, which then go to the investors? You can see how this begins to spin out of control in ways that we’re not adequately monitoring. But the ultimate paradox is that we didn’t destroy any of our capital. There was no bust. We just left it, and it’s not clear in all cases how we can go back to it.

Can we even figure out who’s doing well in this? You could say the United States is doing all the wrong things: it didn’t keep people in furloughs, it didn’t protect them, it didn’t cushion the economy as much. The checks were haphazard, the unemployment boost worked but they can’t agree on an extension, and now people will lose their houses or lose their jobs. But what if those jobs aren’t ever coming back? What if they need to get new jobs as they emerge? The European solution, what I call the Volvo with all its airbags, is kinder but perhaps not as good in the long run as the Mustang, since you’re keeping people in jobs that may never come back. So what’s the best way forward? We don’t know.

ágb: Can you elaborate on this distinction between the “Volvo” and the “Mustang”?

mb: A Volvo is covered in airbags. And it’s very comfortable and looks very nice. But it costs a fortune to run. Whereas if you have a Mustang, it’s all about performance. You’ve got a five liter GT engine, two real seats, and some air bags. If everything’s moving correctly all at once, you can run a Mustang at 100 miles an hour, and everybody else will fall behind.

The American economy is very much like a Mustang. It doesn’t do airbags. It doesn’t do shutdowns. If everything’s optimized—your labor markets are flexible, your capital markets and credit markets seem to provide infinite liquidity—it’ll go fantastically well. But if you care about survivability after a crash, a Mustang is not ideal. That’s what we’re seeing in the American economy right now. When you throw something like Covid-19 at an economy that only works when you assume everything is functioning perfectly, the system will break, and it’s not clear how you build new airbags to absorb those shocks.

The Volvo solution to this crisis would be to send everybody home for months and pay them eighty percent of their original wages until we all go back to work. We live in a world in which that’s possible. First of all, because it’s all relative value trade, every country’s deficits are ballooning so one country gets blamed for doing it. Everybody gets headroom. Secondly, for lots of complex and simple reasons, interest rates have been falling, by some estimates, for 700 years. Inflation is nowhere to be seen, except in consumption baskets of poor people and in asset prices. You can issue bonds in these uncertain times at negative rates. Because of that, you can run the Volvo for a very long time.

But eventually you have to get out of the Volvo. That’s the problem. How do you do that? The Republicans were saying the problem with 600 dollars a week of unemployment benefits is that you’re disincentivizing people from returning to work. Why are Americans paid so low that 600 bucks a week would make such a difference in someone’s incentive to go to work? That means you’ve built a low wage economy, and there are very negative consequences to that.

ágb: There’s very little talk of a V-shaped recovery anymore. Why is that?

mb: A V-shaped recovery assumes mean reversion. Even a W-shaped recovery assumes that. What’s happened is that we’ve had a big bump. The assumption is the economy will come back to where it was before. But what if it doesn’t? What if we end up in a whole new growth track? The minute you realize this—the notion that large portions of our capital will need to be mothballed, other portions will need to be redeployed, and the way that we do business will need to be rethought—you abandon the idea of mean reversion.

ágb: What about China? Is there a scenario where it comes out stronger from this crisis in relative terms?

mb: Someone took my car analogy and suggested to me that China is a military truck rather than a Volvo or a Mustang. I kind of like that. It’s big enough that it just rolls over all of the bumps in the road, but it takes a pounding in doing so. It is only survivable because it has a military infrastructure. If you want to continue the analogy, that’s where I’d go.

China has a very different kind of command and control system for its economy. When the central banks in the United States and England, for example, say to the financial markets that they will launch a program that will buy assets, they’re actually all playing games with each other. The Chinese state just goes right to the banking system and says, “You will lend this much to this entity. Then tell the entity what to do with the money.” That’s much more direct.

But the problem, as Herman Mark Schwartz and Michael Pettis have pointed out, is that the fiscal multiplier you get out of money declines over time. The first time you get a huge monetary stimulus, it’s good, but eventually you’ve built all the bridges you could possibly build. So China may be about to do a big stimulus, but the effectiveness of such stimulus programs seems to decline over time. You’re also then massively in debt on your public balance sheet. There are corresponding assets, but there remains a question of the valuation of the assets because it’s a relatively closed economy.

ágb: The pandemic took longer to take root in the developing world, but it seems to be ravaging both public health systems and economies in Latin America and in countries like India. How will they fare given this structure you’ve laid out?

mb: Latin America, despite its own efforts and exertions—and sometimes because of its own efforts, since there’s big money to be made in soybeans and ripping out the Amazon—has always been integrated globally. Countries in Latin America are commodity exporters, and if the global economy goes down, nobody wants commodities. These countries have also loaded up on a lot of international debt, denominated in dollars, which is now twice as expensive because local currencies have fallen. We’ve seen all of this many times before in Latin America, and with Covid, it’s come back again with a vengeance.

India is a very different case. It has nearly the same population as China, but a much smaller economic footprint, a much higher degree of inequality, and a large number of people who are still living on a subsistence basis. Obviously, Covid-19 is going to affect them much more. We’re beginning to see that even in those areas of the country that seemed to be doing really well, like Kerala. When the Gulf ran out of money because of the oil price collapse, they started sending home migrant workers. But the migrant workers had all been living in dorms, potentially with Covid-19, and they’re all going back to the local populations. But the population demographics do seem to help. Being young as a country does seem to mean less death.

Put it this way. It’s good to have a Mustang because even if you crash it, you’ve still got a Mustang, even if the rebuild is painful. It’s really nice to be in a Volvo if you’re in a car wreck; the question is just can you get out of it once you get in it. For everybody else who’s driving an army truck or just walking along the road, it’s a lot harder.

ágb: There’s been talk of reshoring production to Western Europe or the US, who lacked the capacity to supply themselves with tests and masks during the first wave of the pandemic. Even before the pandemic hit, there was some deep questioning of globalization. What lies ahead for that political project?

mb: Michael O’Sullivan’s book, The Levelling, argues that the era of globalization is over and we have a global leadership vacuum. Forget the G20, there’s a G0! I think that’s all true, but there’s a problem with oversimplifying the negative effects of globalization. Martin Sandbu’s book, The Economics of Belonging, explains this really well. It’s true that trade shocks and terrible domestic policies in certain countries have hollowed out the industrial base and ramped up inequality. But let’s not forget that Apple is an American company that puts its taxes through Ireland and Holland. Practically none of the profits end up being remitted to the United States in any taxable form, and they still make many of their products in China.

Let’s say you reshored Apple. What would happen? Sandbu’s point is that capital substitutes for labor at the margin in manufacturing better than in any other sector. If you have to reshore Apple’s production, Apple is not going to pay more American Foxconn workers, they’re going to build robots. Increasingly, you don’t need people to make stuff anymore. Think scaled up 3-d printing and manufactures. It’s a fundamental problem that we refuse to get our heads around. The question then becomes how to distribute the value added from that increased production in a way that leads to sustainable growth. That’s a political question, not an economic question.

ágb: How do you navigate the critique of globalization while preserving a commitment to internationalism?

mb: Nationalism is not an economic category. From an economic standpoint, you get into trouble when the congruence between the economic means of production and the area encompassed by a democratic settlement are displaced. That’s where we are. Democracy is local, production is global. If you can design a set of rules to more closely align those interests then you can perhaps make the game more positive sum.

The other thing about national economies that I like is that we can all try different things. If I have one deep critique of the EU, it’s their very nineteenth-century idea that there’s a single set of best practices. If we have one set of market institutions, and one set of ways of dealing with crises, then we’re flattening all of the niches, complementarities, and unique aspects of these different growth models, as if there’s one thing called the “European economy.” There isn’t.

National economies mean that you can have national experiments. Like we explain at the end of Angrynomics, nobody knows how to get to full decarbonization. Should we have one big international agreement with no monitoring, like Copenhagen? Or should we have everybody confront the reality in their own way and try to do what works for them? Individual national experiments would let us learn from each other and scale up from there. I think that’s a much more sensible and survivable way of doing it. If deglobalization means anything, that’s what it means to me.

ágb: Throughout this conversation, you’ve criticized the role played by central banks, the austerity hangover, and the upward redistribution of income before and during the pandemic. All of this goes back to the building social discontent you wrote about in Angrynomics. What would an alternative program look like?

mb: I have written on neoliberalism as a set of ideas, but another approach is to think about it as a set of practices that governments do: open up, privatize, globalize and integrate. Once you’ve made that choice, unless you have wars, pandemics, or other course-altering events, it’s very hard to imagine a world that’s different. What we try to do in Angrynomics is to say that you don’t need an entire plan, you just need to change the furniture.

In the first part of the crisis we sent the workforce home, leading to a drop in consumption and production. In the second part we realized that there is no V-shaped recovery. We can’t go back to cruise ships, because they won’t have any passengers. Our capital is still there—it hasn’t been destroyed, unlike in a war—but it’s functionally destroyed in the sense that we can’t use it right now, and we’re not sure exactly what we can and cannot use in the future.

But then we have a good question, how do you repurpose that capital? We’ve got a chronic housing shortage, and we effectively stopped building public housing in 1980. Well, we’ve got all this office space, some of which is pretty damn fancy, in really nice locations. You can imagine retaining people from those displaced sectors from decarbonization and converting those buildings into carbon neutral housing. Since our capital hasn’t been destroyed, we have to ask how it should be redeployed. That’s the good side of this, and given the current cost of capital, it’s really limited only by our imagination.

But this process of redeploying our capital can also become an opportunity to think about what we actually need and how we get there. Part of the function of government is to act as that bridging fund that allows the private sector to liquidate bad assets in such a way that they don’t go bankrupt, and then redeploy that capital in such a way that we all get a new set of investments. I think of decarbonization as the greatest investment opportunity in the twenty-first-century. Get it right, and everything can be made anew. Get it wrong, and nothing else matters. It’s like a covered option. Covid is going to force us to start making those choices.

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