In How China Escaped Shock Therapy (2021), Isabella Weber analyzes how China applied market reforms selectively, avoiding the broad agenda of liberalization advocated for in the West. Retaining oversight of prices for critical goods was key to this strategy.
Recently, Weber served on Germany’s gas price commission, whose recommendations are a pillar of the country’s €200 billion response to the energy price crisis. Her new paper with co-authors Jesus Lara Jauregui, Lucas Teixeira, and Luiza Nassif Pires provides another challenge to prevailing orthodoxy by examining which prices have the greatest impact on inflation. The authors created an input-output model to identify the sectors, goods, and services that more significant drivers of inflation. They also determined three characteristics of systemically-important prices, including their weightage as inputs.
In December, Weber spoke to Kate Mackenzie about the links between energy sectors, inflation, and the green transition. The following conversation has been lightly edited for length and clarity.
An interview with Isabella Weber
Kate mackenzie: You were on the German gas price commission. Have you been involved in a policy process like that before?
ISabella weber: In rich countries there hasn’t been this kind of emergency management in quite some time—there have been Covid-19 measures, but they took a different form. So it was a totally new experience. In Germany, previous government commissions had been set up to address very contentious policy issues, but those were focused on, let’s say, transitioning out of coal. These were big, long-run strategy questions, and the commissions working on them met regularly over a longer period.
The gas price commission, by contrast, was set up on extremely short notice and it was very intense. This speaks to the question of how best to govern economic emergencies, in real time, when relevant institutions do not exist. It’s been tough trying to develop institutional innovations to deal with this extreme situation in energy prices.
One can question whether such commissions are a good way of doing this, or whether they are democratic. But the government did try to come up with a solution, after having waited a long time, and after not having fully appreciated the severity of the situation before.
KM: That seems relevant to some of your earlier research about the institutional muscle that the state needs to have for critical industries.
IW: I think part of the reason it took so long to react in the German case was because there was no mindset that these specific prices can really matter, that they have the potential to undermine not only monetary stability, but even economic and social stability. If you have a central bank that does interest rates but cannot target specific prices, then that limits people’s thinking.
We are living in this age of overlapping emergencies where shocks to essentials are becoming more common, possibly even systemic. It seems likely that more shocks are to come, and they’re going to be more regular than before because of climate disasters, geopolitical tensions and the unraveling of global economic order, the whole disease environment, and so on. If this is the case, we might need a mindset of disaster preparedness in economic policymaking. This requires the state to have monitoring capacity and a policy toolbox for systemically significant sectors.
This is not to say that we want to have constant regimes of price controls, but we do want to be able to intervene if we need to. Ideally we’d be stabilizing prices well before the point where we have a price explosion.
KM: You mentioned a lot of that specific capacity exists, but it isn’t coordinated. Is there an unwillingness from the macroeconomics field to engage with other areas?
IW: For the most part, our economic training does not include a strong education in institutional economics, or even the basic institutions that govern our economic reality, starting from our corporations to the basic government agencies that actually do economic policy. Of course you can be an energy economist, which has become more common because of climate change, or an agricultural economist, and so on. But generally speaking, the assumption behind macroeconomics is that you can talk about the economy without sectoral knowledge, which often leads to a situation where we don’t have these links between disciplines.
Let’s say the energy economists on the commission do not care about inflation—it’s not something they’re worried about, and they’re just concerned about the price of gas and the efficiency of corporations and households using it. The macroeconomists care about inflation but not about the specific situation in the gas market. Now, unsurprisingly, we find that the two areas are actually deeply related. What’s happening in energy markets is extremely relevant to what’s happening in inflation. It’s just that the energy experts don’t care about inflation and the macroeconomists don’t care for the energy markets. We are missing the links between sectoral developments and macro trends.
I think the business analysis and business literature—even business news—are probably the best on this. But in economics, we lack the expertise or theories or ways to study how these two levers are interlinked.
IW: In the paper on overlapping emergencies and inflation, we try to identify systemically important prices for overall price stability. The aim is to create a framework to link sectoral development with the macro level, but we of course also fall short of understanding all the critical sectors we identify in sufficient detail to come up with policy recommendations for each sector.
I’m thinking of this as creating a framework for a platform to bring together the people who understand all these sectors, and the literature on these sectors, with those who understand questions of macroeconomic stability, outlook, and growth.
KM: It seems important to identify what those sectors are. I assume it was also a very difficult modeling exercise, but it seems surprising that this hadn’t been attempted before.
IW: There are contributions by Saule Omarova—we are taking the terminology of systemically important prices from her work. She has been talking about many prices that also show up in our analysis.
In contrast to Saule’s inductive approach or the general discourse around specific inflation drivers, we’re taking a more structuralist and systemic view. This means that we run these shocks through an input/output framework, which captures all the input/output relationships in the economy, and we make use of sectoral price volatilities before the pandemic. We compare what we’d have expected to be “systemic” before the pandemic with the post-shutdown economy, and also to the war in Ukraine. We find that basically the same sectors mattered before the pandemic that also matter more recently.
I’d add that the inflation commentary over the last couple of months has become commonplace in all sorts of policy reports—from BIS to OECD to the Fed to the European Central Bank. Now it’s more commonplace to read that supply shocks in energy matter for inflation, that food has been a big driver of inflation, that housing has played a role, and so on. So from that perspective it’s not surprising to find these prices matter.
We captured three dimensions, or channels, that can render a price systemically significant for inflation:
Position of sector in relation to all other sectors: Upstream oil and gas—which was the second-most important sector identified in the modeling, with a particularly high “indirect” component—are an important input to all other sectors.
Price volatility: The price of oil is very volatile whereas the price of administrative services in companies is very stable, because it’s basically just wages which tend not to fluctuate.
The weight of goods in consumer baskets: Residential housing may not appear to be hugely volatile. Compared to oil prices, housing is relatively stable. It’s also not an important input into industrial production, but it shows up as a systemically significant price because it has such a large impact on people’s consumption baskets.
KM: How did energy sectors show up in the analysis?
IW: In contrast to the Consumer Price Index (CPI), our simulation is capable of capturing indirect effects. If you look at the CPI, you only see the first layer—you don’t see that the price of oil is important because it’s important for plastic or all the things that people consume made of plastic. We show a large number of indirect effects. For example, in our analysis, oil and gas extraction shows up as the second most important category for price stability, which is basically because of an indirect effect. If you think about consumer inflation, you think about gasoline at the pump, or gas for heating, but you don’t think about oil and gas extraction as a sector that matters for consumption. Even something like chemical products have a fairly large indirect component which would come through things like fertilizer—or inputs into industrial processes—which then reside in goods that people buy which affect consumer prices.
This all becomes important with regard to the question of how we’re going to deal with price stability in a green transition. A key finding in our paper is the fundamental importance of fossil-fuel dependence. Trying to overcome this dependence underscores the challenges for monetary stability. This is not to say that we shouldn’t try, but we should take these challenges very seriously rather than hand-waving and saying everything will be fine.
KM: Capital investment in upstream fossil fuels is particularly lumpy, and other aspects of fossil fuels, such as their traded nature and their vulnerability to geopolitics, are volatile. Does your work also point to the possibility of a more stable future?
IW: I think there is potential for it to become more stable, but we should think carefully about how these systems are designed to achieve price stability instead of just assuming the new energy systems will deliver more stable prices. We should still think of our ability to avoid and manage energy shocks. If you look at what happened with China with hydro—if you have a drought you can lose a very large source of your energy supply.
The question is: When were design new systems, which we will have to do, how do we ensure that they don’t build in the same price volatility that we have been struggling with these last hundred years?
KM: What does it mean for the big energy transition scenarios which smoothly swap out one part of the energy system for another?
IW: I think that we will need a lot of redundancy in the transition. We need to build the new stuff before we shut off the old stuff. And you even need the old capacity to build the new capacity.
It’s not as though you have a given amount of energy and you smoothly transition from one system to another. It’s more like first you have an oversupply, and then you shut down the system you want to get rid of. There will be a moment in which you have both, so it’s not a gradually changing composition. This also means that there will be bumps, but maybe fewer bumps than if you were to try to mimic the straight transition path.
KM: What are the implications of this research?
IW: We could imagine performing these exercises for goals other than price stability, by the way. But the specific policy that follows from this would need to be informed by the insights of people working on these specific sectors. It could bring together people who’ve been arguing for specific policies—anti-trust legislation, windfall profits, public investment, price stabilization, and so on. The idea here is not to say we need these specific policies, but to say that these are the sectors that matter and here’s a set of policies that we’ve been talking about.
Few scholars have done more to elucidate the relationship between democracy and economic development in the United States and its corresponding regional—or “sectional”—antagonisms than Richard Franklin Bensel, the Gary S. Davis professor of government at Cornell University. Among Bensel’s published works are Sectionalism and American Political Development, 1880-1980 (1984), Yankee Leviathan: The Origins of Central State Authority in America, 1859-1877 (1990), and The Political Economy of American Industrialization, 1877-1900 (2000), all of which introduce key arguments about the course of US political economy that remain critical to understanding the evolution of the two-party system and its cross-class coalitions.
The first book measures key moments of “sectional stress” between the industrial core of the United States and the parts of the country that were traditionally agrarian and underdeveloped before the postwar decades. In his treatment of the House of Representatives as an institution which primarily represents “trade delegations,” Bensel demonstrates that a fundamental core-periphery dynamic persisted over the course of the twentieth century even as the South industrialized and the geographic poles of the Republican and Democratic parties reversed. In particular, he tracks the rise and fall of the Democratic Party’s bipolar coalition and the party’s deepening support for the most economically advanced regions of the US, anticipating today’s polarization between large, prosperous metropolitan areas and rural and peri-urban counties.
In Yankee Leviathan, Bensel shows how the Civil War and the Union’s victory under the leadership of the early Republican Party modernized the federal government and its infrastructural power. Party-state control over national economic policy, he argues, secured the hegemony of Northeastern manufacturers and finance capital as well as the political-economic integration of the Western frontier. In The Political Economy of American Industrialization, Bensel further explores how the Republican Party forged a “developmental coalition” that provided the popular support required of rapid industrialization and the creation of a national, if starkly unequal, “home market.” The linchpin of this coalition was a “tariff complex” that melded together different sectoral, regional, and class interests across the North in spite of pronounced conflicts over monetary policy, labor rights, and corporate regulation.
His latest book, The Founding of Modern States (2022), marks a turn toward political theory and comparative politics. It compares democratic state formation in Britain, the United States, and France with the emergence of nondemocratic states in the Soviet Union, Nazi Germany, and the Islamic Republic of Iran.
In this interview, Bensel presents his framework for the political construction of economic development in the US, highlighting in turn the feedback loops between the policy commitments of political elites and the regional distribution of political and economic power.
An interview with Richard Bensel
JUSTIN VASSALLO: What drove you to the field of American political development, and particularly, the focus on economic development and sectionalism?
Richard bensel: When I started graduate school in 1973, I was very interested in rational choice theory. I wrote a dissertation on the rules of the House of Representatives—a political economy interpretation with a strong institutionalist bent, considering how rules shape politics. I had trouble publishing that sort of work at the time, though this approach later became more widespread.
This helped lay the ground for my first book, Sectionalism and American Political Development,1880–1980, which studied the relationship between institutions and the larger political economy of parties. The book focuses on macro politics, and shows how the House of Representatives has played an important part as an evidentiary source—a register, that is—of sectional interests and coalition formation. But the broader project was about sectionalism.
What is sectionalism? I give an empirical definition based on coalitions in the House of Representatives. At the most basic level, it is an orientation towards regional interests and an interpretation of those interests in primarily economic terms. Put otherwise, it is a political-economic approach to the maintenance of coalition politics. The construction of those coalitions takes a geographic and ideational form, and those elements do occasionally come up in the book. But the approach generally challenges the notion that ideology—be it liberalism, conservatism, or something else—forms the substrate of American politics. Rather, ideological contestation itself has largely been generated out of sectional interests.
In the US, sectionalism depends on several factors. One is the vast geographical expanse of the country, which has necessitated a high degree of economic specialization and differentiation. Political economy could not be uniform throughout the US, and that has generated different interests in the national economy, which have been filtered into different parties and institutions. Sectionalism is unlikely to play as much of a role in a small country like the Netherlands or Denmark, for example. In the US, the historical poles of sectional competition have been the Northeast and the Deep South.
JV: Your framework introduces socially complex developmental coalitions that comprise different interests. They are sectoral but they are also expressed in terms of class, which complicates a simplistic labor vs. capital understanding of development. The regional specialization you just described shapes the process of state formation and the evolution of the party system. One interesting example of that is your discussion of the pre-New Deal Republican Party as a political catalyst of economic development. Can you talk us through that historical moment?
RB: After writing Sectionalism and American Political Development, I wanted to go back and look at the dynamics that created the sectionalist patterns from 1880 to 1980. That is what led me to write Yankee Leviathan. There, I approach the US as a developmental case facing the enormous challenge of southern separatism—that is, the South wanting nothing to do with the program for economic development put forward by the North. That is because they were an agrarian cotton export economy rooted in slavery and the preservation of slavery. The North was still underdeveloped, but it had an industrial orientation and the beginnings of an industrial infrastructure. Its ideological position was based on a political-economic calculation: it was incompatible with the developmental program of the North. Even if the North were willing to entertain the survival of slavery, it was unlikely to survive in a capitalist industrial economy.
The Republican Party was an interesting amalgamation of all kinds of impulses. One of them was free labor, another was industrial protectionism, and another was pro-immigration. Those elements came together to oppose the South, and in so doing it also came to oppose slavery. The Republican Party was not an intentionally designed vehicle for Northern industrial development; it was also a bottom-up phenomenon. I agree with Eric Foner that the Republican Party was a creature of the Northern capitalist economy, but I would add that it is also the product of voters responding to that complex of interests and possibilities. Notably, this party excluded the South, and in most southern states Lincoln wasn’t even on the ballot.
The South remained agrarian even after the abolition of slavery. Both class and race politics played into this. The Republican Party decided to enfranchise the freedmen—now available to counter southern planters—and attempt to protect them through Reconstruction. But eventually the southern whites come back into power. This meant that the upper classes in the South were all Democrats, while the lowest classes, the freedmen, were Republicans.
This is the reverse of what happened in the North. There, the upper classes were Republicans, and, to the extent that workers and immigrants were aligned to the major party system, they were Democrats. Within the northern working class, there were, of course, many divisions—key among them, religious—that undermined labor solidarity. That being said, northern politics largely turned on the tariff and military pensions, both of which aligned much of the native-born, Protestant, industrial working class with the sectional interests of their employers against the South. So, this disjunction in cross-regional class coalitions frustrated the sort of class-based politics we would expect in national politics.
The lower-classes in both regions were subordinated to their respective upper classes and the latter, in turn, dominated their respective national party organizations. In sum, the national bases of the party system were incoherent in terms of class interests and, thus, lower-class insurgencies had no way, in a sectionally polarized politics, of shaping, or even entering, national political competition. Working-class parties were always going to be small and, accordingly, so was their contribution to the national debate.
Once these southern whites came back into power, they posed a problem for northern development because their interests were contrary to that of the North. They had to be bought off somehow, they had to be assuaged. In the Political Economy of American Industrialization, I argued that the bargain was struck via the Supreme Court; it legitimated segregation in the South and struck down civil rights legislation. That was the concession to the South in exchange for the development of a national market. This national market gave rise to national industrial corporations that finally, by 1900, could compete in the international market. You can’t find an open declaration of this bargain, but it was a tacit agreement between the parties.
That in part explains how the developmental coalition was facilitated. The unique combination of democracy and rapid industrial development was not the product of virtue but of the compromises born out of political-economic considerations. On the one hand, this tacit agreement was a fairly transparent accommodation of sectional interests: the North got market-centered industrial expansion and the South received political autonomy, which facilitated upper-class dominance. On the other hand, American industrial expansion rested, in very important ways, on the political and social suppression of southern freedmen.
JV: In Yankee Leviathan and The Political Economy of American Industrialization, you argue that the tariff-policy complex which emerged in the early 1860s had few, if any, equals in the nineteenth century. How did it affect the pace and scope of economic development?
RB: There were at least three major effects of the tariff. The first is obvious: tariff protection was for industry. And the reason it was for industry and not agriculture is because the US was exporting—not importing—agricultural products, so the tariff was no use for those. During the Civil War, American industry was shielded, primarily from British, but also from European competition. And this is an example of how a policy creates the interests that sustain it; when the tariff was implemented, there wasn’t enough industry in the North to constitute a major interest, but the tariff itself created it. Part of the reason for this was that industrialists saw opportunities for investment. The other part was the need for revenue during the Civil War. The financial viability of the war effort induced a very complex system to receive tariff revenues: they were paid in gold, which went into the treasury. The gold was used to pay the interest on bonds which were issued in greenbacks. But the dividend coupons were paid in gold, so once the gold came back out it was brought back in through tariff revenue. This cycling served the need for revenue, including the revenue needed to issue the bonds that also funded the war effort.
The national bank system was developed in order to create a market for Union debt which the banks were required to hold as a reserve when they issued their own currency. The investors who owned these banks became, in the first instance, strong supporters of the Union war effort because the value of the government bonds they held depended on northern victory. But they also became, once the war ended, opponents of a radical reconstruction of the South because that would have entailed continued military expenditures in the region.
After the Civil War, tariff revenue was still important, not only to redeem Union bonds and return to the gold standard, but also to pay the pensions of veterans. These, of course, were Union veterans, none of whom were southerners. This complex developmental engine reinforced and furnished the base of the Republican Party in the North with the tariff protecting industrial expansion, funding Union war debt, and paying for pensions for Union veterans. At their peak, for example, Union pensions accounted for around 40 percent of the federal budget
By 1880, this tariff lost some of its significance as a form of sectional redistribution from the South to the North. This is because at that point, the South was just too poor to generate wealth for anybody. The only thing the South had were cotton exports, which were needed to earn foreign exchange. They were used by the Treasury to redeem its own bonds and remain on the gold standard.
This was a great system for Northern interests, but it was not one which anyone sat down to design. It was the result of different institutions finding their own role to play in the economy. The courts extended the national market, the executive branch maintained the gold standard, and Congress constructed tariffs to the political advantages of the Republican Party. The question is, could the Republican Party have taken a different course? Personally, I am a little bit of a determinist, and in Yankee Leviathan, I suggest the Republican Party was the only kind of party the North could have produced at that point.
JV: Parts of your books, as well as your wife Elizabeth Sanders’ book, The Roots of Reform, raise this question of coalition formation among workers and farmers during the late nineteenth century and Progressive Era. Do you have your own thoughts on why industrial workers didn’t rally behind William Jennings Bryan in 1896?
RB: As presidential candidate for the Democrats in 1896, Bryan had an impossible coalition to maintain. The crucial support necessary to win the election all came from the South. And in the South, where many were already disenfranchised, labor was out of the picture. There were poor whites still voting, but they were not industrial workers. The other problem was that the Populists in the South were oriented towards a market connection between tenant farmers, sharecroppers, and merchants, all of whom cared about cotton prices. In the West, Populists were oriented towards the infrastructure through which yeoman farmers marketed their crops. These farmers owned their own land, they were independent producers, so they didn’t identify with labor. In the industrial North, workers were concentrated on the wage bargain itself. Across regions, very different interests dominated, which made it hard for them to talk to one another.
Bryan looked for the common denominator. Although there were planks on labor injunctions in the Democratic national platform, it was ultimately the silver campaign that became the unifying element. The silver producers were willing to fund this campaign. The problem is that if Bryan had won in 1896 and the US shifted to the silver standard, the American dollar would have depreciated by 40–50 percent. That would have been a catastrophe for a major element of the Democratic Party: New York City financial elites, who were pro-free trade and pro-gold. This would have probably thrown the US into a deep depression. Considering this possibility, industrial workers moved against Bryan, and they voted against a strong labor program because of the larger implications of Bryan’s approach to political economy.
To some extent during the Great Depression and the New Deal, the Democrats did what the Republicans did during the Civil War: they implemented national policies to create the interests that sustained them. The New Deal was an opportunity for doing that.
JV: Turning to the Progressive Era, your book on sectionalism contains quotes in which Republican politicians and their supporters paint the Democrats as this irredeemably sectional bloc. To what degree did Northern perceptions of the Democratic Party inhibit the latter’s growth in industrial centers of the Northeast and Midwest before the New Deal realignment?
RB: There were several things that the industrialization program generated. One of them were trusts that were becoming undeniably big and a major force in national politics, and people were afraid of them and their influence. Progressivism comes to represent a number of alternative ways of responding to this challenge.,. At this point, the old tariff-military union pension system is also deteriorating. American industry doesn’t need tariffs, and Civil War pensioners have all died; it is vanishing as this force that might countervail this hostility to the trusts. The problem is how to incorporate this “taming of the trusts” in a party system that continues to be sectional. The Democratic Party, not Wilson but his party in Congress, wants to tame the trusts by breaking them up, by developing rigid, clear rules for legitimate combination and have them operate through the entire economy. That is the position of the Southern wing. The Northern Republican position is that monopolies are bad, but we can deal with them on a case by case basis. It’s a more accommodating, elite-centered response. Then, there are progressives within both parties, but particularly the Republican Party in the Midwest, that take a position of regulation as opposed to law [i.e. the extensive legislative program of Southern Democrats] or the accommodationist approach. They [all] converge on the hostility towards the trusts, but diverge on the solutions. These different responses arise out of the traditional political economies of the sections. Southern Democrats do not trust the central state, they want firm rules–laws–that can’t be reinterpreted by the courts and by government regulators]. That’s the only way they will contribute to the growth of central state authority.
The Midwestern progressives like regulation because of their experience with railroad commissions, and the reconciliation of transportation charges with the different needs of railroads and shippers. They are comfortable with commissions and this notion of a regulatory commitment to the public interest. And the national Republicans represent an elite negotiating style. They are used to national, state authority and discretion. No one has ever had a good model for the Progressive Era. Elizabeth Sanders comes closest
But the Progressive Era runs into World War One, which eliminates the impulse to respond to the trusts. Southern Democrats oppose intervention in the war, though Wilson is strongly in favor. He becomes increasingly aligned with the interests of finance capital, which has overextended itself funding the European powers. This becomes a disaster for the Democratic Party, particularly in the North. At this point, progressivism becomes increasingly agricultural in nature and it becomes a backward-looking, retrograde interest in the view of the North that is opposed to industrialization and urbanization.
JV: I want to jump ahead a bit, to the last four or five decades. The last few chapters in Sectionalism and American Political Development outline the quasi-bipartisan sectional coalitions of the 1970s . Which alliances formed, and what conditions in the national and world economy led to these temporary alliances prior to the hyper-partisan, regional polarization that now exists? Is what we see today actually sectionalism, or something different?
RB: The 1965 Voting Rights Act undercut the Southern Democratic Party by enfranchising black voters in the Deep South. This was a bet by the northern Democratic wing of the party that they could do without the white South. They also wrongly believed that national class coalitions would form. When black people were enfranchised, they voted exactly as northern Democrats had expected, which did generate some progressives in the South. However, it also drove the expansion of the Republican Party. Southern politics was adjusting to the incorporation of Black voters, and Democrats there became more accommodating in national politics as Black voters began to pursue political power under the protection of the federal government.
By the 1970s, the federal government was very different to what it had been in the 1930s. There were now vast social welfare programs that had been, in a sense, liberated from sectional dynamics thanks to the money coming from Washington.
Nevertheless, stagflation and other challenges generated regional pressures that in turn became new sources of disunity in both parties. During this period, Boll Weevil Democrats maintained formal membership in the Democratic Party while negotiating quite attractive policy alliances with the Reagan wing of the GOP. In the North, Gypsy Moth Republicans entered into the Northeast-Midwest Congressional Coalition in occasional partnership with Tip O’Neill Democrats. During the energy crisis and urban redevelopment of the 1970s, regional interests were often nakedly on display as congressional coalitions fought over the distribution of federal assistance. This was a time when national political parties were redeploying their respective sectional bases: the Republicans reorienting toward the South while the Democrats became increasingly dependent on the northeast and Pacific Coast littorals.
The expansion of the southern, very conservative, often racist wing of the Republican Party appalled many northern Republicans. That’s a major reason for the emergence of the Gypsy Moth Republicans; they felt free to vote against their national party when it took extreme positions. Just as northern and southern Democrats were facing divisions, so were Republicans in the North and South. This was a major change in the sectional bases of the two parties, a major reversal of the historical alignment that had persisted for over a century.
The status of sectionalism today is complex. We have red states and blue states, and the differences in their political-economic positions are very stark. In some regions, communities have become very concerned with the terms and conditions of their own reproduction. It is clear these communities are interpreting the national economy in terms of the durability of cultural values, social institutions, family structure, and so on. Cultural questions are back on the agenda in a way that they haven’t been been in the past.
JV: Do you have any thoughts on the strategic protectionism of the Biden administration?
RB: First of all, I don’t think it is nearly as important in the scheme of long-term development as past policies have been. Biden’s policies tend to be contingent and discretionary, rather than rigid developmental policies. But the Biden administration is very clearly committed to furthering the interests of those parts of the advanced industrial economy that are aligned with the Democratic Party. That increasingly tends to be the high-tech and social media sectors. It’s a bit like [Theodore] Roosevelt and the trusts—you can talk down to them, scold them, but are you really going to go after them? The answer is no. Any Democratic administration is going to favor these interests in the long term.
Then we have the opposing interests. The major exporters in the US are still farmers. It’s wheat, soybeans, a bit of cotton. These are massive industries that persuade some Republicans to back free trade. However, the federal and, to a lesser extent, state governments fund a vast social-welfare system that has removed a large portion of the citizenry from the rigors of the private economy. Most Social Security recipients, for example, are free to live wherever they wish and, while they are certainly concerned with the size of their pensions, they tend not to be particularly interested in their regional economies. These recipients are thus free, for the most part, to support policies without reflecting on the economic impact they would have on their particular region.
JV: The problem for the Democratic Party seems to resemble that of the Republicans at the turn of the twentieth century: how to keep these midwestern states, the remnants of the industrial base in the US, in a Democratic coalition. Tim Ryan, the most protectionist Democrat in the modern era, lost pretty decisively in his Senate race in Ohio, but this program of reshoring and boosting renewables seems to have some potential.
RB: Currently, industrial labor is much more contingently aligned with the Democrats than was the case before the repolarization of the party system. Workers are torn between the promise of reshoring industrial jobs and their communities. Some workers believe that their communities are being undermined by the Democrats policies. White industrial labor in the North is still a pivotal player in all of this because of how instrumental they are to the future of the private economy. However, one of the problems facing industrial labor is that it appears to have become a very expensive coalition partner for both political parties and it is not easily incorporated into either national coalition. In fact, I’m not sure most northern industries outside of hi-tech really believe that reshoring incentives are strong enough to invest in plants that operate for thirty years. And if they don’t believe in them, they won’t do it. And if they won’t do it, they won’t create the interests necessary to sustain them. I’m very skeptical that a few new plants here and there are going to reshape national politics.
The recent victories of left parties across Latin America—most recently the election of President Luiz Inácio Lula da Silva in Brazil—have prompted comparisons with the Pink Tide of the early 2000s. But with narrow margins of victory against far-right opponents, fragile coalitions, and the effects of global economic disruption fueling discontent, the current moment looks very different than the last.
In a recent event convened by the Ralph Miliband Programme and the Latin America and Caribbean Centre at the London School of Economics, Claudia Heiss and André Vitor Singer reflect on the trajectories of left parties in Chile and Brazil, and discuss the future of the Latin American left. The event was moderated by Robin Archer, and a recording can be viewed here. This transcript has been edited for length and clarity.
A conversation with Claudia Heiss and André Singer
ROBIN ARCHER: We just saw the re-election, albeit narrowly, of President Lula in Brazil. A few months earlier, we saw the rejection of the constitutional reforms that the new progressive government in Chile had only recently put forward.
To speak about those and other developments I’m joined by an absolutely first rate panel. Professor Claudia Heiss is the head of Political Science at the Faculty of Government at the University of Chile. She is an expert on the Chilean constitution, and on the politics of constitutions more broadly—I’ve counted thirty-two articles on these subjects just in the last decade. She also sat on the technical commission which advised on the new constitution, so she’s got an insider’s view in addition to her scholarly one.
Joining us from São Paulo is Professor André Singer, Professor of Political Science at the University of São Paulo. He, too, has written a significant number of important books about political and social change in Brazil, and about the phenomenon of the Lula presidency in particular. He was also the managing editor of Brazil’s largest newspaper, Folha de S.Paulo. And not least, he was a spokesperson for Lula during his first presidency.
Claudia, would you like to start with some introductory remarks?
CLAUDIA HEISS: I’d like to make two big points and a few smaller points to begin. The first big point is that this Pink Tide carries a bittersweet feeling—it’s not filled with hope like the one we had in the early 2000s. Of course, I’m happy that Bolsonaro and José Antonio Kast lost the presidential election—not only because they were right-wingers, but also because I think they represent threats to human rights, the preservation of the planet, and to pluralism and democracy.
However, the previous Pink Tide coincided with a commodities boom which enabled some left-wing governments in Latin America to fundamentally change people’s lives through redistributive policies. That was clearly the case in Brazil, while Chile was slightly different. We did not build anything resembling a welfare state, but we did have direct transfers that improved people’s standard of living.
Today, some of the largest economies of Latin America are once again governed by the left—Argentina, Brazil, Chile, Colombia, and Mexico all have left-wing governments. We also have leftist governments in Peru and Honduras, although in those cases there is no clear left political party to sustain the governments. We also have non-pluralist left-wing governments in Cuba, Nicaragua, and Venezuela. The worries surrounding this wave begin to emerge when we look at voters, rather than the elected parties. There is of course great variation, but on the whole, we are not seeing a lot of active citizen mobilization behind these parties. On the contrary, their membership is disappearing, at the same time as trade unions are weakening. We can analyze this trend in four ways. First, we see a very strong anti-incumbent vote. The election of the left in this case was very much the result of a swing effect—people just rejected what they had before. In that sense, the elections represent a punishment of all ruling parties, rather than a positive movement in favor of the left alternative. The Chilean constitution is an interesting example of this: in October of 2020, 78 percent of voters rejected the existing constitution, but in the recent referendum 62 percent of voters rejected the revised proposal. Ultimately, voters are just rejecting what they perceive to be the establishment.
The second trend we see is an acceleration of political time. We see shorter and shorter honeymoons for new rulers; Boric, the current leftist President of Chile, was elected with 56 percent of the vote, and in less than a year his support has fallen to about 30 percent. The same happened to Pedro Castillo in Peru, and to the Argentine government, which had a very poor performance in the legislative elections of November 2021.
Third is the role of lesser evilism in coalition formation. Lula and Boric were not elected with strong and stable support, they were elected by anyone who didn’t want the extreme right to come to power. One has to wonder what the result would have been if the opponent were a centrist. Crucially, we shouldn’t read the Brazilian election results as a demonstration of broad support for Lula, because he was in a coalition with his former rivals in the center.
Finally, I think we should be slightly cautious in celebrating this Pink Tide because of the overwhelming trend towards political fragmentation and polarization. In Chile we used to have a very stable party system, which is today composed of twenty parties in the Chamber of Deputies and new parties forming as we speak—the former Christian Democratic party, which almost had no voters, has now been divided into three separate parties. And the elites are more polarized than the electorate.
This bittersweet Pink Tide means that we have governments which lack the political and parliamentary support required to produce structural transformations. In Chile, for example, we are seeing huge obstacles to the constitutional process and enormous legislative difficulty in passing tax reform because the right has the majority in Congress. This divided government and the impossibility to perform is likely to create disappointment, which may mean a future swing to the right.
The second big point I’d like to make is regarding the issues we’ve seen with political mediation mechanisms and the capacity for public representation in our democratic institutions. We clearly face deep anti-political and anti-party sentiments. Collective action that is taking place is organized around specific issues like education and pensions, rather than a broad political vision or programmatic platform.
In Chile, the social outbursts of 2019 did not come out of nowhere, they began in 2006 with the high school student protests. As voter turnout has declined, we’ve seen very strong mobilization in the streets. People stopped voting and started marching. These social movements have represented in some cases a reaction to neoliberalism on ideological grounds, and in others a resistance against the weight of private debt (in Chile we have very low public debt, so almost all of the debt is absorbed by families who pay 75 percent of their salaries in debt for education, health, food, clothing, and so on). In 2019 in Chile, the discussion was around dignity. But what does dignity mean? The problem of mediation is one of translating expressions of discontent into a positive political program. We can have a spokesperson for people’s anger who has no capacity to build a better future. This is what Pierre Rosanvallon has called a “counter democracy,” people want to check power, but not to construct their own destiny. So, again, we have 78 percent of voters rejecting the existing constitution, but we lacked the same force to recreate the constitution—the voter turnout went from 51 percent to 43 percent.
So, the questions we are left with are: Who are the people? What are they rebelling against? What do they want? I have a few possible answers. Firstly, as difficult as it is to tell politicians, there is no single voice of the people. Some people march because they want socialism, others march because they want more access to consumption. Between these, there is a convergence of demand around welfare. The demand for dignity clearly has something to do with a demand for redistribution. Second, people are rebelling against institutions and elites. This creates the ground for simple answers which can be damaging to our political culture. Third, people clearly want some limitations on the abuses of the market. Inequality is not new in Chile—we are one of the most unequal countries in the world. But in recent years, inequality has become politicized and people don’t want to tolerate it anymore. People also clearly want increased recognition of excluded peoples, including indigenous peoples and gender minorities. The Chilean Congress was composed of 13 percent women, so gender parity in the Constitutional Convention was historic for us (we only legalized divorce in 2004 and abortion was illegal under any circumstances until 2017).
But the difficulty in political interpretation continues despite these intuitions: the right interprets the rejection of the constitution as a sign that the population supports them. The left is citing the social protests and the voice of the people in the streets. Political scientists analyzing the results of the plebiscite of course tend to focus on the mythical median voter. The truth is that we cannot simplify what people want, and legitimate political decisions can only be obtained through pluralistic democratic citizen led deliberation. Unfortunately, I think we have to stick with politics as usual, and try to see what we can do to increase citizen involvement in the political process.
RA: You have emphasized that the electoral forces which have brought these presidential results are composed of extremely broad democratic coalitions that stretched way beyond the center and indeed into the right. They don’t even seem like the French Popular Front of the 1930s. There is of course a left-wing figurehead, but the movements themselves don’t seem left wing in any clear sense. To what degree is “Pink Tide” a relevant description of what we are seeing?
André singer: I think Claudia and I agree on the most important aspect of this question. If you look at the results in Chile, Colombia and Brazil, there is a Pink Tide: the left won. They won by a small margin, but they still won. But the context we are in today is entirely different from the one of the previous Pink Tide. In the first Pink Tide, we were very optimistic. In Brazil, it was the first time a left party had been elected. We were excited about all of the social improvements we could do. Some of them were achieved, others not. But the question was: what does a (reformist) left program look like?
Today, we are very scared about what I call authoritarianism with a fascist bias. This is a defensive situation in which the left—in Brazil as in Chile—has been placed in the middle of the hurricane. Of course, we have to ask ourselves what these governments are capable of doing. But we need to acknowledge that this is primarily a defensive movement.
On the economic side, we have significant challenges. There is a global pressure for austerity, at the same time as the social situation must be improved. And these improvements demand money. We’re in a difficult situation because people expect to see results, and the economic situation in Brazil has been bad for at least a decade.
CH: Boric did not win with the support of a broad coalition, but he did build a broad coalition with what is now called Democratic Socialism. I think it’s important to understand that the resistance we are seeing now is the product of many years of center-left governments. The first president we had after the return to democracy in the 1990s was a Christian Democrat in alliance with the left, Patricio Aylwin. Then we had Eduardo Frei Ruiz-Tagle, Ricardo Froilán Lagos, and Michelle Bachelet. We had four left-wing governments that did not make any important structural reforms to the economic model. Why? Partly because they were a broad coalition, but also partly because of the Constitution.
The Chilean Constitution was in many ways constructed to preserve what the dictatorship called the “subsidiary state.” In Europe, this term is used to describe institutions intended to protect civil society from the state. In Chile, these institutions are understood to protect the market from the state. Our constitution emphasizes the primacy of the market—we channel public funding into for-profit health and education industries, a huge transfer from the poor to the wealthy. This model is what many students and teachers have been resisting since the “penguin” protests of 2006. These policies are all associated with center-left governments, and as Jennifer Pribble has written, the fact that center-left governments have failed to enact center-left policies has weakened people’s faith in politics and sent them to the streets.
And it’s not just about the broadness and fragility of the political coalitions, it’s about deep-rooted dictatorial enclaves. We did not finish democratizing in 1990. We had appointed senators until 2005, we had an electoral system which completely distorted preferences until 2015. The right agreed that this was a bad constitution, but they also rejected the new proposal. Now that the negotiations are happening, and the pension fund and private healthcare companies are running open political campaigns, we are beginning to see the real economic interests at stake.
RA: The last question I’d like to put forward is regarding the role of generational change. For older generations in each of these countries, there is a lived memory of dictatorship and profound authoritarian rule. Yet, many younger citizens must have no recollection of this at all. We know that generational change in many cases has political consequences—how does it play into present day politics in Brazil and in Chile?
AS: I think Brazil is a country with a very short memory of itself. What is past is past—it is very different from Chile in that respect. So the problems we experience in Brazil are understood to be more imminent problems, and the electorate votes based on the present. But there is a concerning symptom regarding this element of generational politics, which is that Bolsonaro is aiming to return to the dictatorship. It is not spoken of in explicit terms, but it’s a fact: Bolsonaro is a former military captain who was formed by the dictatorship. He speaks well of the dictatorship all the time. His movement has new aspects which make it similar to Trumpism, which have nothing to do with the old military movements. But nevertheless, he does aim to revive this pre-1964 political structure. The relationship between the new right and the old military regime may not be directly relevant to the decisions of the electorate, but it is of interest to people studying the political moment.
CH: We have witnessed the importance of generational change in the wave of protests over the last two decades. The first big wave was, as I mentioned, with high school students in 2006. These high school students eventually became university students, and they formed the basis for the wave of 2011. Some of these university students then entered government, some became members of Congress (one became president!).
At the same time, I think it’s important not to overstate this generational memory. When my students went to protest in 2019 and 2020, I was terrified that they broke the curfew. As someone who lived under a dictatorship, breaking a curfew to me meant that you could be killed. But my students were not afraid, they went out and marched while I stayed up calling the student union to make sure they were okay. Many of them were injured, actually. The police committed very serious human rights violations in 2019—more than thirty people died and more than 400 lost their eyes after being shot by the riot police. Nevertheless, these students were not as scared as the older generation would have been. And part of their political appeal is that they are seen as newcomers onto the political scene. Their views bear resemblance to some of the older centralized political programs, but they are not traditional workers’ parties. Their way of doing politics is different, but they are mobilized. Still, one thing that is clear in Chile is the notion that the poor, the young, and the less educated automatically vote for the left is not to be taken for granted anymore.
The supply and demand whiplashes of the Covid-19 pandemic snarled global supply chains, shaking up labor markets and well-established migration patterns in the process. Existing cracks in logistics and infrastructure systems widened, thereby making them newly visible. In the US and Europe, a dramatic shortage in the supply of long haul truck drivers sparked panic among businesses and policymakers in 2021.
In her new bookData Driven: Truckers, Technology, and the New Workplace Surveillance, Karen Levy of Cornell University offers an in-depth view of the US long haul trucking industry, explaining why so few workers today are willing to take up what was once considered a respectable, skilled job. Decimated by waves of deregulation and union-busting since the 1970s, a once highly organized and well-paid workforce has fragmented over time, subjected to the intensifying discipline of markets and management.
Over the past decade, a new technology has emerged to threaten the autonomy of truck drivers: the electronic logging device (ELD). ELDs, which became mandatory in 2017, replace the fallible, driver-completed paper logs which have long allowed drivers and companies to subvert the “hours of service” regulations which place limits on working time. But Levy compellingly shows that ELDs function simultaneously as regulatory devices, instruments of managerial control, and objects of worker resistance. Overall, they appear to undermine the skills and autonomy of truckers to the point that they singularly fail in their stated aim—reducing driver tiredness and accidents—while at the same time opening up new ways for truckers to undermine the authority of managers and regulators.
Levy further scrutinizes some of the automation technologies coming down the line. Puncturing hyperboles about fully autonomous vehicles peddled by Silicon Valley’s prophets, she argues that “human/machine hybridization,” rather than a jobs apocalypse, is the most likely scenario over the medium term. Due to the impossibility of eliminating human labor from the complex bundle of rote and safety-critical tasks performed by truck drivers, she foresees an intensifying rollout of bundled automation and surveillance technologies. The “cyborg” trucker of the near future will face brainwave, eye pattern, heart rate, emotional, and other kinds of biophysical monitoring by a range of wearable and in-cab devices. Ostensibly to ensure safety, such devices serve another purpose—cementing managerial power over performance management and control.
An interview with Karen Levy
WEI WEI: Your book discusses the impact of technological integration on workers in the trucking sector. What led you to this topic?
Karen levy: I am a lawyer and a sociologist by training. I’ve always been obsessed with rules, and how rules are used in the world. Recently, I’ve grown interested in the use of technology to enforce rules—either by making it more difficult for people to break them, or by surveilling people and monitoring who breaks them. We have moved to digital rule enforcement in all kinds of domains, either because we think it is more cost effective, or because we think it is more consistent. But when we do so, we also discover that there were good reasons that rules were imperfectly applied to begin with—that is, that rules as they live in society are not as simple as they appear.
In graduate school, I spent some time searching for an arena in which to study this transition from manual to digital rule enforcement. By coincidence, I heard a radio broadcast about the digital enforcement of “hours of service rules” in the US trucking industry, which determine how long a trucker must drive before taking a break. That day, I decided to visit a truck stop and speak with some truckers there, whom I found incredibly thoughtful and interesting. That led to my dissertation, and, ultimately, this book.
steven rolf: The US trucking sector is notable on the one hand for its prevalent libertarian ideology, and on the other hand for its legacy of militant collectivist organizing through the Teamsters. How do you square these apparently contradictory impulses in the workforce?
Kl: On the history of unionization in the industry, the key person to read is Michael Belzer. His book Sweatshops on Wheels is indispensable to everything I think about trucking and collective action. It is true that trucking was heavily unionized in the mid-twentieth century—about 60 percent of the industry was unionized in the early 1970s. But trucking was also one of the chief industries hit by the deregulatory wave of the early 1980s. During this time, the federal government abolished barriers to entry and stopped setting standard freight rates. This prompted a race to the bottom in an increasingly competitive industry where companies were trying to cut costs in order to offer discount rates. Among the key things that were cut were the conditions of labor; the annual salary of a truck driver tanked from $110,000 annually in 1980 to $47,000 today. Union membership rates also declined dramatically; they were down to 25 percent in the 1990s and have continued to fall since. Today, it’s hard to find a unionized long haul truck driver.
I think this deregulation is responsible for the contradiction you outlined—truck drivers work long hours under dangerous conditions and are undercompensated for their work. This is both what decimated truckers’ unions and contributed to this libertarian ideology.
WW: Digital surveillance of workers is increasing across various sectors. For example, in warehousing there is digital real-time monitoring through the use of wearables, and in banking, digital surveillance is used to prevent insider trading and ensure regulatory compliance. Is there something distinct about the digital surveillance of trucking work? Or can we see some sort of convergence in how digital technologies are integrated into broader systems of social control?
KL: I ask myself all the time whether there is anything special about the sort of surveillance we see in the trucking industry. Is it just one instance of some broader dynamic? In some ways, what truckers are experiencing resembles what workers in warehouses, food services, and professionalized industries like law and medicine have seen. You could even say that trucking is just catching up with the monitoring in other low wage sectors. Because trucking is mobile and geographically distributed, truckers have been able to maintain autonomy and preserve immunity from the surveillance common in factories, offices, or warehouses.
But there are some things that distinguish trucking and the digital surveillance which takes place in the sector. One is that trucking constitutes a very unique workplace—truckers live in their cabs for days or even weeks on end, which is very different from entering a workplace and leaving to go home. If you talk to truckers about why they do the work that they do, they will often tell you that they didn’t want someone looking over their shoulder all the time. In this context of total independence, surveillance strikes at the core of a deep occupational identity. It is very deeply connected to their sense of self and their self worth.
Another key issue is what I call surveillance interoperability. In trucking, some of the data collection is mandated by the federal government through those timekeeping regulations I mentioned earlier. But that government monitoring, which is actually not so extensive on its own, serves as a scaffold for corporate surveillance from companies. Now that these companies had to buy and install these electronic logging devices, they may as well use them to fulfill their own organizational goals. These include fine-grained performance monitoring of drivers—how much fuel they use, how hard they break, how fast they drive. There are cameras trained on their faces to see if their eyelids are fluttering and so on. This is easy and cost effective for companies because it also operates for government data collection. On top of that, there is third party data collection—this data is very interesting to third parties who want to do things like sell parking spots to drivers. In the book, I talk about how these different forms of surveillance are mutually constitutive and interoperable not just technically, but economically, culturally, and legally.
WW: In the book, you describe what trucking might look like in the future. Can you describe how the relationship between automation and surveillance is evolving in the trucking sector?
KL: In the 1960s, Manfred Clynes and Nathan Kline wrote about the cyborg and the idea of technology as an augmentation of the human, giving humans greater control over their environment. In the workplace, that integration between humans and machines has had the opposite effect, where technology has been used to more closely supervise and control workers.
For the future of the industry, I think we can continue to expect that automation and surveillance will have a complementary relationship. There is a lot of fear over worker displacement—via autonomous vehicles for instance—but we are not nearing this reality for a number of technical, social, legal, and economic reasons. In the short term, the role of artificial intelligence and automation is to hybridize the human trucker forcibly with machines, with wearables, cameras, and other technologies. This relationship between automation and surveillance is something we can expect to see in all kinds of contexts. Even “autonomous” systems require the human to interact with the machine in some way, and this will result in surveillance over that worker.
SR: We’ve recently done some research on the trucking industry in Brazil and China, in which we found that services like route planning and automated pricing are far more widespread in middle income countries than advanced ones. Just yesterday, I read an interview with the CEO of Uber Freight in which he said that they account for 2 percent of all freight moved in the US market. Why have these digital disruptors made such quicker strides in poorer economies?
KL: It definitely seems to be the case that services like Uber Freight seem to have more of an influence in middle income countries. That might in part be due to how concentrated the long haul trucking market is in the United States. Brazil and China have much greater concentration of ownership in small fleets, and those types of carriers can really benefit from things like load matching—matching unassigned loads to carriers with available capacity. In the US, 80 percent of assets are carried by 20 percent of trucking firms, which is to say that there are some big firms that are really dominant.
Load matching could be useful for owner-operators—where drivers lease or own their trucks—and small fleets, but many of the drivers in these arrangements find themselves in exploitative situations, like long term lease-to-own agreements. This means they can often only drive for a particular company, and they’re beholden to that company for deciding what they’ll carry and when. Steve Viscelli’s The Big Rig explains how companies keep workers in really precarious positions where they have neither the employment protections that an employment arrangement might afford them, nor the freedom to decide what or for whom they’ll haul. I think these constraints on autonomy are part of the reason digital companies have been less successful in the US.
SR: From our perspective, it is interesting that platformization has so far predominated in non-critical industries. You can platformize take out food or a cab. But for critical logistics, we are reaching an entirely new level of co-ordination problems. Assets and people need to be in the right place at the right time, so the degree of coordination is far more demanding. How far do you think this can go? Can the entire industry be reliably organized on a just-in-time basis?
kl: That is very difficult to imagine given the current political economy of the industry. The coordination costs may not be so high, but the incumbents in the industry do have a lot of power. When we think of the number of assets and people that need to be utilized, it feels like a very distant future.
SR: At the beginning of the book, you observe that despite the truck worker shortage in North America and Europe, firms continue to provide low quality jobs which results in high employee turnover and labor market dropouts. How will automation impact the value of trucking labor?
kl: More experienced workers tend to object more to greater digital supervision, and it’s not difficult to understand why. These workers have enjoyed a great amount of autonomy for years and have millions of miles of safe driving under their belt, when suddenly they are told they have to start doing things completely differently because they are no longer trusted to perform their job correctly. Many truckers I spoke to said that in-cab monitors made them feel like criminals or children.
The younger truckers have fewer objections. They’ve never done it any other way, and there aren’t many jobs requiring relatively little training that are not subject to deep workplace surveillance. So, ironically, the more experienced workers are driven out by these technologies which are meant to promote safety.
When it comes to automation, people like to suggest that workers who lose their jobs can be upskilledinto leadership positions. But anyone who thinks this is going to happen in trucking hasn’t spoken to many truck drivers. People’s occupational identities matter, and we can’t pretend that they don’t. When we think about automation and reskilling, we need to remember that people aren’t cogs, they carry histories and occupational pride. You can’t just reconstruct the identities people build over long periods of time.
SR: Your book does point to some examples of resistance. But overwhelmingly, it seems, these avenues for resistance are being closed off with greater turnover and the declining occupational identity you describe.
kl: I think you’re probably right that it has become more difficult over time, but there is still a fair amount of informal informational exchange among truckers—at truck stops, on message boards—where drivers can exchange some of these strategies.
When writing the book, I found it surprising the degree to which resistance is sometimes accepted or even encouraged by companies. Companies want monitoring and compliance with federal rules, but they also want stuff to move quickly. If that requires breaking the law, they will encourage truckers to break the rules. To some degree then, we can expect resistance to persist in part because it serves corporate interests.
SR: I’ve been struck by the reactionary nature of recent collective action in the North American trucking sector, from the 2019 Black Smoke Matters anti-regulatory protests that you describe in the book, to the more recent Canadian trucking protests against vaccine mandates. Do you see any prospect for a shift towards more progressive mobilization?
kl: We have seen some progressive action when it comes to unionization rates among workers for delivery tracking companies, like UPS. There, people work locally and get to know one another. Things are more complicated in the long haul segment, where the work is geographically distributed and fairly isolated. The culture is consequently very focused on preserving autonomy; in my own conversations with truckers I didn’t find a single one who seemed excited about collective action.
In order to think about progressive actions for workers in this industry, we have to look to other mechanisms. One of the most impactful tools in this regard has to be a reform of the pay structure to make sure truckers are paid for the work they do. At the moment, truckers are exempt from the Fair Labor Standards Act, which provides access to things like workplace protections and overtime pay. This would allow us to address things we tend to sidestep like monitoring fatigue—you remove the incentive to overwork if you pay people well for the work that they do.
Ww: One of your key arguments in the book is that technology on its own is not deterministic. Factors like culture, economy, and institutions matter. What role do these other factors have in protecting workers, promoting the public interest, and upholding human dignity?
kl: That is the million dollar question. I think the most important thing we can do is recognize that when technology seems to be used to solve a problem, it is often actually being used to avoid confronting an even deeper problem. This is sometimes called the digital band-aid or digital duct tape—technology keeps things together enough while not addressing the root causes of a social, economic, legal, or cultural issue.
Truckers are a good example. They are subject to all this fatigue monitoring because they’re overworked, overtired, and underpaid. But instead of resolving these underlying elements, we manage the situation using digital surveillance. I’ve also done some work in collaboration with a gerontologist about monitoring in nursing homes, where people put monitoring devices in the rooms where their elderly relatives live. This technology is perceived to be necessary because people don’t trust nursing home facilities, and that is because they are underfunded and understaffed.
The tricky thing about technology policy is that it’s not really about technology at all. The center of required policymaking is often in the economy or through social organizations, and technology might have an important role in how we address the problem. But we should use technology as kind of a lens on that broader social landscape rather than as a substitute for resolving underlying issues.
The past year of rampant inflation and energy system chaos is a clear indication that we need paradigmatic change. Any new economic system is going to be anchored by major scientific innovations; historically, spurring these technological transformations has required a mix of initial state action followed by entrepreneurial execution. Sebastian Mallaby’s The Power Law is a cutting, prescient analysis which argues that the individual who currently stands as a symbol of market excess—the venture capitalist—will be required for such a transformation.
Mallaby’s 2022 book recounts the origins and evolution of an industry that aims to upend the economic order while still working within its structural confines. Along the way, it punctures several myths. While the Silicon Valley press heralds founders as iconoclastic saviors, Mallaby illustrates how the top venture capitalists (VCs) mold them, systematically finding ways to get a seat at the table—if not making the table outright.
VCs—through capital allocation, ingenuity, and often straight-up guile—shape the parameters of the future. But the industry is not simply a history of big checkbooks. Mallaby emphasizes the social basis of innovation: the power of social networks in cultivating new ideas, resolving conflicts, and generating outsized economic returns. The network is select, and the gains from the innovation are not evenly distributed. But is that still the price to pay for technological progress?
An interview with Sebastian Mallaby
NIKHIL KALYANPUR: Over the course of writing the book, how did you change your thinking on the value of speculation?
SEBASTIAN MALLABY: If one understands speculation to be a somewhat reckless risk-taking attitude, hedge fund investors are not always speculators, whereas venture capitalists are. Hedge fund investors in public markets often have crunchy statistical bases for the bets they make. When they pile on big, they’re not taking crazy risks. They have very solid logic for making their trades.
A “power law” style of investing—investing under conditions intense uncertainty—is speculation on steroids. When two individuals walk into your office and say they’ve got a vision, you’re making a bet on whether that vision will come true. You always know you’re going to be at least as likely to be wrong as right. But you make the bet anyway, because you’re hoping for that right tail upside. Venture capital is highly speculative, requiring a kind of superhuman risk appetite.
NK: The VC model implies that there’s something wrong with the efficient markets hypothesis. Do you think we need private sector bubbles for big innovations to take place?
SM: Inefficient markets allow skilled investors to generate alpha—better-than-expected risk-adjusted returns. I do think markets are efficient to a first approximation. But they are not perfectly efficient, so active managers—hedge fund managers or venture capitalists—can generate alpha through skill.
Do you need bubbles? I don’t think you need bubbles to generate innovation, because entrepreneurs and VCs would want to develop new technologies even in the absence of market overshoots. But if you turn the question around, when you do have successful technologies, they almost always come with bubbles. There’s almost always a moment when the euphoria overshoots—the railways in the 1850s, bicycles in the 1890s, and the internet in the 1990s.
NK: One of the core tensions in the book is the diverging role of the investor and different market actors. At one level, we really want the venture capitalists to come out swinging and take risks, yet we want the public market investor—the hedge fund type or the institutional investor—to be the disciplinary force. What does that tell us about how our markets are operating today?
SM: A diversity of actors that have slightly different objective functions or analytical processes is ultimately a healthy thing. You get different types of investors with different levels of risk appetite, and different specialties in terms of which part of the economy they understand. That diversity is more likely to yield sound capital allocation than a monolithic system in which all the capital is allocated either by the government or by banks or by some other particular player.
NK: There are so many varying approaches just within the VC industry itself. Historically, you describe the initial venture capitalists as taking such an active role that they’re working with founders to eventually replace them and bring in new CEOs. We’ve also got the other extreme, characterized by Peter Thiel, where VCs just hand the money off and let the founders run. Is there something specific about the venture capital industry that allows for such different models to thrive at the same time?
SM: Venture capitalists invest in people and ideas, and those can be pretty diverse. Different personalities and technologies will come into your office. Peter Thiel is special in his professed reluctance to get involved with companies after he invests, but in many cases, the venture capitalist may need to bond quite deeply with the entrepreneur. They can’t bond with everybody. Maybe the personality types won’t mesh, maybe their skills are not complementary enough, maybe their strengths and weaknesses don’t match up.
We talk about startups as if they make up one bucket of things. But there’s a massive difference between a social media company and “deep tech”—people building advanced batteries or whatever it might be. In my book, I describe how different sorts of technology opportunities will come with different types of entrepreneurial personalities. The kinds of founders that you’ll back when looking to fund routers in the 1980s will be distinct from those getting into web 2.0 in 2004.
NK: Thiel seems to represent thinking in the other extreme, to the point where he argues that capitalism needs to avoid competition. Do you think that we require monopolies to make the VC model work? Would a more credible US antitrust policy harm the VC model?
SM: I think his argument is thought-provoking, but Thiel exaggerates for effect. Sure, every business wants to accumulate as much pricing power as possible. But one business’s power is another business’s problem, and VC-backed startups are often on the losing end of that.
If the US government were more aggressive about fighting tech monopolies, it would arguably be better for venture capital. VC is funding the challengers to the monopolies, and those challengers would have more of a chance to grow. I’ve talked to VCs who are quite bothered by the tech behemoths and would much rather have an antitrust policy that reigned them in. People talk about a “kill zone” around the tech giants—if you launch a startup that competes with Alphabet or Microsoft, they may clone your product. For example, Yelp has a long-standing campaign to persuade antitrust authorities to get tougher on Alphabet. And of course Microsoft was the target of the Department of Justice back in the 1990s for alleged predatory practices towards the upstart browser company, Netscape.
Now, that is just one side of the argument. There are many VC exits that take the form of mergers and acquisitions (M&A), but in many cases the acquired startup is too small to trigger regulatory scrutiny, and would be too small even under an enhanced M&A regime. Set against VCs’ desire for M&A exits is VCs’ desire to grow a startup as much as possible without a large competitor crushing it.
I think there’s also a bit of a myth that VCs are always pushing for early exits, including through M&A, and that therefore they must be on the side of lax antitrust. Sarah Frier’s book on Instagram documents how it wasn’t the VCs who were pushing for a sale to Facebook, but rather the founders. In my research, I found other cases where an acquisition offer comes in and the founder is initially tempted to take risk off the table, but the VC prefers going it alone for longer in hope of a larger exit.
NK: One of the big themes in your book is this progression towards the founder having more power. How much of the lionization of the founder do you attribute to the changes in the interest rate environment?
SM: Over the period covered in my book, capital had progressively less leverage over founders for two reasons. First, interest rates were falling, eventually leveling off at a very low base. Second, and probably more profoundly, technological changes made creating a company less capital-intensive. Both forces pointed in the same direction. Thanks to low interest rates, capital was cheap and plentiful, so the capital providers had less negotiating power. At the same time, founders needed less capital and therefore had even less reason to defer to capital providers. Between the low interest rate effect and the rise of cloud computing, I would say the latter was more important in the rise of founder power versus the VCs.
NK: You make the point that it’s neither market nor hierarchy, but the network that’s doing the work. There’s an image of Silicon Valley where anyone can come in and be creatively disruptive, but when looking at the figures you highlight, it seems that having an MBA is a prerequisite to joining one of these funds. These networks are quite closed—you even bring up the idea of the white man from Stanford basically being the architect of this world. Can we harness the power of these networks without reinforcing this elitism?
SM: Networks are super important. A key example is the Israeli tech scene, which is remarkably strong for such a small country. The success of tech there is linked to the military: a high proportion of people in the Israeli tech world pass through a special unit of the Israel Defense Forces. That, first of all, trains you to be a technologist, but more importantly, it means that everybody who’s graduated from that unit can check each other out. The network is so tight that only one degree of separation is needed to understand whether a person is to be trusted with capital.
Networks are tight and often narrow, but there’s an incentive to extend them. I would argue that VCs deliberately extend the network to make themselves more productive and profitable. Think about the PayPal Mafia—the former PayPal employees who went on to found companies like SpaceX, LinkedIn, and Yelp, among many others. In the same way, somebody coming out of Google may have a good shot of being a VC, because they will know people leaving Google to become founders. After Moderna’s success with mRNA technology, VC partnerships focusing on biotech will try to hire more PhDs in that field.
All these examples of deliberate network extension tell us that at some point, VCs will put aside that clubby white male Stanford elitism. In recent years, we’ve seen that happen with ethnic and immigrant networks. Chinese American, Indian American, and Persian American communities have all contributed to the tech industry, so of course VCs are hiring from those groups. Still, African American representation remains especially woeful.
NK: Do you think Silicon Valley in particular represents something unique about America?
SM: I think the success of Silicon Valley demonstrates the importance of the US law, particularly around non-competes. In the UK, when you hire somebody from another company, it could take four to six months of gardening leave to get them to join. If you’re a VC-backed startup with a runway of four to six months, that’s a problem. American VCs who come to the UK are often shocked by that barrier. In California, non-competes are non-enforceable, and this has contributed to the flourishing of the startup ecosystem in Silicon Valley.
US law regarding limited partnerships has also had a major influence. US venture partnerships are pass-through entities, meaning that investing partners, called the limited partners, pay tax on their capital gains, but the partnership itself is untaxed. The US partnership structure also allows for the use of different classes of stock: common stock for founders, preferred stock for investors, and stock options for employees. One of the reasons that Europe has been slow in developing its venture ecosystem is that, until recently in several countries, it was unattractive to grant employees stock options because the tax provisions were too harsh.
The attractiveness of the US legal model is illustrated by China. Starting in the late 1990s, when companies such as Alibaba began to take investments from western financiers, Chinese startups borrowed the entire US playbook. With the help of Silicon Valley lawyers, they were set up so that they used New York law for dispute resolution and could issue employee stock options. This would have been impossible for a normal Chinese firm. But Silicon Valley lawyers created Cayman Island parents for the Chinese startups, and these parents could issue stock options, preferred stock, and so forth.
NK: You’ve documented the connections between US and Chinese VCs with great depth—the links between the early founders, the different models adopted, and the laws eventually adopted. How different would the Chinese venture capital industry look if it were more state-directed as opposed to American VC-inspired?
SM: Until the late 1990s, venture-backed tech startups that made a big impact were highly concentrated not just in America, but in Northern California. Absent this special formula of risk capital, you don’t get world class tech companies. Before the recent crop of unicorns in Europe, the biggest tech company and almost the only large-scale software company in the region was SAP. A continent with rich consumers and lots of trained engineers simply didn’t generate that kind of startup because of a lack of risk capital. If there had been the same lack of venture capital in China, it wouldn’t have mattered that China was becoming richer. Lots of talented Chinese engineering graduates would not have translated into the formation of companies like Tencent and Alibaba without American input.
In the late 1990s, Shirley Lin of Goldman Sachs, the first investor to back Alibaba, also advised on government-backed attempts to build technology in semiconductors. SMIC was going to be the rival to TSMC. The strategy didn’t work, and twenty-five years later, China is still trying to build a strong semiconductor sector.
But the other half of Lin’s work—backing startups like Alibaba—clearly did work. I argue in the book that western investment and western legal structuring made all the difference to that success. Jack Ma built a world class company by attracting world class talent. He hired Joe Tsai to be the chief operating officer and chief financial officer, which would have been impossible without the ability to offer Tsai equity options. Likewise, he hired John Wu, the chief technology officer at Yahoo. Wu explained to me how his decision to quit a prestigious Valley firm and join the upstart Alibaba boiled down to the options package that Ma was able to offer.
NK: How should we then conceive of the role of the state in the innovation process? The book outlines a few different models—the Mazzucato view of needing the state, or a competing view that the state is only required for large fundamental innovations, and the market can function after that. Yet the conclusion of your book focuses on the state’s role in tax policy.
SM: Investing in basic research, science, and education is a government role. Connected to that is the training of the scientists who can become professors or entrepreneurs. Certain kinds of big tech, like building a semiconductor fab, are too capital-intensive for normal venture capital to back. The government must also provide good intellectual property (IP) rules to govern the technology transfer out of universities. In the United States, the Bayh-Dole Act of 1980 allowed inventions generated with the help of federal grants to become the property of the inventors, who could then form startups to commercialize the inventions or license the IP to entrepreneurs.
I argue in my book that putting government money into VC funds is less effective on the whole than giving tax assistance to VC funds. I favor tax rules that facilitate the use of employee stock options and allow venture partnerships to be pass-through entities, so that capital gains aren’t taxed twice. I am not a fan of the carried interest loophole—this takes tax subsidies too far.
However, I think the idea that venture capital’s role is unimportant and indeed suspect, because it’s reaping subsidies from government investment in science, is too extreme. This is a case of reacting against the mistaken view that venture capitalists are the sole agents of innovation and embracing the opposite mistake of saying that the state is the sole agent of innovation.
NK: Do you think there’s more room for collaboration between VCs and government? There’s also a redistribution question in that relationship: at what point should the government be trying to equalize the gains out of these technologies?
These companies see huge gains, which are some way are needed for venture capitalistic risk, but there’s also a large societal cost. For example, Silicon Valley has been a substantial driving force behind the rise of the billionaire class. What billionaires do to democracies is an open question, but there’s a compelling case that more billionaires leads to more capture and less democratic representation.
SM: I don’t think the government’s record as a limited partner is particularly good. When EU funds dominate capital allocation for startups and they don’t have to generate a market rate of return, the incentives are messed up. The same is true for the state “guidance funds” in China. I’m comfortable with a commonsensical recognition that government is very important in some things, and risk capital in the private sector is very important for other things. At the same time, I agree with your point on redistribution. I think the right remedy for that is a higher personal tax, and much higher wealth and inheritance taxes. I’m not keen on more billionaires.
NK: At what point do you think inheritance tax or a potential higher income tax is going to change the innovation landscape in the US? One argument against higher taxes is that when it comes to billionaires, people who are really good at picking winners have the money to pick winners. We could have Bill Gates pushing innovation in the climate tech space.
SM: I think that the winners could win a fraction of what they’re getting, and they would still be highly incentivized to do what they do. I don’t think higher taxes will dampen innovation. But we can’t have it both ways when it comes to billionaire philanthropy. If we’re going to argue that billionaires threaten state capture, we can’t make an exception for the billionaire we like. Bill Gates is doing great stuff for climate tech, but we’re going to have to tax him too.
I don’t think taxing the billionaire philanthropists will shut down an irreplaceable driver of innovation. We already have savings institutions that allocate to venture capital, including university endowments and pension funds, which arguably have their own useful public purposes. I think one can be anti-individual billionaire, but pro-innovation.
The material economy is back. Economists and commentators in recent decades had heralded (or lamented) the arrival of an automated, redundant, frictionless system of international commerce. But over the past two years, multiple global crises have exposed the fragile physical underpinnings of world trade. Persistent shortages and spiking energy bills are transferring the pain of distant crises to ordinary workers and consumers.
The global pandemic and the invasion of Ukraine are proximate causes of the current turmoil. But longer-running forces are driving the seize-up in supply chains, making it unlikely to let up. Policymakers are taking emergency lessons in the sinews of global trade: energy, materials, location, logistics, labor. We see a mad scramble to reacquaint leaders with the hard stuff of the global economy, with the moment calling for a new set of experts to come forward—and talk to one another.
The last two years has demonstrated the power of feedback effects—how crises and policy responses magnify each other. Sanctions have sharpened geopolitical tension, for example, and produced more inflation. Uneven international access to finance for energy worsens climate vulnerability, causing countries to then pay a higher price for debt.
This roundtable discussion—“The Geopolitics of Stuff”—featured Kate Mackenzie, Tim Sahay, Joe Weisenthal, Thea Riofrancos, and Skanda Amarnath. Experts in subject matter ranging from price controls to metals mining to markets, the panelists explored recent policy moves towards more direct management of the economy: bans, nationalizations, rationing, windfall taxes, and price controls. Where are these measures well-designed? When are they counterproductive? Read an edited transcript below, and watch a recording of the event here.
The event is the inaugural presentation of a new project: The Polycrisis, a series focused on the political economy of climate, and its attendant security dilemmas, with an emphasis on Global North/South dynamics. The Polycrisis is founded and led by Tim Sahay and Kate Mackenzie. Coming soon, you can expect a series of articles, more roundtables, and a newsletter by Tim and Kate. Sign up here to receive updates and new content.
A discussion on commodities, supply chains, and climate
Kate mackenzie: Joe, on Odd Lots, you and Tracy Alloway have covered the world of “stuff” over the past two years—choke points, bullwhip effects, bottlenecks, and the impacts of increasingly frequent and severe weather events. Back in the macro blogging days of the late-2000s, understanding how the world worked, where crises came from, was all about getting to grips with finance. What is the role of macroeconomic policy in this new world we’ve entered?
joe weisenthal: Post-2008, we were all concerned with bank balance sheets and sovereign finance. In 2010, the biggest challenge that most rich economies faced was insufficient aggregate demand. There has been a flip, and we can mark that shift in March of 2020. Since Congress’s huge fiscal bill and the unveiling of new tools by the Fed, the story has changed. From 2021 to today it’s been supply chains and energy. For us as journalists, the approach has been to start with the issues people are talking about and then pull on the strings.
We did our first episode on supply chains in December of 2020, when shipping costs between China and the US rose dramatically. We spent all of 2021 talking about supply chains, but it wasn’t intentional—in questioning why shipping costs were so high, we found out that the unidirectionality of US imports from China meant that ships returning to China had no containers on them. As a result of the shortage, container prices increased. This brought us into the ports, and the trucking bottlenecks there.
In retrospect, I think a lot of us would like to return to the earlier set of problems, because we actually know how to solve an aggregate demand shortfall. Today, things seem much more challenging. I don’t think there is some grand solution to solving questions of global stuff, whether that’s logistics or the incorporation of renewable energy onto the grid.
It’s important to understand, though, that the traditional macro world still exists. There’s a lot of appetite to talk about lumber prices and used car prices, but the Fed still operates in a traditional macro framework. But what we have learned is to ask, “Why is this really going on?” We’re interested in pressure points, so when the Fed argues that we need to raise interest rates to fight inflation, we have to ask how this instrument will really operate. Similarly with the ECB and energy prices—we all know it isn’t equipped to deal with them. So the question for us now is: what happens when we apply these blunt instruments to a world which is fragmented and complex? This tension I think is the interesting story of our moment.
Km: It is tough when the tools available just don’t really seem to be up to the job.
jw: We can see this very clearly with housing. Everyone, including at the Fed, knows that rents are unaffordable and home prices are surging. When the Fed raises interest rates, mortgages go up but supply worsens because home builders exit the game. The blunt tool will pressure the housing market and probably help ameliorate inflation, but it won’t resolve the core problem underlying US housing: why is it perpetually so expensive? At some point we will need a housing-specific policy.
It would be nice if we had a strategic housing reserve like there is for oil, and then we could use something like Skanda’s Strategic Petroleum Reserve (SPR) plan, and sell housing now with the commitment to buy more housing in five years. We need an SPR for all the sectors! But we don’t have it.
Km: Skanda, could you take us through your SPR proposal?
Skanda amarnath: The SPR is the Strategic Petroleum Reserve. It’s a series of salt caverns owned by the US government. Historically, they have been filled with a lot of oil. They are not currently full, because they are being drawn upon to provide some marginal supply to the market given the supply risks from the Russian invasion of Ukraine.
The real value of the SPRs in our view is not about releases. Yes, releasing stockpiles of oil can help meet current consumption desires. But the real power of SPR is in the vacant stores—empty caverns that can be filled with oil. You can take supply off the market in the crash. This is useful because of the cyclical nature of oil markets. The US has grown as an oil producer; it now produces more oil than Saudi Arabia. That has been a function of the fracking revolution in the 2010s. But we had three big oil price crashes in a matter of seven years: we had the big 2014 to 2016 decline in prices that went from triple digit oil prices to $25. We had a mini crash in 2018–19 related to the trade war with China. And then we had negative oil prices in April 2020.
That cyclicality shakes out producers. It forces them to restructure and be bought out. It has led to a more consolidated industry in the US, but also an industry which is more reluctant to invest. Shareholders are really mad about the amount of lost returns, and they are demanding that management admit that their risk mitigation technique should really be one of under investment. Better to under-produce and settle for high prices. So the volatility has over time led to less investment and higher hurdle rates.
We had an oversupplied market in April–May 2014. We had an oversupplied market in 2015–16. In those instances, you can find ways to contractually bind the SPR through a forward contract or by selling options such that when the price goes down that supply is being put into government owned caverns. SPRs are therefore really valuable to provide a significant amount of stability.
As for the SPR’s climate impacts, low prices are neither good for reducing consumption, nor are they good for industry. But oil prices going up to $200 because of precipitous declines in global supply is a problem for a whole host of end users. So you want to avoid this precipitous decline in global supply and curb that risk. SPRs can smooth out the volatilities in the short term.
KM: In the climate world, we always talk about “managed transition” as being the goal. Nobody wants economic recessions or harmful energy crises. And the size of the SPR capacity in the US is substantial.
SA: It is 714 million barrels of storage. Demand balances are usually about 500,000 to 1 million barrels per day, and that’s the order of magnitude that they’re releasing right now in SPR sales, so the marginal demand can actually be shifted by what the SPR does.
Km: Related to this question of smoothing the transition is the supply of minerals: rare earths, cobalt, lithium, and bulk minerals like copper. Thea, do minerals present a path towards development for countries in the Global South? And what is their role in the geopolitical shifts we see underway, and what do these markets tell us about the global order?
THEA RIOFRANCOS: We have these extractive sectors labeled “critical minerals” due to their importance, applications and susceptibility to disruption. They include lithium, cobalt, nickel, and rare earths, among others (copper isn’t on there even though it is important because the supply disruption is minimal, but it could be moved onto the list in the future).
I want to start with a simple and counterintuitive claim: the fact that these markets are now linked to the energy transition hasn’t changed much about their operations. When we think about their potential as a route to development, it is important to remember how they haven’t changed rather than how they have.
What do we see when we look at extractive sectors? We see inelasticities on the supply end and on the demand end, which leads to swinging prices. In some cases, that volatility increases because of financialization and commodity trading—as in the recent fiasco in the nickel market. These prices are even more volatile because of financialization and commodity trading. Copper price movements are also linked to big movements in commodity trading. The volatility in prices raises questions for sustainable development, because revenues will also be volatile.
A couple of points on the crude power dynamics in the global order. First, there is a huge disparity between where raw materials come from and where profits end up. The top 20 percent of the global population consumes the majority of industrial metals—there is an extreme inequality in the distribution of metals and the products they end up. Second, the extractive sectors consume a lot of water and produce a lot of toxic waste. In general, lower- and middle-income countries remain net exporters and net producers of raw materials. And rich countries—with China inching its way into this category—are net appropriators. The inequality in these sectors is one set of reasons why we might not expect it to be a route to broad-based development within those countries.
There are some changes underway now. One is that Global North countries are passing muscular policy and moving into these sectors. The US, EU, and now also in Canada, all want to onshore these sectors, to control the entire battery supply chain. Brussels and DC are throwing a huge amount of money across the supply chain, in the form of de-risking investments, cheap loans, and venture capital. These are giveaways, with no public stakes or equity, without any public ownership. So we could critique that just within the Global North, setting aside global implications.
But your question is how does this affect the Global South? Two points here. One is that the move to onshoring is hypocritical—which isn’t an interesting critique, everyone’s a hypocrite—because Global South countries have for many decades tried to pursue resource nationalism and industrial policy developmentalism and been chided, and in some cases sanctioned against doing so, or dissuaded by the IMF and WTO.
A more substantial, but still speculative, point is the question of how the influx of money and investment in the extractive industry in the Global North is going to bring competition to these markets. Primary producer countries may not remain primary producers. That might decrease their leverage, and also their market share, and therefore their revenues. This is related to the question of hawkishness in these new policies: will producers be cut off from some of their markets, either because they are an “entity of foreign concern,” or have dealings with one, or just because of the prioritization of Made in America minerals?
Tim sahay: Thea, you wrote a paper recently on the “security versus sustainability nexus.” The picture is usually of Western companies going to resource-rich countries in Africa, Asia, and Latin America, getting those cheap resources, screwing around with environmental rules, contaminating the water, killing whoever they need to kill and then bringing cheap resources to the Global North. Why should they not want to do this anymore? Where are the carrots that they are getting from rich countries to come back?
TR: The first question is: why do Global North governments that promoted that regime of neoliberal globalization and dispersed supply chains not want it anymore? It’s easy for me to see why investors and firms would take free or cheap money, and start setting up operations in new places. But when I first looked into this, it was less clear to me why Washington, DC or Brussels were not satisfied with this cheap import scheme, and also with the ways in which it externalizes environmental harm and political contention.
Some of this connects to the aftershocks of the commodity boom. One legacy of that is a kind of capital discipline: after boom-bust cycles, there’s a drying up of money for exploration, production, etc., and a prioritization instead of things like buybacks. At the same time as investors were reacting to the commodity boom and bust, Global North governments were getting worried about access to raw materials. The origin of the onshoring push dates to the period of the bust, in 2010–2012. In the past couple years, with the pandemic and supply chain snarls, there’s been an opening with broad salience around supply chain security.
The way that this works out is a bunch of “deal sweeteners” for supply chain investments from lithium mining to cathode cells, to EVs, the whole thing. Companies will get money, your consumers will get rebates, there’s a whole industrial policy there.
But what’s the trade off or the tension? There’s the question of whether this particular type of industrial policy is publicly beneficial, whether leverage is being used to increase public ownership, stakes, and decision making. Or is it just free money for companies that have been basically paying off their investors for a long time? And the question of whether producing minerals in the North is actually more sustainable. There’s a big regulatory gap until we can actually say that production is more “responsible” at home. The focus is really on the “deal sweeteners,” and not so much on the “responsible supply chains.”
Km: It is hard not to see a depressing picture here. Tim, your notion of “electrostates” reclaims agency for Global South nations. Where do we see signs of that approach?
TS: The dire inequalities in mask and vaccine distribution that we saw in 2020 and 2021 represent the contemporary model for dealing with the energy crisis. A shortage of something leads to a bidding war. And in that bidding war, the countries and people who have the capacity to pay the highest prices will be first in line in a global commodity market.
We saw that with masks: most of those produced in Asia ended up being flown out of Vietnam and China and sent to Europe and the US. Similarly, there were some efforts to pull together money and vaccines for the developing world, but there was always a shortage. So low income countries were put at the back of the queue. This literally became a matter of life and death.
The energy crisis is also a question of life and death. People who don’t have access to an AC in the summer or heating gas in the winter are facing higher risk of mortality. And there is a direct link between the announcement of a successful vaccine, rising energy prices, and reopening increasing the demand for energy. Since the end of 2020, we’ve been in a global bidding war.
One wild example of that, just recently, was when the entire country of Bangladesh lost power. They had been rationing before that, but at some point, the limited supply of gas just meant that there was an entire blackout of the grid. Why doesn’t Bangladesh have enough gas? Bangladesh had bought gas via long term contracts on the global market. But the companies which had promised to supply Bangladesh with gas said: “wait a second, I get ten times the price if I sell into Europe, so I’m just going to break my contract with Bangladesh, pay them the penalty, and go make more money in Europe.” So there’s a direct link between shortages and blackouts in the Global South, and energy, the ability to pay, and finance it through debt in Europe.
That’s what developing countries are responding to—that the entire world-order is slanted against them. They have shortages of money. Shortages of stuff. And broadly speaking shortages of technology. So that they can’t make their own mRNA vaccines or generate sustainable, cheap, and secure green energy at home.
So to your question: is there any power they can exercise? In the case of large developing countries, like Indonesia, India or Brazil, they do have power. One aspect is just pure market power—Indonesia can demand access to technology as a condition of access to its 300 million person market. That’s the kind of power we see developing countries exercising at this moment of uneven markets and the geopolitics of war.
Strategically, they have used non-alignment as another bargaining tool. Mexico, Brazil, India, Indonesia, and dozens of other countries in the Global South have remained neutral regarding Russia’s invasion of Ukraine. One reason for this, in Brazil for example, is fear: joining in on the Russia sanctions would block access to Russia’s fertilizers, threatening the entire soy market and agricultural industry. At the same time, dependence on the West for technology and money means they can’t give open support to Russia or China.
The “electrostate” is the counterpart of the petrostate—countries rich in oil and gas make a lot of money by selling it to the rest of the world, and use that money to create a social welfare state domestically. Norway is probably the best example of this. The question is whether countries in the Global South which possess the critical raw materials that Thea described can use those minerals to industrialize their way up the value chain. Indonesia for example banned any export of raw unprocessed nickel. Companies have to set up battery factories inside Indonesia to get access. So the Chinese company CATL, South Korea’s LG, Volkswagen, and Tesla are all coming into Indonesia to set up joint ventures with the Indonesian state-owned mining giants. Under that deal, Indonesia gets to export batteries.
Contrast this with the colonial picture in which countries in the Global South exported raw materials, and then used that precious hard currency to import finished goods from the west. By forcing Chinese, German, and American companies to set up shop inside your country, you take ownership of your own nickel and churn out the batteries that sell for a pretty penny in the global market.
Thea, you’ve written about Latin America’s lithium triangle and the potential for a “Lithium OPEC.” How does that compare with the Indonesian model?
TR: There has been a weak and vague attempt to set up a Lithium OPEC—OPEC is not really the right word for it, it is some kind of policy coordination between Mexico, Argentina, Chile, and Bolivia. Those countries all currently have left or center-left governments and a lot of lithium. But they differ in how big their sectors are. Chile and Argentina are actual exporters, while Bolivia and Mexico aren’t quite there yet. That matters for their ability to coordinate.
I don’t foresee a lithium OPEC developing. It’s not an accident that oil is the only commodity that we got third world coordination around. That happened in a really particular conjuncture of the original nonaligned moment, which was much more auspicious and ambitious. At that time, there were ideas for an OPEC of minerals like copper, but only oil took off.
But to go against this pessimistic framing, we could definitely see governments using more leverage as the supply crunch worsens. The less lithium you have on the market, the more bargaining power producers have. The Pink Tide and the commodity boom both gave way to dramatic contract renegotiations that funneled a lot more money to those governments. But did that lead to post-extractive development models? That’s a much thornier question. Certainly more money stayed in the country, but supply-chain upgrading is much harder.
KM: We have a question for Skanda from the audience: The SPR is a good example of attempting to manage largely private investment cycles. What other tools do governments have to manage the investment cycles underpinning a managed transition?
SA: I’ll be optimistic here. I think there is room to do this for many transition mineral inputs that have the same properties of cyclicality—a long time lag between the investment decision and production, and inelasticity in supply and demand as Thea pointed out.
Oil is hard to store, so it’s not trivial to be able to store oil over long periods of time. It’s actually a lot more straightforward to store copper, aluminum, or lithium carbonate. The easier it is to store things, the easier it is to think about developing stability. There’s a lot of people that are interested in stockpiling. Maybe we should stockpile everything else! Prices have surged on not just oil, but also on lithium, and a host of other commodities. What do you do about that? It’s really about creating downside certainty. That usually involves the state underwriting some of that risk. If states do that, they can create conditions where hurdle rates can be reduced.
There are also things that the US Treasury can do. It’d be a little out of the box and more politically contentious, but we’ve proposed how the Treasury’s Exchange Stabilization Fund can be used to cut off downside risk. This is an important component for a host of valuable commodities. Using these tools well, and using them judiciously is a separate question. But we should be thinking about using these tools for commodities that tick the same set of boxes that oil ticks.
Ideally for the energy transition, we also want to ramp up the ability to produce other commodities. If the 2000s was the story of the China boom, the 2010s was a series of stories for every single commodity where producers were shaken out. There was so much industrial capacity within China. And for other producers, that industrial overcapacity meant really poor returns due to low prices. That is a lesson that’s still pretty hardwired into the brains of a lot of people making decisions about investments. The climate conversation should be in part about understanding how these commodity markets work, and developing public sector levers to shape things.
KM: Do the challenges of 2022 represent some turn away from the emphasis on market efficiency as the tool for allocation?
JW: It does feel like it, doesn’t it? Across ideological spectrums there’s a pessimism surrounding the idea that market mechanisms can solve major global problems. Take the CHIPS act. Most people would say that the current structure, where you have some R&D centers in the US and most advanced semiconductor manufacturing elsewhere, is not great and carries risks.
Then with commodities themselves: as Thea mentioned, there are national security concerns surrounding the purchase of the cheapest commodities. And boom-bust cycles are corrosive; there are real long term costs for having entities get washed out and producing unpredictable markets. In retrospect, it would have been nice to have the SPR as a stabilizing force when oil was negative $40, or zero, or maybe $20.
Many people are discovering that the slow growth period of the 2010s was extremely costly. I mentioned the decline of lumber mills. Or the scarring of housing producers that still remember 2007 and 2008. Even fifteen years later, we’ve never gotten back to that old equilibrium of high housing production.
Regardless of ideological priorities, these cycles have made people pessimistic towards market solutions and more optimistic about the public sector playing a positive role in accelerating industry.
KM: An audience question for Thea: we focus a lot on scarcity and the security of supply for critical minerals. Are there any possible substitutes?
And for Tim: do Global South countries actually have the fiscal capacity to underwrite the downside risk of sharp falls in export commodity prices? If not, is the OPEC cartel model better?
TR: There are substitution possibilities, but not for lithium. Battery chemistries get pretty ornate, and you can swap different elements in and out. Those generate trade offs around power density, energy, density range, and so on. But lithium cannot get substituted for the time being.
There is also a huge sunk cost issue here. The auto industry is a multi-trillion dollar industry, and it is pouring huge amounts of money into one technology (minus Toyota who are still betting on hydrogen). Hydrogen is a useful technology for other applications, but for passenger vehicles and mass transit, we’re gonna have a lithium battery story. I am in favor of substituting elements which can be substituted, especially using recycled feedstock in place of new mining. But you cannot get rid of lithium.
We want to imagine a magic substance that has no environmental harm, no geopolitical risk, is abundant and cheap. But that kind of technofix is not real; raw materials are the substrate for all of this production, and they carry environmental harm and geopolitical risks.
One issue I’d like to throw into the mix is demand. Take lithium as an example: Lithium is experiencing a crazy supply crunch right now. The numbers are from the top forecaster—Benchmark mineral intelligence—There are forty or so lithium mines that exist globally, including the small ones. By 2035, we will need almost double that in new mines (seventy-nine total) to serve projected EV demand. Even if we recycle a lot, we will need fifty-four new mines. This is a huge factor of growth. As Joe has discussed on Odd Lots, mines take a decade to come online. So, if we need seventy-nine new mines by 2035, they should have started yesterday.
We also know that protests are on the rise, often for good reason. That makes the opening of new mines riskier. So this intense supply crunch will affect the price of EVs and subsidies will have to increase to cover that for ordinary consumers. The supply crunch generates a series of downstream and knock-on implications.
We’ve been talking about different ways to manage this “stuff” crisis: Skanda is talking about reserves and smoothing volatilities. If Isabella Weber were here, she’d be talking about price controls. Joe has talked about how we incentivize the production of more stuff. I’d like us to also think about how we use what we have; how we channel things to priority purposes, but also how we think about reducing some forms of demand. Affluent people don’t need an Electric Hummer. It is a terrible use of lithium. Can we make that illegal? I would support that law, and I can imagine a populist coalition around it—think of the War Production Board, the Atomic Energy Commission, the Texas Railroad Commission. These are all agencies at the state and federal level that regulated, and often constrained, the use of raw materials in the past. So there’s precedent, in addition to price control and supply provision, for shaping demand.
KM: Yes! There just hasn’t been enough attention on demand side measures for stuff. From what I’ve seen of transition mineral projection scenarios, there are critical assumptions about how much is actually used and how much is recycled. Does anyone else have thoughts on that?
TS: There are indeed many things you can do. We can invest in them, but we could also just ban certain types of activities. Thea’s absolutely right that during war there are scarce materials, and states have to choose whether rubber will go to tanks or car tyres. Those are decisions that get made in extreme rationing scenarios.
Taxes are also climate politics. Taxes are a great technology to cut climate emissions. In general, fiscal policy is a good way to encourage certain types of activities and consumption. If you could have an infinity tax on your fifth home, that would reduce the amount of emissions that might be coming out from your fifth home. You can imagine graduated taxes on private jets. Or a tiered tax on long distance flying, where you have to pay higher carbon taxes after two flights a year.
That is an underused area of fiscal policy, and for obvious reasons: rich people control the levers of political power, and therefore can fight back against taxes. That was the message of the yellow vest protests in France—why should lower and middle income people pay taxes on heating oil and fuel to commute to work, while private jets are exempt.
As for the question on fiscal capacity: there’s a reason why Isabella is unable to join us today. It’s because she’s designing a €200 billion program for the German government to subsidize and cap the prices of what people and companies are paying for the energy bills. That €200 billion number is 5 percent of Germany’s GDP. Did Germany spend that during the 2008 financial crisis? No. Were Greece, Italy, Spain and Portugal allowed to spend 5 percent in fiscal stimulus to get through their massive unemployment and homelessness crises? No.
The state has been remade during the Covid-19 and energy crisis: what the state is allowed to intervene in, and at what level and scale it is intervening. The British Government tried something very similar with the £150 billion price cap proposal. That’s also an enormous 6–7 percent of British GDP. It’s not clear if any developing country has the ability to finance that kind of spending with debt—India is not going to go to the bond market and borrow 5 percent of its GDP for solar panels, batteries, and bill subsidies. They would face severe punishment by the bond markets if they tried that. So there’s an unevenness of what countries are able to do, what they’re capable of doing, and which tools they’re reaching for. And which set of tools they say “Nope, we’re not going to touch that.”
JW: I am an unbiased mainstream media journalist, so I don’t take views on what the right policy should be. But I am frequently bewildered by how much appetite there was for austerity and demand management in 2010. Greece and Portugal were absolutely not given the green light for fiscal flexibility, even with double digit unemployment across those countries. Now we barely touch the idea of anyone, anywhere, conserving consumption. Whether for the rich, or for everyone else, it is completely off the table.
KM: I wonder to what extent it was the Rogoff and Reinhart narrative and its undoing after Olivier Blanchard came out against austerity in 2014–2015. Maybe it was also about how bad things became in Greece. Izabella Kaminska, my old colleague from FT Alphaville, had years ago suggested taxes on private jets. It would have seemed like a ludicrous climate person policy, but these measures are not unpopular among many domestic political constituencies. In climate policy, pricing carbon is seen as a solve-everything-policy when there are so many specific ways of targeting consumption.
TS: Joe, you’ve followed so many commodities and sectors on your podcast. Is there something new on the horizon? What is the new oil and new semiconductors?
JW: I do think the “Whack-a-Mole” is going to be nonstop. I was down in Texas last week, and I was talking to a farmer. Due to the drought, hay prices are surging again, and the hay price surge means that people can’t afford to carry their cattle for as long, so more people are taking their cattle to the slaughterhouses at a younger age. That has some dampening effect on meat prices, but it also means there are going to be fewer cattle being bred. That will mean fewer cattle born a year from now. Weather impacts are a huge part of new shortages.
We have been talking about these big macro things. But all of these drought and climate effects are pretty significant. That’s not going away. But that also just seems to be human history, right? You probably could go back 1000 years and find these recurring cycles. In 2018 we thought that oil and coal were really cheap, and the energy transition was happening. Then reality smacks everyone in the face again. I suspect that it’s going to be the decade of getting smacked in the face a lot.
KM: If you look at the energy transition, it’s really hard not to conclude that we are inexorably going in a direction of a less stable, less benign climate. But there’s something in the fact that climate impacts are diffuse and distributed. Certain communities are adversely affected at one time, and then others at another time, but it’s not all synchronized or uniform. That makes it harder to create momentum around resilience and preparedness or even for cutting emissions to avoid these impacts.
By contrast, the geopolitical realignment with the pandemic and war was so big and impossible to look away from that it managed to change the discourse. And it quickly changed ideas about what is possible. Skanda, Thea, what are things that tend to galvanize new thinking and behaviors?
SA: We’ve already discussed a couple of big breaks in terms of how the conventional wisdom has shifted. Even the playbook on industrial and trade policy that the US has been pushing onto developing countries for decades is out the window. Now, that is hypocrisy in one sense, as Thea pointed out. And it’s a shift in the conventional wisdom within the Republican and Democratic Parties.
Taking Trump as an example on the right, and Biden on the left, there is more room for policy experimentation. It is going to be interesting to see whether the shift leads to more collaboration with developing countries. In the end, there is a lot of interconnectedness that’s not going to go away. We’ve crossed a certain Rubicon there.
Likewise, in Europe, we’ve seen a new way of thinking. Germany is no longer talking about fiscal constraints. Fiscal constraints in the European context were a fiction. Now they have real constraints in energy. And that is a real problem. So when the real constraints come up, no one wants to talk about demand management.
We actually should think about smart ways to reduce consumption, however politically unattractive it may be. There is a real shortage of things that are really important, and yet, there’s not the same kind of attention paid to that. Experimentation will require thinking about a durable coalition in civil society which would be able to reshape institutions to deal with things. Experimentation can be good and bad, right? It can lead to a lot of failed ideas. But there is an upside if you get policy right. So I have some embedded optimism.
TR: Something has definitely shifted in the US policy conversation. Of course, we would like to see more discussion around industrial policy. It is an umbrella term—is a tax break for a company an industrial policy? The term doesn’t mean much without a plan attached to it. We can think about forms of public or social ownership playing a role, with the public sector demanding compensation for undertaking risk. Demand management tools are another missing piece.
I am pretty skeptical about bipartisan alignment—it has happened around terrible things like war, and austerity, so it’s not always a good thing. It would be interesting to debate the goals of industrial policy, sector by sector—what are the Democrats proposing that is different to the Republicans? And how do the left and centrist factions of the Democratic Party differ?
We’re at a very nascent stage of this in the US. Other countries have had much more interesting vibrant debates around industrial policy. The conversation shift on its own is not enough, we should start to distinguish political positions, winners and losers, coalitions behind each policy and get more granular in our discussion.
Ts: No one really has the answers to these questions—there are too many things moving at the same time. The phrase that Skanda used, “policy experimentation,” literally means we don’t know what to do. We’re trying to figure it out as we go along, and that is why you see one flip-flop after the other: we are going to ban this! And then we’re going to export it! There’s just a lot of flux right now.
Our reason for launching this project is simply so that we can get together and learn from each other about what the concrete issues are and who are the people blocking developments. This is all location-dependent. What the US can and cannot do is a function of the balance of power in Congress. What Europe can and cannot do is a function of what France, Germany, UK, Italy and the big countries in Europe can agree upon doing. What India or Bangladesh can or cannot do is a function of how many dollars they have, and how much fiscal space they have to try out new things.
So we need to get different people with different skill sets and expertise, talking to each other, learning from each other, and writing and explaining things to each other.
The inflation of the past year has reshaped the political economic landscape in the United States and around the globe. While the IMF and World Bank echo UN calls about the recession risk of globally-synchronized rate hikes, the debate over the causes—and definition—of inflation continues to be unsettled. As does the question of the politics of inflation and its distributional impacts—who benefits and who pays.
To clarify the foundations of these questions, Assistant Professor at the CUNY School of Labor and Urban Studies Samir Sonti spoke with Assistant Professor of economics at John Jay College JW Mason. The conversation was conducted for the New Labor Forum’s “Reinventing Solidarity” podcast, and a recording can be viewed here.
This transcript has been edited for length and clarity.
A conversation with JW Mason and Samir Sonti
SAMIR SONTI: For a long time, I have been preoccupied by the way the politics of inflation affect working people. There is hardly anyone I’ve learned more from about this subject than Josh Mason. To kick us off, it might be helpful to get some basic definitions on the table. Headlines tell us that inflation is at a forty-year high, but for working people, a rising cost of living is nothing new: house prices, for instance, have been climbing for years. Could you explain what precisely we mean by the term inflation? What distinguishes the recent inflation we’ve experienced from some of these other trends?
JW Mason: The definition of inflation that people are most familiar with is a period of rising prices. But as you pointed out, that immediately invites the question: which prices? There are many prices in the economy, and they do not all move in lockstep. When we look at inflation, we’re measuring the average price of things that a representative household buys. But this, again, invites a question: Which household? Different people buy different things, and the average prices of some goods are difficult to calculate. There is no such thing as “the price level” out there in the world, just various ways of constructing it.
In general, when we measure inflation we look at goods and services that people use. We’re not including stocks, cryptocurrency, interest payments, and other financial assets. But we’re also including some things that aren’t goods and services. For instance, the biggest single item in the consumer price index is what’s called “owners equivalent rent.” This is not a price that anyone pays—it is an estimate by the Bureau of Labor Statistics of how much it would cost a homeowner to rent their home, and computing it is a fairly complicated process.
You’re absolutely right that housing prices are a longstanding problem in the US. But that is not necessarily captured in the inflation statistics, because most people in this country are homeowners, and coming up with a measure for the prices that they’re experiencing is not straightforward. Healthcare is another interesting case. Our statistics are constructed on the assumption that people consume things they buy for themselves, but much of our economy is more socialized than we usually recognize. We call healthcare a form of consumption, but most of the actual spending is by an employer or a government, not by the person getting the care. So when we talk about the “price of healthcare,” do we mean the price paid by families or the price received by providers? If you’re talking about bread, or plane tickets, it doesn’t make much difference, but in this case they can be very different. So the answer is not straightforward.
The Consumer Price Index (CPI), the measure of inflation that gets the most attention, has gone up by over 8 percent in the past year. However, there is also the personal consumption expenditure deflator, which is traditionally favored by the Fed, and which doesn’t always move with the CPI. Today, inflation measured by the PCE is significantly lower (something like 6 percent). It’s not obvious that one is more accurate or relevant than the other.
What we should take from all this is that inflation is not just a fact, it’s a statistical construct which involves many assumptions and choices. Depending on how you navigate those, you may end up with very different numbers. This also means that the ideas like inflation always increasing with excess demand or spending don’t really line up with the numbers we generate. Economists like to imagine that the thing we calculate is the same as the concept we derived in theory, but in a lot of ways they exist in different universes.
That said, it is true that a lot of prices are going up. They are doing so in different ways, and perhaps for different reasons. Rental housing prices have been increasing more rapidly than the general price level since 2015; we don’t have enough housing in the places where people want to live, and most places don’t have any sort of regulations that would limit landlords ability to jack up rents on the housing that does exist. Then you have things like energy and food, which have also been rising quite a bit over the past year. Gas prices are the image of inflation everywhere—every article you read about inflation has a picture of a gas pump next to it. But the thing about those prices is they fluctuate a lot. They go up and they go down. Current gas prices are roughly the same as they were in 2014, and they were actually somewhat higher in 2008.
One thing that is new in the past year or two is the rising price of manufactured goods—cars, very visibly. Those are prices that, by and large, have been falling for quite a long time. Our global capitalist economy really does constantly improve its capacity to produce manufactured goods, and businesses are very good at sniffing out cheap labor to produce them. So the fact that these prices are now rising is arguably the piece of the current situation that is genuinely new.
The important thing is to pay attention to each of these stories and not lump them together under one big umbrella of inflation.
SS: Let’s focus on that piece that is new. The Biden administration has attributed many of these price increases to supply chain disruptions. Critics argue that they are the result of the administration’s stimulus programs. What are the stakes of this debate, and what exactly is going on?
jw: We’ve got these competing stories: one about supply, the other about demand. In some ways, these are the same story, just told from different perspectives. You could say the price of a good is increasing because people want to buy more than businesses can produce, or you could say that businesses can’t produce as much as people want to buy.
But differences do emerge when you think of these narratives more closely. We tend to think that the productive capacity of the economy rises steadily over time, which historically has led to the conclusion that if prices start rising more rapidly, that’s probably about something that’s happened to demand rather than to supply. Because normally, we don’t have big changes in our ability to produce stuff, while the amount of money that people want to spend can change quite rapidly.
Well, that’s generally true, but not always. Because of course, in this moment, we’ve had a very clear disruption in our ability to produce and transport goods.
It’s a bit puzzling when you listen to Larry Summers, Jason Furman, and others on that side of the debate. They talk as if the only thing that has happened over the past three years is that the federal government suddenly started spending more money. And that’s true, it did. But something else happened too. It was called the global pandemic, and it was kind of important. Auto prices, to take one example, have increased dramatically not because people are buying more cars than they were a few years ago—they are not—but because at the onset of the pandemic manufacturers didn’t think they’d be able to sell any cars and stopped ordering semiconductors. Once you’ve halted demand for these specialized electronics it’s difficult to turn them back up again. So auto production collapsed and imported cars from the rest of the world could not fill the gap. Which is why, when people turned out to want to buy cars after all, prices went up. You can tell similar stories with other goods, it’s not so mysterious.
The war in Ukraine has also boosted energy and food prices. There has been some interesting research recently about the importance of energy for broad based inflation. Energy is an input for almost every kind of industrial process, so its impact on broader prices is much bigger than that we see if we consider energy prices in isolation.
Moreover, if we look at GDP trends from these past few years, we can see that prices were already going up even when demand was still well below the pre-pandemic trend. So I think if we’re arguing between supply and demand, it’s just unambiguously the case that the supply story is correct. In the absence of the pandemic, the level of spending over the past two years would not have produced anything like the inflation we’ve seen.
That said, we shouldn’t deny that, given the pandemic, if we had had less spending in the economy, we probably would have had less inflation. But that doesn’t mean it would have been a better outcome. If we think back to the sense of economic doom that characterized the early part of 2020, we should also be grateful that we seem to have avoided the predicted economic catastrophe, even if it was at the cost of somewhat higher inflation.
One example: The fraction of households who the US Department of Agriculture describes as suffering from “very low food security,” meaning that people literally are not getting enough to eat, is roughly 4 percent, in that worst category. In 2007, it shot up by 50 percent in just a couple of years, from 4 percent to 6 percent. That’s still a small percentage, but there are many more kids going to bed hungry every night. That was because of the financial crisis and its mismanagement by people like Larry Summers, who worried about over-stimulating the economy. We didn’t make that mistake this time around—we actually spent enough money to fill the economic hole created by Covid-19 and maintain people’s incomes. And as a result, the number of hungry people just went down.
That is wonderful news. It also means that people have more money to spend than they would have in the alternative scenario. Yes, if there had been a massive wave of evictions, rents might be lower today. If enough people were going hungry, food prices might be lower. So if you want to blame demand, you can. We would have still had inflation due to prices imported from abroad, but we would have had less. That, however, is a different claim than the one that high demand is the reason we have any inflation in the first place. In any case, what we cannot lose sight of are the tradeoffs. Perhaps we could have had several points less of inflation, but how many hungry children is that worth? How many shuttered businesses? How many people were kicked out of their homes? That is the conversation that isn’t really happening, but should be.
SS: Let’s talk about the Federal Reserve a little bit. Thus far, the principal response to the inflation that we’ve seen has been higher interest rates, and all indications suggest that we can expect this to continue. So firstly, can we just establish what the Federal Reserve is? And second, why is it raising interest rates given everything you have said?
jw: The Federal Reserve is the central bank of the United States. It’s the institution that sits at the apex of the financial system. Today, it’s basically just part of the federal government; historically, it occupied a more ambiguous position with a greater relationship to private banks. It’s actually an interesting story. In the nineteenth century, the US didn’t have a central bank. One of the demands from the left end of the political spectrum—the populists in particular—was for a public institution which could manage the currency, and stop the periodic crises that resulted from the unmanaged gold standard. The Fed is in many ways the compromising response to that. Of course, the question of democratic accountability is a problem. But we should remember that we do want an institution to manage the financial and banking system. The problem is that we’ve also tasked that same institution with managing the macroeconomy, which it is not very well suited to do.
As for the interest rate—the idea is that you have an overnight rate that banks charge one another. This is a twenty-four-hour loan which allows banks to settle their accounts. The rate you pay on that loan is called the federal funds rate, and that is effectively set by the Federal Reserve. Since the 1990s, we’ve relied on this one interest rate to manage everything from economic growth to inflation and unemployment. It’s a bit crazy if you think about it. Despite what most people think, the legal mandate of the Federal Reserve is not to manage inflation and unemployment. Their mandate is to stabilize the long-run growth of money and credit, in a way that’s consistent with price stability and full employment. It’s an important distinction. It means that instability arising from the banking system ought not to be the responsibility of the Fed.
In any case, the idea is that if you raise the interest rate, banks pay more to borrow from each other. Consequently, they will charge more for other kinds of loans, and in particular they will charge businesses more for borrowing to make investments. Less investment spending means less demand in the economy, less spending, and less employment. (Businesses hire people to make stuff, so if they’re making less stuff, they hire fewer people). When there’s a lot of unemployment and few jobs, wages also go down, which then flows back into lowering prices. That is the story. And in fact, Jerome Powell has been pretty up front about controlling inflation by forcing workers to accept lower wages.
From our perspective, we might ask two questions about that. First, does it even work? And second, is there some better way to accomplish the same end? I personally think it doesn’t work very well, and we definitely could find alternative ways of solving this problem.
The fact is, when you ask business owners how they make their investment decisions, the interest rate doesn’t figure prominently in their calculus. And on the other end, the labor market is changing for many other reasons. High unemployment leading to lower wages are probably the most solid element of the chain I’ve outlined. But the next step is much shakier—we know that prices don’t just move in lockstep with labor costs. If that were the case, the share of income going to wages would never change. So almost every step in this chain is pretty questionable.
If we look at the statistical evidence based on the Fed’s own models, we see that the interest rate does have an effect, but it takes about two years to see it at its peak. So when they’re raising interest rates now, that may reduce spending and employment sometime in mid to late 2024. By that point, we might well be in a recession. If you’re trying to steer a car on a highway and you’ve got an enormous lag between when you move the wheel and when the vehicle actually changes direction you’re probably going to crash.
On the other hand, the potential ineffectiveness is also a reason for optimism. Last time the Fed raised interest rates was in 2015, and there was no noticeable effect on anything. To be sure, if they raise interest rates enough, they can create a crisis, especially from people and the government paying higher rates on their existing debt. But if they don’t raise them high enough to provoke a crisis, it’s not clear they will have any effect on the real economy at all. The idea that the Fed by tweaking this one interest rate can steer the whole complex economy—this enormous division of labor with all these different decision makers—doesn’t have a lot of historical or statistical support.
SS: At this stage, we are seeing interest rates increase, but the actual number is still quite low (we may go up to 4 percent, but in the 1970s it was 20 percent or so). Before this, interest rates had been kept very low for many years, which raised issues of its own. Critics point to 2009-10 and the reliance on quantitative easing, which fueled Wall Street speculation on financial assets, introduced all kinds of new risks into the economy and intensified economic inequality. You’ve got a more nuanced take on this.
jw: My personal view is that the impact of quantitative easing has been overstated for good and for ill. The idea behind quantitative easing is that the Fed puts more money into the economy by buying bonds. But in the modern economy, “money” is a very amorphous thing. Many different assets can serve as money, and the Fed has no monopoly on their creation or destruction. When you give a bank however many billion dollars of reserves in exchange for the same amount of government bonds, you haven’t necessarily done much of anything, because those bonds essentially operate as money already. There is very little difference between the asset that the Fed is buying and the money that it’s paying for it. So the impact is going to be pretty negligible.
In the immediate aftermath of the 2007 crisis, when they were buying the bad assets that banks didn’t want and couldn’t sell, that was a different story. But the policy that people usually mean by QE, which is buying government bonds, is just swapping one safe, liquid asset for another. It’s like taking a bucket and moving water from one end of the swimming pool to the other.
On the issue of asset bubbles, I think low interest rates do lead to higher asset prices in general, but I’m not sure they reliably lead to asset bubbles. Bubbles take some other ingredients. If we look historically at the major disruptive asset bubbles, they weren’t necessarily in periods where interest rates were especially low. Interest rates were not particularly low in the late 1920s, in fact, they were quite high at the peak of the stock market bubble. Arguably, that was part of the problem, as high interest rates shift more activity into the bubble. If interest rates rise from 3 percent to 6 percent, that might discourage people from starting a business or buying a home. But the people buying stocks because they expect them to go up by 10 or 20 or 30 percent in the next year, they don’t care.
I think if we want to blame the Fed for bubbles, we should focus on the fact that it doesn’t do its job of supervision, it doesn’t effectively manage the banking system. That should include an element of oversight and inquiry into what kind of assets banks are holding and what their terms are. We don’t need high interest rates to manage bubbles, we need a better regulated financial system.
SS: Finally, what does all this mean for working people? And how should those of us committed to political and social change respond?
jw: There are three broad answers to that. The first is that we want to respond to inflation in a way that supports our larger agenda. We don’t want to talk about overspending, partly because it is wrong, but also because it supports an agenda of austerity which we don’t want. We don’t want interest rate hikes, not only because they don’t work, but also because we don’t want working people to bear the cost of the crisis even if they did work.
The supply-chain narrative is therefore important because it implies that the solution here is public investment. If we don’t have enough port capacity, we need to build more port capacity. If energy prices are swinging all over the place, we need more investment in green energy and green jobs. If housing prices are going up, we need to build more public housing.
Second, we can’t forget that the Fed is trying to raise unemployment and lower wage growth. That is what interest rate hikes are intended to do. Our demand on the Fed should be very simple: don’t do that. We don’t need some complicated bank shot with conditions attached to bank bailouts, or anything like that. We just want the Fed to stop what it’s doing. We don’t want unemployment to go up. We don’t want wage growth to be slow. We don’t want it to be harder to find a job. We think a good economy is one where workers have an easy time finding a job, and businesses have to scramble to find workers. It’s good for working people, but it’s also good in the long run for productivity growth. It’s good for democratizing the workplace, it’s good for innovation. It’s good, and we want it, and we want the Fed to stop messing with it.
Third, we can’t get distracted by inflation. Inflation is not the only thing happening in the world. Another important thing happening is that we have very tight labor markets, which make it easier for workers to bargain with employers. That’s why people are organizing at fast food restaurants and Amazon warehouses—not the only reason, but it’s very favorable terrain to be fighting on.
One thing I’ve often heard from organizers is that you don’t need to tell people that, as we used to say at Occupy Wall Street, “shit is fucked up and bullshit.” They know that. Everybody knows what’s wrong with their job. What you have to convince people of is that they can do something about it. We shouldn’t lose sight of the fact that the current economic moment is one that is favorable to efforts at confronting our bosses collectively and individually. We don’t want to miss this opportunity.
China’s high-speed railway network is one of the largest infrastructure programs in human history. Though today international headlines emphasize the decline in China’s growth—lagging behind the rest of Asia for the first time since 1990—for more than two decades, the central government has been investing vast sums into the country’s public infrastructure. The political processes underlying this government investment—and the causes for drastic regional variation in investment—have remained overwhelmingly underexplored.
In his newly published book Localized Bargaining, Xiao Ma offers a novel theory of intergovernmental bargaining that examines the unfolding of China’s unprecedented high-speed railway program. Drawing on a wealth of in-depth interviews, original data sets, and surveys with local officials, Ma details how the bottom-up bargaining efforts by territorial authorities―whom the central bureaucracies rely on to implement various infrastructure projects―shaped the allocation of investment in the railway system. Demonstrating how localities of different types invoke institutional and extra-institutional sources of bargaining power in their competition for railway stations, Ma’s new book sheds light on how the nation’s massive bureaucracy actually functions.
In this interview, Xiao Ma and political economist Lizhi Liu discuss the politics of mega-projects, the intricacies of localized bargaining, and the broader conclusions to be drawn from railway development.
An interview with Xiao Ma
LIZHI LIU: Your book studies how politics influences the rollout of China’s high-speed railway program—“the largest state-directed infrastructure program in human history.” Why is it important to study the politics behind such investment initiatives?
XIAO MA: My time as an undergraduate student in Japan coincided with the launching of China’s first high-speed railways. Just as I was observing the extensive use of trains for facilitating everyday life in Japan, projects like the Wuhan-Guangzhou high-speed railway gained significant media attention. I increasingly began to envision how daily travel in China could be transformed with an extensive and integrated transportation system like Japan’s.
Throughout my development as a political scientist, the subject of high-speed railways never really left me. On the contrary, it only gained in importance. The size of China’s high-speed railway project is unprecedented; since 2004, the Chinese government has invested over 10 trillion RMB in railway infrastructure. The operating mileage of high-speed railway in China grew from zero to over 40,000 kilometers in 2021. That’s twice the length of high-speed railway networks in all other countries combined. There hasn’t been such a large government-led investment project in modern human history.
Because the project is planned and executed by the government, it is fundamentally political. Understanding how governments allocate scarce policy resources is among the key questions of political science. Harold Lasswell once said that “politics is about who gets what, when, and how.” Learning how politics drives the rollout of rail infrastructure can also help us understand the logic behind the allocation of other government-funded projects such as highways, ports, and the electricity grid.
LL: What is the central argument of your book?
XM: I argue that the Chinese central government’s investment in high-speed railways is shaped by the bottom-up bargaining efforts of the territorial governments (e.g., provinces, cities, counties, etc.). This broad model of investment also applies to other types of regional projects allocated by the central government. At a broader level, the theory explains the distributive patterns of various public policies and projects like railways, ports, airports, subways, electricity grids, and so on. These are contrasted with universal policies that affect every jurisdiction, such as interest rates, income taxes, and environmental regulations.
The theory helps explain the allocation of funds that are irreversible. Once the project is delivered, policymakers can hardly withdraw the benefits. Many social policies, such as agricultural subsidies or income supplements, are reversible: policymakers can decide to stop supplying these benefits to the recipients if they choose to do so. These kinds of reversible benefits are commonly seen in patron-client relationships. In the case of projects like railways, policymakers cannot buy off the long-term loyalty of localities. Instead, local governments actively lobby their superiors to get access to funding.
lL: People often conceptualize the Chinese state as monolithic, operating through top-down commands from the center. China scholars have long argued against such claims, and your research contributes towards these arguments. Where does the bargaining power of local governments come from in the Chinese context?
XM: It’s not just a question of central and local governments making decisions; decision-making power is also shared by central government agencies. In the case of the high-speed rail, a number of central government ministries, such as the National Development and Reform Commission, Ministry of Transport, China Railway Corporation, have been involved in approving the project for specific localities. These ministries have different specialties and interests, and they are not always in agreement.
The need to coordinate consensus among these central bureaucracies presents one entry point for the bargaining of local governments. In fact, the central government tolerates these dynamics in order to acquire information on local conditions. Because China is a very large country, it is very costly to collect information on the demand for government programs. When localities approach the central government for access to particular projects, they are not only letting them know about their needs for resources, but also conveying information on local socioeconomic conditions, such as fiscal capacity, debt burden, and the labor market. Such information is crucial for central policymakers to make effective policy decisions.
The question then arises: what makes some localities more successful at bargaining than others? In my book, I distinguish between localities with high bargaining power (“cardinals”) and those without bargaining power (“clerics”).
The institutional bargaining power of the “cardinals” comes primarily from their privileged positions within the party state hierarchy. In particular, I focus on an institutional arrangement called “concurrent appointment.” That is the situation in which a local leader simultaneously holds another leadership position at one level above his own rank. For example, the party secretary of Suzhou, a municipality in Jiangsu province, is concurrently also a member of the Jiangsu provincial party standing committee. I argue concurrent appointments empower localities in two ways. First, they give local leaders easier access to central policymakers. Meetings among Chinese bureaucrats follow the rule of reciprocity: an official usually gets to meet with his exact counterpart in rank at another bureaucracy. A local leader with another higher-ranked position gets to meet with higher-level bureaucrats in the central bureaucracies than his peers without such appointments.
Second, concurrent appointment also gives localities agenda-setting power. When two nearby places compete for a project, a leader with a concurrent appointment can use his position to make decisions in favor of his jurisdiction. In the book, I conduct a quantitative analysis of Chinese provinces and cities and find that controlling for different indicators of socioeconomic development, places with a concurrent appointment enjoy systematic advantages in getting central government approval for high-speed railway stations.
Among Chinese localities without such institutional power (the “clerics”), some use a strategy that I call “consent instability.” In these places, local officials allow mass mobilization from local residents to do their bidding. In the past decades, there were numerous high-speed railway protests across China, where local residents went into the streets to demand a station be built in their city. These protests sent a strong and credible message to the decision-makers at higher levels that if demand was not met, social stability would be challenged. In my case studies of such incidents—for example, the protest demanding a high-speed railway station in Linshui County in Sichuan province in May 2015—such mass mobilizations were successful in winning some kind of concession.
lL: I wonder if you can talk a bit more about “the pressure of the masses” being a source of power for local governments. We know from past research that authoritarian regimes occasionally allow protests to happen as a safety valve to release public anger. Through such protests, a central government can also collect information about citizen preferences. But your research in China points to a fascinating feature of intra-governmental bargaining: local governments tolerate certain protests or even strategically mobilize them to bargain for policy benefits. How does this strategy align with the need to maintain social stability as a “Key Performance Indicator (KPI)”?
XM: That is indeed a fine line for local officials to walk. Social stability is among the top priorities for local officials; there are studies showing that officials who failed at maintaining social stability were “vetoed” for career advancement later on, no matter how well they performed in other realms of governance. Chinese local officials often spare no efforts in nipping mass mobilizations in the bud, and that’s why “consent instability” stands out as an unusual phenomenon in China.
There are a number of ways that local officials relying on this strategy can avoid facing consequences. First, local officials don’t bear primary responsibility for social mobilizations—their superiors who are unwilling to make policy concessions do. So, the pressure is actually on those bureaucrats who have the power to change the disputed policies. If local officials can show a good work ethic by communicating with their superiors in a timely manner, maintaining order, and avoiding further escalation, there is not much they can be blamed for. Second, local officials do not publicly associate themselves with the mobilizations. In many cases, the forces organizing the mobilization are local business associations. So, in public, they appeared to be spontaneous events organized by society.
We also know that Chinese entrepreneurs are highly dependent on the state, and they share all kinds of formal and informal connections with local governments. These business associations, as I argue in the book, play the role of intermediaries that allow local officials to learn about the mobilizations and perhaps even pull strings behind the scenes while also shielding them from the spotlight. Finally, these policy-related mobilizations are not as dangerous as other types of protests. Their demands are usually relatively easy to satisfy, particularly as they pertain to very localized interests, so they are unlikely to spread across jurisdictions. Consequently, most higher-level decision makers see such incidents as a revelation of local policy demands rather than a more serious challenge to the regime.
lL: High-speed railways are making profits in the East but running huge deficits in the western part of China, which lacks passengers. Of course, those fewer passengers deserve good transportation even if it is not profitable. What are the aggregate welfare implications of localized bargaining?
XM: I do not have very specific data on the welfare impact of the high-speed railway projects. But economists have examined how the introduction of high-speed railway affects local investment, labor mobility, and urbanization. Some find that high-speed railway supports local economic development by improving transportation, whereas others find that it drains resources away from small cities. Generally, I think there is mixed evidence of the railway’s economic impact.
On the question of distribution, it depends on the angle. Localized bargaining provides a mechanism for territorial administrations and other organized interests within the regime to articulate and pursue their interests. In a political environment that lacks open contestation (e.g. contested elections), I think localized bargaining allows policy needs of the relevant stakeholders to be heard and makes policy competition a more open and fair game.
On the other hand, there is growing regional inequality in China. The developmental gap is not only widening between coastal and inland regions, but is also growing between major and peripheral cities within a single province. I would attribute such gaps partly to localized bargaining. As I note in my book, the institutional bargaining power of the localities is crucial in determining the outcomes of their lobbying.
Institutional arrangements such as concurrent appointments often favor those places that have already got ahead in economic development. These places in turn use their privileged positions to gain access to more resources in their bargaining with the central or provincial authorities. This is how gaps in regional development get consolidated and reinforced despite the central government’s continued efforts to address them. It’s not only about unevenness in local economic endowment, but also because of the politics that structures policy competition among localities.
lL: To what extent is your story China-specific? Can we expect similar political dynamics elsewhere?
XM: I hope the arguments I’ve developed in the book can be useful for those interested in distributive politics and bureaucracy more broadly. The story is certainly not unique to China. We can find many parallels in the developed and developing world.
Scholars of India, a country with a similarly vast territory and multilevel governance structure, also find similar patterns of resource allocation. In Sunila Kale’s study of electricity networks and Adam Auerbach’s study of urban slums in India, they both find that bottom-up mobilization is a crucial determinant in local communities gaining benefits from the state. In Jonas Kornai’s study of the planned economy system in the former Soviet region, he identified a phenomenon of “plan bargaining” in which state-owned firms tried to ask for more input and promise less output. Although China today is no longer a planned economy, local governments still need to engage in bargaining with their superiors in ways similar to those documented by Kornai.
Finally, although my book focuses on domestic projects, the arguments are also relevant for overseas infrastructure projects. Chuyu Liu, who teaches at University of Amsterdam and studies Chinese overseas infrastructure projects, finds that the fragmented decision-making authority in central agencies that regulate overseas projects allows state-owned enterprises, which have more know-how of navigating the system, to win contracts for projects. In contrast, private firms that have less knowledge and connections to help them navigate the complex regulatory system become less competitive. So, if domestic localized bargaining is about competition between local administrations, then the overseas story is about competition between different types of firms. Based on this comparison, I hope my book can stimulate new conversations on the policy process behind China’s infrastructure projects home and abroad.
Comments Off on Resource Nationalism and Decarbonization
Across Latin America, a string of recent left-wing electoral victories has drawn comparisons to “Pink Tide” of the early 2000s. The Pink Tide took place in the context of a global commodities boom. The current moment, however, coincides with a global push towards decarbonization, and much of the world’s supply of commodities essential to that transition—most prominently lithium—are found in the region. How will these new left governments navigate this frontier of resource extraction?
Already, President López Obrador nationalized Mexico’s lithium supply in April; Colombian President-elect Gustavo Petro recently declared an anti-fracking stance while supporting boosted investment in a green transition. Heated debates have emerged regarding the role of state in resource development, the use of resource revenues in national development strategy, and the environmental and social harms of mining for frontline communities, especially Afro and indigenous groups.
In July, a Phenomenal World panel discussed these ongoing debates, probing the current and future status of resource nationalism from Mexico to the Southern cone. A recording of the event can be seen here. The transcript was edited for length and clarity.
A conversation on resource nationalism in Latin America
ALEX YABLON: As the global push to decarbonize accelerates, however haltingly, there’s mounting pressure on countries that produce an outsized share of the commodities essential to that transformation. In Latin America, growing demand for metals like lithium and copper has simultaneously increased the ambition of the new generation of left-wing political leaders eager to assert sovereignty over natural resources, while dividing the same politicians’ own coalitions over how to balance economic development with local environmental protection. Recently, Chile’s world-leading copper industry was rocked by a strike after left-wing President Gabriel Boric announced he was shutting down the state-owned smelter over emissions concerns. Resource nationalism has also introduced geopolitical quandaries: it has made Latin America a center of competition between China and the United States. In Mexico, President Andres Manuel López Obrador has had to walk back a bold declaration on nationalizing the country’s lithium deposits after running into conflicts with Chinese mining firms who already secured lithium concessions.
Resource nationalism in Latin America is nothing new; there’s a long history of state involvement in mining and energy. What’s different about this wave of decarbonization?
Miguel Angel Marmolejo Cervantes: This wave is driven by the energy transition. In Mexico, we’re seeing a new wave of announcements and energy around nationalization, largely comprising old practices. The current proposal is an increased role for the state, and a lesser role of the market, with no checks and balances.
THEA RIOFRANCOS: I want to talk about what’s different about resource nationalism in the present moment versus the classic moment of the early to mid twentieth century. Looking at Cardenas and oil in Mexico, or Allende and copper in Chile, these classic nationalizations did expropriate resources. They took assets out of the hands of capitalists, in some cases forcing foreign capitalists to leave the country. There was capital flight, a real transfer of assets from the private to public sector, and at times deep reorganizations of the sector to serve goals apart from profit accumulation. In comparison to today’s agenda, this is both a “classic” but also more radical form of resource nationalism.
We can broaden it beyond decarbonization because some of what I’m saying pertains to the fossil-fuel sector in the Global South. First of all, we’ve seen less of the classic form of expropriation, and more actions like forced renegotiations of contracts, majority stakes for the state, and joint ventures. In the current moment, the state is more collaborative with foreign or multinational capital, even if it’s coming from a position of strength. It doesn’t generally exclude private ownership, but aims to put the state in the driver’s seat. In some cases, there isn’t much private capital at all, and we see the state taking charge in new sectors. But despite the rhetoric, the aim is to attract private investment.
Another new development is that state-owned firms and resource sectors—mining or fossil fuels—are more isomorphic with multinationals. They look similar, they have similar governance structures. That again is another way in which nationalization is less radical than in the past.
In the lithium sector, there are different roles being envisioned for a state firm outside of exploration and ownership. These include research and development, upgrading, and value-chain coordination. The goal is to put the state in a key coordination role along with existing or new private investment to orient the sector towards, variously, increasing the societal take, the value-added, or spurring the energy transition. Whatever the goal is, the state’s role in coordination is different from the classic “digging in the ground” image of resource nationalism.
Martín Obaya: In general, we think of nationalization as greater involvement of the state, but as Thea said, the state can intervene in many different ways. There are different strategies involving lithium in the region. On the one extreme, you have a more classical example of nationalization in Bolivia: the state owns the resource and a public firm has the monopoly of exploitation. On the other extreme, you have Argentina: it’s market-led, and the only push towards nationalization is public oil company YPF saying they want to step into the lithium business. A more intermediate experience is that of Chile. We’ll see what will happen, but my feeling is that Chile’s intention to build a public lithium company will be more along the lines of creating a company that can form joint ventures with a private firm in order to have more control of the resource. But the starting point is that they don’t have the resources to do it by themselves.
This new wave of decarbonization-induced resource nationalism provides states with new narratives. In Argentina, one narrative is that we are the protagonists of the energy transition as suppliers of raw materials, so we have to supply these materials as quickly—before our window of opportunity closes. There’s a narrative that the energy transition is unfair, because it benefits countries from the North, so a country like Argentina should claim strategic control of necessary resources. Then yet another narrative is that resource extraction alone is not enough. If we have lithium, we have to industrialize it, and we should directly produce batteries.
These are the narratives of nationalization within the frame of the energy transition. As Miguel Angel suggested before, is this not old wine in new bottles? In the end, we’re discussing what the role of natural resources is in the strategy of economic development. But we’ve had the essence of this discussion for the last seventy years.
AY: What is that old wine? What have traditionally been the pitfalls of resource nationalism as the engine of national economic development? Where has it made good on its promise and where has it fallen short?
MO: When I say old wine, I mean first the role of national resources in the strategy of economic development, and then the role of the state in that particular strategy. There’s the case of Codelco in copper, a national champion of Chile, where a state-owned company producing natural resources contributed to development, at least in macroeconomic terms, and provided foreign resources to a country. In the case of Argentina, the experience is more modest. The oil company did contribute to the development of oil resources in the past, but then it was privatized before being nationalized again, and contributed to the development of nonconventional sources. The experience is mixed and depends on each country.
MAMC: To me, one old practice or framework is the idea that the state as an entity should be present all the time. But it could refer to extractivism. Extractivism as a concept has evolved over time. Following on from Thea’s work, I wrote an article with Rafael Garduño-Rivero that asked whether extractivism with regard to lithium was hard or soft nationalization. Hard nationalization, to us, is just the state, and soft nationalization is half the state, half private investors. We have a mixed economy, where you have to let the investors play around and develop their expertise, especially around technology. Old practices mean extractivism, but these could evolve.
TR: I’m glad that Miguel used the term extractivism, which is a contested term and carries its own critique of state-led resource development. There’s an environmental, social, and indigenous justice critique of any type of resource development, whether public or private. But to stay with the macroeconomic question, we can ask: how much has resource development contributed to the overall economic revenues of the state, and what have those revenues been reinvested in? Has it contributed to developmental indicators through reinvestment in social and public services, or job growth? Has state ownership contributed to economic diversification and upgrading? The record is mixed on all fronts, which doesn’t just point to the errors of state ownership, but also the constraints of the global economic order.
There is a position of dependency on foreign capital which constrains state action. But even with this caveat, the most recent nationalizations—not “hard” nationalizations at all—did see a big boon to state finances through the forced renegotiation of contracts, majority stakes, and joint ventures. In many cases, those were invested in ways that met human needs. Putting aside corruption and mismanagement, the overall picture is that many were lifted out of poverty, and much of that was due to resource rents—in my view, that’s a success.
There was a failure in limited diversification and limited value added. Many petrostates don’t have refineries, so there’s no value adding in the supply chain, let alone diversification. So the fundamental dependency on the overall market structure persists, even if there’s less dependency on immediate foreign capital. The volatility of these commodity markets affects that fiscal basis of the state in a very deep way. The closer you tie the fiscal basis to volatile markets, the more you are at a loss when there’s a commodity bust, and then you are forced to implement austerity.
MAMC: Pemex resulted from a nationalist policy, and now lithium is next. There’s been successful national development, but crises in governance—corruption, international trading, and debt burdens—compel governments to find and coexist with market solutions. We are at a turning point right now, especially with lithium. In Mexico, there will be a state company, but it’s yet to be incorporated. President López Obrador amended the mining law and it was approved by Congress, and now they have 90 days. But we still don’t know if this is the path we should follow in a modern economy.
AY: Thea, you’ve written quite extensively about conflicts between the old-school resource nationalists who want to engage in, as Miguel described, a hard extractivist resource nationalism, and a newer generation of activists aligned with the indigenous rights movement, who seek to limit extractivism. In the context of oil, these seem like pretty clearly demarcated camps, but does that change in the context of lithium and the transition away from oil?
TR: There was a tension that resonated across the region between environmentalists and indigenous movements, on one side, and Pink Tide governments that had pinned their economic and political mandate on expanding the state role in extractive sectors and, in many cases, expanding extraction in territorial terms. This generated conflicts, especially in Ecuador. Drawing on recent events in Chile, Ecuador, and Colombia, I think there’s been a mutual learning process since then, and both sides are now less defined.
On the one hand, very militant indigenous and anti-extraction activists are still resisting at the point of extraction. But there’s also been a realization of how dangerous it is to have the right wing in power. Left fragmentation leads to even higher levels of criminalization of anti-extraction protesters. It’s worse to be under a right-wing government, even if the left-wing government does not behave well towards those protesters. I think there’s a shared desire to have the left in power, even if those tensions exist. Mexico might be distinct, but in Chile, Colombia, and even in the failed campaign of Arauz in Ecuador, there’s also much more acknowledgement of the environmental concerns of indigenous movements and of pluriculturalism. Both sides seem to be reaching each other a bit.
Is this tension different in lithium or energy transition sectors? Just to underscore what Martín said earlier, I do think that there are new narratives from the state, and these are good and bad from the environmental perspective. On the one hand, many states are emphasizing not the extractive end but the value added—the upgrading, the innovation—and some of those roles have less immediate environmental harm. The state is inserting itself in a part of the supply chain that might generate less conflict with frontline communities, which is a positive way to look at it. But the more negative side is that corporate mining corporations are equipped with a narrative that they need to mine lithium to fight climate change, no matter what the resistance is.
MO: In the case of Argentina, the category left or right isn’t very useful in explaining the positions around the environment and indigenous rights. Obviously there are relatively small progressive groups which are sensitive to this topic. But in general, there is political consensus that lithium and resources in general are strategic industries. On the left, the narrative is more centered around adding value, providing a strategic role to the scientific community, and creating capabilities related to the resource.
On the center right, the narrative is around immediate exploitation and exportation. We have a supposedly left-oriented government, and there are two groups of discussion within the coalition. One group is more sensitive to environmental issues, and the other is in favor of greater extraction, basically arguing that we have the same GDP per capita as 1974. In political terms, the urgency is how to get foreign dollars from the exportation of resources. This is the priority, and that’s why there’s broad consensus.
MAMC: Mexico is trying to balance social and environmental justice. For instance, we are part of the ILO 1969 Treaty, which was incorporated in the recent mining law amendments. Mexican states have a duty to protect the environment and the rights of the indigenous community and Afro Mexican communities.
MO: In Bolivia, many environmental groups were disappointed with the government of Evo Morales. They felt that the government went too far with the exploitation of natural resources. It is a delicate balance—the government needs to deal with the urgency of the economy, which in terms of perception is more urgent than the environment now. It’s important to understand why some people change when they enter government. Promises to an environmental agenda are difficult to maintain alongside a social agenda.
TR: An interesting development is civil society groups thinking in terms of the role of public control, a little distinct from outright state control. Miguel pointed this out earlier: public ownership is maybe broader than state ownership, it can take various forms. There can be community ownership, there can be worker ownership, there can be joint governance. Activists in Chile and elsewhere in the region are saying that they don’t want to repeat Codelco, because Codelco created environmental harms. Instead, they advocate for expanding the role of the public broadly construed in order to meet environmental goals.
The question becomes: even if you arrive with that agenda to power, will that create dissensus within the state? I think that anti-extractivism in the past was more anti-statist, and now there is a greater focus on the hybrid forms of ownership that include the public, civil society, workers, and communities that can ensure more of the environmental agenda is actually implemented.
AY: Commodity shocks have driven many large firms to vertically integrate their natural resource supply chains, particularly in the case of lithium. Tesla, for example, is taking extraordinary measures to secure vast reserves of these minerals, and that means that a new generation of large corporate actors are going to have interests in the region, in natural resources that are at the heart of these national economic development strategies. How can national governments balance their desire to attract foreign investment and expertise with the very troubled history of multinational and American corporate conduct in the region?
MO: The experiences are very different in the lithium triangle. In Argentina, I see no conflict because the market is open to foreign firms. The firms operating in downstream segments—the processes after extraction—are in some cases creating joint ventures with mining companies. In other cases, they deal with supply agreements. If in the future YPF enters the market, it will operate like a private player without privileges. In the case of Chile, there shouldn’t be any conflict if the government creates this public lithium firm. As far as I know, the idea is to create a joint venture, in association with private firms. The two contracts with SQM and Albemarle will remain in force. Maybe the case of Bolivia is different, because the normative framework is different.
MAMC: It is quite the opposite in Mexico. There is conflict, especially with the recent amendments of the mining law. But I’d like to add that it’s not only Tesla, Chinese companies are also working vertically, and the main demand right now is from China. Lithium offers an important opportunity across North America, especially because in the US, it is considered a matter of national and defense policy. In terms of the USMCA, lithium could represent an opportunity for Mexico, but the recently amended law is also under review in the Mexican Supreme Court. It has been challenged for contradicting the Mexican Constitution and trade agreements signed by Mexico.
TR: These answers reveal a lot about cross national variation. What are the implications for state ownership and the state position in the global market of this rush to secure resources? Argentina and Chile are already major producers of lithium. What does it mean to have Tesla, Volkswagen, and BYD China invest? One option is a long-term offtake agreement—Tesla wants to make sure it has a lithium supply for the next ten years, so it contracts directly with a lithium firm to get the supply from a specific mine. The second option is more unusual in contemporary terms, but it almost harkens back to the early twentieth century with direct vertical integration—Tesla might be a joint owner of a mine.
More investment flows and buyers mean demand and prices stay high—this is the positive side. But the geopolitics are complex. Chile is an example, it is an existing producer and it’s establishing a state-owned company. Chile wants to maintain its market position while moving up the value chain, two goals with different policies. The US and the EU have declared lithium a strategic critical mineral, incentivizing lithium production within their borders. Global South producers may lose their market share five or ten years down the line. Now, there’s new competition around raw materials, and Global North states are also pursuing the same developmentalist strategy—they want to move up the value chain and they’re fighting for investment from Korea, Japan, and China to build battery companies. On both ends, Global South producers are being squeezed. In terms of setting up the supply chain and maintaining market share, there’s suddenly competition from countries very well-positioned in terms of their relationship with multinational firms.
Will Chile and Argentina remain number two and three on the lithium production list? Or will they be bumped down by Portugal and Mexico? The whole list of producers is changing and that has a lot to do with the securitization of lithium by the Global North, a strategy pursued by both governments and firms.
MO: The US signed a mineral security partnership with Canada, Australia, the UK, and Germany a few weeks ago. The idea is friend-shoring in response to competition with China. I think that’s the correct framework to analyze the latent question in Latin America. With the exception of the US, I don’t think we’ll find much lithium in other parts of the world, at least at competitive prices, in the next ten years. In Europe, there’s Portugal and some alternative lithium resources, but the technology has to be developed.
In my view, it’s the same with Mexico—I don’t think Mexico will be able to produce lithium compounds or lithium concentrate in the next ten years because they have clay resources and the technology has to be developed. In the beginning, the production costs will be much higher than the rest of South America. I agree with you, Thea, about the context, but I think that South America still has some advantage on the upstream sector, the exploration and production side.
In regards to the competition between the US, the EU, and China, Argentina is the most interesting case because it’s the most open. Last month’s International Lithium Congress in Catamarca expected 200 people, and 800 people from all over the world attended, because Argentina is the only country with good lithium resources open to investment. Chile is practically closed and Bolivia is closed.
MAMC: I agree with Martín. Lithium is present in pegmatite, brine, and even in oceans, and it is economically feasible in brine and pegmatites. Unfortunately, Mexico has lithium waste and clay deposits. It seems that the technology won’t be on our side for the time being, but that’s just on the upstream side. If we are talking about midstream and downstream, we are in a strategic position. Chinese companies can Mexicanize their investment and get access to the North American free trade market. If I were the president of Mexico, I would remain neutral because we need to work with the US—we are basically integrated in terms of global supply chains, but we don’t want to be more dependent on the US economy. Still, we need to open our economy and try to set up a joint venture with the Chinese market because at the end of the day the demand is coming from China, not Europe, the US, or Canada.
The question is, are we going to follow this free market vision? What about the environmental concerns, the questions around social benefits for the public? One of the main critiques is that free trade agreements don’t necessarily benefit the public, and if the public isn’t the beneficiary, we’ll have political turmoil. We’ve seen that in Chile, and tensions are high in Mexico in terms of the US-Mexico relationship. Trudeau and Boric just celebrated the twenty-fifth anniversary of the Canada-Chile Free Trade Agreement. You will not see López Obrador and Biden getting along in this way, and this matters because it’s how countries set up a meaningful dialogue on critical issues.
AY: A decade ago, there was some hope that decarbonization might foster global cooperation. It now seems clear that this is a domain of global political competition, particularly between the US and China. How are various lithium producing countries of Latin America trying to situate themselves within this competition, not to mention within the rest of the global market?
MO: As Miguel said before, I’d say that Argentina should follow the same strategy of neutrality. They’ve done it with the US, China, and even with Russia, but I don’t know how long they’ll be able to maintain it. The US was the pioneer investor of lithium production in Argentina and in the region in general, but in the last few years, China has adopted a more effective strategy and now controls a few sellers in Argentina. In the future, we may see the majority of lithium production in the country controlled by Chinese firms.
MAMC: I would say that Mexico is “nearshoring,”and the decoupling of the global supply chain is not as easy as we may think. In fact, it’s on the verge of a conflict. Chinese companies were granted a concession for thirty years of lithium exploitation in the last administration. But how will that work when the US is our main trading partner? At the end of the day, the best strategy available to Latin American countries is to remain neutral. If you pick one position, then your community will suffer the consequences.
MO: There’s a big difference between Mexico and the rest of South America, which is that Mexico is already integrated into the North American automotive production network. I assume that North American producers that sell vehicles count on Mexican lithium. It will be a delicate balance, because if you have this critical mineral just across the border, it is your strategic advantage. It will be difficult to maintain this neutrality.
TR: If you had asked me a couple years ago if I saw the decoupling of supply chains along geopolitical alliances as a possibility, I would have said well a lot of people I interview in government and corporations either want that or are worried about it, but it’s hard to imagine: how would you take apart these intricate sprawling supply chains, where would you decide the US begins and China ends? Fast forward to the present, and we have decoupled a major economy from a large portion of global trade and financial systems. The Russia sanctions are showing us in real time how something like decoupling could work. At the same time, the US Congress passed the Uighur Forced Labor Prevention Act to scrutinize supply chains that run through forced labor in China, but we are still seeing how it will actually work in practice.
These are two touchstones—Russia’s invasion of Ukraine and the economic fallout and sanctions, and the US Congress showing a rare moment of bipartisanship taking action to limit how goods coming through China are entering the US. This makes it seem more possible to me that there’s a future in which countries need to pick sides. The flipside of friend-shoring, like Martín said, is: will there be moments in which a state-owned lithium company that has a deal with CATL, BYD, or another Chinese battery maker is cut off from the US because it violates the Forced Labor Act? These are real questions with more to them than pipe dreams of autarky.
For some, neoliberalism is to blame for most, if not all, of our societal problems, as well as for the resistance to progressive changes that characterizes contemporary policymaking. This is for good reason. As has been extensively documented, the neoliberal obsession with fiscal austerity and efficiency has been associated with the increase of inequality, precariousness of job contracts, and dismantling of safety nets throughout the world.
In her new book Thinking Like an Economist, sociologist Elizabeth Popp Berman suggests that, in the case of the US, neoliberalism may not be the root cause of all social problems. She instead redirects our attention to the role of economics, or more specifically, the institutionalization of an economic style of reasoning that has transformed US public policy since the 1960s. The main consequence of this institutionalization, Popp Berman explains, is that goals that made sense through the lens of economics—growth, efficiency, productivity—came to displace competing visions for policy. Efforts to promote political empowerment of the poor, limit the concentration of power, and protect the environment were harder to understand in economic terms. The result has been a restructuring of the space of political possibility, constraining it to policy options that meet the value of efficiency, but not necessarily equity.
Thinking Like an Economist convincingly shows that the social sciences can indeed shape politics, but perhaps not how academics intend or anticipate. In Popp Berman’s account, the impact of economics comes not by providing the right answers to politically relevant questions, but by shaping the questions that can be considered in the first place. As the state of the world attests, the book serves as a powerful reminder that the time has come to start asking different questions.
An interview with Elizabeth Popp Berman
Luciana de Souza Leão: In contrast to narratives of a neoliberal turn that explains most societal problems—and in particular the lack of progressive policymaking in the US—you suggest that an economic style of reasoning became institutionalized in the US government. You argue that it was actually so-called liberal economists—liberal in the American sense—that are to blame for many of the problems attributed to neoliberalism. How did you arrive at this conclusion? When did you start thinking that the problem was economics as a form of thinking about the world, and not necessarily just neoliberalism?
Elizabeth Popp Berman: The motivation for writing the book was partly political. I felt that the horizon of possibility was very constrained for people on the left in the US, and especially within the Democratic Party, but it’s not that I set out to write a book about why the Democrats don’t do more ambitious things.
I had a pretty clear sense that I did not want to tell the right-wing Chicago School economist story—I’d felt for a long time that an important piece of the story of neoliberalism and political change was missing. Not everything turned out the way it did because Milton Friedman and Friedrich Hayek had a project.
My first book was about the marketization of academic science. I argued that economic ideas shape how policymakers think, and in that particular case, the idea that technological innovation drives growth was paramount. I began studying different cases, and I kept returning to the centrality of technocratic economists, people who wanted to use government to make change and to do better, but had a very particular idea of what that change needed to look like. It wasn’t until fairly late that I decided to commit to taking them to task for that. I knew it would provoke some response: a lot of the people in this space share progressive values and genuinely see themselves as helping through the means of the state and government.
LSL: In the book, you don’t talk a lot about your methods and historical work, though you base yourself in data and historical analysis. What were the main sites of research, and how did they shape your argument?
EPB: I went through a lot of different cases in the process of thinking about what the argument was. I started out by trying to identify policy domains where economics had been demonstrated to be deeply influential. Anti-poverty policy was one of my starting points. In some domains, there’s already a rich secondary literature—for example, Marc Eisner’s Antitrust and the Triumph of Economics makes a compelling case about the influence of economics in that area. As I was doing more research, these cases kept intersecting, and people were showing up in policymaking spaces that I had assumed were somewhat independent.
In some instances that wasn’t so surprising, but sometimes anti-poverty policy overlapped with antitrust or regulation, or some other totally different domain. So tracing influence in different policy domains was the original methodological logic, and then as I started to develop an argument, I added cases to test it, some of which were significantly cut in the final book, like housing and education policy.
I realized that I wasn’t telling a story just about specific policy areas, but rather a broader story about policy change. I did a lot of archival research, but honestly I think the most important work was the synthetic work, drawing on lots of existing information about these different policy domains and figuring out how it all fit together.
LSL: The institutionalization of economic reasoning meant that arguments based on efficiency were taken for granted, and other policy options based on rights or universalism were considered naive. This resonates with what I found in joint work with Diana Graizbord around anti-poverty policies in Mexico and Brazil. Experts have to do cultural and ideological work to make people buy into the idea of efficiency—essentially winning their hearts and minds. You mention resistance to changes from inside the government. Could you tell us more about both the resistance work at the symbolic level, and how the technocrats you study were able to initially convince people to buy in?
EPB: There was a very broad cultural resistance to the kinds of arguments that economists made in the 1950s and 1960s. For example, in 1959 Ronald Coase published a paper arguing that the Federal Communications Commission (FCC) should auction off the electromagnetic spectrum. But at the time, the FCC assigned these rights through administrative means. The dominant idea was that the public owns the airwaves, so they should be run in the interest of the public.
When Coase initially made this suggestion as a consultant at the RAND Corporation, it was so controversial that RAND suppressed the report. When he testified in Congress, members of Congress voiced their complete rejection, saying, “How can you say that we should just sell off this public resource to the highest bidder? What a terrible idea.”
People in positions of authority found the basic framework of economics to be problematic because it competed with their existing moral vision in some way, and they voiced their opposition verbally. But a lot of the advance of economics really took place in the federal bureaucracy, and in those places the resistance looked different. A big piece of the story is the spread of the Planning-Programming-Budgeting System (PPBS). This budgeting system grew out of the RAND Corporation, and it was implemented across different executive agencies. With PPBS, you would decide your agency’s goals, and then systematically compare the different programs imagined that could get you there. You would try to quantify everything to the greatest extent possible, and then choose the most cost-effective program as the best policy decision. Your budgeting decisions would follow from that initial analysis.
There was a lot of resistance to PPBS, for different reasons. Some people were morally opposed: Alice Rivlin once spoke about how teachers and doctors don’t like to think of their work in terms of its economic value. But a lot of times, the resistance was due to bureaucratic interests as well. Agencies didn’t have the actual staff prepared to use these methods, to think about their goals and define them in a quantitative way. Many bureaucrats found the system stupid, thinking that it was for show and the real decisions were going to be political anyway—which is kind of what ended up happening. I would distinguish between these kinds of resistance, which were about the practical implications of ideas, and a broader moral opposition to the framework of economics.
LSL: Once these methods and frameworks become institutionalized, were bureaucrats persuaded? Were these methods imposed on them, or did symbolic work eventually make them believe in efficiency as a value?
EPB: It was less about the work of persuasion and more about the work of creating new believers. The PPBS rollout was initially top down. It started at the Defense Department with Robert McNamara’s directive, and Lyndon B. Johnson rolled it out on the basis of its success there. He had been convinced by a couple of economists at the Budget Bureau, and he signed an executive order.
At the time, there were some interesting studies done that looked at which agencies really used the methods and which just filled out the paperwork. They found that in the few agencies that really used the methods, the leader had some kind of belief in the system, even if they weren’t an economist. But the PPBSers didn’t convince most agency leaders. The process of rolling out the methods led to the creation of new believers. The origins of policy schools trace back to this moment. The government needed people who could use these methods, and universities saw an opportunity to meet a market demand for people who could do these analyses. Thousands of people were trained to think in this way, and then they moved into policy spaces. People were convinced at age twenty-three when they were getting their master’s degree.
Implementing the methods created new resource streams, in particular around social policy. Those advocating for PPBS generally believed that we should measure the cost-effectiveness of policy in general, so they supported policy evaluation. They started to ensure that evaluation money would be included in social policy bills—this created resources that could go to think tanks, which could then hire people to conduct these analyses, who are in turn those who have already bought into the framework. All of a sudden, there was a much larger space of people, think tanks, and research institutes invested in this vision.
LSL: You mention Alice O’Connor and the poverty research industry. As you show very convincingly, technocrats avoid talking about race when they’re talking about efficiency. Using the example of social policy, why do you think economic reasoning was so successful with anti-poverty policies? Can you pinpoint some of the racial, cultural, and class premises that favored one type of anti-poverty option, say the Child Tax Credit or the Negative Income Tax, over policies based on community participation, for example?
EPB: Anti-poverty policy in particular was a project that succeeded because it solved certain racial problems for the state. The initial phase of the War on Poverty was organized around the idea of community action. This phase reflected an underlying theory that if poor people were politically empowered, they would be able to make their own claims, and get their needs met through the state—political empowerment could solve poverty in the long run. But the project was very quickly bogged down in racism. Poor communities, mostly communities of color in cities, organized and placed demands on mayors, who were typically white Democrats. The collective organizing of Black and Latino organizations—which often produced conflict and drew attention to achieve political goals—created problems for the Democratic Party.
Community action became a problem to solve rather than a model to emulate, specifically for Johnson. All of a sudden, Democratic mayors were showing up at his door saying, “What the hell, we are your support base, why are you doing this to us?” The shift to an economic framework—the idea that what poor people need isn’t political agency, but income—was instrumental. If we can just figure out how to get money to people who don’t have it, we can solve the problem efficiently. The shift worked in part because of racism. There are moments where proponents of the economic style speak with a subtext which points to race—or perhaps an opposition to the world view of those supporting community action efforts. But what was fundamental was that the new anti-poverty methods sidestepped questions of race, and made it irrelevant in policy. You don’t have to talk about race if all you care about is people’s incomes. And I think that’s a big reason why economic reasoning around anti-poverty was so successful—it sidestepped race.
LSL: What were the paths not taken that would allow us to rethink the relationship between economic reasoning and public policy?
EPB: I find it hard not to feel like the whole thing was overdetermined. Even if the people I write about in the book hadn’t existed, I do think that the broad political and economic changes at the global level—and the changing position of the US within that—make it seem that this turn away from government and its ability to deliver on universal ideals and claims about rights, would have happened anyways.
LSL: You have a great line in the book, almost playing on Weber’s switchman: “The economic style of reasoning was not the main reason, but the main channel.”
EPB: It matters that once you have a certain set of people with certain ideas occupying positions of influence, more and more people are trained in certain ways, take new things for granted, and this becomes very sticky and very difficult to dislodge. I believe completely that a large-scale material change could disrupt the whole enterprise and usher in a new era. But in the meantime, as we go through periods of smaller change, the institutionalization of the style of reasoning makes it difficult to do much outside of it.
The Biden administration has several appointees that come from a different place. But I think you can also see that many of the progressive policies they’ve advocated for have been marginalized by the more dominant voices who adhere to the economic style of reasoning, and consider these other approaches naive.
LSL: How can we approach the question of policy values in terms of economic reasoning? I come from a so-called poor country that has universal health care, and the health-care story you tell is striking in terms of paths not taken; I take for granted that everybody should have access to free healthcare. How can we discuss those values with economists without sounding naive?
EPB: In policy spaces, it’s almost a necessity to translate any action into economic terms. Someone may be motivated to pursue a policy because of justice, equity, or some underlying deep core value that doesn’t have anything to do with efficiency, but in many cases it just absolutely has to be translated into that language in order to be heard. I think part of the problem is that we often limit ourselves to that language even when we are not talking to narrow technocratic audiences. Whole political campaigns are focused on narrow technocratic fixes. I think of Obama and the health care exchanges. It is politically difficult to sell some complicated market-like mechanism and convince someone it’ll make their life better. I think it’s really important to aggressively make the other kinds of value-based arguments to broader audiences.
LSL: To what extent is this an American story? As we know from the work of Marion Fourcade and others, economics is an international field, regardless of where you’re trained. Can we expect this style of economic reasoning to have similar political effects in other parts of the world as well?
EPB: The answer is both yes and no. The book is fundamentally about the US case, and many of the dynamics and actors are specific to the US. Economists & Societies is a great illustration of how different configurations of knowledge formation of states work together to produce nationally distinct outcomes. At the same time, like you say, economics is an international field, and there is a lot of commonality. Many people trained in the US go elsewhere to work in policy positions. The US is still the hegemonic figure within the discipline, at least for now. In that respect, I think you can see the US as a bellwether case; these changes were happening here before they happened anywhere else.
A lot of what I refer to as the economic style of reasoning is part of this broader space of rationalization processes. New public management, scientific management, all these processes of thinking quantitatively and rationally about how to effectively reach organizational or political goals—these are global societal trends. There are places which it is channeled through economics and tends to look similar to the US, and there are also places where it’s happening through other national disciplinary configurations, making it look quite different.
LSL: I’m always struck by how the US public policy debate is not comparative—both the differences in the dominant policy-relevant disciplines, and the policy outcomes that flow from them, are obscured. In some cases, compared to the US, countries in the global South have accomplished more progressive measures with much less money.
Brazil provides one way to think outside the grammar of efficiency. When it implemented its conditional cash transfer, Bolsa Familia, it was a very specific moment when ending poverty was the political project. The Lula administration said, efficiency is not our priority, we are worried more about excluding poor families than including families who are not poor into our CCT. Those good years of political focus on inclusion are long gone, but it proves that there were political moments where bureaucracies could legitimately say that efficiency was not their goal.
Yet, you show very well how this language of efficiency connects to strict budgeting and austerity, which seems to be the most common political context. PPBS is always more useful when you need to cut costs. This language of fiscal austerity and efficiency fits together really well.
EPB: It’s a good reminder that the right political configuration can produce more significant structural change. Does that seem likely to happen in the US soon? I would say no. On the other hand, I do think that social movements and the resurgent left in the US can put real pressure on that system. While it is easy to be pessimistic about what’s coming, it is also possible to imagine enough of a base organized that you have politicians brought into power championing the idea that inclusion and not efficiency is the priority. If you’ve got enough political power, then everything else will follow along. Maybe economists don’t matter that much in the end.
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