Adair Turner: When Supply and Demand Both Crash


Rob talks to Adair Turner—member of the House of Lords, former Chairman of the British Financial Services Authority, and member of INET’s Commission on Global Economic Transformation—about how the COVID-19 economic crash compares to the post-2008 recession: namely, how to deal with a crisis of supply in addition to aggregate demand.

Transcript

Rob Johnson:

I’m here today with Adair Turner. He is the Chair of the Energy Transition Commission. He was the head of the Financial Services Administration in 2008 at the time of the great financial crisis, and he has been a Senior Fellow, a member of the Commission on Global Economic Transformation, and formerly the Chairman of the Board of INET. Adair, thanks for joining me.

Adair Turner:

It’s great to be here.

Rob Johnson:

Well, you’ve been illuminating all kinds of issues and all kinds of challenges through your writing your book or whatever, but I remember your first Saturday night speech at the very first INET conference at King’s College Cambridge in May of 2000 … April, excuse me, April of 2010. It’s really nice to have you on this podcast, particularly given the distress and disorientation people feel. I keep looking at the past bailouts and I look at the present bailout, and many people express great confusion. Where most of our macro economic systems and bailouts are about a financial problem and a collapse of aggregate demand, it’s very hard to know whether things come from supply or demand in the light of the pandemic, and people who are perfectly capable being asked to stay home from work and to refrain from shopping and all kinds of things. Tell me how you see this crisis in relation to the one that you played a big role in managing in 2008.

Adair Turner:

Yeah, certainly. I think most crises that we’ve faced in the past, whether it be the global financial crisis of 2008, or let’s say the Great Depression of 1929 to ‘33 are fundamentally a set of reasons why demand suddenly collapses in the economy, whereby a whole load of people or firms don’t want to consume or don’t want to invest. They want to pay back debt, or the financial system won’t lend the money. But for a set of reasons, people don’t want to spend money, investment or consumption, even if the supply is potentially there.

Now, what is different about this crisis and we need to get our heads around it, is that is a crisis that begins on the supply side, though it then also becomes a potential demand problem as well. Essentially, in order to control the health aspects of this, the epidemic, we have told large amounts of the economy simply to shut down, not to supply. Stop running your factory, stop opening your shop, stop running your restaurant, your hotel, you’ve got to stop that. And in and of itself, that’s just an immediate collapse in supply. It is also, of course, an immediate collapse in income, or might be an immediate collapse of income for the people who were previously working in those sectors. That of course in itself means, that that could be a problem of demand.

It’s a bit of a mix this because we have some people in the economy who are in danger of losing their income if the state doesn’t interfere, and we have others who are continuing to receive their salaries, but are constrained from spending and they are piling up savings. They’re piling up cash balances, which they will want to spend when the thing loosens up again. So, you have to think about this interaction between the supply constraints, and then the implications that there could be for demand. The fact that some people have maintained income, they’ve got as it were constrained demand but it’s still potentially there to be unleashed. Others could lose income and some firms could go bankrupt.

Now in this environment, it is absolutely clear that we need to unleash a fiscal stimulus, and that that fiscal stimulus needs to be targeted on maintaining income for people whose incomes would otherwise collapse and/or under maintaining the existence of companies, perfectly sound companies, both medium and large, which could collapse themselves in ways which would then create a challenge for the future. What we’re trying to achieve as much as possible is as it were to turn this into a giant enforced holiday where you can’t work as much as you could. It’s a holiday we are not allowed to consume but with the intent that in three months time you come back, we’ve still got the same skills as before, we’ve still got the same install base technology as before and we all start again. That is the aim of public policy.

We will never be able to achieve that even remotely perfectly, but we have to try that as best possible. That requires maintaining as much as possible of an attachment between employees and their companies as possible so that they are still attached to those companies and can be reemployed at the end of it. It means dealing with the distributional consequences of this. This is much worse for many people, particularly people on low income but particularly in vulnerable sectors whereas in income terms, it’s not bad for others at all. The impact of that, in order to do those sorts of programs, and I think … I would say the UK Government one, and we’ve seen it also around a lot of Europe. I think we’ve ended up with a reasonable design of basically saying wherever a company is about to make somebody unemployed, don’t make them unemployed, put them on a leave of absence and the state will pick up a significant proportion, in the UK 80% of that expenditure. I think those have been the correct interventions.

But going forward, what we will have to get right I think are the following things. First of all, there’s a very, very tricky micro issue, which overlaps with the health management issues, which is how do you safely relax the restrictions? Which sectors of the economy can begin to work again in a way which with social distancing is safe to do? That is slowly reducing the supply side constraints. We will also find, because we just can’t do this perfectly, that there has been a scarring element, that some companies will have gone completely bankrupt. We will have increases in unemployment so we will have to find a way of stimulating the economy generally and we’ll have to think about, what are those that occur? Because, demand won’t spring back magically in exactly the pattern that it was before. Then we’ve got to think about, what is the implication of these large increases in fiscal deficit?

Now, let’s be clear, final point, what will happen with these fiscal deficits? We will run up large fiscal deficit. I would suspect most European countries and the US to run fiscal deficits this year of say 10%, 15% of GDP. There will be a one-off increase in debt to GDP. Some people ask, “Well, who will fund that?” The answer is, largely it will be funded by the people who are still sitting on good incomes but aren’t able to spend. I mean, let’s be clear, and this is a funny thing to think about, there will be an aggregate increase in the aggregate personal sector savings rate as a result of this because some people have maintained income, but constrained consumption. So, we will have the private sector moving … The public sector moving into the deficit, but actually an increase of savings on the other side.

So, we can run those large fiscal deficits. The crucial thing in those fiscal deficits is two things. One, effective targeting to get it to the people who really need help in the period of crisis, the period of total lockdown. And then, the careful targeting to drive a recovery of the economy once we are able to relax the supply side constraints.

Rob Johnson:

Now in the middle of all this, I see a lot of confusion, particularly in the United States that this bailout is being directed towards the powerful, the politically powerful corporate institutions and that there aren’t enough, which we might call, conditions being put on large corporations and financial institutions to maintain the employment. In other words, they can fortify their balance sheet, do what they want with the money. I sense that in Europe, it’s a somewhat different mix or allocation. How do you see the comparison between the two?

Adair Turner:

Well, I’m less familiar with exactly what’s going on in the US. I have some familiarity with it and I’ve heard these debates, and I think broadly more of the money in the US is in danger of going straight to corporate ends, rather than forms of targeted support. Across most of Europe, what we’re seeing is the combination of the following set of packages. We are typically seeing salary protection schemes. In the UK, the way it works is that up to £30,000 a year equivalent salary. If a company is having to close down but the burden of proof is not on the company, if they claim it they get it, they can get from the state a revenue equal to 80% of the salary they were paying that person and fundamentally they say to that person, “Sorry, my hotel has had to close down, my pub has had to close down. You are being put on a leave of absence. You will continue to get 80% of your pay. I will get that 80% of that pay from the government.”

So I am able to keep going as a company, you are able to keep going as an individual and probably in most cases, their consumption is going to fall significantly in any case because they’re going to be stuck at home, not able to spend money. That has been a crucial feature of the schemes across Europe. There’s been a lot of debate also about how we support the self employed individuals, individuals who don’t have an employer. And again, in the UK and in other countries we have schemes, usually with upper income limits. In the UK it’s £50,000. So, say if your self employment income has collapsed, you used to be a taxi driver, you used to clean someone’s house for them, you were paid on a self employed basis, you were a tour guide around London, whatever it is. And you say, “Look, my income has collapsed,” you can get a top up to the level that you were getting in the previous years.

There are a set of debates about how exactly we design these schemes. They differ country by country but broadly speaking, I think there’s an agreement that that is the core of what we need to do. Now, if you switch around to a corporate side, for most companies, that will make a very major difference to their survivability because if they’re not producing any longer, they won’t have a cost of goods sold. The hotel is no longer going to be buying food and drink. And if they don’t have to meet their payroll, that removes their biggest element of costs. What of course it leaves, and what could drive companies into bankruptcy even if you do that, is rent, and so there are a set of actions in place to say, how do we get rent holidays either negotiated or supported? Or, debt. I think the crucial issue here is, how do you get stays on debt repayment?

I think what people are more wary of is people getting their existing debt paid off by the government because the existing debt was created by a set of decisions in the past and I don’t … We can just write it off. But I think the trick of good design is as it were to freeze the economy for a few months and basically say, “We want firms to come out of this in the same position that they were when they went in. We want good, under-leveraged, well round companies to come out looking good, well round, under-leveraged companies which are able to get going.” But, if something was a highly leveraged risky company on the way in, it shouldn’t find a way in the course of this crisis to escape from the consequences of its own prior actions.

Now, that’s the principle. It is complicated to exercise in practice and I think the policy has been, if anything, to err on the side of getting the money out and supporting people, rather than asking too many questions. I think that’s probably right, that … Actually, I would say, going back to my experience of the global financial crisis in autumn 2008, when you hit an absolute crisis and your whole banking system is in danger of collapse, there has to be a little bit of an element of you are … You may end up rescuing some people who in an ideal world would’ve faced more of the consequences of their prior actions. But bluntly, it’s more important to prevent a 1929 style downward spiral. Having said that, the principle that should still be there is that equity is there to absorb losses and that if necessary, if firms need to be bailed out, they may need to be bailed out but with the equity owners losing, because that is what equity is there for, to absorb risk in a capitalist economy.

Rob Johnson:

Yes, and I think in the United States, the tension has been that, how would I put it? We just went through a presidential primary where everybody from the center to the right criticized Bernie Sanders as a socialist. And yet, many people in this country think what we do is, we socialize the downside for the powerful and privatize the upside, and I think the what you might call, quality and vision that you are articulating is a much healthier sensibility and balance.

Where my concern is, Adair, and we’ll talk about this in the coming minutes, is that when the integrity or the trust in expertise is damaged, it really impairs society, and I know that we are watching a different type of expertise. When we first met, it was all about people pretending they were in control of a financial sector. Now we’re talking about a disease and the medical profession and the epidemiologists, excuse me, are at the cutting edge, at the vanguard. But corruption, evidence of corruption, damages the faith in expertise even when the experts are real. We have to move through the lessons of this period to a place of governance that is more balanced and healthy in the eyes of many people, rather than what I’ll call authoritarian and coercive on behalf of a narrow oligarchy. I think we’re at that fork in the road right now. I’m curious about your perspective.

Adair Turner:

I think it’s an interesting one and I think there are some potentially divergent trends here, and maybe different between Europe and the US. What undoubtedly happened during the great global financial crisis was a collapse in the trust of the expertise of people who had purported to be experts on the financial sector. If you go back before 2008, you will find statements about risk control in the financial sector, which essentially in retrospect turned out to be rubbish. I remember I quote in my own book a quote from the IMF’s Global Financial Stability Review April 2006, which said the world has got much safer because all this securitization, distribution, use of derivatives to hedge risk, it’s made a better system.

Alan Greenspan used to give speeches about how techniques of value at risk management had improved the quality of risk management throughout the financial system. And when some people raised queries about this and said, “Is this really true?” One thinks of Raghu Rajan at the Jackson Hole meeting, I think it was 2005, saying, “Well hang on, isn’t all the shadow banking stuff a bit risky?” I mean, basically he was dumped on from a great height by most of the establishment saying, “No, you’re wrong. You’re a Luddite. We’ve created these new technologies.”

So let’s be clear, what happened in 2008 was that a enormous crisis with huge impacts on ordinary people’s income occurred after a decade and more in which some very, very highly paid people had been assuring the populace that all this financial innovation, and trading, and complexity was creating a safer world. So it was not surprising in retrospect, that a lot of people thought that these so called experts were emperor with no clothes. And that worse, they had been paid huge amounts of money not for doing clever risk management, but for doing pointless activities which had increased risk. That is what created a corrosion of trust in the central banks, the Federal Reserve, the regulators, the ministries of finance, but also absolutely the private banks, the head of the investment banks, the banks. It was just a perfectly understandable collapse of authority.

Now, this is a bit different because it’s not the case here that you can go back two years ago and have the head of the CDC or the top epidemiologists in the world saying, “Don’t worry, it’s all under control.” Indeed if anything, we now find that we can see various warnings from the experts, the scientific experts, the epidemiologists, the people who think about public health and crisis management over the last few years saying, “We’re not taking the dangers of a virus seriously enough,” but being ignored, or not enough attention being paid by the politicians or being made by the people who control the money.

So in this case, the people who purport to be experts, and who frankly I think have a more rigorous body of expertise than the so called financial experts were suggesting before the crisis, they in a sense have not been proved emperors with no clothes, they have been somewhat vindicated. What we now have is standing beside the President in his press conferences, between our Prime Minister, our Deputy Prime Minister at the moment because our Prime Minister is himself recovering from the virus, standing beside Macron and Merkel, chief medical officers, heads of Centers for Disease Control, et cetera. In Europe, there’s actually been some commentary as to whether this will result in a bit of a pushback against the populism of the last 10 years, and people suddenly saying that actually we do sometimes need to trust experts when they really are experts. There’s been a lot of commentary saying that in the aftermath of this, what we may look for in our political leaders is quiet competence, and a willingness to listen to true scientific experts rather than to be showmen and charlatans who in several countries have done well in the last 10 years.

Now, I think that then depends on the nature of political leadership. And I think what has actually happened across Europe is that because the politicians in this environment have very clearly deferred to the medical experts, listen to them, treat them with huge respect, do not cut across them, do not pretend that they have a separate area of expertise. And because the debate in Europe has, I think been largely bipartisan, there has not been a sense that Macron or Merkel, or Boris Johnson are using this to pursue their own political agenda. There is just a … There is legitimate questioning of the governments in power. Are you doing enough? What is your plan? But actually, the tone of the debate is if anything, is a reversion to something which we were used to 20 years ago and which we sadly felt we’d lost.

So, I think what is interesting is a bit of a divergence between what is happening in the US where the experts that you have, the medical scientific experts are as it were, topped out by a president who is often not listening to them and is asserting his own distinctive understanding and judgment, and that is not going on in Europe. In some ways, it may be that this crisis in Europe rather than exacerbating the collapse in trust in experts and the collapse in the civility of political discourse, if anything, it’s possible that we may come out of this with a healthier respect for expertise, and careful forward looking planning and listening to experts where they have something to offer, within a somewhat more bipartisan and a measured style of debate than we’ve recently had. But from what I understand, that doesn’t seem to be the dynamic which is developing in the USA at all.

Rob Johnson:

Yeah, I think you’re right about the dangerous in the USA because people are not viewing experts as what you might call, visionaries for the public good. They’re viewing them as marketing men for power. I think there are some, particularly this medical realm, some very, very high integrity people who are experts and the population has become so callous, they can’t separate the signal from the noise, and to the detriment of our well being and our vision of governance for the future.

Adair, you’re working with this Energy Transition Commission. You’re leading it and you’re doing a lot of work for INET’s Commission on Global Economic Transformation. As I see the fatigue, the exhaustion, the dislocation in the economy, as I see the fiscal deficit swelling, you were talking about up to 15% of GDP. I ask the question, whether that fatigue, that exhaustion, that fear will retard the vigor and the intensity of our approach to reducing carbon and … How would I say? Avoiding or diminishing the damage associated and disruption associated with climate change. On the other side, I see the unmasking of an all too confident vision of a social system, and perhaps a deification that the market will always deliver. This may create a renewed conversation, which accelerates the approach to what might call collective challenges to our health, well being and survival. How do you see what the pandemic has done in relation to the agenda for climate change?

Adair Turner:

I think at the political and discourse level, it will probably as you suggest, produce a greater willingness to focus on the tail risks that face society and the long term tail risks and the long term risks even if they’re not tail risks, they’re high probabilities that face us. I think there will be an awareness, and we can see this gets extensively debated already, that we have a market economy which we are told by the neoliberal orthodoxy will essentially solve all problems and produce a welfare optimization, because we will … Logically, thoughtful, private participants will understand the risks that they are running and will take action to offset that.

Now, we knew from the global financial crisis, that that was not the case. And indeed famously, Alan Greenspan said, “I found a fault in my model. I had assumed,” he said, “That you could rely on private agents to take account of extreme risks, and I’ve turned out to be wrong.” We learnt that in the financial sector, and we have been much more cautious since then about leaving a financial sector entirely to its own devices. But I think what we’ve realized is that there are at least two other categories of risk that markets left alone are not well placed to deal with.

One is these small probability events, events that don’t occur one year and then they occur catastrophically the next year. You don’t get a virus in 2013 or ‘14 or in ‘15, or ‘16, or ‘17, or ‘18, or ‘19 and so we ignore the possibility, but then it hits us in 2020, and free markets do not deal well with that. I think they do also not deal well with things which are highly certain to occur, which is climate change, but where it occurs very, very gradually. Where the increase in the warming this year is oh well, sufficient, we can deal with it. And we don’t quite extrapolate, we don’t think, “Yeah, but hang on. Suppose this goes on for 30 years. What are the consequences of that going to be?” So, we don’t feel … Markets don’t deal well with small probability potentially sudden catastrophic event, nor with slowly developing, long term challenges which just don’t get pulled into the either markets or even in many cases, into political decision making.

So, I think there will be an increasing awareness that in a sense of failure on coronavirus reminds us that we often make failures and makes politics more alert to the fact that to deal with climate change as well, we will need a role for policy directing, and guiding, and forcing markets in the right direction rather than just leaving it to them. In that, I’m confident that there’s a step forward in our tendency to focus on the climate change agenda. On the other hand, there are some immediate short term things which are worrying.

It is worrying that in this crisis, the fossil fuel prices have collapsed. Oil price is essentially down 80%. It’s down more than 100% in the US, but that’s a little bit to do with the oddities of the WTI contract. But overall, it’s down about 60 or 70% across the world. Gas is down 40%, coal is down 25%. And whenever you get those falls in fossil fuel prices, that makes renewable energies, new clean energies temporarily look less economic. And so, this could be a setback to the progress of renewable energies as also occurred by the way, back in 2009. There could also be a setback to the progress of electric vehicles, and it could happen in this way.

The car companies, the auto companies have all closed down. They’ll be desperate as they come out of this lockdown to sell their cars and they will be lobbying to have subsidies to sell the cars that they can produce at the moment, which will be internal combustion engine cars. And, gasoline may be very cheap and those cars may look cheap. All of that unless we get it right, could slow down the progress towards electric vehicles which we need to drive our progress in the future. And indeed, we also have a interesting feature that … One thing that’s going to happen after this crisis is, people are going to be a bit wary of public transport.

If you look at the figures from China, road transport is back to pre crisis levels, but subways are lower. That’s because people think, “Well, a subway is a difficult environment for me to be safe. I’m continually touching surfaces that somebody else has touched.” This could give us a setback to the shift to mass transit systems, which are so much more energy and carbon efficient. So, I see a set of dangers and what we have to do is design policy responses which respond to those dangers, and make sure that this is not a setback to the green agenda. But I think we will be able to do that within the context of many people being aware that there is a certain broad category set of things that free markets don’t deal well with, and that climate change is one of those, and virus is another, and that this event reminds us that we cannot leave all the important decisions about our future to free markets. We also need thoughtful strategic states as well.

Rob Johnson:

In your work with INET in the last couple of years, we’ve been focusing on this group of a little more than 20 people from around the world on the Commission on Global Economic Transformation. We had identified what I would call the four disruptors of financialization, climate, technology, and the deterioration of the nation state associated with globalization as challenges to address. Then more recently, how all of those things combine, particularly technology and climate on a continent, Africa, where the working age population is set to more than double in the next 40 years, and where a coherent development strategy based on success in the past, particularly related to manufacturing does not appear to be viable. Well, we were in the process of building those reports and those outlines, and now this has occurred. I’m curious just as a member of the Commission, how do you see … How should we respond across the spectrum to the challenge that’s been put before us, and how will this change our trajectory in completing our work?

Adair Turner:

Well, I think it clearly implies that a long time, alongside the medium to long term challenges, we have to think about the more immediate challenges of recovering from this crisis, and whether this crisis will produce a very strong accentuation of problems for particular parts of the world. I saw a comment by Paul Kagame, the leader of Rwanda warning that unless we’re careful, this crisis itself could set back development in Africa by many, many years or decades. And of course, that could occur if we have a very big setback to global trade, we have setbacks to commodity prices on which many companies, countries are dangerously dependent. If you get debt crisis, balance of payments crisis and if there are not packages of support from the IMF to handle those, you can have a danger where short term crisis problems, short term cyclical problems become as it were, long term problems because you didn’t take enough cyclical offsetting action.

I think we need to be aware of that and aware that in this environment, one can’t simply say, “Well, we’re just going to plow on and focus on the medium term issues.” Because sometimes, short term setbacks to economic growth become self fulfilling over time. There’s almost a hysteresis of nations as well as hysteresis within labor markets. The very process of being depressed for a period of time can lead to a failure to deliver skills and competitive advantages, which depress you over a longer structural period.

I think the second thing that we need to think about though is that … It strikes me that it is possible. That this crisis will lead to a significant acceleration of some structural trends which were already in place, and structural trends which create a major challenge. I think we have talked on the Global Commission about the impact of technology, the impact on more and more jobs being susceptible to automation and what that does to future labor markets? Where do the jobs come from? And in particular, what will be the wages of those future jobs? I mean, at the limit you can always find work for people to do so there isn’t a lump of labor fallacy which we believe in. But if lots and lots of jobs get automated, it may be that other people will only be employed if they offer their labor at very low wages. So we know there’s a complicated nexus out there between the pace of automation, job creation, in what sectors, and rising inequality.

Now, I think that this crisis could well give an additional impetus to that. I think we are going to have people with supply chains reaching into the developing countries which are going to say, “Well you know, complicated global supply chains often break down in these crisis. Wouldn’t I want to do my manufacturing closer to home?” I think we could see manufacturing coming back to the rich developed economies, but in an almost entirely automated, zero person fashion. I think we’re clearly going to see a acceleration of the shift from online … From bricks and mortar retailing, to online retailing. We are seeing an accelerated shakeout of classic bricks and mortar retailers going bankrupt and laying off their labor, and we are seeing Amazon share price going through the roof.

Yes hiring another 175,000 people, but that 175,000 people is probably matched by 10 million people losing their job across the world in retailing sectors, in shops which previously worked in a bricks and mortar fashion. We’re seeing in the online retailing and distribution space … It’s quite interesting, you can run a warehouse picking process in two ways. You can either do it in a Amazon type super robotized way, or you can do it with lots and lots of relatively low wage people. If you look at what has happened in this crisis, the super automated guys have been able to keep going, and the labor intensive guys have had to close down because they can’t do that in a safe way in health terms.

Now, there is going to be a fear that these viruses will come back. We are going to want to have a labor activity in distribution centers, in factories, which is resilient to another virus occurring and us having to use social distancing protocols to allow workforces to be safe. That broadly speaking will mean, have less people and more machines for the simple reason robots don’t catch viruses. So, I could see this actually giving a significant impetus to those trends towards automation which were in place in any case, which have in the developed economies major challenges in terms of the distribution of income.

But I think even more, they are a challenge for some of the emerging economies because it creates the challenge of … It makes it even more difficult to imagine that a currently low income emerging economy can follow the East Asian path to middle income and high income levels. Essentially, the Eastern Asian path to middle income and high income levels of income starts with mass manufacturing, employing lots of people coming off the farms. The feasibility of using that as a development model in the rapidly population growing African countries was already challenged. I think it’s going to be even more challenged in the face of some accelerated structural trends that we may see after this crisis.

Rob Johnson:

So Adair, we’re at a time and a place where people are in distress, expertise is very valuable, and the credibility and the need for collective action and public services is how would I say, on center stage in the pandemic and underpins your working climate. In the realm of ideas, I’ve often thought at INET that one of the things we had to address was the way in which the economics profession has tried to what you might call, bifurcate or separate politics from economics. But we are now at a place where the institution of governance is not the problem as opposed to the solution, as Ronald Reagan stated 40 years ago. Many of the fault lines related to social sustainability, inequality, environment, periodic financial instability and now the integrity of our health systems suggests to me that reestablishing the importance of the public sector as playing a primary role is very important.

At the time of the New Deal, Franklin Roosevelt changed course and invigorated the American economy. And when years later, 1939 roughly, he started to envision war preparation, the credibility and trust related to government service as something that could make society better off was very strong. How do you see … What is the process that is in your imagination in America and beyond that could bring us back to that place?

I had a Swedish group meet with me in New York about a year ago, and they said it used to be the American growth model was right. That you made the supply side more flexible, things were reallocated and you sustained growth and dynamism. But with the scale of technical change, the disruptions of climate, the disruptions of globalization, financial shocks that ripple through the system, America in the minds of the Swedes was now in a place where the negative politics was going to destroy the capacity to incorporate the technological change for the what you might call, improving the production possibility frontier and making society better off.

He thought we were going to drown in our social and political discord, and that a new model, and obviously the Scandinavian model was in the mind of the people I met with. A new model of growth where there was a role … As he said, “We love the robots and our society, they don’t protect jobs, they protect people.” I’m curious like I said, how do you envision the next face in the world where maybe some places are doing better than the United States, but in a world where the philosophical systems between East and West, between the US and China are somewhat at odds? How are we going to restore order, and faith and vitality around the world in light of this?

Adair Turner:

Well, it’s interesting to work out what will happen and what should happen. I Remember at the time of the global financial crisis, there was a lot of talk about how it would be a watershed. A realization that the model of capitalism which had developed in the 80s and 90s post Thatcher, post Reagan, post the financial liberalizations had become unsustainable socially. The assumption was that we would see a shift to the left. And broadly speaking, it didn’t happen. Indeed, it’s really been a very bad decade for the center left in most countries, with a fragmentation of politics between various forms of nationalist right, and various forms of more extreme populist left. What many people thought would be the dominant ethos of the 2010s, which would be a sort of an FDR, Scandinavian mixed economy, use the dynamics of the market but manage it in order to pursue wider social objectives. Many people thought that that would be the dominant ethos of the 2010s and it really wasn’t at all. So, we don’t know.

But I think it is the case that there is something about the challenges that we’re facing to which the pure free market model is not an adequate answer and that it does tend to produce rising inequality. It’s not good at dealing with small probability, catastrophic events like coronavirus. It’s not good at dealing with very long term developments like climate change. So I think more than ever, we do need to develop an alternative model of how we balance the dynamism of markets and private capitalism, which we should continue to use where it is effective, with these wider social objectives. That leaves for INET the process of thinking through what is the economic theory of that, what is the economic policy of that is very important.

And I think let’s be clear, we have one country now which is purporting that it has a better model and that country is China. China has come out of this crisis looking much stronger. I know there is I think some legitimate questioning about what happened in the first month in Wuhan, whether things were not revealed as rapidly as they could be. There are issues about the numbers, are the numbers absolutely right? Those issues by the way, relate to everybody’s numbers. But let’s be clear what the numbers tell us. The numbers tell us that the fatality rate in China from this virus aren’t 10% below the rest, aren’t 20% below the rest, they’re about 1% of the West. We are seeing fatality rates in Europe and now in the US which are 50 to 100 times as high as China has faced. And by the way, not just China but also a Korea, Japan, Hong Kong, Singapore, Taiwan. The whole of East Asia has come through this crisis in a much better shape.

And when it’s all of those countries together, you really have to say, well, what is it that they’ve done right? And, what is it that you need to do to be able to deal with a crisis like this? Now, it may be what China has done to deal with it involves limits on personal freedom, which are not acceptable in our political systems. But if that is the case, we’d better find other ways within our political systems to be equally effective in making sure that we can deal with this challenge. So, I think it is a wake up call to think deeply about the extent to which different types of economic system and behind that political system can achieve politically adequate consensus and in economic terms, adequate strategic vision to deal with challenges, to which simply saying, “We’ve got a market, we’re market dynamic. That will solve the problems.”

Let me give you a very particular example. It turns out that even when we develop a vaccine for this coronavirus, we face a major challenge in vaccine manufacturing capacity because there’s only a small number of companies in the world that are able to do this, and they have not developed their capacity on anything like the scale required to deal with a challenge like this. And why is it? Well, it isn’t because actually vaccines is a very tricky economic business to be part of. Because you get a scare like SARS, you go out, you develop a vaccine, you develop vaccine manufacturing capacity to deal with a massive SARS epidemic, and suddenly SARS for reasons we don’t fully understand dies away and you say, “Well, that wasn’t a very economic thing to do.”

So, it turns out, and this is a point that Bill Gates and the Bill & Melinda Gates Foundation have often pointed out, that simply relying on pure private motive to have enough vaccine manufacturing capacity in the world is not going to work at the pace that you need to respond when it occurs. Because, the incentive structures are just not there for a market alone to put in place a capacity which may be needed, but might turn out not to be needed. And so, I do think we need to just be aware there are some vitally, vitally important challenges for human welfare, which cannot be solved by markets alone.

Rob Johnson:

And I think one of the things, and I point again to my critique of the United States that we have to consider is how to free experts and public servants to make what I’ll call social design, or implementation, or enforcement for the public good, rather than to be what economists called captured. But I think you’re … The fault lines in the system that have been revealed, say, over the last 40 years in the United States, profoundly in the UK, somewhat in other market economies really require a reexamination in a integrated sense, a political economy. I guess, final thoughts Adair. Are you writing a book currently? I knew you were thinking of it. And, what is the thematic focus of your book?

Adair Turner:

Well, the book is called Capitalism in the Age of Robots. It is about what happens in a world where increasingly we can take most jobs that people do, and we can automate them. It should be coming out next year. Clearly this crisis has got me thinking about the nature of jobs, the nature of those jobs which can, and I think will be automated in an accelerating fashion. The balance between bricks and mortar retailing and online retailing, manufacturing, distribution, et cetera. And, the jobs which we either can’t automate or don’t want to automate, but which at the moment in most of our societies we pay very poorly, such as jobs in social care.

We know that across the world, social care homes where people are looked after often for The last 18 months of their lives on average once they are relatively no longer fully healthy people and need intensive care, in most of our societies, those are sectors with very low paid staff. And, staff who are doing heroic jobs at the moment dealing with often terrible levels of fatalities, and also putting themselves at risk. And I think already within my book, the theme of what jobs do people do? What jobs will get automated? Which jobs will still be paid a lot, even in a world of automation? And, which jobs will still exist which will be paid a small amount? Those are the themes I’ve been thinking about.

I’ve been thinking about the disconnect which we often see between those jobs which are really, really important for human welfare and without which we can’t live, and what people get paid for them. The crisis has I think, accentuated our awareness of that dichotomy between as it were, the human welfare value of some jobs, and what people get paid in a market. I will certainly be thinking about those issues even more as over the summer I develop the final text of that book.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.

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About the Guest

LORD ADAIR TURNER is an INET Senior Fellow and member of the Commission on Global Economic Transformation (CGET). He also chairs the Energy Transitions Commission, a global coalition of major power and industrial companies, investors, environmental NGOs and experts working out achievable pathways to limit global warming to well below 2˚C by 2040 while stimulating economic development and social progress.

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