Too Little, Too Late, Again with Michael Spence


Andrew Michael Spence—Nobel laureate, Professor of Economics at the NYU Stern School of Business, and Co-Chair of INET’s Commission on Global Economic Transformation—talks to Rob about how the U.S. government typically errs on the side of doing too little, too late, in response to major crises like the coronavirus pandemic. Spence and Rob compare and contrast how governments in the U.S., Europe, and Asia have responded to COVID-19.
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Transcript

Rob Johnson:

I’m here today with Mike Spence, the 2011 Nobel Laureate in Economics, a senior fellow at the Hoover Institution in California, and the co-chair along with Joseph Stiglitz of the Commission on Global Economic Transformation at the Institute for New Economic Thinking. Welcome, Mike.

Michael Spence:

Nice to be with you, Rob.

Rob Johnson:

These are difficult times, but it’s always nice to hear your voice and be with you, and how do I say, for years and years I’ve enjoyed exploring with you and today I’m excited to have another opportunity.

Michael Spence:

Same here, Rob.

Rob Johnson:

We’ve got the coronavirus. I know you’re based in Milan, Italy right now. I’m in New York. How are you seeing how the responses are being constructed around the world? What gives you pause, what gives you solace? Where do you think the world needs to rethink what we’re doing?

Michael Spence:

Well, Rob, there’s a lot of dimensions to that. So I mean, first, maybe we should describe this. It looks pretty clear that this started in China, that this is a virus that, A, is highly infectious and, B, has other characteristics that make it quite difficult to contain it early on. I mean, there are people who are asymptomatic and carry the virus around and infect other people. There’s a fairly significant delay, even when you develop symptoms before those appear, and so on. So it was never going to go to be easy. And in fact, I think what we’ve seen is that governments have two characteristics all over the world. One, to varying degrees, but to a very substantial extent everybody was unprepared. And I want to come back to that. And second, everybody was caught flat footed and intervened once this thing had really spread almost invisibly in the population.

I could document some of that if it’s useful. It is a very interesting thing happened here in Italy, which is an early epicenter outside of China for this before major outburst in the United States and various parts of the United States and around the world. But there’s a little town in Veneto over near Venice that has 3000 people and it was an early hotspot and got locked down along with some other places and they’ve been very aggressive. There’s 3000 people in this town, they tested them all. And by their calculation on that population, there were 3% of the people that tested positive and of that 3% 45% were asymptomatic throughout.

So we’re dealing with something that’s somewhat different from SARS, which appeared more quickly. The first SARS around… Certainly with Ebola and other epidemics that have been dealt with. But caught flat footed, we do not have the systems or the medical capacity to deal with this. So we are now using the only weapon we have which is to try to reduce the rate of transmission by what’s called social distancing, just preventing contact between people and proximity where they can transmit it on surfaces as well as through the air.

Rob Johnson:

I would like to take issue with the world right now for calling it social distancing.

Michael Spence:

Yeah, me too.

Rob Johnson:

I like staying in touch with you and my friends and my family and they’re all over the place. I’m not social distancing I’m physical distancing.

Michael Spence:

You’re right. That is a good point. Well, we should change the term for sure. So my take on that is that it’s necessary. The second observation, which I’d be happy to try to defend if it’s useful, is that you can only do this for so long before the economic and social costs become so high that you have to stop, even if you have to stop by taking risks with health. And then we have to make a transition. And I think so far, there’s a fairly high degree of clarity on what a good transition and exit would look like, but it’s not clear to me that there’s sufficient investment and focus on the various elements of that.

But just backtracking, I mean, one of the things that’s pretty clear is that the warnings from people who had been involved in previous epidemics about the need to get ready, to make sure you’ve accurately estimated what facilities you need, what training you need, et cetera, what materials and equipment you need and all that were there, these assessments even within the American government, but they didn’t result in a response, a policy. So I like to think of it in terms of type one and type two errors. Do you wait until the problem is so clear and then start to deal with it or do the opposite? Do you run the risk of sort of overreacting?

And seems to me that with the possible exception of hurricanes in the United States, the overwhelming bias is in the direction of under-reacting and this strikes me as a good example. Bill Gates did a TED talk right after they… He and his foundation and many others were involved with the Ebola crisis, basically saying this isn’t the last time this is going to happen. And we need to make a whole set of investments through medical epidemiology, tracking and all that stuff. And we’d be in much better shape if we’d follow that advice.

Rob Johnson:

Yeah, I think Gates was quite prescient in that regard. Well, let me ask you a question. I think we’re in a climate of tremendous anxiety, and it’s justified. But what I see lots of people doing is resorting to blaming whatever demon was on the tip of their tongue before this started. In other words, they use whatever evidence to fight the fight they had meant to have irrespective. But I hear lots of criticism, particularly in the United States that health care is a public good and we had turned it into a commodity. And somebody said to me the other night, people who are vulnerable, like in dense urban areas like New York, now are being extorted to pay for masks, as opposed to having what you might call the competitive price. People are able to take advantage of the elasticity of demand.

But more generally, in a period where we’ve seen in the United States, a tremendous concentration of wealth in a narrow segment of the population and a lot of permission of doing things like keeping money offshore rather than paying taxes. They’re talking about one of the wealthiest nations in the world, and we can’t afford a health care system. I mean, when you’re looking at the Democratic primaries, we can’t afford things, even though we’re paying more money for health care than almost all of the OECD countries on a per capita basis, and have a system that the World Health Organization ranks as 38th in the world. So the question at some level is, are we under providing public goods? Are we under providing for systems and do we have to change our philosophy, the nature of taxation, so that these things are taken care of, and not left to the free market? Is that a lesson that you would draw from this experience? Or is that people just fighting those old fights?

Michael Spence:

No, I think that’s a fair characterization. I mean, it is a public good. You wouldn’t expect based on just ordinary economic principles to have an optimal supply coming from private sector incentives. That’s not a moral problem. That’s just the way the world works. So there’s no question that preparedness is a public good in this respect. And part of preparedness is just having adequate peak load capacity in the healthcare system. The problem, I think, or a headwind to this is that in lots of places, including say Italy, where the amount of fiscal space in ordinary time appears to be limited for a variety of historical reasons. Using that space to build peak load capacity, which you might not need is a difficult argument to make.

Rob Johnson:

Yeah, yeah.

Michael Spence:

We need some kind of oomph behind that argument to get the cost benefit analysis right and tip the balance away from, “Geez, this might turn out to be a waste of resources,” to the cost of not doing it if the probabilities go against us, where we get slammed, are so high that we really… This is probably a pretty good investment. And so, I think there’s work to do. In the Italian case, in the north of the country, at least the healthcare system in normal times works reasonably well, is accessible to everybody including visitors, and so on. But what it wasn’t, was built up to the point where the capacity to have a surge of the magnitude of critical cases that we have experienced… There’s trade offs here. So you want to, on the one hand have some kind of surge capacity, maybe it comes from the military, maybe it comes from really good sharing relationships among what would be states in America, and some of that’s going on, because of leadership and goodwill.

But some of it comes from the flip side of the coin, which is if you’re more alert than we’ve been in this instance in getting control of the virus, then you can control the magnitude of the peak load requirement as well.

Rob Johnson:

So let me think about this in terms of a kind of multistage economic process. If we had repaired or fortified our health systems, this might not have propagated so deeply or in the duration. Might not be so long. But before I changed our course a little bit, you had talked about the long term ramifications can be pretty severe. And we might, as you say, go back to supporting the economy because the cumulate… In other words, flows turn into stocks. And if you keep negative flows for too long, the stocks deteriorate and the balance sheets are massively impaired. We start with needing to stop the pandemic, then we will probably be in a very tentative climate of angst about returning to work or communal activity or going to restaurants or what have you. Where do we go with, I’ll call fiscal stimulus or government policy, where do we go in that second phase as we’re trying to reignite biz commerce as usual? Life as usual? What actions can be taken by public officials to facilitate that?

Michael Spence:

Yeah. So I mean, I think there’s really… In the way I think about it, Rob, there’s really three things. The first item on the list is investing in the healthcare system. And I’ll put these in the same bucket, and in the capacity to move into a much more targeted testing, tracking, et cetera, with or without the use of digital technology. I know there’ll be sensitivities in America and other Western countries in this respect, but I think we’ve simply ignored those things too long. There’s lots of cases that can be studied in Asia. So that’s sort of an aside, but with or without those tools, if we want to leave those tools in the toolbox and just do it the old fashioned way, fine. But we’ve got to invest in those things and we don’t have a huge amount of time to do it. If you accept the proposition which I do, that you can’t stay in lockdown forever, or even for a long period of time without doing an unacceptable amount of economic and social damage.

Michael Spence:

So that’s item one, I think it should take precedence. In the second one, in-part for a moral reason, it should take to resonance because if we don’t do that, then there’s a whole bunch of people out there who are demonstrably at risk, who are looking after the critically ill and not properly armed with facilities, equipment, et cetera. And that’s just wrong. In here in Italy, by last report, 100 doctors have lost their lives. Listen, I’m sure the number when you add nurses and other people that drive ambulances and stuff, it’s a much bigger number. The second thing is, we need to make sure that we don’t have desperate people who aren’t able to make it through this necessary period of… So we need support. We need unemployment insurance, we may have places where we want to put the money into companies in return for which they don’t eliminate the jobs.

We need people out there in various categories who need food. We need support for recovering monthly bills like rent and all that sort of stuff. And I’ve often said the easy part is passing a two or three or whatever it is trillion dollar stimulus because we have the fiscal space to do it. And the central banks are going to make sure that we have this fiscal space to do it. The hard part is making sure it gets to the right place fast. So we don’t have that kind of damage. And part of that relates to the speed of recovery, if we lose a whole lot of businesses as we did in the Great Depression, along with banks, nobody knows how fast they come back, but it’s certainly not like flicking a switch overnight. So we don’t want that to happen or on the supply side and the employment side it will adversely affect the recovery.

And the final thing is, if we do well, the transition to a targeted containment kind of program, using the best examples and characteristics of the ones that we can find around the world, then I think we can lower the risks not immediately but faster. And that will help restore the demand side of parts of the economy that will otherwise be held back by risk aversion.

Rob Johnson:

Yeah, that’s interesting. And Mike, I know Peter Bowfinger, one of our members of the Global Commission based in Germany, just made a presentation to the CEPR Center for Economic Policy Research in Europe. And he’s tracing through what you might call sequence or phases in balance sheet, what you might call deterioration propagation. And you were talking about taking care of people, taking care of wages, that takes care of rent, or at least a portion of it. Rent takes care of mortgages, mortgages are a big piece of banks. You can watch this almost like a game of dominoes. And the longer it goes, the deeper it penetrates into many sectors in the economy.

But do we have…. I’m really now talking about the echoes of 2008. Do we have enough faith in independent central banks to make these decisions? Or do we need something like what the Americans did in the Great Depression called the reconstruction finance corporation, where something is relatively transparent, but decides on the allocation and the sequence of the dispersals and the nature of how it is financed, particularly in relation to the central bank? I sense they’re putting an awful lot of weight on central banks to make an awful lot of the decisions at this juncture.

Michael Spence:

Yeah, that may be right. I’m uncertain about that, Rob. My view of this runs along the same lines that has been well articulated by Olivier Blanchard, which is that the role of the central bank in this context is at least somewhat different than it was in 2008, 2009, where there was a massive amount of balance sheet damage in the household sector that may get reproduced in parts of the household sector here but also in the financial system. And they were basically trying to, in addition to making sure you didn’t have liquidity problems and kind of lockups, they were trying to help the process of restoring demand. It was complemented by a fiscal thing. I think, in this instance, the primary benefit of having the central bank reverse course in the case of the Fed, and ease on monetary policy, whatever its long run consequences is, is just to make sure that we create a lot of fiscal space without forcing choices we don’t want to make on the fiscal side in the government. And I think they’re going to stick with it for a long time.

So those who thought we were sort of normalizing the interest rate environment, I think will probably want to rethink that given the amount of debt. And it isn’t just the United States, I mean, we’re going to issue a ton of debt here in Italy. And we started from a pretty high level, and then the denominator will shrink, and it’ll look terrifying for a while, and so on. But anyway, I mean, I think that’s a slightly different role. Maybe we’re going over rely on the central banks, but I think… But what I haven’t, I don’t think thought through carefully is what is the mechanism by which you want to… So governments will use the fiscal space, even ones that look pretty stretched before. And then the question is, what is the mechanism to ensure for accountability in the deployment of those resources in the best possible way in pursuit of recovery, protecting people, the public interest? And probably the existing array of institutions is not so far proved to be up to it, but I’m not sure. I can’t architect on the spot what I would like to see in its place.

Rob Johnson:

Yeah. Well, I remember the late Paul Volcker, who was a good friend of mine, and we used to talk about these issues for years and years and years. He helped me get my first job at the Federal Reserve and my second job working for Pete Domenici. But Paul had very strong views related to the risk of central bank independence. And he essentially said if you leave it to their discretion, say in 2008, and they buy mortgages to take losses off of the balance sheet of banks, but they don’t directly buy bonds in municipalities where they’re laying off police and closing schools and closing hospitals, it puts them as in the phrase “picking winners”.

Michael Spence:

Yeah.

Rob Johnson:

And he was very concerned that we manage to preserve central bank independence for macro stabilization particularly around electoral cycles. But when it came to the lender of last resort activity, or being the fiscal agent, in essence, and it is in his mind, and I’ve read a lot about this, the origin of central bank was about organizing war finance.

Michael Spence:

Yeah.

Rob Johnson:

Later it got to be about lender of last resort, particularly with regard to agricultural cycles between harvest and planting and so forth. And then finally, it got to macro stabilization. But he said, the macro stabilization independence can only be preserved if you have transparency, and modest responsibility for any of those other factors. Those really are the responsibility in his mind of the Treasury. And I remember when the group of 30 put out a report that talked about allowing… saying, essentially, Congress would never pass another TARP because it was so unpopular. So we got to ship everything onto the central bank’s balance sheet. Paul was apoplectic, he said, “You do that and you will lose every aspect of central bank independence within years.”

And so I think I have talked about this a little bit with Mark Carney at the Bank of England and others. I think there is a question of… which you might call confidence in governance and the importance of acknowledging expertise, but also ensuring that what you might call the integrity of the decisions reinforce the validity of that expertise.

Michael Spence:

Yeah. I think that’s right.

Rob Johnson:

And then traumatic times, that can be dangerous. People can be mad for the wrong reasons. And so that’s why I post the question and talk about it at some length because I think that that question of how the money is allocated is in play. I think a lot of people who are looking at the current bill in the United States are really complaining about the echoes of 2008 more than about what’s happening right now, though, I don’t pretend to know exactly what’s happening right now. And it may turn out to be a bad dream in terms of government credibility. But as Jean Ludwig, the former Comptroller of the Currency, and I’ve been discussing, this is more like eminent domain than it is like a financial bailout. In eminent domain. Let’s say your country’s going to war. They come to a farmer and say we need your land to build an airstrip and we will compensate you.

Michael Spence:

Yes.

Rob Johnson:

Well, the workers didn’t screw up here. The workers are a transmission line for the infection and telling the workers, “We will pay you to stay home so you defend the public good,” is more akin to the analogy that Jean Ludwig brings of eminent domain that it is to a financial bailout.

Michael Spence:

Yeah, and I think that’s absolutely right. I think in some ways this is simpler than what we faced in 2008, nine, maybe I’m agreeing with you. But it seems in this case, the primary actor has to be government. The central bank’s role is primarily to make sure that the financial system continues to function and the government can finance a fairly large increment in sovereign debt. lo’s up to the government or in our case, because we many of them, the government’s aid to work together and, B, to deploy these resources in exactly the way you described, which is a combination of protecting people, protecting unnecessary economic damage and being fair. And the details matter, but I think that’s what we need, that central bank shouldn’t get into that business as far as I can see.

Rob Johnson:

Oh, yeah. Well, I think in a period where to follow the work of Case and Deaton about diseases of despair, and where the geography of disruptions, technological globalization, little bit from climate financialization, when you look at the geography of where despair is, it’s similar to the geography of where economic disruption has been and it’s similar to the voting patterns for the AfD, Marine Le Pen, Brexit, to Leave, Donald Trump. So we’re in a very fragile climate, and repairing the faith and integrity of expertise, repairing the faith and integrity in the eyes of the public about governance, when things like a pandemic which are what you might call a collective responsibility, we just can’t go with the recipe and playbook of rugged individualism.

Michael Spence:

Oh, no. Absolutely.

Rob Johnson:

And I really think we’re unmasking something here about how the collective is intermixed in the society with the individual. You and I might have always understood that. But the way in which things were sold was more and more on the kind of harsh the Horatio Alger myth, in my opinion, which is put your head down, work hard and you can control your own fate. Put your head down, work hard, you can’t control your own fate, you’re part of a system. And it’s that systemic integrity now that I think is being challenged by this horrible disease. But our response has to come from a different place. It’s more like war preparation than it is like, lay in bed and let the market do its work, though markets is a valuable tool.

Michael Spence:

Yeah, I mean, it’s like war except we’re all on the same side, except for the virus.

Rob Johnson:

That’s right. That’s right.

Michael Spence:

And I hope we act that way. But yeah, I think this is going to turn out to be kind of a test in the dimensions you’re talking about, which is, either by the actions that are taken as we go through the virus and then exit and then deal with these distributional issues. It will either send a strong message that we’re in this all together at least in crisis periods, or everybody’s on their own. And we come out somewhere in the middle, but I think that is going to… that more to me, more than the immediate sort of tangible economic consequences is going to determine how we come out of this as societies domestically and internationally.

There are bright spots. I mean, as far as I can tell, the scientific and medical community has decided that they’re not in the business of blaming each other. They’re in the business of figuring out vaccines and cooperating and sharing data kind of globally. And that’s really encouraging. It doesn’t solve all the problems, but it’s a very good start. Yeah. No, I think that’s exactly right. What’s the issue here is I mean, we can have differences in how socialist we are and all that, but there comes a time when in push comes to shove. You either act… And everybody has to be on board in this. We act like we’re all in it together and we have to protect everybody, or not.

Rob Johnson:

Yep. And together is not just within one nation.

Michael Spence:

No.

Rob Johnson:

Together in the case of this virus and in the case of our globalized commerce and globalized financial system is the world. You’ve done a tremendous amount of work with regard to technology and with regard to China and I’m very curious how you see the notion of global supply chains, and just in time delivery and other things being affected by what we’re seeing right now.

Michael Spence:

Yeah, I think what you hear out there is the proposition that well, this time everybody’s going to learn the lesson. And the supply chains are under private sector, incentives are wound too tight and insufficiently diversified and everybody’s learned the lesson and we’ll go a different direction maybe. We’ve had big shocks to supply chains, not this big, but the tsunami in Japan brought parts of the automobile industry to its knees because… A few very key parts, but not an enormous amount of the value added came from that. And so I think I’m a little bit more agnostic about that. On the other hand, I think that the general prediction that we will continue to see diversification in supply chains is probably right. In part because we were on that trajectory anyway. We were on that trajectory because of the evolution of China, it was accelerated to some extent, we know from talking to people in the management of supply chain world as a result of trade tensions.

And now we have another accelerator that will move us in that direction. There are some qualifications, Rob, I don’t want to detain us on them. But at this point, we simply don’t know what the effect of the virus is going to be on a very wide range of countries that fall below the kind of middle income and above category. But a very large number of people, probably including the two of us, and I know Joe, and many, many others are worried that that’s a part of the world where the virus could strike if they don’t contain it right at the start, where the medical facilities aren’t even within shooting distance of being able to handle it. The fiscal space is much smaller than it is in the China’s in India’s in the western developed countries and so on.

So there is a question mark over what condition they’re going to be in when we get through this particular crisis. I hope it’s in reasonably decent condition and that the international community will focus resources and effort on helping make that happen, but it’s not settled yet.

Rob Johnson:

And I think, as I mentioned, you and I have both done a great deal of work in China. And we were, how would I say, amidst a… we it call it break down or rising turbulence in US-China relations. You had mentioned earlier that this disease, this pandemic emanated from China, though, they now seem to be at least beyond the first wave. I think the first wave has peaked. But in the scheme of things, talking about public goods, talking about global public goods, and seeing how things that are so powerful can… How do I say, can transmit from one shore to another, seeing the prospect of climate change, reading Daniel Ellsberg about the risk of nuclear war, can we afford for China and the United States not to patch up their differences and cooperate and become partners?

Michael Spence:

Well, we’ll pay a very high price if we if that doesn’t happen, for sure. It’s hard to imagine the climate change thing coming out properly without a change in direction on the American side on that and real cooperation in areas. All these health issues, including, but not limited to pandemics or epidemics is another area. Looking after the development interests of the wide range of countries that aren’t going to be able to do it very well on their own with digital technology and other things. And a host of things that will go a whole lot better if the major players cooperate with each other. And right now we’re living in a world that’s dominated by nationalism, where Europe is sort of inward focused, although not rejecting, at least in principle, some important global public goods, especially in the climate change area.

But if the United States and China decide to fight and Europe decides to fight internally, that’s not a world that is designed to produce optimal outcomes or to be resilient.

Rob Johnson:

Yeah. Well, I think the… How would I say the… Clash of two systems and the distrust. I know Orville Schell, who’s may still run the US-China program for the Asia Society. He once wrote a book called Wealth and Power. And it was about US and China and what he foresaw was that China, which had been the Middle Kingdom, which had struggled with the indignity of the Opium Wars and British dominance and then with the Japanese invasion in the 1930s had a heightened sense of nationalism and desire to restore its identity. And in the United States, the longer term echoes where we have taken over from the British Empire and the US was the world leader. The Chinese and the Americans systems of organization are not entirely synchronized, they have different vision of the role of government in particular.

So we run into this tension where China wants to be bigger America’s afraid of it, not being big or at least not getting bigger by emulating the American model. And I think that’s kind of where we were with the entrance to the WTO. But even people like Wang Shi Shan saying, “We may have entered, but it didn’t mean we were going to just rescind our entire vision of what a proper balanced society and role for government is.” And so all of those things I think are still straws in the wind. But this crisis is beckoning us to resolve those differences. Or we, as you said, will pay a very heavy price.

Michael Spence:

Yeah, I think that’s right. I mean, another scenario, which I think is part of the heavy price is that we all go our own way, even more dramatically than what we experienced before this crisis hit. Limited travel because it’s sort of dangerous. Executive spying on corporate jets because the board says it’s not safe to fly commercially for referencing this particular bit of history, et cetera. And then there are social consequences. I mean, if you live apart from people, it’s very easy to think of them in sort of caricature terms. It’s very different than having close friends in various places around the world. So that’s not a world that I wish for my children and grandchildren, but it is one that’s possible as we come out of this.

And people make short sighted decisions about how to respond to this or the threat of this kind of thing in the future. And that less attractive scenario has to me, very high costs and subjective costs. Yeah.

Rob Johnson:

I guess you and I share being wise old men with young children. And so that’s, how I say, that vision of the future 2030 years from now that we’re handing off to them is very important.

Michael Spence:

Yeah.

Rob Johnson:

And I think the power and the potential of things becoming very, very positive does exists, can be envisioned, but the will to get there not just the vision is… how would I say, must be brought to the surface and overcome some of these suspicions and resentments that have taken hold. And I think in the United States, Wang Shi Shan told me at a meeting I know you couldn’t be at because you had a back problem. And he said to me, “There was a certain sense in which China was powerless, that when a large nation engaged in global integration it was up to the American officials to create the adjustment assistance and the transfers to help their society evolve and get the what people who talk about free trade, make everybody better off and no one worse off is the promise. And the failure to do that created a great deal of resentment, and it’s very awkward to see it directed towards China.” Meaning the failures of American governance are something China had no control over.

Michael Spence:

Yeah, I think when the historians write about this, they will say, “An American led global order in the post war period did an enormous amount of good because it unlocked a set of opportunities not only for war recovery, but for whole enormous collection of people in what were developing countries and initially very poor developing countries.” And I don’t think we should ever forget that that’s something that collectively, we can be, A, happy about and even a bit proud about. But we didn’t handle very well, the internal distributional consequences of that. And we probably should have had a more muted and less full throated endorsement of a completely free and open version of globalization, especially as the decades rolled by. And now we’re in this sort of spot where we’ve kind of dug ourselves into a hole, both domestically and now internationally because those things can’t be disconnected. That can’t be disconnected from each other.

Rob Johnson:

Damn. We haven’t talked about another very large Asian country, which is India. And my understanding from Guarav Dalmia, who’s from INET’s board who I know you know and others that I’ve been in conversation with is they have become very strict about internal mobility, but not engaged in the way of fiscal policy at this juncture or demand stimulus or fortification of their financial sector. So they’ve gone to the… what you might call crux of the issue, the health lockdowns. But the other policies have not been… how you say, is large in scale and scope as we’re envisioning in Europe or was] recently passed in America. You have thoughts on where India’s portrait is here?

Michael Spence:

Yeah, I think that’s, I mean, not surprisingly, an accurate characterization. They basically have some version of a lockdown. We don’t have much data from India. So we don’t know how late in the game or early in the game they may be. So It’ll take a while to know that even for them. Or they may have better data than outsiders have. But it’s an instructive case. I don’t know, India probably has some fiscal space, but it’s still a kind of middle, middle income country with a pretty high batch of government deficit. So they’re probably a little concerned about that. It’s also one of the more highly densely populated countries in the world. So physical distancing is easier said than done.

But in the absence of a kind of massive program to support people who are out of work, I mean, the stories that dribble out as they do in everywhere, here in Italy, in America, about people who are kind of caught in the crossfire of this are, they’re just people were getting hurt and there doesn’t seem to be any place to turn. But the most dramatic thing I’ve seen is that is people who are living in big cities like Mumbai, who are out of work because of the physical distancing program, a kind of lockdown, are basically piling onto trains or walking back to their villages in order to stay alive. And I don’t think walking back to your village or getting on a crowded train sounds a lot like physical distancing, but in India it is a real challenge in dealing with this if it gets out of control.

Rob Johnson:

Yeah. Yeah, it has a lot to… How to say. It’s in a stage of development where the needs for lots of basic things from fiscal capacity really couldn’t at some level accommodate a large fiscal reaction to those pandemic.

Michael Spence:

I mean since it’s been a priority for the Indian government for some time, but I don’t think the healthcare system has been built up to the point that it could withstand a tsunami of cases. I mean, that’s true in a lot of places like New York and here in Italy and other places. So if we can overwhelm our systems here, I think there’s an even greater chance that they’d be more overwhelmed in India.

Rob Johnson:

Yeah, yeah. Well, along those lines, you and I worked together at the World Economic Forum in Davos in January. And there seem to be a bit of a turning point in terms of recognition of the importance of climate at that time. I don’t think that people, how would I say, necessarily came up with a process for addressing climate, but almost all of the top level meetings and plenaries, and so forth, or just being at dinners and talking to people, you’ve got this sense that people now we’re moving climate to the front. And imagine very substantial transformation that would involve fiscal capacity. How does the wound to our fiscal capacity that we just experienced, related to the pandemic, how is that going to interact with the fiscal capacity we need to address climate over the next 10 years?

Michael Spence:

I mean, this may sound radical, but I think the difference between this pandemic which is kind of in our face, and the climate change sort of sustainability issue is that the second one still seems remote, it doesn’t create a sense of crisis. And so I imagine that if something happened that convinced the vast majority of us, as opposed to however many we are now in percentage terms, that there was some fairly immediate challenge to our survival, livelihood, way of life, et cetera. That absence of what would be thought of as fiscal space wouldn’t stop us, even if we’ve used up some of what we think of as fiscal space on this. Or put it another way, the binding constraint. It still seems to me in dealing with climate change is still mainly what you might call political will, or commitment, broad based commitment, including through government and all the other sectors of society to making a fairly dramatic and fairly quick change in course.

Michael Spence:

Now, I may be wrong. I mean, maybe that we’ve maxed ourselves out and we’re kind of sitting there defenseless. whatever the next thing that comes down the pike, either climate change or another pandemic, my best guess is that’s not the issue. I worry more in this pandemic situation, that we’ll get through it and people’s preferred psychological approach would be to forget it as fast as possible because it’s an understandable urge. But I think a better response would be, “Yeah, forget the really bad stuff as fast as possible, but make sure that we sort of invest in better preparation for the next one, even though we don’t know what his precise characteristics are going to be.”

Rob Johnson:

Yeah, yeah. Well, I think you cited a very important point, which was the acute right on top of danger of the pandemic is very different than getting up day to day and things not changing even by micro dots. But knowing that 10, 12 years out, there will be a crisis. And I think the challenge of climate change is very much… The gestation period for turning the supertanker of carbon burning is probably very long. The depth and the breadth of the transformation we need is quite extreme. And it’s not going to happen in three months, or six months or after panic migration takes place because of fire. I think the preparation time is longer, and we have to kick it into gear before the acute crisis terrifies us like this pandemic has. I think your insight is very good. But it’s a daunting challenge to embrace the imperatives of climate.

Michael Spence:

Yeah, it is. I always go back to hurricanes Rob, I mean, hurricanes, first of all, they happen all the time. So we kind of gotten used to the fact that they’re an uncertain threat. And so we kind of take them seriously and people buy plywood and board things up and there’re mandatory, more or less mandatory evacuations and stuff like that. And so we don’t wait till they hit the see if maybe we have to do something about it. We don’t bet on winning the lottery. But in other areas, I think we still… When the lottery is more complicated, more distant, more theoretical, more other things we either bet winning the lottery or say we’ll deal with that when we get there. And that’s unfortunately in the climate change too late.

Rob Johnson:

Yep. Well, I think we’ve covered a lot of basis here today. And, Mike, I must say, I’m doing a lot of podcasts right now, but I love your depth of commitment, your imagination, your lack of anger or bitterness, and just your willingness to move things in a constructive direction. I think you set an excellent example for economists, someone who can step outside the paradigm, someone who can lead and someone who can envision change. It’s just my young scholars should pay very, very strong attention to the life that you’ve lived. And I want to thank you for being here today.

Michael Spence:

Oh, thank you, Rob. You’re too kind.

Rob Johnson:

And thank you for your insights. And I’m sure we’ll be back together again talking about these things in a future recording.

Michael Spence:

I’ll look forward to it. Meanwhile, it’s all hands on deck, Rob.

Rob Johnson:

That’s right. That’s right. All hands on deck. You’re talking to a sailor so you got a grin out of me there.

Michael Spence:

All right.

Rob Johnson:

Thank you.

Michael Spence:

Thank carry yourself.

Rob Johnson:

You too.

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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

ANDREW MICHAEL SPENCE is Co-Chair of INET’s Commission on Global Economic Transformation (CGET) and Professor of Economics at the Stern School at NYU. He served as the Chairman of an Independent Commission on Growth in Developing Countries (2006-2010) He is Professor Emeritus of Management and former Dean (1990-1999) in the Graduate School of Business at Stanford University, Senior Fellow of the Hoover Institution at Stanford In 2001, Spence received the Nobel Prize in Economic Sciences.

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