Peter Bofinger: Europe’s Economic Crisis and What Needs to Be Done

Peter Bofinger, an economist and former member of Germany’s Council of Economic Experts, talks to Rob about the economic crisis now facing Europe, how Modern Monetary Theory could address it, and how it differs from the Great Recession of 2008.

Mentioned in the interview:


Rob Johnson:

I’m here today with Dr. Peter Bofinger of Würzburg University. He has been for most of the last 15 years on the council of economic experts they used to call the Five Wise Men, though it’s now it’s inhabited by many women as well. He is also a commissioner on the Institute for New Economic Thinking, Commission on Global Economic Transformation.

Peter, thanks for joining me today.

Peter Bofinger:

Thank you for giving me the opportunity to have this podcast with you.

Rob Johnson:

Well, there’s an awful lot going on. There’s an awful lot of very, very stressful things that at one level are daunting, but at another level are an opportunity to reopen the question about how we organize society, and the role of markets in economy, and how you say making for a prosperous future.

We’ve with the coronavirus 19 panic, and the responses that you see, I guess I’m just curious. Wide open, what are your observations? What do you see being done wrong in some places? What do you see being done right? What’s missing? What would you like to see?

Peter Bofinger:

Well, first of all I think it’s important to make an assessment of what’s going on, and just today the IMF came out with its world economic outlook, and its forecasts, and assessment of the global economy. I would say the analysis of the IMF is very negative. I think what they present is a kind of economic tsunami, which is hitting the global economy. According to the IMF this is the worst recession since the Second World War, and the forecasts of the IMF are for the most important countries are really terrible, so almost minus 6% for the US, minus 7.5% for the euro area. World output shrinks by 3%. World trade goes down by 11%, and at the same time unemployment rates will be going up in a very severe way. The US unemployment will increase from 7.7 to 10.4% in Spain, from 14% to more than 20%, so it’s a really frightening picture that the IMF has now presented.

Well, how to deal with it I think right now global leaders and politicians are also overwhelmed by the dynamics of this pandemic. I think four weeks ago, eight weeks ago, the hope was it won’t be that bad, and now we see it’s really, really bad, and maybe it’s getting even worse. Already now the IMF is expecting that most countries will have huge fiscal deficits for the US. They are expecting a deficit of 15%, in 2020 for the euro area minus 7%, so this tsunami is also really making it. It has a terrible effect on public finances.

How far can one assess what has been done by the governments all over the world? I would say they’ve really been relatively fast. They’ve been building to extend relatively large support to the real sectors of the economy. I think overall the governments have been giving guarantees to small and medium sized companies that they can somehow get loans from the banking system. In a lot of countries the governments have support companies to reduce their wage bill by what we call in Germany short-time work. There is also in many countries companies are no longer have to have make payments for taxes, so there’s a kind of tax deferrals.

Overall I think the first reaction was relatively strong, relatively forceful, and I think it now remains to be seen how to deal with the further consequence. I think so far there has been some kind of first-aid support I would say to keep the economies from collapsing, but now as we see the crisis will be relatively prolonged, we are coming a kind of second stage where we have to find I think more intensive support, and in principle you can compare the situation of the economic system in this shutdown period to a kind of artificial coma for the economic system. During this artificial coma it’s the role of the governments to support economic system in a way that once the shutdown is over, once the economic system is getting out of this artificial coma that the damages are as small as possible.

As I said, the first support mechanism is liquidity support, and I think that has been provided in an ample way, but if the shutdown goes on, and I think that’s what it looks like, in addition to the liquidity support what is really needed is now also some kind of solvency support.

To explain this a little bit I think the problem of the crisis the longer it lasts is that debt is built up in the economic system. You have your firms in the service sector, in the production sector. Their revenues are going down, but they still have to make fixed payments not only for wages. There’s a possibility to reduce wage payments somehow, but they have to make payments for leases, for rents, for leasing, for interest, for principle, so they have still these fixed payments, and as long as you have to… On the one hand you have declining revenues, and fixed payments. Of course your debt burden goes up.

The problem, and the challenge for the governments now, somehow to relieve the production, and service sector from this debt burden because otherwise if this debt burden remains in the private sector of course it will then translate from the production service sector to the real estate sector, to the banking system. Then we will get a full-blown banking crisis, which threatens the whole financial system.

The challenge for the government is now somehow to relieve the production service sector from this debt burden. This will leave, we can also call it balance sheet repair, cannot be done with guarantees, cannot be done with liquidity support. This relief requires solvency support. I think this is still missing. Even in Germany where we have this bazooka, so our Finance Minister and Economics Minister, they are very proud of having this bazooka, which is a very ample, and generous liquidity support, but it does not help to repair the balance sheets, and so in the second stage the question is now how do we provide the solvency support, how far governments are willing, and able to provide this solvency support, but it’s obvious. If this solvency support is not provided the debt burden is piling up in the production service sector. It will then go to the banking system. Then it will destroy the banks. In the end the government has to come up anyhow for this debt burden.

Therefore, in my view it’s better to act timely to help the production service sector with this kind of solvency support instead of waiting, but this is now, as I said, a kind of second stage of the support, which is still not very far developed. I think many governments, I think in Germany, they still hope they don’t have to do it because liquidity support is not so much a burden for the government. Whole solvency support requires direct transfers, negative taxes, which of course has a direct effect on the deficit of the governments.

Rob Johnson:

You’re seeing what you might call a chain. I’ve looked at your recent coronavirus PowerPoint presentation for CEPR, A Coronavirus Crisis: Now Is The Hour Of Modern Monetary Theory. I’ll try to attach a copy of that to our website, but I watch the flow, what you might call the sequence of balance sheet trauma that emanates I guess, what? Is the starting point where workers are asked to stay home, and therefore if they get laid off, or their wages, the businesses close down, accompanying they’re going home. Then it starts to propagate through to things like mortgage payments, or just the losses, and earnings in corporations. That moves to the financial sectors. Where should they intervene? How soon should they intervene?

Peter Bofinger:

They should intervene as early in the chain as possible. I think one instrument that very helpful, and that you see in Germany, but I think also in Austria, and some other countries, is short-time work, which means that the firms can reduce the time for which they pay workers, and the loss of income to the worker due to the reduced working time is compensated in Germany by 60% by the government. This is really helpful because if companies have to pay less wages, so their fixed payments are reduced. At the same time the loss of income, which normally would come because of the reduced working time is compensated by the government, so you maintain somehow the purchasing power of the workers. At the same time there is a relief for the firms from their fixed wage payments. I think that’s a very useful instrument, and in Germany it has also been applied with a lot of success during the financial crisis in 2009.

In Germany we had the remarkable situation that in 2009 although our output declined by 5% you could hardly see an increase in unemployment because all the bugger that is needed was provided by the short-time work procedures, and that’s a very useful instrument, but of course it’s costly because the government has to come up for the reduced working time, and has to provide 60% compensation to the workers for their loss of income due to their reduced working time.

Rob Johnson:

Do you, how do I say? Do you think that people are politically sensitive now in the sense that in 2008, ‘09, and ‘10 in many places, particularly the United States, there was a lot of acrimony associated with the distribution of where the payments went. The famous quote by Joseph Stiglitz, the polluters got paid, and everyone else suffered.

In this instance I don’t see it as quite like a financial crisis, but is there a lot of controversy in Germany at this point, or in Europe about how you say the points of intervention, and the distributional consequences?

Peter Bofinger:

Well, so far I think there is broad consensus that at least the short-time work is the right thing to do. I think the more critical discussion will come up if one discusses how much support you will give to the medium size, smaller companies, how much transfers they get from the government. Of course, the question will be is it the right thing to give so much money to companies just to keep them alive. But, I think one also has to be careful that not to compare the present situation 100% with the financial crisis.

I think in the financial crisis banks have huge problems because they made lots of mistakes, and of course then the idea is that they should have felt the pain, and I also with all due respect to Joe Stiglitz, I would say the narrative that the banks did not suffer in this great financial crisis is also not really correct because the stock prices of banks declined tremendously. The bank owners, they made huge losses. Now if you compare the share prices of German banks to the share prices in 2007 there were huge losses.

Anyhow, but today if companies get support, or need support from the government it’s not because they have made wrong decisions because their business models were not successful. They make losses because the government has decided to close down businesses in order to safeguard public health, so it’s a public purpose for which this shutdown is implemented. As a consequence one should say, “Well, if companies suffer for the public good of preventing the spreading of a disease they would deserve a compensation from society.” But, I think it’s this view is not widely shared in Germany, and I’m also not sure whether there will be enough support for companies in order to survive during this crisis.

Rob Johnson:

When you made your PowerPoint presentation you talked a great deal about the notion of modern monetary theory. If it all flows back to the central bank in the end, and how would I put it? They can either monetize, or debt finance things. It’s still the collective responsibility of the entire society. What role does modern monetary theory play in your thinking right now?

Peter Bofinger:

Well, I think we have to realize that this tsunami we create a huge amount of debt whether we like it or not. This amount of debt will be there. The question is where can this amount of debt be stored in a way that it has the least cost for society. You can have the debt burden in the real economy. You can have the debt burden in the banking system, and both is not a good idea. You can have the debt burden in the government sector, and I think the idea of modern monetary theory is that you shift this debt burden in the final instance from the government to the central banks. The idea is that the central banks are the institution who are in the best position to deal with this debt burden, to put this debt burden on the balance sheets. I think that’s the logic of M&P as I see it.

If you look at the financial crisis in 2008, 2009, in effect that’s the way it was handled. In the financial crisis the debt burden was mainly in the banking system, and what the governments did, especially in the United States, they took the debt burden out of the banking system on the balance sheet of the government providing the banks with equity. In exchange the government also got a share in the bank balance sheet. Then what did the government do with the debt burden? It transferred it to the central bank, not directly but in the form of quantitative easing where the central bank was readily buying up all the debt from the government, and putting it in its balance sheets. More or less the same thing you could see in other countries, and in Japan you can observe this for many years until now, that the government is having a relatively high deficit to somehow to sustain the economy, and the central bank is piling up huge amount so government debt.

Right now, the share, the amount of government debt in the Bank of Japan’s balance sheet relevant to GDP is 90%. In the United States it’s 25%. In the ECP it’s also 25%, so Japan is really the paradigm for modern monetary theory where really the central bank is financing the government. It’s not directly financing the government, but more or less directly. The government issues bonds. The banks buy the bonds on the primary market. Then on the secondary market the Bank of Japan buys these bonds.

So, Modern Monetary Theory as I see it in the present situation is simply the idea we have this inevitable increase of the debt burden, and in order to survive economically this debt burden has to be passed to the institution which is most able to deal with it. In my view, this is central bank. Of course, many people now say, “Okay, there’s a risk with this financing of the government by the central bank”, and I’m still surprised that prominent Keynesian economists, like Rogoff, or Summers, or Krugman criticize MMT so heavily. Of course, their main argument is if you have excessive debt financing by the government then it leads to inflation. But, I think it all depends on excessive. Of course, if you do things in excessive there are always damagings.

If you think about drinking habits, I think excessive drinking is always a bad thing, and you don’t need very much scientific evidence for this, and the same way with MMT. If you have excessive debt financing of course it has negative effects. But, right now it’s not about excessive. It’s about the amount of debt financing by central bank. That is required somehow to stabilize our economies to get the debt burden out of the private sector into the central bank balance sheet. As this debt financing is just filling a gap in the private sector, repairing simply balance sheets in the private sector, this is not inflationary. It’s just on the opposite. It’s preventing an inflation. It’s preventing deflation. It’s preventing an implosion of the whole economic system that would occur without this government support. It’s definitely will not inflationary as MMT critics tend to argue.

Of course, when you are in an equilibrium situation where the economy is doing well, where you have full capacity utilization, and if in this situation the government says, “Okay, I want to spend 10 or 20% more, and I finance it with the central bank” of course this will lead to inflation. Like in medicine it depends on the diagnosis, and it also depends on the dose. As we know from our sciences it’s the dose that makes the poison, and well and timely dosed central bank financing in the present situation is my view the only therapy they’ve got, so we should be very clear of this. If we don’t allow this transfer of debt from the private sector into the central bank balance sheet it will be a real disaster. It’s already a disaster, but we somehow can deal with the disaster if we do it in this way.

Rob Johnson:

Well, I sense first of all the idea after 2008 that there is scarcity. I remember the acrimony in the United States on both sides, both Republican and Democrat, which was they got all the money in the world to bail out the banks, but all of the states and localities had to lay off policemen, close hospitals, increase class size in schools because “in the downturn no one could afford it.” There was a movement on the right in the United States led by Ron Paul about taking away the independence of the central bank because he said at the time, “These guys are picking winners, and the winners are all in the financial sector.”

Now, one can say I think intention with that, that if you let the financial system collapse, it takes the whole real economy down with it. Going to that point if intervention made some sense in 2008, but this whole tension about picking winners, and the use of scarcity in an MMT like world is a very difficult argument to make as to where the constraints lie.

Some of the people I know who are very positive about MMT tell me that where they think the tension, or the instability is, is when one nation engages and another doesn’t, and the implications therefore being for the foreign exchange market, that the currencies appreciate where they maintain the scarcity notion, and where they use extraordinary measures, but the currency depreciates, and we end up into a mercantilist battle shifting the burden of deflation. How do you see all of that? Does that a concern?

Peter Bofinger:

I would say the exchange rate argument is also one of the main criticisms against MMT, so the critics say, “Well, if you have MMT you get a depreciation, and you get a currency crisis”, but the current situation I think this doesn’t apply because all economies, big ones, small ones, advanced ones, not so advanced ones, have the problem that they have huge deficits. If they are able to monetize it so they all have the same situation, so there would be no reason that MMT is a threat to the stability of a currency if all major economies act in the same way. I think, yes, the US will do some kind of MMT. They will not call it like this, but it’s obvious. If you have 15% deficit in 2020 that somehow the fed will buy up the treasuries. There will be no doubt about. In Japan they will do the same thing, but they’ll do it in the UK, and in the euros on the same thing will also have to do something with it.

ECB has announced its PEP pandemic purchase program, so all the central banks will do it in a way. They will not call it MMT because many observers dislike this term, and they don’t want to see that clearly, but that’s how it will be going on.

Rob Johnson:

The Green New Deal, and the role of MMT was a big feature of the dialogue over the last few months prior to the onset of the pandemic. In particular, I remember at the World Economic Forum this year there was a lot of discussion about what you might say the need to massively transform the energy industry, and get on with meeting the goals of the IPCC and others about stopping, reducing carbon, and stopping the rise in temperatures. Many people saw MMT as a complement, with an E, to that process. Do you see the question now with the pandemic? Will this accelerate the move toward what I’ll call institutional transformation, and embracing of climate, or do you think people will be exhausted from the fear of the pandemic, the balance sheets all loaded up from carrying the debt that the pandemic related recession has created? I guess the other question is their scope, if that recession is prolonged, to use energy transformation as the equivalent of a new deal to stimulate the economy, transform the nature of jobs, get people back to work, and contribute to the recovery?

Peter Bofinger:

Yeah, it can go both ways. A negative scenario would be that inevitably debt levels will go up, public debt levels will go up, and conservatives will say, “Okay, now we have this huge increase of debt, and now the most important thing is to reduce debt levels.”

I think in Germany this discussion has already started. It’s funny. There’s still our economists who say, “Well, it’s very important that all the additional debt that is incurred now during the crisis has to be paid back.” In Germany we have this famous debt break, which is now a constitution, and this debt break says, “Okay, in a situation like today where there are emergencies outside the control of the government there’s no problem to have large deficits, but all the additional debt incurred due to such a crisis has to be paid back within a reasonable period of time.” In Germany we’re just starting about this payback situation, and of course that would be the real negative outcome that we have this higher debt levels, and for the next 10 years we have to pay back all this debt. There’s no money, even less money is available for ecological transformation, and all that stuff. That would be the negative scenario.

The positive scenario could be that people wake up, and realize all these doctrines about balanced budget, about net zeroes as well call it Germany, of debt breaks realize these are only doctrines, which have no scientific foundation. The same applies to the famous 60% debt threshold in the Maastricht Treaty, which had absolutely no academic background, which has no evidence.

Overall, if one looks at all the fiscal rules that are floating around, there’s almost no evidence for that. You of course know this famous article by Reinhart and Rogoff saying, “Okay, 90% is the maximum debt level that countries can, top can bear,” and then of course it was found out it’s all nonsense. The calculations were flawed, so the positive approach could be that people realize all these doctrines have no sound, academic, scientific basis, and let’s think about fiscal policy in open way, and Abba Lerner, he was the father of MMT, and father for this called functional economics. He said, “Do not forget about these doctrines. Ask about the effects of fiscal policy”, and getting rid of these doctrines would be a wonderful opportunity to ask, “Well, what are the challenges that we have once the shutdown is over? What are the challenges in terms of green transformation, and how can we use fiscal deficits and central bank financing in a way to achieve these targets?”

I think the main message of MMT is there are no financial constraints for large economies. There are real resource constraints of course. You have to have respect the real resource constraints, otherwise you get inflation. But, if you have this ecological transformation you can ask, should not ask what… You should not take this fiscal rules as imperative, but instead you should ask if we finance very comprehensive programs to transform our economies where are the real resource constraints which could lead to inflation? I think that would be a kind of scientific way to approach it, so that’s my hope. The positive thing is that people realize a little bit these fiscal rules are something like the Emperor’s New Clothes. It’s just such as myths, and narratives, but which have no substance, and to get rid of them would be a major, would be one really positive effect of this corona crisis.

Rob Johnson:

Let me ask you about the European Union because in the United States we have a common monetary policy, common banking regulation, and fiscal transfers. In other words, a centralized, and nationwide fiscal system, so if something bad happens in Texas you can, how you say? Draw on the entire body politic to support the local conditions that are dire in one region, say in Texas. In Europe migration is not quite as free as within the United States. The fiscal transfers are not complete. You’re kind of in an intermediate zone as a system. Then this enormous pressure from the pandemic comes down on it. Is there a risk of the European Union breaking up as a result of these challenges?

Peter Bofinger:

Yeah, you’re raising a very important point, so first of all countries like Italy and Spain are very severely hit by the crisis. So far Italy, the projected GDP decline this year is minus 9.1%, for Spain it’s minus 8.0%, so they’re even more affected by the crisis than other economies. Now if we talk about MMT you always have to take into account MMT is a recipe for relatively large, relatively closed economic areas. When you are a very small country MMT doesn’t work, and now in the euro area we have the problem that you raised, that we have a common currency, but we don’t have a federal level, and we do not have federal bonds, which would be there to finance all the member states in an MMT-like way, so we still have the national member states. We’d have the national debt, and they have to try to raise funds on the capital markets in their own responsibility.

The conditions for a well-functioning MMT financing are not existent in the euro area, and that makes euro areas extremely vulnerable to this corona crisis. You could already see it after the great financial crisis where you had this main recession in 2009 that affected all economies in the world. Then you had a second recession in the euro zone, 2011, 2012, 2013, which was due to the fact that the countries had to raise money on their own account. The member states, they did not have the federal level, and this vulnerability is a real problem of the euro zone, and the only way out of this situation is to issue joint bonds, kind of since now it’s called corona bonds, which are issued by all the member states together in a joined and mutual liability. Once you have these bonds, then you have more or less the same playing field as in the United States, or in Japan, or in the UK.

It’s extremely important to create these kinds of conditions for the euro zone to survive this crisis, but unfortunately in Germany, in the Netherlands, there is an extreme political opposition to this, which is really regrettable, and it’s not only regrettable it’s also dangerous because if we can’t fight the economic crisis with the right economic therapies of course in addition to the health problems we get also huge economic problems. But, last week we had the meeting of the euro finance ministers, the so-called euro group, and the only thing that was agreed is that Italy can get some access to the European stability mechanism, but it’s only loans that Italy is provided on its own account for which it is responsible, and the main problem if this approach is of course that the debt levels of Italy, which are already very high, will be even higher, and once hopefully the corona crisis is over then the markets will realize, “Oh, Italy has now a debt burden of 160, 170% of GDP.” This is not sustainable, and then after the corona crisis you will get a full-blown government debt crisis in Italy, which will then devastate what is left of the Italian economy.

It’s really, really urgent that we are able to convince policy makers in Europe that only a joint approach, common approach, will save the euro area, but so far the willingness, especially of the German political elites, whether it’s the Chancellor, or the Vice Chancellor, or Finance Minister, is extremely weak, and it was from the very beginning very disappointing that when the crisis started, from the very outset, the German policymakers said, “We do not want corona bonds. That’s dangerous. We don’t want it”, and now of course it’s very difficult to get rid of this position. That’s a real, real threat economically, but also politically for the Eurozone because of course Italy, if the Italians see that in such a terrible situation, economically, and also what the health, and the whole society is concerned, that the only thing the European partners are willing to write is loans. There’s absolutely no willingness to make, really to support them in solidarity as a group, then of course, then the anti-European leaders in Italy will say, “Okay, let’s forget about the euro. Let’s forget about Europe.” They are really only interested in our money, but not in our wellbeing.

Rob Johnson:

In our work with the Global Commission on Economic Transformation we talk about a number of things that are disruptive. We’ve talked a bit about climate, and finance today. Technology is another big theme, but one that I know Joe Stiglitz, and Dani Rodrik are very concerned about, and I think we all share, is the notion of globalization, and the notion of the nation state when many of the factors of production, financial capital technology, can travel almost with the speed of light, and people cannot shift to regions, and across borders nearly as easily.

I have seen a lot of work done over the last few years that is about the what you might call mal-distribution that comes from the advantage of certain factors relevant to human beings, but I’ve also seen a clarion call for global governments on things that are essentially like global public goods, of which climate sits at the center. Do you see this pandemic being a substantial influence in changing the way nations are organized in the context of a global economy?

Peter Bofinger:

Yeah, this is a difficult question. First of all I would like to say that the crisis should not be taken now as an argument to reduce globalization, to reduce the international division of labor because I think this will definitively be associated with wealth losses for all economies. With all problems, and negative side effects that globalization has overall it increases the wellbeing of nations. I think that was a fundamental insight by Adam Smith, and I think this is still true. If we reduce globalization we’ll have less wealth of nations.

But of course globalization needs governance, and in order for globalization to really work for the wellbeing of all nations, and all people in all nations, you need global governance. I think that’s quite obvious, and I think that’s where almost all economists would agree.

Well, after the Second World War, which another even more catastrophic event, the global community realized that only with global governance we can create a healthy global economic system, so it was the Bretton Woods system for the World Bank. It was the GATT. It was the International Labour Organization, so this spirit was there in the 1940s. Maybe as an optimistic scenario you could say, “Well, if there’s really a huge challenge which has devastating impact on our societies that maybe then also there’s an awakening of politicians of the elites that only with a global approach things can be healed, and that the return to prosperity, and also to…” That’s the only way how we can protect our climate.

I think this kind of enlightenment would be a positive scenario, but honestly if you look at the political leaders so far in the United States, in the UK, in Brazil, in Russia, I’m not so sure whether these guys will be really open for such an enlightenment. That’s where… You would really need a change in the leaders of major nations in order to really achieve such an enlightenment, and to get a revival of this kind of Bretton Woods spirit that was so important after the end of the Second World War.

Rob Johnson:

More generally, more wide open, we’ve seen the, which you might call bravado, and audacity of people talking about how wonderful the world was, and how technology would deliver us a much better standard of life, and so forth. But, at the same time we’ve seen tremendous political discord. When I look at these studies that were initiated I believe, or at least brought to life in the eyes of economists like Case and Deaton on the diseases of despair, and the geography of where those diseases are located, and where the sources of economic disruption, automation, machine learning, technical change, the impact of globalization, local fiscal austerity, the economic disrupters are located in the same geography as these diseases of despair, but in an even deeper sense it’s the same location of where the vote for leave in Brexit, Marine Le Pen, the AfD, Donald Trump, so there is a despair. There’s a despondency, and now we have this pandemic that has descended upon us.

Is this going to just break what you might call the sense of ideas wide open? Are we going to re-envision, or reconfigure society with all of this despair, and all of these pressures which you might call unmasking the need for re-thinking? Are we going to just devolve into a what you might call stale authoritarianism? How do you see it, and most hopefully how do you see the conventional wisdom needing to change in light of what we’ve learned?

Peter Bofinger:

Again, two scenarios are possible. If we see that after this corona crisis they have a lot of unemployed people, if we see that incomes have come down, that people have lost a lot of money it could lead to a narrowing of thinking, so why each country is just looking for its own survival, and it will be probably more difficult to make a case for climate change, for more equitable distribution of incomes. It could go this way that is just a survival mode in our societies for the next few years after this crisis.

But, as I said, I think the solution to most problems that with which our economics, and countries have been dealing the last few years is the lack of a global governance, a global governance for climate policy, a global governance for tech standards, a global governance for labor standards, a global governance for competition policy. I think without this global governance you have the problem that each country is going its own way. It’s trying maybe to underbid other countries with climate standards, with labor standards, and so on.

I think what we really need is renaissance revival of a Bretton Woods spirit that only if we act together we can solve the problems not only of the world, but also the problems of our own countries. I think this, so as I said, if you take the precedence of the Second World War, if a real disaster happens maybe it also opens the minds for people to see things in a different way. That would be my optimistic scenario, that we somehow will get the Bretton Woods spirit.

Rob Johnson:

In the, how do I say? In the academic world do you see a revival, how would I say? The importance of governance? What I’ve seen in recent years is not what you might look the traditional dilemma, say at the time of the new deal, should government be empowered, or should the markets be empowered? It’s actually, particularly in the United States, gotten worse where people say, “Well, the government exists, but it’s captured by the rent seeking, and the money power of large corporations in relation to small citizens”, or in the event of plutocrats, and billionaires compared to the average citizen, that what I call commodification of social design has taken over, and demoralized many people about the capacity for government to serve them.

When I bring up this question of globalization that you just were so lucid in discussing, a lot of the cynicism that I hear is, “Well, if you have a big global government way up there in the tower they won’t feel, or be sensitive to anything that is happening locally.”

But, I think the counterpoint to that is if you’re right down there in the turf, and you can feel where the people are suffering you may not have the tools because, how would I say? The scope of the market is larger than the domain of the sovereign, and the things that affect you, you have no influence or control over unless you create a unified global government where everything which you might call is under one roof of authority. But, I think this question of the reinvigoration of the importance of role of governance is a big one, and I was involved in a presentation this morning in memory of the life of Paul Volcker. The last thing he did was form something called the Volcker Alliance.

The Volcker Alliance about was dedicated to what I would call the restoration of trust in governance. He thought that was the missing ingredient. He wasn’t here obviously. He passed away last year before the pandemic, but I just with the cynicism about governance it concerns me a great deal where the impetus will come from to revive it.

Peter Bofinger:

I think that in this regard the corona crisis could really have a positive impact. Look at the situation in the health sectors of economy.

Germany for many years, almost for many, many years, there was a complaint that Germany has way too many hospital beds. In fact, Germany has nine hospital beds per thousand inhabitants. In Spain, Italy, they have three. I think the United States also something like three, so for many years the statistics were shown as saying, “Look, way too much, way too many hospital beds in Germany.” Of course now today, we see that in Germany the death rate of corona diseases is among the lowest of all countries. I think people will see that the market is not the solution for all problems, and that it’s good to a have a government that is able to deal with such emergencies because the market will not provide you additional hospital beds that are probably not needed in normal periods of time.

I think this is maybe can also lead to rethinking that we can see, okay. In areas where we had other countries where the government was stronger, and was deferring more like Germany in the health sector, they were much better able to deal with the crisis than countries with the very weak, and oppressed from austerity health systems, so I think to us it’s balanced between state and market. I think there the consensus will be much stronger that we cannot rely on the market to deal with all emergencies, so we need the government, a strong government, and a government that has enough money to fulfill its role in protecting its people in emergencies.

Rob Johnson:

Well, as they often say, necessity is the mother of, what’s the thing? Necessity is the mother of invention. We do have necessity now. We do have a challenge, and we cannot afford as a society, and I’m thinking at the world level now, to be neglectful, or not rise to this challenge. In that respect I think your sense of hopefulness is a good one, and very much on target.

Peter, it’s been lovely to explore with you today as always. I look forward to continuing to work with you in the Commission on Global Economic Transformation, and please keep us posted as you put out new, and further insights and reports. I know you publish a lot of things at the CEPR, Center for Economic Policy Research in Europe, and I’m sure we’ll get back together again on this podcast after a few months have passed, and we have a chance to look at it from a different vantage point, but thanks for being here today.

Peter Bofinger:

Thank you very much, Rob. It was a real pleasure to talk to you, and I hope that when we hit a positive, and a negative scenario that we and the positive scenarios will materialize.

Rob Johnson:

I think that’s the reason to explore both sides because then the path that we want becomes much more evident in that positive dimension.

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.


About the Guest

PETER BOFINGER is currently Full Professor of Economics, Money and International Economic Relations (C4 chair) at the University of Würzburg, a position he has held since August 1992. From March 2004 until February 2019, he was also a Member of the German Government’s Council of Economic Advisors (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung).