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Rob Johnson:
Hi, this is Rob Johnson, president of the Institute for New Economic Thinking, back here for a third panel, sponsored by INET, in conjunction with Tito Boeri and the wonderful Trento Economic Festival. As we say every day, we wish we were there in person, but that’s just not how the cards were dealt this year. As I mentioned in the previous two sessions, INET has been building a commission on global economic transformation in these very difficult times. We had Mark Carney and Bill Janeway two days ago, and yesterday, Jayati Ghosh, Rohinton Medhora, and Joseph Stiglitz.
Today, I have Michael Spence, the co-chair, along with Joseph Stiglitz, two Nobel laureates, to talk about other elements of where our commission is focused on, which are the major challenges to transformation and disruption. I would say that there is a context, or a stressful nature of unforeseen change that ignites fear, makes the temptation to authoritarian politics much greater than it might otherwise be. And at the same time, there’s vast potential. The epigraph at the beginning of the movie on Netflix, Social Dilemma, about the big internet platforms and Silicon Valley, said, “Nothing vast enters the life of mortals without a curse.” That is a quote from Sophocles.
But I would also say that with that curse, you can’t smother the vast potentials that are on the horizon. As Diana Ross, from my home city of Detroit, sings, “Do you know where you’re going to? Do you like the things that life is showing you? Do you know?” Well, we can’t know. But the best thing we can do is bring somebody who is a deep diver, whether it’s relationship between technology and economy and labor, or technology and new forms of commerce, or US China relationship. I don’t know any better cleanup hitter than Michael Spence. And the only thing I’ll tell our audience, I had an unintended export to Italy this year because between Mike Spence and Mark Carney, I’ve got two Ivy League graduate, former hockey players. One is a goalie at Princeton … Excuse me, a goalie at Harvard. Mark Carney and Mike played hockey with Princeton University.
So I don’t know what the relationship. I grew up in Detroit and I love hockey, but I don’t know what the relationship is between what we’ve exported and that sport. But I do know Mike will deliver a tremendous export today. And Mike, thanks for joining me.
Michael Spence:
No, it’s great to be with you, Rob.
Rob Johnson:
So, Mike, when we’ve talked in preparation for this, we talked a lot about what you might call precedence of past transformations, and how this one, which just appears all around us. I mean, in recent years, financialization, the prospect of climate, concerns about migration, globalization, and whether the nation state can manage its affairs any longer. But the realm of technology, you’ve been working with the Luohan Academy. I’ve had the good fortune of doing a podcast with their leader, Chen Long, recently, about a report that you were involved in writing.Rob Johnson:
But there were many aspects, biomedical science, gene editing, the digital big data kind of issues, the issues of what you might call relative power of factors of production. And you see them all, solar, DNA sequencing, all of these things. How do they relate to the past and what kind of lessons can we draw from the past about all these things that are right on the horizon right now, and both exciting and a little bit scary?
Michael Spence:
Well, I guess I would say, Rob, we live in a period where so many things are changing that I think virtually all of us, at times, feel somewhat bewildered by it. And we certainly live in a period in which making accurate forecasts about where we’re going, especially long term ones, I think are really unrealistically out of reach for us. And that is anxiety producing for everybody because there are some significant challenges and downside risk.
I would say a sort of second point is I was struck by looking recently at the power of the tools that are being made available by science and technology. So I looked at solar, which 10 years ago was basically a nice idea, but relatively useless from a cost point of view in dealing with climate change. And now it’s at least competitive, and by some standards, better than the fossil fuel alternatives, and other alternatives like nuclear. The only thing that really beats is sort of hydropower. And that is important, but has limited uses.
And then I looked at 50 years ago, roughly, the structure of DNA was discovered. And about 25 years ago, we sequenced the first genome. Probably cost a billion dollars to get that done. And now the costs are so low that it’s become a very powerful tool in biomedical science. And similar thing are occurring on the digital side. So I think what I’m trying to say is when you look into the future, sometimes you can see these things coming, but we’re at a point where they’re actually with us. I pick biomedical science as an example, even though are formally going to spend most of our time on digital, because this is very, very powerful stuff.
And particularly gene editing is an excellent example. The two women who received the Nobel Prize in chemistry this past year, in 2020, received the award for doing the foundational work that has enabled us to do gene editing. Gene editing is a classic example of a technology that has enormous potential. This is something that everybody cares about deeply, which is human health. And other hand, it has potential misuses that are genuinely terrifying as well.
So we’ve got very powerful tools, that are available, that are going to change the opportunities for our lives. I recently wrote something with James Manyika that said we think, at least in the digital area, that the tools are now accessible enough and powerful enough, and the willingness to adopt and use them, partly as a result of the pandemic, has been accelerated so much that we may have another burst of productivity, and productivity-enabled growth as well. So that’s kop the plus side. And I think there are lots of other dimensions of it that we’ll explore.
But the main point is with anything this powerful that’s changing our economies, our societies, the way we interact with each other, governance, and so on, comes huge opportunity and challenge at the same time. They’re all double-edge swords.
Rob Johnson:
Yeah, people I know who are studying Africa are of two minds. One is the ability to integrate a market and create opportunity where none existed before with these new digital platforms, some concern about how to get the capital raised to install the digital platforms, but the potential is on the horizon. Others are very concerned about how essentially replacing human beings will exacerbate inequality, weakening labor relative to the owners of these platforms, in whatever context, but particularly in places like Africa, where the income and wealth inequality is quite extreme.
So there seems to be, how would I say, visions of dread, and visions of progress … How would I say? On the same screen, at the same time, in almost all of these places. And the question becomes how do we manage it as human beings? How do we govern?
Michael Spence:
Well, I’d say that’s a hugely challenging question. So the festival this year is about the return of the state. So we certainly don’t take this on by adopting a hands-off approach, so we just simply can’t. We’re going to have to step up to it and make value-based collective choices that try to carry us through these things, that mitigate the downside risks, and amplify the opportunities. But let me say one more thing about digital. So you asked about the past. We had the Industrial Revolution that began in Britain, spread to continental Europe, spread around the world eventually, but really didn’t make it to the developing countries until the post-war period.
Industrial Revolution had lots of mechanization. We would probably use the term automation now, but it isn’t quite right because these machines weren’t autonomous. They were in control of human beings. They augmented human beings, and human beings’ jobs changed enormously. I think the machines replaced human muscle. The digital technologies, in particular, the programmable computer, and networks, and all the other things that we don’t have to list here, are basically entering the world of information, coordination, decision making, transactions, that up till the digital era were essentially, and there were a few exceptions, entirely in the hands of human beings.
If you put that in sort of popular jargon, at least the way we use in the United States, we are experiencing both automation and augmentation in the world of white collar work, really for the first time. And maybe the effects there are bigger. They’re not confined to that. I mean, we have now with artificial intelligence and sensors, we have robots that really are relatively autonomous and do replace human beings in sort of manufacturing, logistics, and so on. But we’ve got tons of jobs, even without the most advanced digital sort of … In machine learning technology, tons of jobs being eliminated from economies in the white collar area because the machines do them faster, better, and sometimes with great accuracy as well.
So I think that puts us on a trajectory that’s really different than anything that we’ve experienced before. So if we look at the industrial revolution, we say jobs change, but they didn’t disappear. Machines took control of the jobs, acquired new skills, and so on. And maybe that’ll happen again. We can’t reject that hypothesis. But the point is that we now have machines doing something that humans uniquely did up to about 50 years ago.
Rob Johnson:
So I guess we got to wait and see whether they’ll replace poets with imagination, but other than that.
Michael Spence:
Highly unlikely. Highly unlikely.
Rob Johnson:
But there are, how would I say, tremendous learning curves from automated machines. And even just in these last few years, you’ve seen them beat world champions at chess and things like that. So there clearly are dimensions of mind that are being challenged. One of the things I find fascinating is the difference between a technology being introduced to create what couldn’t be done before, and a technology being introduced to perhaps make more efficient, less costly, something that was done before. You’ve done a lot of work in China. The growth of mobile financial platforms and fintech, with US banking and branches and so forth, I can see that displacement factor being very large in relation to the, how do I say, creating new opportunities. It may cost less or what have you, but in China, I would imagine is such a big country that you’ve probably seen both.
Michael Spence:
Oh, absolutely. Yeah. Take the eCommerce side of that first. These are based on studies that have been done by the Luohan Academy, which is located in Hangzhou and sponsored by Jack Ma, and has access to the Alibaba and financial Alipay data, which is an enormous collection of data, given the progress that the Chinese have made in that aspect of the digital economy. And what those studies show is that in eCommerce, you see both patterns. You see eCommerce displacing retail where retail was well-developed, to some extent, as well as augmenting them. So you see both. And where would that be?
It would be in places like Shanghai, where retail was well-developed before, the eCommerce really took off. And then you look at third- and fourth-tier cities, and they do in the studies, and agricultural areas, particularly ones that are relatively remote, and the eCommerce is providing a set of opportunities, options, and services that weren’t there before. It’s not displacing anything. Now eventually, they’ll look similar. The offline retail will develop. It will be coordinated with the online retail, or so-called omnichannel. So it’s not a permanent condition, but in terms of inclusive growth patterns, you see something pretty impressive.
Half the entrepreneurs on Taobao, roughly 5 million, are women, of the 10 million, and so on. So you see these patterns. And on the big data side, you see something quite impressive. Although, they’ve got to figure out how to regulate it. And that is with very large amounts of data, and very large numbers of people using the mobile payment system, they have data on people who are otherwise relatively anonymous to the financial system, meaning they don’t have collateral, they can’t really borrow, it’s too expensive in the traditional channels for banks to kind of deal with them.
But the machine learning algorithms can do a pretty good job of credit scoring and pricing credit. And so that’s starting to develop very rapidly. There’s an entity called MyBank, it’s an offshoot of this process, Vivant Financial and some other entities. And they’re lending to individuals, to households, and to small businesses with five or fewer employees that were more or less cutoff from credit, or the credit they could access was highly inefficiently, and sort of extractively provided. It was almost loan sharks, I guess is the way I would say it.
So once again, you see sort of, on the upside potentially, you see an inclusive potential growth pattern emerging from these things. And you see it in other areas. I mean, I don’t want to be long-winded, but there’s of applications now of things, like image recognition in healthcare, that are providing primary care diagnostic opportunities with respect to things like skin cancer, or diabetic retinopathy, that were essentially unavailable to very large fractions of the world’s population because they don’t live near ophthalmologists or dermatologists.
And I think sometimes when we get sort of smitten with all the challenges that we face, and they’re real for sure. Are we going to have enough jobs? Is the income distribution going to be okay? Do we have any reasonable way of dealing with cybersecurity? There may be a tendency to forget these huge upside opportunities as well.
Rob Johnson:
Yeah. Well you mentioned the Luohan Academy. I know you were part of a report that was released in early February called Data Calculus in the Digital Era. A number of both Asian and Western economists. I know Eric Maskin, Chris Pissarides, Bengt Holmstrom, yourself, and others were there. And I had the good fortune of making a podcast with Chen Long about this report. And it seems to me that there are a number of what I call dilemmas embedded in this. Big data can allow … I was involved in a conversation years ago with the Federal Reserve about taking data, kept anonymous and aggregated, but by county, by state, by region, by congressional district, the Federal Reserve could see in 72 hours what was happening in the business cycle rather than waiting six weeks for the next employment report.
Michael Spence:
That’s right.
Rob Johnson:
And so what you might call the duration of being off course was diminished greatly.
Michael Spence:
Oh yeah. Oh, it’s no question.
Rob Johnson:
So there’s a lot of potential improvement, a lot of ways in which we conserve society better. But then there’s also this angst that’s related to surveillance, and related to, how do I say … I can’t remember the adage, but it’s something like in some of these mobile platforms, you are the product. In other words, you get a free service for being the product. And then the question comes, as you and I have talked about in many instances, if you have economic platforms that also give off big data, which creates opportunity for surveillance, how can places like the United States and China collaborate when hackers are so good at penetrating systems and at hiding their identity?
How could the United States and China make an agreement to work together, but maintain the faith that both sides are complying and playing in good faith, when hackers from everywhere can pretend they’re either Americans attacking the Chinese system, or the Chinese attacking the American system? How do we overcome that? How do we overcome things like ransomware? Is this where we need to evolve, what you might call, as a new dimension of what these technologies reveal for the next step?
Michael Spence:
Yeah. I mean, it’s ironic. This comes up in the context of pandemic, where the ability of the economy to function increasingly on a digital foundation and made economies resilient in a way that they just simply wouldn’t have been before, or to put it differently, the economies would have had to continue function at enormous cost in terms of health, because you had to shut them down. You can partly shut them down, and we did with significant costs, both to the economy and to lots of individuals, and we have to fix that.
But you’re right. I mean, so I guess I would phrase it it’s not just the platform. The entire economy is being built on digital foundations pretty much everywhere, and this created vulnerabilities that we haven’t addressed. And in particular, if you are operating on a digital platform, and it’s vulnerable, in a whole variety of ways, to attack, ransomware being an example, which is an attack on data, or accessibility of data. But in principle, you could have an attack that destroys data and makes it very difficult to kind of get the system up and running.
So one of the puzzles is this is not a new idea, although it gets more serious as the extent of the digital underpinnings of the economy continue to increase. But the question is what are we doing about it? I think, given the subject of the festival this year, we have excessively weak, thus far, activity in regulatory activity, with respect to sort of security, digital security, which isn’t just international, by the way. I mean, you can attack things from within. As you pointed out, you can attack them from pretty much anywhere if you’re good enough. This is the role of the state.
I’m quite sure private sector incentives are not sufficiently strong to create the kinds of security that we need, in part because there’s huge externalities. We just had a pipeline taken down in the United States, which caused all kinds of problems. That was a ransomware attack. The latest one was a supplier of beef. You might say, “Well, who cares?” But I mean, the next one could be the electric grid in the Northeast, or in Germany, or something like that. So I think this is both domestically and internationally extremely high priority that hasn’t been addressed so far.
Now, when it gets addressed, the question is are there defense mechanisms? There’s offense and defense, who’s going to win? We don’t, at least I don’t know the answer to that. Maybe the experts do, but if they do, they haven’t made it very clear. But in the mean time, I think we just have inattention to the problem. I mean, let me give one final example. The Internet of Things has been used in denial of service attacks. What are they? Basically, you bombard a website that’s used at high volume with so much volume that you bring it down, that it can’t function. This has happened to Facebook and a number of other mega-platforms.
But essentially, you create fake users of the internet, and they all address the same servers at the same time. Now, maybe cloud computing makes this a little easier to withstand. I don’t know. It certainly helped solve the peak load problem. But the Internet of Things consists largely, up until now, of things that, unlike computers and phones, don’t have really any security built into them. So they’re very easy to hack and use in denial of service attacks.
What we need, of course, is regulation that says you don’t get to sell video cameras, little things that you use in your refrigerator and what not, that don’t have any security built in them, which is an example. So if we get that problem addressed properly, then I think there is an important agenda, international agenda, to try to deal with the same set of issues, but on a kind of cross-border basis, for the reason you mentioned, the hackers can fake where it’s coming from.
Rob Johnson:
Ni think people talk about the new word that’s so widely used is resilience. And I’m tempted to ask our subcommittee chair on climate transformation, Adair Turner, how much energy do these digital platforms consume? And if we’re going to make, I don’t know, semiconductor technology evolve, do they have to be retooled so as not to have the adverse side effects vis a vis energy consumption? And I’m also concerned, in the realm of resilience, about whether this semiconductor technology, where people say, and you’ve said it yourself to me, that the cutting edge is now in Taiwan. How does that play into US China relations?
Michael Spence:
So what’s happening is, as I understand it, in the semiconductor world, is that they’re trying to make the distances between the circuits smaller and smaller. And when they’re able to do that, it’s very hard to do. When they’re able to do that, it increases the speed of the semiconductors in doing whatever they’re supposed to do, and it reduces the energy consumption. So the scale keeps coming down, but my understanding is that some of the smallest scales, like four nano whatever they are, are being produced mainly in Taiwan by TSMC.
And I’ve also been told, although I won’t report this as authoritative, that those scales make a huge difference in the energy consumption, which is enormous, of the big data centers, the big server centers that run the cloud computing systems that eventually we’re all going to end up using. So in all kinds of ways, Taiwan has become a kind of very strategic property in the digital world. It’s also, quite obviously, by many accounts of the experts in international relations, one of the most dangerous places with respect to China and the US, because China claims it as part of China, and it may get fed up with the sort of long game of waiting, or see that the winds are blowing against them.
And if they decide to aggressively address that problem from the point of view of taking over Taiwan, there’ll be all kinds of trouble. So who knows whether semiconductors are an incentive, but they’re important. The big data … This is creeping up on us, but big data centers, and things like Bitcoin, which are very, very computational and network-intensive activities, are major consumers of energy going forward. So part of the climate change agenda is minimizing that, which means further progress in the semiconductor area.
Rob Johnson:
And when you look at, how would I say? One of the things that we’ve studied in the global commission is the scenarios that places like the International Office of Migration present, that a essentially, 55 years from now, there will be more than 5 billion people in Africa. You’re very knowledgeable about development. You ran the Growth Commission at the World Bank. But at some level, can past be prologue when in under-developed countries in the global South, in equatorial regions, carbon burning and rise in temperature can destroy subsistence farming, create a shock that’s a frame of … How I say, a contributor to social unrest.
At the same time, we don’t have the East Asia model of development anymore. Global supply chains, machine learning and automation, there’s … How would I say? We don’t have the playbook for development with a growing population that will lose at least some significant proportion of its subsistence farming. But I know from our conversations, you’ve been quite hopeful about some of what digital can do for Africa. Share with us how you see an unprecedented development strategy that probably involves solar, and involves digital. Help us.
Michael Spence:
Okay. Yeah, no, on the … So I guess the starting point is many African countries have made significant progress. There are setbacks, but there are setbacks everywhere when you look carefully. You can see that in Latin America now, where you get forward progress, but then some real challenges come up. Second, and post-war period, African has kind of fallen behind in many dimensions, on average. It’s an unusually configured continent, because there are more landlocked countries, and there’s a lot of natural resource wealth, which is an asset, but it’s difficult to manage. And if managed poorly, it leads to conflict and disfunction rather than enhanced ability to invest and grow.
Right now, you and I have talked about this, there’s lots of investment opportunities in Africa, but the risk premia are pretty high. And so we have, again, a role for government and international institutions to try to sort of overcome this. And a good example is the one you just mentioned, which is if there’s any continent that ought to be sort of planing in the future to run on substantial chunk of electricity generation with solar, it would be Africa. It spans the equator and so on.
But right now, the progress on that front is at least a question mark because of the investment incentives, cost of capital, risk premia, and other things that need to be addressed to sort of overcome that. And in the meanwhile, I think the experts in climate change have said clearly that some parts of the world are going to be adversely affected more than others, and that some of the sub-Saharan countries in Africa, to the extent climate change takes hold, and continues to be an expanding problem, then we can expect real trouble there. And that raises the migration issue and so on.
I mean, on the digital side, I would say the bad news is that … So a good development model, it does two things. One, it leverages the global economy’s technology and demand, and allows countries to specialize on the tradable side, and sort of bring people in to the sort of more modern manufacturing, urban sector, the growing urban sector of the economy. And that kind of jump starts the growth process. And the second thing is as important. If this is going to really work, that those be powerful employment engines.
So the Asian development model had all of the above. It starts with textiles and apparel, and then you assemble other stuff, including electronics eventually. You’re selling a big global economy. Because of the low cost of labor, you have competitive advantage. And it employs tons of people, draws them out of the traditional sectors where there’s surplus or under-employed labor. And that model was used in countries sequentially, starting with japan, through a good part of the world, especially in Asia.
And the negative side of the digital revolution is that robotics, powered by artificial intelligence and enhanced sensors, things like image recognition. I mean, the robots can see, I mean, put it crudely, in a way that wasn’t possible before, and which means that they can start to displace human labor in doing labor-intensive things, like assembling electronics, or … This hasn’t really happened yet. Textiles and apparel is a big challenge for automation. But I don’t think it’s a reasonable bet. Most people wouldn’t want to bet that it’s a challenge that won’t be solved, which means that the Asian development model in that specific form, labor-intensive, manufacturing, assembly, and so on, is going to lose its power at just the point where the handoff looks like it would come from East Asia, to South Asia, and Bangladesh, maybe some in India, to some of the poorer African countries.
And so the question is is there an alternative that has those characteristics? You leverage global technology and demand, and have big, powerful employment engines. Now, I think the honest answer is we don’t know. I mean, I don’t think anybody’s sure there’s an alternative. On the positive side, you can include a lot more people in the economy, create a lot of entrepreneurial activity and so on, within a country, using the digital platforms because the low cost of entry, the fact that you can overcome challenges associated with distance and so on so easily with digital technology, provided you have the infrastructure. And by infrastructure, most people are going to connect to this using the mobile internet, which is a little more than 15 years old, but not much.
People forget how … Or I forget how little time it’s taken for the mobile internet to essentially spread throughout the world. But you still need the underlying structure. You need the speed, or it’s connectivity but not terribly, terribly useful for things like online commerce, education, and other things that can be useful. But there is potential there, for sure.
Rob Johnson:
A lot of people are concerned about globalization, the kind of, how do I say, hip pocket joke is the Treaty of Westphalia is dead, that you can have models as a economists of all the things you would do to keep things on track, ameliorate distress or extreme imbalances. But in a world where finance can be transferred in nanoseconds, where people are resistant, because they’re not just factors in production, they’re citizens who have social customs and histories and so forth, and large-scale migration can frighten other people, that their platform is being changed. So we have a situation where the integration that digital provides for us is both very positive. Someone who’s a fashion designer in India can reach markets all over the world. But there’s also a sense in which things can escape.
Now, in the old days, people talked about foreign direct investment in places where there were no labor laws, or foreign direct investment in places where there was no climate protection. But it does seem that finance and technology are relatively stronger than people in this global system. And the name of this conference is The Return of the State. How do you envision the state returning? And there’s so many levels. There’s the level of everything is under one tent, global governance. Then there’s … But how sensitive are they to the stresses and pains in any given area? Then there’s local governance, but you and I can identify what’s wrong before the mayor, but we can’t stop it if it’s the cross-current of many global forces. In your mind, how do you see the return of the state, the role of governance, in the context of the technologies and systems that we do have?
Michael Spence:
So I mean I think the return of the state is several things. First of all, there’s enhanced understanding that the state is absolutely crucial in dealing with challenges, anxieties, things that really matter to people. It’s the social insurer. It’s the fixer of kind of market failures and so on when it’s working properly. So what I anticipate, Rob, is modification of various aspects of globalization, including ones that have to do with digital, technology, and data flows, to make the thing that people rely on, which is the nation state, not global.
I mean, I don’t think … I haven’t heard anybody say that we’re all going to feel comfortable being governed by a single global government. When people talk about global governance, they’re talking about, I think mainly, institutions that facilitate cooperations among nation states and their sub-entities. Because that’s what people turn to. I mean, my political science friends tell me constantly all politics is local. I think it’s probably true. So bottom line is I think we will modify, in various ways, the interdependence to make nation states more powerful and more able to deliver what their citizen expect.
So that means fragmentation of the internet. I may mean backing off in certain digital areas. It’ll be modifying trade arrangements. Finance is more complicated, but when I looked at the successful developing economies over the last 25, 30 years, and we ask … It wasn’t just me, I mean a whole group of people on that commission and global growth and development. Did they have totally open capital accounts? No. Did they open them suddenly? No. So I think we’re in a period of what I would call useful subtlety that will push us in the direction of limiting, to some extent, extreme forms of interdependence.
Now, having said that, with things like climate change or global health challenges, we can’t carry that to an extreme. We can’t just kind of shut down and say, “We didn’t like that world.” Where people felt a loss of power and control over their lives, via their governance structures, because we have to cooperate in those areas. But I think the direction of movement will be reducing challenging volatility, creating job, destroying interdependence to some extent, interdependence to some extent, and then focusing on the areas that are absolutely crucial.
Rob Johnson:
Well, we do see a rise in awareness. I attended a little bit of the sessions a couple days back of the Green Swan conference, and the central bankers were talking about the need for international coordination, collaboration, and potentially financing. Christine Lagarde, J. Powell, and others were quite clear about this. I do see concern. Well, let me just go to the question. The G7 announced a minimum tax deal yesterday. How do you see that? Do you see that as what you might call each nation’s responsible, but there’s a sort of teamwork that’s being put in place so that people can’t evade a threshold? And then the other question I’d ask is should we be taxing companies or people?
Michael Spence:
That’s a good question. I mean, taxation issues, international, digital, the fundamental questions. Do you tax … How do you tax services that are produced in five countries, and consumed in two others, inside a company? I don’t know. There’s very big challenges in that area. But to answer your question directly, I think what the G7 did, I gather it’s in response to a suggestion that Secretary Yellen made, is an important step in the right direction. And if the G20 picks it up and goes along with it, that’ll be 85% of the global GDP, and I can imagine a version of that actually getting implemented. And even though there’ll be dissidents, they won’t be that powerful. It’ll be possible to implement it.
And I think this destructive form of tax competition for corporate activity that has been characterized as a race to the bottom is actually something that is usefully dealt with. Because the alternative, and there is an alternative, which is to tell your multinational corporations not to operate over there, as opposed to pay a kind of fair tax to whatever jurisdiction you’re in. I mean, in the end, I don’t know how to answer the last part, do corporations or people pay taxes.
I mean, I guess in the end, people end up paying taxes, directly or indirectly. But there’s an important set of issues that I think need to be dealt with, which is where do taxes … What are the … We know governments have to have revenue in order to operate. So they have to tax something. They can tax corporations. They can tax individuals. They can tax transactions. They can tax wealth. And you see just enormous differences, even across the OECD countries, in those respects.
And I think we’re entering a time in which we’ll ask important questions about, given the objectives that we had, generating revenue for companies, dealing with fairly powerful trends in the direction of inequality, what are the best forms of taxation that allow for economic progress and dynamism on the one hand, but fund the government and deal with the inequalities on the other.
Rob Johnson:
You raise a number of interesting points, but one is where people collect the tax. We might have an agreement, but do you pay to where your headquarters is? Do you pay to where your plant is, or whatever? Which brings me to a second dimension of this, which is there is an awful lot that these countries need to do collectively now with revenue, particularly as it pertains to climate.
Michael Spence:
Absolutely.
Rob Johnson:
You had mentioned earlier the high risk premiums in Africa. Well, the benefit of solar in Africa is not just to the African people. It’s to your and my lungs, and the quality of oxygen, and the quality of the environment on planet earth matters to us all. So if they’re faced with a risk premium of 800 basis points, shouldn’t we create the equivalent of revenue, or guarantees, or something to fund something that benefits the public good, meaning the global public good? And I don’t think it should be a competition between whether Germany pays or whether America pays or Canada pays. At some level, maybe these homogenous floors on taxation create a pool of revenue that could be dedicated to those common causes?
Michael Spence:
Yeah, no. I think that’s … I mean, ideally that is exactly where you would want to go. And the question is are we going to kind of get there. But that does mean … I mean, we see this in Europe all the time. I mean, how much fiscal centralization do you really find acceptable? But there’s no question. The underlying argument doesn’t have a flaw, which is there’s a collective interest that goes way beyond the citizens in a particular region for overcoming obstacles like high risk premia stuff. I don’t have any doubt about that at all.
Rob Johnson:
In fact, in this morning’s Financial Times, or the weekend edition, there’s a report about how potentially rising inflation in the advanced countries will take what you might call the risk free rate higher as inflationary expectations start to rise a bit. And that that will add to the burden in many emerging economies, some of whom, what you might call, are on the cusp of need for debt restructuring right now.
Michael Spence:
Do you mean because of the pandemic [inaudible 00:49:20]?
Rob Johnson:
Well, after the pandemic response and what have you, they have, how would I say … These countries, places like Argentina, what have you, didn’t cause the pandemic. But their revenue capacity diminished, what you might call their credit rating ratios deteriorated, and now the risk free rate’s getting pushed up as the advance economies recover, which deepens their challenge.
Michael Spence:
Well, it could. Especially if they’re out of balance on the capital account going in, then it could make it dramatically worse fairly quickly I guess is what I would say. But I think your earlier point is right, which is that I think the general trend is people are not going to take what you might call full hyper globalization for granted anymore, and ask, “How are we going to adapt to it?” They’re going to ask, “How are we going to adapt globalization so that our national, local objectives, based on values, human development, and so on, are achievable without the risk of dramatic disruption?”
Rob Johnson:
Mike, you mentioned a couple of times, and I think I did early on, the Growth Commission. What are the five bullet points of wisdom that that long and deep process imparted to you? What do you conclude? What are the lessons of that study?
Michael Spence:
Well, we tried to summarize it under five headings. So in virtually every country, we were focused on developing countries, but since we wrote that report and thought about it … Let me explain just for the audience what we were doing.
Rob Johnson:
Sure.
Michael Spence:
That exercise was done … These are always progress reports. There is never a moment when you declare you know everything you want to know, ever. So the last kind of progress report that got a lot of attention was that the Washington Consensus, kind of codified by John Williamson in 1989, was criticized for the name. But if you actually go look at it, I just recently wrote something about this, is highly sensible. But there’d been 15 years. And in those 15 years, China had grown dramatically. It wasn’t clear that was going to happen. India had started their growth acceleration, and a whole bunch of other things that happened in the developing world.
So our job was to find out, based on experience, talking to experienced practitioners and serious researchers, what have we learned in that period that’s useful to carry forward? And that’s kind of our interim report, to try to be useful. And what I took away from that, and what I think we tried to summarize is that there were five areas. I won’t try to cover them all.
But I think John Williamson and the Washington Consensus were concerned about macroeconomic instability and failures on that front. There’s been at least a significant improvement in that area, and there’s no controversy whatsoever about the importance of that. The second one I think is one that we ought to listen to kind of pretty much every year, which is if you want to achieve your objectives, even if you’re a poor country, you have to invest and save at high rates. And high rates means 25-plus-percent of GDP. You just can’t grow at 5%, 6%, 7% if you’re under-investing. And that means both public and private. The mix matters, and I won’t bore you with the details.
The third one is that on a standalone basis, if you’re not connected to the global economy, whatever the risks and challenges are associated with that, then you can achieve this kind of very rapid progress. So you’ve got to make your piece and do the best you can dealing with the global economy because it gives you a big market, and it gives you the demand I mentioned before. But by far … And you can’t run a centrally planned economy. You need markets. That’s not neoliberal fundamentalism, market fundamentalism, or nothing like that. You see all kinds of models, but all of them delegate some of the resource allocation to markets, prices, incentives, and so on.
But the most important one is governance. I mean, if you ask yourself, “Where are the problems really coming from?” In a very large fraction of the cases, the answer is there’s a governance problem. And this problem means whoever’s in charge, I don’t mean an individual, but a group of people, if they’re not competent, if they’re pursuing some objective that doesn’t sound like the long-run public interest, then you get significant deviations from potential I guess is a technical way to say it. Governance is just absolutely, absolutely crucial.
Rob Johnson:
And it seems, I guess with the experience of the last four years in the United States, that some of those problems of governance can occur at the core of the system. And there’s been obviously a great deal of concern, particularly after the pandemic, about how would you say, the distribution of the burden in this country, or the deterioration of public schools where money that used to be called tax evasion is now tax avoidance, and it’s offshore. And then you say, “We can’t afford it,” as the knowledge-intensive economy grows, and the human capital ladder that the American citizens can climb, is eroding.
And so I think it’s hard also, using your lessons, to understand what leadership looks like in a global system from a core nation. And I do believe the Biden administration has made substantial progress in trying to re-engender trust and setting a good example. But it’s a formidable challenge.
Michael Spence:
Oh no, there’s no question. I mean, as you said, every country, including the United States now, has had the experience of kind of a shaky period with respect to leadership. I think the ingredients, they’re not easy to define. It’s not even easy to prove it matters from a social scientist point of view, but I think humility, perseverance, and dedication to some version of inclusive public interest, meaning bringing everybody along, and a willingness to recruit talent and get the best talent you can in government in order to … Because nobody has all the answers, so the great leaders are ones that bring people in, bring people together, create a vision that’s different from where we happen to be going now, get people kind of on board.
It sounds mushy, but I mean if you go back to developing countries, Rob, and I’ll let you wind up at this point because we’re running out of time. Countries are known to stay in a low or no growth equilibrium for a long time. So it’s not as if that’s an unstable state. So the question is if over a fairly short period, you move to a different trajectory, where you’re investing, and saving, and growing at, let’s call it 6% a year, or 7%, where you’re doubling the size of the economy every 10 years, something fairly dramatic has to have happened with respect to people’s expectations, what they believe is going to go on in the economy. And, at least as I thought about it, that’s the critical role that leaders play. They help people understand there’s a different trajectory, that’s sufficiently believable, that maybe we ought to give it a try.
Rob Johnson:
Well, Mike, we’ve been talking about all of these challenges in the context of what’s been rising political despair. And I guess I’ll take my Detroit heritage and go back to Marvin Gaye’s, What’s Going On, where in the third verse he says, “We got to find a way to bring some understanding here today.” And I would say I feel very fortunate, at the Institute for New Economic Thinking, to work with you and the other members of the Commission on Global Economic Transformation. And I do think we are in a place where just pointing at the pain is insufficient.
If we’re going to bring this world to life for our children and grandchildren, we’ve got to show that there can be light at the end of the tunnel, alleviate some of that fear, and pull together. It requires a lot from the state and from political leaders. But, Mike, leaders like you are making a great contribution. Thanks for being here and thanks for working with us.
Michael Spence:
Thanks, Rob. And thank you, Tito, for having us at the festival.
Rob Johnson:
Thank you, Tito. Hopefully next year we’ll all be in the opera house together.
Michael Spence:
Right. Right.
Rob Johnson:
Thank you.
