Transcript: Adam Tooze on What He Learned About the World Last Year

(Bloomberg) -- On this episode of Odd Lots, we speak to Adam Tooze, a professor of history at Columbia and the author of ‘Crashed:  How a Decade of Financial Crises Changed the World.” He talks about the political and economic lessons he’s taking away from the extraordinary events  over the past year. You can find the new episode here. Transcripts have been lightly edited for clarity.

Joe Weisenthal: 
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway:
And I'm Tracy Alloway.

Joe:
You know, we're kind of at the point, Tracy, where, I mean, obviously we recently sort of hit the one year anniversary of the markets bottoming, but we talked to a lot of people around this time last year and the world was just, everything seemed inabsolute chaos and markets were still incredibly volatile. We had no idea where things are going. So I feel like it's kind of time to revisit some of those discussions a year later. Like what have we learned?

Tracy:
Yeah. I think it's been pretty much exactly a year since we had the first Odd Lots episodes on what was going on at that time. And I think the consensus back in March or April of 2020 was that this was an unprecedented crisis that was going to lead to these big permanent changes. And I think some of that still holds true. It’s an unusual crisis, that's for sure. But I think the thing that no one was expecting was that we would basically see a recovery this quickly and that we would have a business cycle that was compressed basically in less than a year.

Joe:
Yeah. There's no question the recovery, especially for the U.S., but also I would say the world, even in areas that are still struggling with the vaccination rollout has been much faster than people expected. And then of course, like the other thing that was really going on at this time, besides just the pure health and economic shock was just this idea that all of the world's big institutions were really being stress-tested at once, whether it was the U.S. Congress, whether it was the sort of institutional capacity of the U.S. to roll out testing, which was pretty abysmal for the first several months, whether it was the ability of politicians to deliver a fiscal support and find a way to essentially keep businesses on ice or create a bridge to the other side through economic policy. There this feeling, everything was being tested at the seams all at once.

Tracy:
Yeah. Tested with really, really tight deadlines as well. And everyone's sort of working under pressure. I remember talking a lot about the Fed response back in March and April and looking back on it now, it's sort of amazing how much they actually got done within a few weeks.

Joe:
Yeah,  it's incredible. And the U.S. fiscal performance, in retrospect, turned out to be massive and probably a big contributor to the strong U.S. recovery. So anyway, it's been a year. Lessons learned. I'm sure in 10 years from now, we'll also be even learning more lessons as people study this period further. But I wanted to revisit one of our guests at the time who was probably one of the best thinkers and sort of synthesizing big things in the world. So we are going to be speaking with Adam Tooze, who teaches history at Columbia University. Also the director of the European Institute there. He wrote a sort of magisterial book about the financial crisis called ‘ Crashed,’ which everyone was reading back in 2018. He has another book coming out later this year on COVID specifically called ‘Shutdown: How Covid Shook the World’s Economy.’ We'll have him back on later this year to talk about it. But in terms of, understanding lessons learned from this year, we wanted, we had Adam on, I think exactly this time a year ago. So it's a good time to catch up with them. Adam, thank you so much for joining us!

Adam Tooze:
It’s a pleasure to be back.

Joe:
Well, let's just start with your big headline. Let's start here? What has surprised you most? The single most surprising thing to you over the past year?

Tooze:
Well, it's kind of banal, but it's simply that it happened. Right? That all of those Cassandra, all of those folks that had for a long time — we now know, perhaps we weren't paying attention before — who'd been saying that a pandemic of this type could cause mayhem, were right. And it seems to me that that has to shift our assessment of probabilities going forward. Quite fundamentally. That has really had been since the 1980s and then with increasing force from the 90s onwards, global preoccupation in the global public health domain, some economists were involved with this, Larry Summers wrote a paper about the potential economic cost to the world economy of a pandemic. All of those warnings were there. And you know, it happened. And in fact, I, man, Joe, I've seen your stuff on Twitter and I've been, been following these same graphs.

The fact of the matter is from the U.S. point of view, we almost begin to think of this in the past tense, especially if we think of it as a business cycle. But if you actually look at global infection rates — last week was the worst one of this pandemic and the mortality rate now is much higher than it was in what we think of as it were the North Atlantic crisis of Covid in March, April, when we first spoke a year ago. The pandemic is now being driven in India and Brazil, but also still by very elevated mortality in Europe. So this is not a done deal yet. The really terrifying possibility is that out of those cauldrons of infection, that we begin to get really dangerous mutations. We've not seen those yet, right? So far the mutations increase the risk to young people, increase the risk of infection, but they haven't fundamentally breached the firewall that the vaccines are putting up for us. But that's, I think for me, the single biggest takeaways. Sure. There's a fascinating story about the economic policy response and everything else. But I think we have to treat this as a wake-up call for the sort of risks we might be facing in future.

Tracy:
So, one thing I wanted to ask just on that note is, the crisis is still ongoing, but you have the book coming out later this year. Your first book, which Joe rightly has characterized as a magisterial work on the 2008 financial crisis, but that took, I think, 10 years to actually come out. And you sort of waited and digested everything that had happened in the years since then. Why have you been able -- I'm trying to think how to phrase this correctly — but why publish this book now? Why not wait and see how everything plays out? What's different here compared to the 2008 crisis?

Tooze:
Well, I mean, you're absolutely right. It's a riskier book to write from that point of view. I mean, you folks are in the financial markets, you're interested in this kind of thing and, you know, I'm kind of building a portfolio of different types of intellectual projects, some of which have riskier profiles than others. And this is definitely a riskier one. And I don't mean that glibly. It’s quite a deliberate exercise in risk-taking in a sense. It's driven by a sense of urgency that I think lots of us feel, and this is why I'm on this podcast with you folks this morning. We have to try and make sense of this. And frankly, in 2008/2009, I wasn't part of the conversation. I was an ivory tower academic, working at the time largely on 1914, 1915, 1916, World War One. And this time round, like it or not (and being invited on your podcast a year ago was indicative of this), I didn't have any time to do anything else.

All I was doing, along with you folks and everyone else in our broader intellectual community. And that's how I think about it now, all we were doing, everyone was laser-focused on the current events. So I literally had to shelve another book project. And so this crowded out other activities I was engaged in at the time. And I think another thing that's happened is maybe we've learned something? I mean, part of the lesson for me of 2020 is after all that, some of the learning that we did out of 2008, 2009 has come back to benefit us, right? I mean, some of the things were actually a bit more transparent this time than they were the last time round.

We perhaps didn't quite foresee the tremors in the Treasury market in March, but once they began to happen, folks really did have some of the analytical tools necessary to grasp that immediately, more or less. And as you were saying in your intro, you know, the Fed snapped into action and that's in part because we in fact did have a bit of a playbook. So in a sense, part of the wager of writing this book is to say, well, how does the playbook of ‘08, ’09 extend?

And to that extent, as it were, the intellectual overhead is less because we've done some of that analytical work. It may turn out five, 10 years from now that new perspectives open up. It would be surprising if they didn't. It's definitely a wager, but that what it consists of for me. I didn't really have much choice because this is what I've been doing. And it seems to me that we actually have kind of collectively moved the ball on how we understand macro financial risks. And this is basically a macro financial book again, or macro finance plus geopolitics plus politics, which is a terrain we've really, a lot of folks have been mapping.

Joe:
This actually brings me to a sort of broader question about your particular approach to combining the study of history with the study of economics with also real-time. People are kind of amazed by your output. I mean, you had this huge book in 2018, but previously you had been studying history for the early 1900s. Meanwhile, you have this book that's going to come out in a few months, you have a substack newsletter where you like take on current events and you have all kinds of charts. It's much more writing than most people can do in a week. You wrote a recent London Review of Books story, essentially cataloging the intellectual arc of Paul Krugman’s career. It's really impressive, how much work you manage to get done on quite a range of things. How do you sort of generally like approach what I guess is the Adam Tooze project? What do you see as your sort of lens that then sort of refracts into all of these, the spectrum of output?

Tooze:
Thank you. I think I'm producing at the pace more like that of a journalist currently. I have huge admiration for folks in the media who have to crunch,  the, what we all know what we all know the names, you two in particular, but you know all the people that we read on a daily basis. We're all involved in this real-time effort to try and make sense of things. What I guess I bring to the party in a sense of a drama, I think that's something that I've consistently tried to do is to inject — not in the sense that we simply take lessons from history in that naive way of looking back to previous periods to say, how is the presence similar? It's more in a sense, the approach that says, look, let's take the current realities as seriously as we do 1914, the outbreak of World War One or 1939, or the dramas of World War Two.

Let's try and figure say the global lockdown or the global shutdown -- as I prefer to call it in March, April -- as an epic event, like the outbreak of a war. It was something that after all affected, literally practically everyone on the entire planet. That's a novel experience. And if you, as a historian, it seems to me, don't, if that doesn't get your juices going, it's hard to see what would, right? I mean, and it's there in front of us. And I happened to have ended up networked in with some of the smart folks who were kind of doing immediate real-time, at-the-coalface-type analysis. I mean, I'm in that kind of meta space, right? Because I'm not somebody in either a government department or at a data hub like Bloomberg or ex-ante where people are actually crunching the data in real time.

So I guess the role is that of a, kind of, framing analysis and there history really does help. I mean, I don't think it's very helpful to go back deep into history to look for analogies, but I think if you want to understand, say Krugman’s trajectory or more generally the trajectory of macro economics, it really helps to go back to 1970s MIT to understand the kind of context that macro economics came out of. And then as it were the story, since — you know, I've been lecturing on global economic history for decades now — then the pieces fall into place quite smoothly in a way, because, if you're steeped in the works of Barry Eichengreen or somebody like that, then you have a take, a pre-shaped, a pre-formed, it's like a model. You know I like Krugman in part because he's, to me, you know, he's the sort of macro economist I get.

I have a lot of macro as an undergraduate and his ISLM, simple building block kind of models, I can wrap my head around. And in a sense what I'm trying to build is almost a historical analogy to that. It’s not going to be a perfect and totally subtle description. But in a sense, what you're trying to do is get those two basic curves on the map, right? And the basic parameters, which determine those and move your way around them. The trilemma models that people use in international political economy are super helpful for that kind of thing too. So that's the kind of MO.

Tracy:
So shall we talk about the past 12 months then? I remember when you came on in April, I think you characterized this as a sudden stop in the biggest part of the economy, at least in the U.S. and that’s services. Given that big stop, how were you thinking this would actually play out? Like in April, what was your blueprint for how this would play out in the wider economy? And how did that contrast with the actual events?

Adam:
I don't think, I mean, I can't honestly say that I had a very clear idea. I mean, I had visions, I guess, of downward multipliers spiraling out from the service sector, living on Broadway the way that we do, we could see there, just the slaughter of small businesses going on all around us. My wife is in the travel business and we felt the shock directly through her global network of people who are suddenly penniless. And I could see the way that kind of multiplier effects would work its way out. What we didn't reckon with, I guess, and this is one of the shocks of 2020 is the capaciousness of fiscal policy support that it might be possible to roll out. Now that doesn't deal with the more sectoral problems, which are still affecting large slices of the U.S. economy.

It's important to recognize that, right? That we’re maybe somewhere between eight and 10 million jobs down to where we ought to be. But we didn't anticipate, I think, the scale of that support and its effects, because again, it's complicated. It's not a classic Keynesian stimulus story because we know that folks haven't gone out and spent the money because in part its main function really was to provide a form of security to households in the sense that they had some savings out of which they knew they were going to be able to meet essential bills. So I think that's one of the elements that we, that I didn't anticipate, nor did I anticipate on the other side of the equation, just the gigantic wealth effect story that we would get through the impact of the central bank. Federal Reserve measures in financial markets, and in equity markets in particular.

So we come out of the year with those American households fortunate enough to have large portfolios of financial assets, what $12, $13 trillion up on the year, not just relative to the March trough. So those weren't developments which I anticipated. I'm not saying that you couldn't have done the kind of basic calculus, which would have led you to that kind of a scenario, but it seemed improbable in March. And after all, we did live through a kind of nerve-biting period in the U.S. And I'm not even talking about the politics, but just around the stimulus after that huge fiscal policy push in March, which you highlighted in the intro, which was a surprise in its own right. We did then after all go into full-on gridlock and it's worth remembering, I think, how nervous folks felt in the last couple of weeks of December and how nervous in particular, low-income Americans, precarious families, that were desperately waiting to see whether the protection of tenants would be extended and so on. As recently as that, there was still a huge sense of uncertainty about the possibility of the American political system reacting to the social crisis in this country.

Joe:
I'll be the first to admit that nothing I anticipated about this crisis came right, and I got everything wrong. But one thing that I remember in particular that I was wrong about thinking back to the spring of last year, I kind of like, the U.S. was still doing a horrendous job, seemingly on the testing front, by this point, it didn't seem like there was much consensus on, lockdowns or mitigation strategies. Meanwhile, the Europeans, Germany, but most of Europe seem to be doing very well with suppression. Very well with mitigation. And so my thought at the time, it was like, O.k., the U.S. is a mess, and Europe is going to suppress this. And not only that, they're going to finally like turn on the fiscal levers in a way that we haven't seen, and Europe is really going to come out of this outperforming. And I don't even know if like comparing different entities like this is useful, but it hasn't been this sort of clear ‘Oh, Europe shows the way’ that I might've expected around this time last.

Adam:
I think you're completely right. I did have the benefit of having spent a large part of my life in Germany. So on that basis, I have to say, I was always skeptical about that first wave of success story. Cause I've seen enough of local government administration in Germany, not to buy that, not to have bought it at the time. And so I'm not surprised. And it's a grim reality that the mortality in Europe is now higher than it was at its peak in March, April. And it's a disaster. And it's really a kind of ultimate reality story. If you want, if you're in regular contact with colleagues and friends in Europe, they are living, they're still living the lockdown chaos that we were in the U.S. in the spring. I agree that there's been a real reversal of fortunes there.

And if you speak to folks around the Eurogroup right now, they are acutely aware of the way that the narrative has shifted, right? They  thought, first of all, it looked as though Europe was going to fail on the fiscal and monetary side. We had that March 12th gaffe by Christine Lagarde parroting the old German line about spreads, and then all of a sudden lurching into action. Then the July deal. Then nerve-wracking months when it wasn't obvious that they could get it done. And then this extraordinary package deal they did in December with the East Europeans tying Poland and Hungary in, getting rule of law provisions in there. I mean, it really looked like the sort of quintessential, kind of European deal. It's a bit like a marvelous piece of Italian sports car engineering or something.

And then it just turned out to be undersized. It's not big enough, it's too slow. It's too complicated. And you get whooped by a muscle car from the U.S. piloted by Joe Biden. It’s pretty confusing for the Europeans right now. And then the vaccine story on top of that, which they've managed to turn into a disaster. So yeah, in terms of the transatlantic balance, it's been a real rollercoaster whiplash. And I think the awareness of that in Europe is quite intense. If you speak to decision makers over there, there is a real sense that they don't understand quite how they lost the plot and how they've ended up looking like, it looks like a rerun of 2008 after all in the sense that the U.S. pulled out of that — as many complaints as we might have about the slow recovery from 2008, 2009 in the U.S., at least it was all going one way, at least through 2015, 2016. And that wasn't true in Europe, of course. And I think they fear that they're going to end up there again.

Tracy:
So just on that note, Adam, what do you think accounts for the U.S.’s ability to get its act together when it comes to fiscal stimulus? And I mean, we've already talked about how it wasn't necessarily a perfect execution, and there was a lot of uncertainty over whether they would get it done or not, but in the end they did. So why, in your opinion, was that able to come together?

Adam:
I think it's a story of several different phases. The continuous through line is that America has to act right. A lot of this is forced action, and this is the comeback you'll get from any European you talk to. They've got automatic stabilizers, they have sophisticated labor market institutions. So they didn't see the surge in unemployment the United States did. And that was clearly critical in March in driving it. I mean, those terrifying Thursday mornings, when we would get that hit of data at 8.30 with 6 million Americans losing their jobs in a week. It was staggering stuff. And that clearly was crucial to pushing, I think, that very surprising consensus in Congress. Then we had the coincidence of it being an election year and the Republicans having their guy in the White House, which was crucial, not crucial enough it turns out to actually drive a stimulus through over the summer, which may have cost Trump the presidency.

Then I think in the fall, again, it was the fact that the social crisis in the United States that was looming was just so severe that the Republicans felt that in light of the upcoming Senate elections in January they had to do something. The really surprising moment, I think most of us agree, is what's happened under the Biden administration, right? Because we could have seen a rerun of Obama 2009. And instead, what we've almost seen is a kind of escalatory logic, at least insofar as we're talking about the immediate response to the Covid crisis. I think the American jobs plan is a different beast altogether. It's much more modestly proportioned, but to deliver another huge hit of essentially relief, so it's almost like a fiscal security blanket for families which are still struggling and there are millions of them.

And Jay Powell has done a remarkable job as Fed chair and consistently pushing the fact that the labor market is much weaker than it looks in some of the numbers and that I think is really this surprising thing. And it has to do with a shift in logic inside the Democratic party. I think they've abandoned the search for bipartisanship. That means that they need every single vote from within their own caucus in both houses. And all of a sudden then, the left has leverage too. And we know where they progressively moved in recent years in part under the influence of radical political economy of different types, whether it's classic Keynesianism or MMT, in any case towards an aggressive assertion of the need for large, fiscal action.

And I think that's where, that's how we've had this really rather remarkable moment. There is an acute social crisis that isn't addressed by robust institutions. There's an uncertain recovery, there's a massive political imperative to do something that demonstrates the Biden administration is in control of the situation to give them a hope of not failing in the midterms. And then I think there is a serious rethink going on within the ranks of the Democratic party. And perhaps the pivotal people here are folks like Schumer, who've moved from a relatively cautious position to an open advocacy of really large-scale fiscal spending. And so then the balance hinges very much on the swing votes between Manchin on the one side and the left on the other,

Joe: 
I'm curious, you sort of hinted at it there. And I mentioned earlier in our discussion, you recently wrote a very long essay about Paul Krugman’s career intellectual trajectory. And at the same time that there are interesting things happening within the Democratic party, here's also interesting things --maybe sort of mirroring it — in the world of economic thought. And you have some high-profile thought leaders, economists moving much more towards the sort of old-school Keynesian, MMT-style thinking. Whereas some of the old defenders of maybe Obama and Clintonomics like Larry Summers and Olivier Blanchard don't seem to be at the at the forefront, or at the center, of influence right now. How do you see that sort of parallel track hanging out within the economics world and also as you were describing the Democratic party?

Adam:
Yeah. It's a fascinating scene. And I think we're only really beginning to sketch its outlines at this point. And I have to say my opinions shift almost certainly weekly, if not daily, given the train of events. But I think one story here, I think there's maybe three different lines that are worth pursuing. One is indeed a sort of intellectually justified shift to the position that says inflation's not a serious risk, the Phillips Curve isn't what it used to be, in any case we have the monetary policy tools necessary to stabilize, you know, let's go for it. Then I think there's the even more radical position, which is Krugman’s at times, which says this is all about politics. I don't actually care that much whether or not there might be some inflation risk. The far bigger risk to the American Republic is the prospect of the Republicans gaining power again.

It’s a sort of an overt embrace of political priorities over all other priorities. And so one is, as it were, a technocratic argument that says the economic risks are not that severe. Another position is to say even if they were severe, even more severe is the prospect of a Republican comeback, we have to prevent that at all costs. I think sitting slightly at a side from this are indeed the Blanchards and the Summers  of this world. And I have to say that I've struggled with their position a bit and actually feel a greater degree of sympathy now we've seen the American jobs plan than I did before, because I think their position after all has always been we don't need to worry about debt quite so much, and no one has made that case more consistently than Blanchard, but Summers as well, working with Thurman and people like that has consistently said that. Their main criticism of the first Biden stimulus was simply that it was a sugar high, right?

That this was delivering stimulus in a highly inefficient way, whereas the priority needed to be investment. And furthermore, this large initial injection of, as it were, immediate stimulus would prejudice the chances of a large investment program in future. And so it was dangerous from that point of view. And furthermore, with a view to 2022, if the aim of the game is in fact to be in the best macro position possible ahead of the midterms, then coming off a sugar high from this immediate hit of stimulus may not be the best place to be. I don't think they said that out loud, but I think one can infer that. And if you look at the jobs plan, you've got to say, you know, it is massively undersized.

And when it comes to the jobs plan, it turns out that they are doing pay-fors, which to me is sort of really topsy-turvy because presumably it's an investment program so that's precisely the kind of thing you would borrow for, but all of a sudden we're back in the pay-for territory. And why, because of politics. Because basically they think that's what Manchin will buy. And then you run the social justice argument that says, well, if we're going to have pay-fors, what should they be? Well, they should be corporate tax increases, which is nothing wrong with that. It's just that there's only so much corporate tax increase that you can get through and that then caps the overall size of your investment program at $2 trillion-odd. And $2 trillion-odd over eight to 10 years, doesn't address any of the big ticket items you've addressed it too. It doesn't allow you to mount a credible challenge to China in the high-speed rail stakes. And it doesn't allow you to address climate change really consistently.

So I'm actually in a space of, it doesn't negate what happened with the $1.9 trillion. It doesn't negate the historical significance of that move, but I'm beginning to worry that there isn't more wisdom in Summers's intervention on the question of the relationship between the initial stimulus and the investment part that's followed and the way in which the political argument has shifted between those two components. And I am very much focused on this question of how America establishes itself as a credible contributor to let alone leader to the global fight on, on climate. And this American jobs plan doesn't do it. It's far too small.

Tracy:
So I'm trying to think how to phrase this next question, but I think a lot of people listening to that would agree that there has been some sort of shift on the Democrat side to becoming more willing to embrace fiscal stimulus, of one sort or another. There's still a lot of debate over exactly what that looks like, but in general they seem more willing to do it than they were before. What does a world where governments embrace fiscal stimulus more frequently actually look like to you? And how does that change your existing understanding of the way the world or the economy works?

Tooze:
Well, it's tempting to imagine it as a return to a utopia. There was a lot of talk last year of new social contracts, people who know some economic history were invoking the example of wartime exigencies and mobilization. I mean, it could be that kind of a world. That was the sort of vision after all, that the green new deal sketched for us. That we would identify grand strategic targets and then head for them in a concerted way. My rather jaundiced, disillusioned sort of take on last year is that that was sort of sugarcoating the story.  In fact, we saw a policy of a very improvised type or rather Frankenstein variety, reall, in which we stitched together a variety of emergency crisis responses, whether they were to the hiccup in the Treasury market, which one shouldn't underestimate the significance of, or as it were to the weakness of American social institutions, which required the distribution of, of checks.

People talk about it as welfare without the state, right? So it's, as it were, a sort of unmediated relationship between the fiscal apparatus and American citizens, without actually any intervening administrative apparatus that provides the security of a government apparatus administration. So in some senses, despite breaking with the old conservative fiscal rules such as they were, and in America, they were always observed in the breach, it still has a slightly Reaganesque feel to it. Look, it isn't really the government that's showing up. It's just the check. So I think there are many different worlds that could unfold within an era of fiscal disinhibition and they could in fact be the program for concerted state-building with essentially social democracy in America, that is indeed what the left of the Democratic party would love to see. But it could also be something much more ambiguous in its politics in which we compensate for the huge shock suffered by the most precarious population with the delivery of occasional checks, which arrive depending on whether the president feels like signing or not, meanwhile, the monetary apparatus does the job of sustaining those of us who have financial portfolios and keeps that wealth growth ticking over by QE and other types of intervention. That's a very different scenario in terms of the future of America and indeed global society.

Joe:
I think that's a super fascinating point. And one of the things I've been thinking about in the last year, and again, I know a year ago we were talking about the testing crisis and all this sort of failure of U.S. institutions. One set of institutions that seemed to hold up extremely well, weirdly and people will probably get upset, is large corporations executed their business extremely well. If you look at the Amazons of the world or the Walmarts of the world and the grocery stores of the world, in a  period of incredible crisis and stress to supply chains, like there really weren't massive shortages. Businesses managed to figure out a way to transition their workers to remote work very quickly. So you could sort of  imagine this nexus where we trust corporations for governance of things and then the government supplies the cash so we have the spending power.

Adam:
Yeah. I mean, quintessentially, even in the financial sector, this time, the banks weren't the problem. So there an instance of that, but I completely agree that the emergence of Amazon as a de facto public service provider was an extraordinary phenomenon. But I guess the crucial thing is not to romanticize it, right? It's to not to buy the corporate hype and to recognize the extraordinary inequalities that operate within those organizations, such that there were hundreds of thousands of workers put in various types of risk as a result of our inability to shield them properly. And I think that's the crucial thing. Absolutely. There's no denying the efficacy of those organizations. And many of us, all of us on this call right now, rely on that infrastructure for the normality that prevaile in many of our lives throughout last year.

We stayed at home in our relatively comfortable accommodation and got on with our jobs based on an electronic infrastructure that worked for us because we had access to it whilst hoards of workers took the risks of supplying us with the groceries that we needed and so on and so forth. Those inner qualities I think were absolutely massive last year. And they took on a visceral quality, right? It moves from being an inequality of just status or income to being a really immediate material reality of those who have to take risks and those who don't, those who have incredibly comfortable setups -- I've been more productive than ever in part because I stopped traveling and just sat at home in my comfortable domestic surroundings and cranked -- and I was able to do that because those surroundings are comfortable and my university went on functioning as normal. And I didn't have to scramble around like my wife and her colleagues in the travel sector to just kind of keep things going and make ends meet.

So the divisions within the division of labor become very stark, even in one, in which those corporations go on functioning the way they do. I think that could be also part of the agenda and the forcefulness around corporate taxation. If that discourse of inequality and just the streaming inequality and inefficacy of a tax system which doesn't manage to reach corporations has become politicized over the last 10 years, I think it's quite significant that there's really a convergence on both sides of the Atlantic behind going after corporate tax strategies and modes of corporate tax evasion. Because that is a crucial node in this new political economy, this new order.

Tracy:
Adam, you mentioned the banks just then, and the idea that for once banks were not the problem. And I think the robustness of the financial system, in this instance probably surprised a lot of people is that vindication for the post-2008 regulatory regime that was put in place? Is that why banks and other financial institutions were able to weather the crisis reasonably well?

Adam:
Well, it’s a counterfactual so we'll never know for certain how they might have behaved without the rules. But we know the rules were absolutely pushing in the right direction. And I certainly would oppose the efforts by prominent and articulate and well backed-up spokes people from the corporate banking side that argued if the regulations had been lighter, we might not have experienced the Treasury market turmoil that we did in March. Cause you can kind of see that argument coming a mile off. I broadly speaking think that yes, you know, these are all experiments. We don't know counterfactually what a system without those kinds of interventions would have looked like, but there's a first cut. Yes. Forcing the banks to accumulate more capital, which they no doubt would probably have done anyway because they don't actually want to fail, but forcing them to do so and exercising the macroprudential oversight that we do is surely a step in the right direction.

And what I think has also been remarkable is the extent to which it's been rolled out worldwide, the extent to which major EMs now also practice various types of macroprudential supervision. And to me, the new frontier is, I would submit, has got to be to extending that to other actors and the sheer obscurity of what happened in March -- the fact that so many people have had to puzzle so long to find out who sold what, when to whom in March -- is an indication of the fact that we need more and more transparency and more regulation of non-bank financial actors, which are clearly at the forefront of new developments in the financial and then in the financial system. So yes, in broad terms, I think that is another area where we've seen progress.

There was a great Economist calculation of what would have happened if the banks had been as poorly capitalized in 2020 as they'd been in 2008. And even if that was a sort of alarmist calculation done on the basis of some of the worst scenarios in the spring of 2020, that fact alone, would have been, the fact that one could see the collapse of several large banks coming would by itself have been enough to create a panicky situation in that spring. And we didn't have to deal with that. We didn't have to deal with a truly massive imploding balance sheet. I'm not even thinking of Lehman, Citi or somebody like that. The really big boys in ‘08, ‘09.

Joe:
Speaking of ‘08, ‘09, your last book ‘Crashed’ really talked about the sort of central role of the dollar system and the importance of the Fed extending swaplines, and if there was any ambiguity after 2008, 2009, about the importance of the dollar, there really shouldn't have been. And then you mentioned earlier in the conversation, in the comparison between the U.S. and Europe, there's still this sort of idea that the U.S., particularly the U.S. consumer, is just, there's no comparison. They’re sort of the consumer of last resort, the U.S. has to spend. And if you look at the U.S. trade deficit, it's absolutely blowing out. Somethe thing I'm curious about though, is the future of China and how you see China fitting into your thinking right now? Because obviously the economy has recovered pretty rapidly in China, it seems to have done a very good job by any measure of suppressing the virus. Where do you see its role and its standing and in sort of the thing as you compare the different performance of different entities and thinking about it for your book, the trajectory that China is now on?

Adam:
Yeah. This is I'm sure the most important issue really longer-term and also for European-American relations, because increasingly those will be defined by the stance that they respectively take towards China and the China story frames everything that happened last year, I think. After all, this should have been an absolute disaster for Xi Jinping’s regime, even if, let's just allow that they actually managed to control it in the way that they did, if the Western States had acted as one would ideally have imagined, they would have acted in February and March and contain this. If China had simply taken the hit that it did in February and March, this would have been the most severe shock that the regime has suffered since 1989, because it was a very serious blow to the Chinese economy where the unemployment numbers for China are very contested, but labor market blow was at least as severe as that suffered by India, the other giant EM. 

In other words, absolutely catastrophic for the vast force of migrant workers, 50, 60, 70. I mean, it's really a guessing game as to how severe, but we're talking about one of the biggest labor market shocks in history -- far worse than that in 2008. But we handed them a huge victory, right? The failure of the West, the failure of Europe and the United States, has defacto handed the Chinese a giant propaganda victory, and also not just propaganda, but victory in terms of political legitimacy domestically. Which is the averse of what should have happened. And on the basis of that, I think we've seen a pretty concerted push by Xi Jinping's regime to assert itself and to do so at the expense of stressing its relationships with let's forget America for a second, because the, the pressure to escalate on the American side was so extreme in the late phases of the Trump administration, but with Europe as well, right?

They've adopted an increasingly bullying attitude, culminating in the extraordinary events of the last couple of weeks where remember in December, the Chinese pulled off this coup diplomatically by getting a Macron, Von Der Leyen to sign up to an investment deal with China, which was widely seen as a slap in the face to the incoming Biden administration and assertion of European autonomy that was heading in towards an increasingly uncomfortable relationship of appeasement with China, fundamentally, driven by business interests. Then it's only predictable the Europeans impose sanctions on some mid-level Chinese officials directly involved in the grotesque repressive regime in Xinjiang. And how does Beijing react? It could have just played it cool and said, well, whatever, that's a different issue, investment is the priority. No, they slapped sanctions on European parliamentarians, who are the people who actually have to ratify the investment treaty.

So it's dead. So there's something going on on the Chinese side, which I don't think we have a really good grip on yet, and that is going to be dispositive. Cause I think that the Biden administration would like to silo too, as the Europeans were proposing. I think one of the shifts we're seeing from the Trump administration to Biden, Trump was fusing all of aspects of American policy towards China, certainly by the summer into an aggressive front. What you see with climate diplomacy, particularly, is Kerry wanting to say, look, we'll take climate off in a silo separately and do amicable policy interaction, cooperation with the Chinese in that domain, and then allow Blinken in the State Department — the defense hawks -- to run their policy towards China on a separate track. And Beijing has said to the Americans, I think on that too, that's not happening.

So that forces a sort of continuous rearrangement of strategies in the West, because it's not clear whether siloing and separating out policy domains. So you could separate out investment treaties or climate policy from issues to do with values, to do with human rights or just flat out geopolitical confrontation in the South China Sea. It's not obvious that Beijing will allow either the Europeans or the Americans to play that game. And I think that comes as, my guess — and I'm by no means an ‘inside China’ specialist -- but my guess is that that comes from the sense on the part of Beijing that really now's the time to up the ante. The West is in a mess. China has come through this crisis relatively coherently, and they're going to push quite assertively and set terms themselves. And that makes obviously for a very precarious, very dangerous, very uncertain situation going into this year and into the medium-term future.

Tracy:
So Adam, I'm looking at your Twitter feed at the moment, and there's one tweet that I think sort of sums up the contrast between 12 months ago during the depths of the market sell-off, versus where we are now. And it's a chart that shows changes in forecast GDP for the major economies, versus pre pandemic. And the U.S. is I think the only major economy that's expected to have higher GDP than before the pandemic. And you tweeted: “In 2020, it turned out a crisis in the U.S. could be so severe that it triggered policy responses so massive that they raised the GDP outlook four years later.” And I think that really encapsulates some of the surprise of all of this, but is there an implication that the U.S. has in some way overdone it on the policy response versus other countries? Or is it just that other countries haven't been able to get their act together, like the U.S.?

Adam:
Yeah, that's a great chart. First of all, shout out to Daily Shot, who’s one of my regular sources of chart data. Fantastic newsletter. Everyone should subscribe. That chart is remarkable. And I don't think it shows overshooting or exaggeration. What it shows is the shift in politics has shifted the political economy of the United States that we've been talking about, which changed the parameters. And we know how far below really longrun trend if you project back to 2008, the United States has been. It's been languishing below its long-run growth trend. And so to that extent, no, I'm not in the overshooting camp. I'm definitely in the ‘running the economy hot’ camp. I think for a whole variety of different reasons, political — it's a matter of social justice. And I think it's an experiment that the United States should undertake, because if it's correct that we can, as it were shift the envelope of potential productivity growth by keeping the economy on that high track, then this is a huge possibility for further, yfor future growth. 

And this is the moment in a sense this crisis has opened the door to that possibility in American policy thinking. It is a gamble, as I think any conclusions that we draw from 2020 are. But we've got a pretty good idea that we can contain the risks if they should arise in the form of inflation. And we have a political configuration in which at least one party is motivated to make this experiment. And I think it's fascinating and broadly speaking, it makes me optimistic as that chart should truly do it. It shouldn't distract us from the fact that the pandemic everywhere else is ongoing. So those data may need to be revised even further downwards for other parts of the world, because that's the other shocking thing in that graph right. It’s the downward adjustment for the emerging markets for Europe. And so we may see polarization coming out of this.

Joe: 
Adam. It was absolutely great catching up with you. Absolutely great chatting with you. And we’ve definitely got to do it again later this year.

Adam:
Oh no, certainly, I think this is a story to follow. So it was an absolute pleasure as always guys. Thank you very much.

Tracy:
Thanks Adam!

Joe: 
It's great catching up with Adam. I don't think there's anyone who quite seems to have his knack — and it's why he's had the success he's had clearly -- but his neck to sort of synthesize the combination of big ideas with current events quite the same way.

Tracy:
Yeah. He's sort of like the most macro of all the macro people out there. Definitely able to range across a bunch of different things. You know what I was thinking when we were talking about this idea of corporations taking on more responsibility for social services? Did you ever read Margaret Atwood's ‘Oryx and Crake.’

Joe:
No, tell me about it.

Tracy:
It’s like a science fiction book but in there social services are provided by companies. And from what I remember, everyone instead of being loyal to a country, they're loyal to their employer and rely on them for protection and healthcare and food and things like that. So maybe that's the direction we're heading.

Joe: 
I’ve got to read that now. I really do think there is a lot there because I think if you look at what the U.S. government really delivered well in the last year, it was clearly the checks and writing big checkbooks to households, but also writing checks to companies and also writing big checks to pharmaceutical companies so that they would be able to safely or aggressively pursue the vaccination research. But then if you look at sort of like who I think, uh, performed well in terms of delivering, I do think that people would say, ‘Oh yeah, Amazon,’ a lot of people, particularly stay at home, people who worked from home and others, would say that in terms of like performance companies like Amazon and other large corporations did their jobs very well.

And I think also, you think about the political splits in this country, the increasing sort of alliance I would say between the Republican party and not business per se, but like small business specifically as this sort of like entity that doesn't quite, you know, most small businesses did not quite thrive nearly as well as Amazon, a lot of resentment among small businesses for the expanded unemployment insurance that the government delivered. And so you could see how there's sort of like this, how this ends up splitting politically. But I think it's a really interesting thing to think about.

Tracy:
Absolutely. And the other thing is that chart that we were talking about at the very end showing pre-pandemic GDP forecast, that one just sort of summarizes the whole situation to me, which is that the pandemic is ongoing in a lot of places in the world, but also if you got the policy response or the policy mix, right, there's a chance that you came out of 2020 on a better footing than you would have without Covid, which is pretty amazing — again, contrasting that with where we were in our mindset in April or March of last year.

Joe:
Yeah, it really shows how malleable the future is. And we had this really terrible recovery post-great financial crisis, and we had a fairly small fiscal stimulus in 2009 and then never really did anything further. But I think in retrospect, clearly we could have probably come out of it much faster with more aggressive action. And I think this time due to sort of like maybe some luck, the way the, uh, things happened politically, we obviously had way more aggressive action and we're seeing it. And I think it sort of speaks to how much the future can't really just be taken for granted as we know what it's going to be.

Tracy:
Yeah, absolutely.  All right. On that note shall we leave it there? 

Joe: 
Yep, let’s leave it there.

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