Michael Spence (MS): The economic outlook is a little grim and tough in the short to medium run. There are two things going on. One is the pandemic, which forced us to conduct experiments in the economy that we normally would have conducted at a much slower pace. And some of those experiments are going to result in learning that changes the whole pattern of work – maybe more working from home, maybe a lot more collaboration, and maybe less international travel.
But the flip side is that the pandemic economy both domestically and internationally has suffered an adverse shock with respect to distribution. I looked at a study done at the University of Chicago by a couple of professors early on in the pandemic, and they asked the question, “What fraction of work can be done at home in the United States?” Their answer is (an approximation, because they did it really quickly) was one-third. They also looked at it by geography and then by sector, which is really striking, ranging from around 80% in the tech and financial sectors down to 4% in hospitality, which we’ve had to mostly shut down in the pandemic.
Then there’s a serious question that none of us knows the answer to: how fast they can come back? That, I think, depends primarily not on policy so much as how fast we can get the pandemic under control, meaning the prevalence down to the point that people’s risk aversion doesn’t cause them simply not to go places.
And that looks like it is a process that varies across countries. The Chinese have done it more aggressively using tools, including digital ones, that we are not willing to use. And in the west, it is pretty clear the process is not going well. Certainly, there are a set of sectors that are going to struggle to come back.
Driving Change (DC): Let’s talk first about Europe versus America, where different approaches were taken to the question of, “Can we keep people in jobs for as long as possible, and hope that we come through the pandemic with as much of the existing economy and workforce in place that when things do start to grow, again, we’re not having to rebuild from scratch?” How are those experiments and different policies playing out?
MS: There are real differences, but the similarity is that everybody basically decided they had to buffer the economy, meaning the household sector and lots of businesses that weren’t going to make it. The shock – and most people don’t think of it this way – is to the balance sheet. There are a bunch of parts of every economy where the people’s balance sheets are fragile and thin enough that they are not much of a shock absorber. So what governments in general have done, basically, is run big deficits and transfer some fairly substantial amount to the sovereign balance sheet, where it’s not perfect, but certainly easier to manage.
After that, it gets more complicated. In the United States, we had a bunch of programs and unemployment insurance, which is not new, we had programs to support businesses keeping people on and so on. The Europeans were further down that road well before the pandemic, having used this kind of technique in the great financial crisis of 2008/09 and even before, most obviously in Germany and some of the northern countries. But it is also true in Italy, where I live some of the time, which has a program that’s similar, where the state absorbs some of the costs.
What these economies do is encourage businesses to partner with the state, basically to redistribute the costs around. So jobs get slimmed down, but fewer people are unemployed – they kind of spread the work around. I think that is actually a pretty sensible way to do it. But it is hard to implement. So if you haven’t put such a scheme in place beforehand, you can’t you can’t snap your fingers and get it done overnight.
DC: So do you think that America is going to suffer from prolonged higher rates of unemployment because it hasn’t had that kind of job sharing scheme? Or at some point, as the furloughs and other job-sharing schemes reach their time limits and stop in Europe, will the unemployment rate there eventually soar too?
MS: Yes, we have too many variables! I would say that, if you held everything else constant, American unemployment would be higher. But there are elements in the American economy that might produce faster growth. Where I am in Italy, we have grown essentially negligibly since the year 2000. So that factors in as well. While I’m not wildly pessimistic, I think there are going to be pockets of real distress, people in sectors that really do struggle to come back. That will make unemployment higher than we would like. Especially as it will be a struggle to move those people into other sectors as the economy recovers. There will be a challenge of structural transition of a certain type.
DC: There’s an ongoing debate about what shape the economic recovery will be: V, W, square root shaped, even a K, where half the economy goes up and the other half goes down. What is your default prediction for how the economy grows from here?
MS: The square root is the one that’s been used most often in the United States, or as the French call it, the wing of a bird. So you get a sudden very big contraction across countries, then you get a flat period where you’re trying to get the virus under control. (I’m speaking now mostly about the developed countries just for a moment.) And then you get things that can come back fairly rapidly, so you get something that starts to look like the start of a W after the after the trough. And then you get ones where the headwinds are a lot bigger, like international air travel: I don’t know when people are going to feel safe and comfortable doing that or when all of the bilateral international restrictions are removed (which doesn’t look like it will be very fast). So you go down, back up fairly fast, and then start to level out: that’s where the square root square root idea comes from. I think that pattern is a reasonable guess.
DC: In terms of job creation, normally economists would say just get the economy growing again. Is that the right policy at this point? Or is there more that can be done beyond the stimulus packages there have been so far?
MS: The thing we lost track of in America is that the other best thing you can do is get the pandemic under control. I think the differences we see across countries are mainly attributable to that. So a widely available vaccine, provided people actually have it administered to them, would produce a V very quickly, but there’s hurdles, even there. I’m appalled at surveys that I read, that a third of the people say they are unwilling to have the vaccine injected. I’m not terribly aggressive about this, but there’s a balance between individual freedoms and rights on the one hand and collective interests.
My friend, Mohamed El-Erian, put it well. He said, in finance, everybody knows what counterparty risk is. And, if it is big enough, the system stops because nobody trusts the other party. What we have now is individual human counterparty risk: as long as the prevalence of the virus is pretty high, everybody is a risk to everybody else. So we need to do things that reduce that risk, to restore confidence that you can safely engage in ordinary economic activity, like riding the subway to work, and stuff like that.
We’ll talk more about China later – but China uses digital tools in a way that we probably can’t, because of concerns about data and privacy and even trust in the government. So the Chinese are walking around with mobile health certificates that are color coded. So if you’re in circulation in China that means that a system powered by a fair amount of data thinks that your probability of being infectious is relatively low. We basically can’t do that. Put it into crude terms: we are all yellow.
DC: To what extent has a mask become a sort of proxy for that? If people are wearing masks, does that overcome the counterparty risk sufficiently that normal life can resume some extent?
MS: It certainly helps. I’m no expert on the medical and epidemiological side of this. Social distancing, I think, is helpful. Being outside is certainly helpful. It seems pretty clear that the most dangerous situation is lots of people in an enclosed space with poor ventilation. So if you’re outside, you’re not gathering in large crowds, and you’re wearing a mask, while it is not a perfect substitute for what we were just talking about, it certainly helps if everybody complies.
DC: You brought up China. It started there, but they got on top of it pretty quickly. What is the economy doing in China? What happened to job losses and then job creation after they started to get the pandemic under control? And what does that tell us about what might happen elsewhere?
MS: China’s recovering pretty quickly. It basically took the hit in the first quarter, mainly, whereas we took the hit in the early part of the second quarter. So they are ahead of us. But because they were so aggressive about it, they literally locked down a whole city of 11m people and didn’t let anybody go in and out, China is looking more like a V shaped recovery. But even there, you know, there are sectors that are going to be stubborn with respect to recovery. And China is still an economy, like many others, that is dependent on the state of the rest of the global economy. And there’s nothing they can do about that except live with it. So it’s a faster recovery than we’re seeing in some other places, but it’s not just snapping back.
DC: We have been talking mostly about the developed economies. What are you seeing in the developing economies? Does this set back the path of development for a lifetime?
MS: I think it does, for a while. So if you think of the resources the developed countries went into this with, we’re richer, our balance sheets are a little bigger. The sovereign fiscal space is bigger in developed countries than in than in many developing countries. And the medical situation is, they have less capacity. In terms of the kind of basic economic policy tools that you need to use, they are less well armed.
If you look at the tracking data for India, the economy is coming back but it’s coming back with the virus still growing at a pretty rapid rate. I’m not sure the data are all that good to make significant comparisons across, especially, the poorer countries, but what I’m worried about is that the health/ livelihood trade-off is much starker in the poorer parts of developing countries, or in just plain poor developing countries, and that they’ll be forced open up the economy, and then just have to accept the consequences in terms of health, because the alternative, which is locking down the economy for extended period, is worse. That’s not necessarily an economic catastrophe. But it’s not something that from a health and human welfare standpoint you would wish to see. A vaccine, or some other therapeutic that really works, if it’s widely available, would help. There is some international support on all those fronts, medical, financial, and so on. But I don’t think it is big enough to blunt the blow to a number of countries.
DC: If so, will they continue to be isolated from the global economy, to some extent?
MS: They will and they will have to deal too with the unknown consequences of a fragmenting global international infrastructure. For much of the postwar period, these poor countries lived under the big multilateral tent that the United States and others built. It was an important opportunity for growth for many of them – and they still need it, especially the poorer countries. So we don’t know, at this point, whether tensions between the US and China and other tensions – Europe is not getting along all that well with China right now, either – will produce some kind of fragmentation that diminishes the opportunity for smaller developing countries, I’m not saying the whole thing is collapsing, to the point that the opportunities are gone, but it is getting there.
The other thing they have to deal with is that digital technology is moving so fast, in the area of automation, vision, robotics, and so on. Labor-intensive process-oriented manufacturing as a source of competitive advantage may not be as powerful a driver of the export side of growth as it was in the past. That means not that the global economy is unimportant, but that they have to invent or discover other ways of leveraging the global economy, other sources of comparative advantage.
DC: So the old Chinese model of making lots of cheap stuff for the West is not going to work anymore?
MS: I think a lot of countries are hoping that the baton will get passed, and the opportunity won’t collapse so fast that that it cuts them off. But it looks like it is at least a threat.
DC: So we have these two big policy challenges in terms of what we do about the future workforce and getting people jobs. One is the pandemic-related concern about industries where there’s high human counterparty risk, as you put it: tourism, travel, etc. The other is where these digital trends have been accelerated by everyone being stuck at home. What policies should governments be adopting to deal with those two quite different shocks in terms of equipping people to get back to work?
MS: You are right. They are different. I don’t think there’s a magic bullet, other than vaccines, that are a substitute for getting the virus under control. So on that one, I’m pretty clear. If you are in an industry that is reliant on basically having trust and low human counterparty risk, such as tourism, your only strategy is to convince potential visitors that it’s a virus-free safe place, and you have to convince domestic folks that it’s safe to let them in.
On the other one, digital and jobs, the lion’s share of the discussion, which is not misguided, has to do with really ramping up our capacity for helping people change what they do, their skills and so on.
Actually, digital tools are showing, partly as a result of the pandemic experience, that they’re really quite useful in doing that. But we are going to need more collaboration that involves business, educational institutions and government. You know, we thought that before and it’s even more true now, but can we get it done?
DC: What do you have in mind, specifically?
MS: Everybody has pieces of the puzzle, right? Businesses know how their business model is evolving and they have a pretty good sense of what skills they need. Armed with the right tools, they can be pretty good educators or partners with educational institutions to get the job done. There’s a reasonable amount of evidence that done at a local level, with state governments or local institutions, that these partnerships actually kind of work.
A second piece of the puzzle, that nobody I know, is wildly enthusiastic about, is the current scattershot approach to international relations and international trade. We could have a strategy for dealing with China and for dealing with international trade and institutions and so on. We know all that has to change; we are not going to go back to where we were before. That strategy could include domestic employment, around where jobs reside geographically. Done stupidly, that doesn’t really help, but done smartly, I think it could.
The part that seems to me hard I wrote about recently. In the publicly-traded equity markets, an increasing part of the value that is being created is in is being created by intangible capital. And the entities that are creating it are doing it with a relatively small number of employees. If you stand back from it – and I’m overstating it for simplicity – employment is diverging from value creation measured in that way. Then you ask the question, “Who owns that capital?” The answer is, it is a highly concentrated set of people at the upper end of the wealth distribution, and a bunch of institutions.
I think, to fully solve this problem, we are going to have to figure out a way to have broader participation in value creation, the turbocharged parts of the economic value creation process. We don’t have that now; actually, nobody has it. This is a challenge that no country I know of has actually addressed effectively.
DC: This crisis has brought about an acceleration of a lot of the trends towards greater concentration of wealth amongst a small part of the population. As you say, this does open up some very big questions. Firstly, if most people aren’t going to be in jobs that are high in value creation, or there won’t be any jobs at all, do we need to provide some kind of universal basic income or equivalent of that to keep people in a decent standard of living? And do we need much heavier taxation of the wealth – and how easy would that be to do politically and practically? Is there a need for nationalizing chunks of the value creating part of the economy, maybe into a common or sovereign wealth fund of some kind?
MS: Well, these are things that, if you get them wrong, can really screw up the economy. On the other hand, the trajectory of the distribution of balance sheets in the economy is not very promising from the point of view of political and social cohesion. I think the most promising avenue to explore (and I don’t want to pretend that this is a worked-out solution), is to have the public broadly, maybe through the government, be passive owners of the growing parts of the economy.
DC: How would it be different from more taxation, the traditional way that we’ve done that?
MS: Given the outcome of the election, I think we’re going to do more taxation. But I think exploring this other avenue as a complement to that is a worthwhile idea. We’ve discussed bits and pieces of this. The late James Tobin put forward a widely discussed, but not implemented, proposal to finance college essentially with loans you pay back based on what you later earn. You would basically pre-commit to a very small fraction of your future income. So people who become artists and musicians, for instance, those who become fabulously wealthy would pay a lot, while others who go into the nonprofit sector and do a lot for their fellow human beings wouldn’t pay so much.
The mechanics of these things need to be worked out. There’s all kinds of moral hazard and other problems that have to be thought through. But I think this is the right time for creativity in these dimensions, as well as the responsible, effective use of the existing tax system.
DC: Are you optimistic that we are going to see that? People have been aware for years of the threat that digital posed to a lot of traditional jobs, traditional middle-class employment. Yet there didn’t seem to be much policy reaction to that. Might the pandemic shock the world’s governments into doing something more ambitious and creative?
MS: It depends on where you are, I think, because the exact challenge varies. In the United States, we still have reasonably powerful engines for generating innovative new economic activity, and we don’t want to destroy those. But we need to address the problem that a significant subset of the population feels, with some good reason, that they were abandoned over the last few decades, and they don’t – I’m going to put this mildly – like their leaders, and the people on the coasts. and so on. It’s a little hard to see that, regardless of electoral outcomes, turning into something that, at least in the short run, looks like a constructive dialogue about how to achieve inclusiveness. I’m just trying to be realistic.
In Europe, at least on digital, the challenge perceived here is that the industry is way behind. They need more platform companies, they need a cloud computing system, that goes along with their policies with respect to data. They need opportunities for very talented, innovative young people to build companies with supportive ecosystems around them, so they don’t have to go to New York or California. So the challenge is to modernize, digitize and get to somewhere near the forefront of innovation. And that has consequences for growth.
This is a slightly different perception of the challenges in Europe, which if you look at Gini coefficients, is a more egalitarian operation. It is not exempt from the pressures that we’ve seen in the United States. David Autor and others have documented that job and income polarization to varying degrees is occurring across a broad swath of the developed world. But we’ve had policies in Europe that have muted the impacts of that to a greater extent than, say, in the UK or the US.
DC: Europe hasn’t had a great record of catching up on these sort of innovation deficits. In two or three years, however we think about the relative effectiveness of the policy response to the pandemic in America and Europe, how likely is it that America will emerge with stronger economic prospects than Europe for the decades ahead?
MS: People in Europe are a little more optimistic because of the new emergency fund financed with European debt. They are saying this is the first time, unlike in the great financial crisis, that Europe has taken the position that we’re in this together, as opposed to “If you’re in trouble, it’s your fault, get out of it”. It remains to be seen if that turns into more momentum on a broader front. Europe’s economy is still fragmented. It needs European level institutions – not bureaucratic ones, but ones that really pump energy into the system. This is bottom line: Europe is pretty far behind.
DC: What is the number one policy recommendation you have for policymakers around the world as they think about how to give their people the best chance of getting good work in the years ahead?
MS: On the work question, I would first get the virus under control. We need to recognize we have a common problem and cooperate with each other on finding solutions to the pandemic, including technological ones, and then focus on skills, job creation and retraining.