WEBVTT - Why Economists Are Looking at Economics All Wrong 0:00:02.520 --> 0:00:14.400 Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Talks Money, 0:00:14.440 --> 0:00:16.680 the podcast in which people who know the markets explain 0:00:16.760 --> 0:00:19.400 the markets. I'm Maren Sumset Web. This week, I'm speaking 0:00:19.440 --> 0:00:23.120 with American economist Professor James Galbraith. James as a professoran 0:00:23.160 --> 0:00:25.360 government at the University of Texas at Austin. He was 0:00:25.440 --> 0:00:28.200 executive director of the Joint Economic Committee of the United 0:00:28.240 --> 0:00:30.960 States Congress in the early nineteen eighties and before that 0:00:31.000 --> 0:00:33.720 in Economous for the House Banking Committee. He's also written 0:00:33.760 --> 0:00:37.960 several books on economics. Most recently is co authored Entropy Economics, 0:00:38.240 --> 0:00:41.159 The Living Basis of Value and Production. This is a 0:00:41.200 --> 0:00:44.240 book GMOs Jeremy GRANTSLM. Called essential reading on the very 0:00:44.240 --> 0:00:46.600 podcast only a matter of months ago, and the book 0:00:46.640 --> 0:00:50.240 that we are going to focus on in today's discussion. James, 0:00:50.360 --> 0:00:51.600 Welcome to Merrin Talks Money. 0:00:52.000 --> 0:00:53.800 Thanks very much. There's a pleasure to be with. 0:00:53.800 --> 0:00:56.720 You your kind, and you couldn't be more highly recommended than 0:00:56.800 --> 0:00:59.520 by Jeremy who every time he comes on it's one 0:00:59.520 --> 0:01:02.800 of our most listen to podcasts. Okay, so you have 0:01:02.880 --> 0:01:07.040 written this book which I have gamely battled my way 0:01:07.040 --> 0:01:09.440 through because some of them's in the middle are quite academic, 0:01:09.600 --> 0:01:15.000 but it's incredibly interesting, useful reinterpretation of the way that 0:01:15.160 --> 0:01:18.039 economies should work. Correct me if I get any of 0:01:18.040 --> 0:01:21.200 this wrong. But the basic idea is pretty straightforward. It's 0:01:21.240 --> 0:01:24.880 that in the main economists look at economies in the 0:01:24.920 --> 0:01:28.160 way they work in terms of equilibrium, as though everything 0:01:28.240 --> 0:01:32.240 is somehow tending to some kind of stable state at 0:01:32.280 --> 0:01:35.560 the end of everything, whereas in fact nothing ever tends 0:01:35.600 --> 0:01:38.399 towards stability. It's not how biology works, it's not how 0:01:38.400 --> 0:01:40.319 the world works in general, so why should it be 0:01:40.640 --> 0:01:43.920 how economies work. So in fact we should relook at 0:01:43.959 --> 0:01:48.280 economics through the prism of not tending to an equilibrium. 0:01:48.560 --> 0:01:51.600 Well, yes, indeed, and since you're in Glasgow, I can 0:01:51.680 --> 0:01:55.880 hardly forbear to mention that, although I have an enormous 0:01:55.880 --> 0:02:00.720 admiration for your predecessor there, Adam Smith, taking a certain 0:02:00.760 --> 0:02:04.400 amount of departure from his perspective. Really, what we're trying 0:02:04.440 --> 0:02:08.160 to do is to bring economics into the main line 0:02:08.240 --> 0:02:13.000 of scientific thinking that developed from the nineteenth century onward, 0:02:13.480 --> 0:02:16.960 and which really make it consistent with the way life 0:02:17.040 --> 0:02:20.520 processes are viewed, the way mechanical systems are viewed to 0:02:20.680 --> 0:02:23.880 give an understanding that the economy is essentially an organic 0:02:24.320 --> 0:02:26.720 construction that has to be thought of in those terms 0:02:26.800 --> 0:02:31.600 and has the same properties as other organic constructions. That's 0:02:31.639 --> 0:02:33.560 the broad idea of the book. That's why we call 0:02:33.639 --> 0:02:35.000 it entropy economics. 0:02:35.320 --> 0:02:38.400 You say, that's why we call it entropy economics, but 0:02:38.760 --> 0:02:42.320 and you probably so superior these days, you don't even 0:02:42.400 --> 0:02:43.880 realize there's a whole lot of people like that. 0:02:43.960 --> 0:02:45.440 Absolutely, no, I do what entropy means. 0:02:46.160 --> 0:02:50.040 It means that every life process taps into high quality 0:02:50.160 --> 0:02:54.079 resources and uses them, and in order to do any 0:02:54.200 --> 0:02:57.119 kind of work, you have to have access to those resources, 0:02:57.400 --> 0:03:00.880 and in the course of doing that work, you degrade them. 0:03:00.960 --> 0:03:04.800 And that's true of living systems, as true of mechanical systems, 0:03:04.880 --> 0:03:08.839 is true of economic systems. What we've realized is that 0:03:09.000 --> 0:03:12.120 the textbook view, if you like, the standard supply and 0:03:12.240 --> 0:03:16.960 demand view, doesn't take proper account of that fact. It 0:03:17.040 --> 0:03:20.600 tends to view resources as a very minor part of 0:03:20.680 --> 0:03:23.600 economic activity because they don't figure all that largely in 0:03:23.639 --> 0:03:26.880 a construct that we call national income or GDP. But 0:03:27.040 --> 0:03:31.000 in fact, without those resources, and without high quality resources, 0:03:31.280 --> 0:03:34.040 nothing else is going to happen. Once you see that, 0:03:34.120 --> 0:03:38.240 you understand that we've essentially misconstrued a lot of economic problems, 0:03:38.480 --> 0:03:43.520 and we're misunderstanding why things are not going according to forecast. 0:03:44.160 --> 0:03:47.560 So most models do not take into account the fact 0:03:47.640 --> 0:03:51.600 that most natural resources uscas, so they assume a type 0:03:51.600 --> 0:03:54.520 of abundance that isn't necessarily there, or at least the 0:03:54.560 --> 0:03:57.960 ability if one resource is not abundant, to substitute for 0:03:58.000 --> 0:03:59.440 an almost equivalent resource. 0:04:00.080 --> 0:04:02.920 Yeah. Well, a small example from the book. One can 0:04:02.960 --> 0:04:07.960 look at gold mining towns in northern Canada northern Yukon territory, 0:04:08.280 --> 0:04:10.560 and you discover that if you accounted for them in 0:04:10.600 --> 0:04:13.240 the standard way, gold mining would not be a very 0:04:13.280 --> 0:04:15.680 large piece of their economy because they had lots of 0:04:15.720 --> 0:04:19.919 hotels and taverns and saloons and I suppose brothels and 0:04:19.960 --> 0:04:23.159 other things. But the fact was that when the mines 0:04:23.240 --> 0:04:26.880 ran out, those places were abandoned and deserted, and they're 0:04:26.920 --> 0:04:29.599 now ghost towns. You know, that's a small example of 0:04:29.680 --> 0:04:32.920 something which happens on a much larger scale. One can 0:04:32.960 --> 0:04:36.080 look at what's happening right now in for example, in Germany, 0:04:36.440 --> 0:04:40.000 which is suffering from an extremely high cost of resources 0:04:40.160 --> 0:04:43.360 as a result of policy decisions that were taken over 0:04:43.400 --> 0:04:46.400 the last few decades, especially the last few years, and 0:04:46.480 --> 0:04:50.120 the fact the industrial system of Germany is suffering very 0:04:50.160 --> 0:04:54.320 seriously from that. In the meantime, if at what's happening 0:04:54.360 --> 0:04:56.760 in the United States for the last ten years or so, 0:04:57.320 --> 0:05:01.839 with the advent of let's say, fracking of natural gas, 0:05:01.839 --> 0:05:04.800 mostly in the Permian basin here in Texas, you see 0:05:04.839 --> 0:05:07.760 the foundation of it of much stronger for the time 0:05:07.800 --> 0:05:11.279 being any way, much stronger overall economy, and even stronger 0:05:11.640 --> 0:05:14.120 manufacturing compared to what it would otherwise be. 0:05:15.000 --> 0:05:17.520 So in Germany, these economic modelers looked at what they 0:05:17.520 --> 0:05:19.640 were doing with their energy system and said, well, you know, 0:05:19.680 --> 0:05:22.159 we won't be using fossil fuels anymore to the extent 0:05:22.160 --> 0:05:24.160 that we don't have to, and we will shut down 0:05:24.200 --> 0:05:28.760 on nuclear industry, etc. They were misunderstanding the fact that 0:05:28.839 --> 0:05:33.480 without access to cheap and abundant energy resources, the rest 0:05:33.520 --> 0:05:35.960 of their economy couldn't operate in the way that they 0:05:35.960 --> 0:05:37.160 had previously expected. 0:05:37.680 --> 0:05:40.440 That's essentially a major piece of it. A second piece. 0:05:40.480 --> 0:05:43.279 A second piece of the argument relates to the relationship 0:05:43.320 --> 0:05:49.000 between the government and markets. In the conventional view, these 0:05:49.000 --> 0:05:52.599 two things are basically opposed. They're antagonistic to each other. 0:05:52.920 --> 0:05:56.400 The government interferes with what, in an ideal world would 0:05:56.400 --> 0:06:00.760 be a let's say, a perfect market outcome balance. We 0:06:00.920 --> 0:06:04.839 call it an equilibrium. But in the reality, all markets, 0:06:04.880 --> 0:06:09.760 all sophisticated markets, but essentially all markets require government. Now, 0:06:09.760 --> 0:06:14.120 they wouldn't exist without having a regulatory framework. And that's 0:06:14.200 --> 0:06:17.200 essentially the same way that our bodies would not survive 0:06:17.279 --> 0:06:21.039 if we couldn't regulate temperature and blood pressure. Our machinery 0:06:21.080 --> 0:06:23.479 would not work if we didn't keep it cool and 0:06:23.680 --> 0:06:27.440 operating within its design limits. And the same is true 0:06:27.480 --> 0:06:30.920 for our economies. So if you then think that deregulation 0:06:31.080 --> 0:06:33.799 is going to make your economy more efficient, our prediction 0:06:33.880 --> 0:06:37.760 would be no general regulation is going to cause breakdowns. 0:06:38.120 --> 0:06:40.360 And you see that, of course in real life when 0:06:40.360 --> 0:06:42.800 you look at the financial system in the United States. 0:06:42.839 --> 0:06:46.040 We deregulated it really beginning in the early nineteen eighties 0:06:46.320 --> 0:06:48.560 and extensively at the end of the nineteen nineties and 0:06:48.600 --> 0:06:51.400 early two thousands, and then we're right on schedule. In 0:06:51.440 --> 0:06:54.160 two thousand and seven, two thousand and eight, it broke 0:06:54.200 --> 0:06:56.919 apart and melted down, and we're still to some extent 0:06:56.960 --> 0:07:00.320 suffering from the consequences. The economist said, well, well, that 0:07:01.120 --> 0:07:04.920 was an unpredictable shock, something nobody could have expected, et cetera, 0:07:05.000 --> 0:07:07.400 et cetera. And the answer is no, if you think 0:07:07.440 --> 0:07:10.600 about it from a systematic point of view, it was 0:07:10.880 --> 0:07:14.600 entirely predictable based upon the policy decisions that were taken, 0:07:14.680 --> 0:07:18.400 which were in turn based upon an economic theory. So 0:07:18.800 --> 0:07:22.560 in some sense, we're trying to bring our theoretical perspective 0:07:22.640 --> 0:07:25.400 in line with way in which basically any business or 0:07:25.400 --> 0:07:28.840 any observer of the real world knows that it actually works. 0:07:29.440 --> 0:07:31.560 You're hardly the first to say that a lot of 0:07:31.600 --> 0:07:34.320 the economic theories and models that we work with are 0:07:34.400 --> 0:07:37.920 fairly useless. They're terrible predictors, and if they worked very well, 0:07:37.920 --> 0:07:40.080 maybe we wouldn't get ourselves into mess up, to mess up, 0:07:40.120 --> 0:07:45.240 to mess So it's no shock to anyone to be 0:07:45.320 --> 0:07:49.960 told that everything's wrong. So why is it that we 0:07:50.040 --> 0:07:53.760 haven't changed the way that we try to run economies 0:07:53.800 --> 0:07:56.160 and the way that we operate on models. When I 0:07:56.200 --> 0:07:59.640 did my economics degree at University of Half, an economic 0:07:59.640 --> 0:08:03.920 agree is does that many many, many years ago I 0:08:04.000 --> 0:08:06.080 was taught the same thing that I think undergraduates are 0:08:06.120 --> 0:08:06.840 still taught today. 0:08:07.440 --> 0:08:10.480 That's an excellent question, But I think the answer to 0:08:10.560 --> 0:08:14.840 it lies in the way politics and economic power intersect. 0:08:15.280 --> 0:08:19.080 There are always forces that want to run the system hotter, 0:08:19.480 --> 0:08:22.280 that want to make an easier, faster profit out of 0:08:22.360 --> 0:08:25.200 in a given situation, and who don't care about the 0:08:25.240 --> 0:08:29.080 long term sustainability of an economic system. This is the 0:08:29.080 --> 0:08:33.319 way in which in which the way speculative forces operate 0:08:33.360 --> 0:08:37.640 on the economy and the way political forces operate on institutions. 0:08:38.080 --> 0:08:39.600 So you have attention there. 0:08:40.360 --> 0:08:43.679 Let's go back to this idea of resource scarcity and 0:08:43.720 --> 0:08:46.199 the use of resources and the running down of resources 0:08:46.240 --> 0:08:50.960 inside a system. There's nothing that can actually be done 0:08:51.000 --> 0:08:55.480 about that, So how do you change policy to take 0:08:55.520 --> 0:08:56.199 account of it. 0:08:57.120 --> 0:09:01.480 Well, normally, in order for the condition had changed policy 0:09:01.520 --> 0:09:05.800 to occur, historically, there has to have been a major disaster. 0:09:06.160 --> 0:09:08.600 There was one in nineteen twenty nine, and it led 0:09:08.600 --> 0:09:11.160 to in the United States a four year depression through 0:09:11.559 --> 0:09:14.480 to the election of Franklin Roosevelt in nineteen thirty three, 0:09:15.160 --> 0:09:19.440 and from that a real extraordinary change in the structure 0:09:19.440 --> 0:09:22.480 of the American economy occurred, with the creation of a 0:09:22.559 --> 0:09:27.800 vast number of regulatory institutions and the setting of a 0:09:27.880 --> 0:09:32.120 policy direction which emphasized the use of new energy resources. 0:09:32.600 --> 0:09:35.120 What Roosevelt had going for him was that at that 0:09:35.240 --> 0:09:37.960 time it just had the discovery of major oil fields 0:09:37.960 --> 0:09:42.000 in Texas, so that you could focus investment on highways, 0:09:42.000 --> 0:09:46.320 in air fields and other activities which used that energy resource. 0:09:46.800 --> 0:09:49.880 But suddenly discovering new sources of abundant energy is not 0:09:49.920 --> 0:09:52.800 a policy, it's a stroke of luck. So I suppose 0:09:53.120 --> 0:09:56.079 my question is that lacking a new source of energy, 0:09:56.360 --> 0:09:59.640 lacking another type of natural resource that we haven't really 0:09:59.679 --> 0:10:00.000 come up. 0:10:00.480 --> 0:10:02.040 You see the way energy. 0:10:01.800 --> 0:10:06.040 Moves through the ages, from wood to coal, to oil, 0:10:06.400 --> 0:10:07.439 gas or whatever. 0:10:07.800 --> 0:10:08.120 Whatever. 0:10:08.120 --> 0:10:12.080 Being the question, Nuclip, there isn't another option out there. Realistically, 0:10:12.320 --> 0:10:14.640 all we can do is attempt to move to renewables, 0:10:14.960 --> 0:10:16.800 and that's, as I say, it's a policy choice. But 0:10:16.840 --> 0:10:19.800 it's not the same as finding a new source of 0:10:20.160 --> 0:10:20.960 dense energy. 0:10:21.440 --> 0:10:26.640 Well, there's the modern situation posses additional difficulties. The fact is, 0:10:26.679 --> 0:10:31.040 of course we are today using more coal, using more wood, 0:10:31.280 --> 0:10:35.079 we're using more oil, we're using more natural gas than 0:10:35.120 --> 0:10:36.920 we ever have in the past. So all of those 0:10:36.920 --> 0:10:40.160 things continue to be used even as new sources, as 0:10:40.240 --> 0:10:43.440 nuclear power came on, as renewables have come on. That's 0:10:43.480 --> 0:10:45.840 the first thing. Secondly is that there is obviously a 0:10:45.840 --> 0:10:49.080 climate question which has to be considered in this equation, 0:10:49.240 --> 0:10:53.480 and that's a relatively new consideration. But the idea that 0:10:53.520 --> 0:10:57.080 you can move from high quality resources to low quality 0:10:57.120 --> 0:10:59.959 resources to ones that were what we call the return 0:11:00.040 --> 0:11:03.040 learnt on energy invested is not very high. It's a 0:11:03.080 --> 0:11:05.920 physical fact. It's a problem, and it has to be 0:11:06.000 --> 0:11:08.280 taken into account. It's going to limit how much you 0:11:08.320 --> 0:11:11.719 can get out of renewables in the long run. So well, 0:11:11.720 --> 0:11:16.000 I'm not, certainly we're not saying that renewables are a 0:11:16.040 --> 0:11:18.040 bad idea, but what they have to be looked at 0:11:18.080 --> 0:11:21.400 realistically in terms of what they can contribute to the 0:11:21.600 --> 0:11:25.920 effective functioning of a competitive economy, of a prosperous economy. 0:11:27.120 --> 0:11:29.320 These these problems have to be faced seriously. 0:11:30.320 --> 0:11:36.160 Okay, So if global economic organizations and big governments at 0:11:36.160 --> 0:11:40.200 the moment accepted the premise of your book and accepted 0:11:40.200 --> 0:11:44.280 your ideas, what policy choices would they be making now 0:11:44.400 --> 0:11:46.440 that are different the ones that they are making? 0:11:46.920 --> 0:11:47.480 Do you think? 0:11:48.280 --> 0:11:52.400 I'll offer two big, big thoughts here. One is that 0:11:52.679 --> 0:11:56.800 our societies have developed an enormous amount. Well, it's basically 0:11:56.800 --> 0:11:59.560 one big thought, if you like, with two aspects of it. 0:12:00.120 --> 0:12:04.160 The society has developed a lot of fixed overhead. One 0:12:04.200 --> 0:12:07.640 piece of this is the financial sector. It's much larger 0:12:07.679 --> 0:12:10.280 than it ever used to be. It absorbs much more 0:12:10.320 --> 0:12:13.880 in the way of resources, and adding to the size 0:12:13.960 --> 0:12:16.560 of the mass of the financial sector, one now has 0:12:16.640 --> 0:12:20.320 the enormous energy resources that are being absorbed by mining 0:12:20.360 --> 0:12:23.199 for cryptocurrency. In this kind of thing, we need to 0:12:23.240 --> 0:12:26.040 think about whether we can cut back and make that 0:12:26.320 --> 0:12:29.400 sector much smaller, much more efficient, and make it serve 0:12:29.480 --> 0:12:32.720 the productive sector rather than being the master of the 0:12:32.760 --> 0:12:36.160 productive sector. Number two is the question of the military. 0:12:36.360 --> 0:12:40.679 We have an enormous overburden of military expenditures. This is 0:12:40.679 --> 0:12:43.200 particularly true of the United States, which has the largest 0:12:43.720 --> 0:12:47.600 the military expenditure in the world. Much of it invested 0:12:47.640 --> 0:12:50.880 in technologies which are now plainly obsolete, and this needs 0:12:50.920 --> 0:12:53.360 to be reconsidered in a serious way. How to get 0:12:53.440 --> 0:12:56.719 rid of the overburden of the nuclear forces that can 0:12:56.760 --> 0:13:01.240 never be used. Of a navy whose technologies were essentially 0:13:01.280 --> 0:13:04.800 fixed in the nineteen forties and modestly upgraded since then, 0:13:04.880 --> 0:13:09.400 but are now outclassed by new developments. We haven't reconsidered 0:13:09.400 --> 0:13:12.320 these things, and we're continuing to pour resources into them, 0:13:12.360 --> 0:13:15.240 which could be used more effectively to build up a 0:13:15.360 --> 0:13:19.800 prosperous and sustainable society. And until you confront the fact 0:13:19.840 --> 0:13:23.880 that you're overinvested in certain things and you can't really 0:13:23.920 --> 0:13:27.480 move resources efficiently to where you which should have them. 0:13:28.480 --> 0:13:31.520 So, if the US is overinvesting in defents in the military, 0:13:31.520 --> 0:13:33.400 which is something maybe you couldn't say about the rest 0:13:33.400 --> 0:13:36.199 of the world, where is it under investing Where should 0:13:36.200 --> 0:13:37.520 resources be diverted to. 0:13:37.960 --> 0:13:40.760 You can look around the United States and find plenty 0:13:40.760 --> 0:13:45.000 of places where you could make useful new investments. And 0:13:45.040 --> 0:13:48.480 if you look at the need for essentially a reurbanization 0:13:48.640 --> 0:13:51.600 and again more efficient use of the energy resources that 0:13:51.640 --> 0:13:54.720 we have, and you look at the kind of needs 0:13:54.760 --> 0:13:58.640 that the population actually has, then you need to support 0:13:58.679 --> 0:14:02.240 a population that is healthy, that is growing, that has 0:14:02.559 --> 0:14:07.680 useful employment opportunities. Essentially, one needs to rethink what our 0:14:07.840 --> 0:14:12.960 national priorities really are. And this is actually going on now. 0:14:13.040 --> 0:14:16.080 You can see that the new administration, the Trump administration, 0:14:16.240 --> 0:14:20.840 is clearly rejecting of forty or fifty years so past 0:14:20.920 --> 0:14:24.600 priorities are past complacency. But the problem is it also 0:14:24.720 --> 0:14:28.320 has a very outdated vision of what direction things should go. 0:14:28.440 --> 0:14:31.360 They think they can revive the American automobile industry and 0:14:31.440 --> 0:14:33.960 make it into the world leader. And you know, I 0:14:33.960 --> 0:14:36.720 think that's a not a realistic view when you compare 0:14:37.160 --> 0:14:40.640 what is happening, what the capabilities of the American companies 0:14:40.640 --> 0:14:43.760 are compared to those that operate in other parts of 0:14:43.760 --> 0:14:46.640 the world, most notably in China at the moment. So 0:14:46.720 --> 0:14:49.640 there's a certain naive te associated with this, But the 0:14:49.720 --> 0:14:53.400 underlying instinct that things should that priorities should change, is 0:14:53.440 --> 0:14:54.000 not wrong. 0:14:54.880 --> 0:14:56.800 And why is it not realistic to think that America 0:14:56.880 --> 0:14:59.080 can rebuild its automobile industry. And one of the things 0:14:59.080 --> 0:15:01.120 that I've seen you talking about is the way that 0:15:01.200 --> 0:15:04.480 for example, sanctions on Russia closing Russia down to a 0:15:04.520 --> 0:15:08.240 degree allowed it to reinvigorate its economy, and tariffon on 0:15:08.760 --> 0:15:13.120 China again semiconductor areas, etc. Given it a way to 0:15:13.320 --> 0:15:16.000 revitalize or invigorate parts of it economy. Why would that 0:15:16.040 --> 0:15:17.280 not work for the US. 0:15:17.600 --> 0:15:19.520 That's an interesting question. Let me talk a little bit 0:15:19.560 --> 0:15:21.880 about the Russian case. This is a very clear cut 0:15:21.960 --> 0:15:27.120 example of the problem of applying the conventional economic theory 0:15:27.480 --> 0:15:31.320 to a practical policy question. The idea, which was very 0:15:31.320 --> 0:15:35.880 clearly stated by the policy authorities, was that they could 0:15:35.920 --> 0:15:40.080 remove crucial building blocks of the Russian economy through sanctions. 0:15:40.120 --> 0:15:42.880 They could take away its financing, they could take away 0:15:42.920 --> 0:15:46.960 its technology, they could take away these important Western companies 0:15:47.000 --> 0:15:50.440 that were managing things. They could encourage bright young people 0:15:50.480 --> 0:15:53.080 to leave the country. And all of this, in fact, 0:15:53.160 --> 0:15:57.160 to a degree, actually happened. What they didn't understand was 0:15:57.200 --> 0:16:02.200 that they were actually creating the conditions under which Russian businesses, 0:16:02.360 --> 0:16:05.600 which in Russia's become basically a business economy over the 0:16:05.600 --> 0:16:09.280 past twenty five years, in which Russian businesses could grow 0:16:09.440 --> 0:16:12.520 and profit and expand. And so there was a major 0:16:12.560 --> 0:16:15.200 shock to the Russian economy that was in fact the 0:16:15.240 --> 0:16:19.360 effect of the sanctions. But once that shock was registered, 0:16:19.400 --> 0:16:21.560 and once it was clear it wasn't going to go away, 0:16:22.040 --> 0:16:26.840 the conditions for indigenous economic growth were extremely good. Resource 0:16:26.880 --> 0:16:31.320 prices were low, domestic financing was available, capital could be 0:16:31.360 --> 0:16:35.600 bought very cheaply from the exiting firms and then converted 0:16:35.600 --> 0:16:39.200 to by domestic producers, and all of that happened. And 0:16:39.240 --> 0:16:41.640 the Russian economy has grown I think twice as fast 0:16:42.160 --> 0:16:44.840 as the European economy, maybe more than that, in the 0:16:44.880 --> 0:16:47.240 last several years, and it's now the fourth largest one 0:16:47.280 --> 0:16:51.600 in the world, after only China, the United States, and India. 0:16:52.120 --> 0:16:55.280 So now we're seeing that the consequences of the sanctions 0:16:55.320 --> 0:16:59.479 policy were exactly the reverse of what was clearly predicted. 0:17:00.000 --> 0:17:02.800 And the reason was not that the sanctions were ineffective, 0:17:03.240 --> 0:17:06.040 but that they actually were a gift to the Russian 0:17:06.080 --> 0:17:08.199 Federation in terms of what it wanted to do. I 0:17:08.200 --> 0:17:11.720 think that's an exceedingly clear example. Now in terms of 0:17:11.720 --> 0:17:14.760 what the United States might do, I think it would 0:17:14.800 --> 0:17:18.000 be much harder in the context of the US to 0:17:18.119 --> 0:17:23.360 impose the same strict incentive structures that were imposed on Russia, 0:17:23.400 --> 0:17:28.080 although to some degree, restructuring the financial sector, restructuring of 0:17:28.680 --> 0:17:33.359 the national security sector, the creationists Trump is clearly doing. 0:17:33.400 --> 0:17:37.600 Of trade barriers, relatively low energy prices. These are going 0:17:37.640 --> 0:17:40.399 to attract European companies, for example, to invest in the 0:17:40.480 --> 0:17:42.200 United States. So a little bit of this is going 0:17:42.240 --> 0:17:46.359 to go on, but I'm inclined to think that it 0:17:46.440 --> 0:17:50.399 will not have the same let's say, mobilizing effect on 0:17:50.480 --> 0:17:55.200 the US because, among other things, we simply haven't got 0:17:55.200 --> 0:17:58.399 that kind of spirit in what remains of our major 0:17:58.440 --> 0:18:01.880 industrial corporations. They're going to be inclined to say, how 0:18:01.920 --> 0:18:04.600 can I profit in the short run and raise their prices, 0:18:05.080 --> 0:18:10.000 increase their dividends, diversify, acquire other companies the way oligopolists 0:18:10.480 --> 0:18:14.600 tend to do. They will be hesitant to expand capacity 0:18:15.040 --> 0:18:19.920 and maybe not capable of moving forward technologically to catch 0:18:20.000 --> 0:18:22.159 up with these same industries and other parts of the 0:18:22.160 --> 0:18:24.400 world which are now well ahead of them. So I'm 0:18:24.400 --> 0:18:27.639 inclined to be a bit pessimistic about the capacity of 0:18:27.720 --> 0:18:32.400 American capitalism to achieve the same kind of gains. That's 0:18:32.400 --> 0:18:34.679 a pity, unfortunately, but that's the way I see it. 0:18:35.480 --> 0:18:39.160 Maybe it'll be pleasantly surprised. Can we talk about that 0:18:39.200 --> 0:18:39.960 the near. 0:18:40.000 --> 0:18:43.600 Future and where you see the US economy over the 0:18:43.640 --> 0:18:48.720 next couple of years. There is a new consensus building 0:18:49.320 --> 0:18:51.560 everyone at the end of last year having said that 0:18:51.600 --> 0:18:54.480 the US would not fall into recession. Now as being 0:18:54.640 --> 0:18:59.359 economists after economists after economists raise their expectations of the 0:18:59.440 --> 0:19:03.800 US being in recession in the relatively short term. 0:19:04.040 --> 0:19:05.040 What do you see there? 0:19:05.680 --> 0:19:10.960 Well, I'm a habitual pessimist, and I think the element 0:19:11.040 --> 0:19:14.520 of uncertainty at the moment is very high, which tends 0:19:14.600 --> 0:19:17.320 to work against major long term investments. 0:19:17.680 --> 0:19:17.880 Here. 0:19:17.920 --> 0:19:21.480 The problem is that, first of all, this administration it's 0:19:21.520 --> 0:19:24.880 basically likely to be a one term administration. It could 0:19:24.920 --> 0:19:28.159 lose control of the Congress in less than two years. 0:19:28.640 --> 0:19:32.480 The tariffs have been imposed, but or are being imposed. 0:19:32.640 --> 0:19:35.760 The question is how long will they last. I'm inclined 0:19:35.800 --> 0:19:38.560 to think that there will be a lot of weight 0:19:38.720 --> 0:19:43.600 and see amongst the major sources of business investment to 0:19:43.640 --> 0:19:46.800 see whether the climate that the administration is trying to 0:19:46.840 --> 0:19:50.360 create will in fact be a lasting one. The President 0:19:50.480 --> 0:19:53.959 has declared tariffs and then taken them off and clearly 0:19:54.040 --> 0:19:57.280 using them for short term political purposes. So if I 0:19:57.320 --> 0:20:00.520 were considering investing a large amount of mone a new 0:20:00.560 --> 0:20:05.280 productive capacity, I wouldn't be entirely committed to it at 0:20:05.320 --> 0:20:09.240 this stage. I don't see that kind of rapid transformation 0:20:09.359 --> 0:20:11.800 that some people are hoping for. Will there be a 0:20:11.920 --> 0:20:15.160 recession in the short run, I think it's entirely possible. 0:20:15.600 --> 0:20:18.520 What thing that goes against that is that the household sector, 0:20:18.560 --> 0:20:20.680 which is the largest part of the American economy is 0:20:20.680 --> 0:20:24.439 pretty stable, and it tends to continue to do what 0:20:24.480 --> 0:20:27.840 it does to consume to take out debt when necessary 0:20:28.240 --> 0:20:31.080 until it can no longer do so. So things can 0:20:31.119 --> 0:20:34.520 go on for quite a while before this expansion comes 0:20:34.720 --> 0:20:38.360 to a final end. But we're clearly in what shall 0:20:38.400 --> 0:20:42.960 we say, I'm certain and even unchartered waters at the moment. 0:20:43.560 --> 0:20:46.159 Yes, with all that in mind, obviously, one of the 0:20:46.160 --> 0:20:49.040 things this administration is attempting to do is just cut 0:20:49.119 --> 0:20:52.720 the size of the state via the Department of Government Expenditure, etc. 0:20:53.480 --> 0:20:55.120 But with the possibility of. 0:20:55.080 --> 0:21:00.320 Recession ahead, are you concerned about the US debt marketcerned 0:21:00.359 --> 0:21:04.119 about the extent of public debt in the US? 0:21:04.600 --> 0:21:06.160 That can that go on indefinitely? 0:21:07.080 --> 0:21:10.480 Well, first of all, I don't see that the administration 0:21:10.640 --> 0:21:15.000 is succeeding so far in reducing public expenditure. They're making 0:21:15.040 --> 0:21:18.480 all kinds of gestures in that direction and doing a 0:21:18.520 --> 0:21:23.200 fair amount of damage to existing institutions, regulatory agencies, regulatory 0:21:23.240 --> 0:21:27.200 structures which will degrade economic performance in the long run. 0:21:27.240 --> 0:21:30.679 So they're running against their declared objectives with all of that. 0:21:30.960 --> 0:21:34.320 But that said, so far as I have seen, public 0:21:34.359 --> 0:21:37.320 expenditure continues to grow. It continues to grow because much 0:21:37.320 --> 0:21:41.080 of it's on automatic pilot anyway, so that will sustain 0:21:41.160 --> 0:21:44.280 economic activity. Am I worried about the fact that the 0:21:44.359 --> 0:21:48.040 Treasury issues debt or pays interest on reserves in order 0:21:48.080 --> 0:21:51.720 to placate the investment community by giving them bonds that 0:21:51.840 --> 0:21:54.480 pay interest or other assets that pay interest. No, I'm 0:21:54.480 --> 0:21:57.960 not worried about that so long as the broader community 0:21:58.000 --> 0:22:01.400 wants to buy those bonds, which so far there's absolutely 0:22:01.400 --> 0:22:04.280 no sign that is losing its interest in doing so. 0:22:04.440 --> 0:22:07.720 And there's no reason why would the United States pays 0:22:07.760 --> 0:22:11.240 a bill with a check that creates a dollar balance, 0:22:11.280 --> 0:22:13.439 and the person receives it, if they don't have an 0:22:13.440 --> 0:22:16.480 immediate use, they like to convert that into an interest 0:22:16.480 --> 0:22:19.520 bearing asset, so the Treasury issues a bond. This is 0:22:19.560 --> 0:22:25.320 not itself a problem of sustainability. If things really started 0:22:25.359 --> 0:22:28.080 going against the dollar, that would show up in a 0:22:28.200 --> 0:22:30.879 decline in the dollar exchange rate, but we're not seeing 0:22:30.880 --> 0:22:34.600 that either. In fact, we're seeing that with uncertainty, the 0:22:34.680 --> 0:22:38.199 dollar tends to rise because other currencies, the euro in 0:22:38.280 --> 0:22:41.200 particular and I guess the British pound, you know, they're 0:22:41.240 --> 0:22:43.800 not considered to be a safe so people tend to 0:22:43.800 --> 0:22:46.399 flee to the treasury bond market because it's large and 0:22:46.440 --> 0:22:50.280 it's liquid. So again, one can look at the level 0:22:50.280 --> 0:22:52.840 of interest rates, the long term interest rates, and you 0:22:53.000 --> 0:22:55.280 just don't see the kind of warning sign that there's 0:22:55.320 --> 0:22:58.840