Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, you know, we're still here at Jackson Hall. We're
Speaker 1: hanging on We're not really in the actual event space,
Speaker 1: so we're just sort of hanging out in the lobby
Speaker 1: looking for people. It's like, hey, do you want to
Speaker 1: come on the podcast?
Speaker 2: And we found a person.
Speaker 1: We found a person. We have the perfect guest. Actually.
Speaker 1: But one thing I'm really exciting, you know, we've one
Speaker 1: of the things we've been talking about already is this
Speaker 1: idea that you know, monetary policy. It's always challenging. It's
Speaker 1: always challenging when you have things like COVID, the war, etc.
Speaker 1: But we're also in a period in which fiscal policies,
Speaker 1: macro policies, trade policy, industrial policy, these things that we
Speaker 1: talk about on Odd Lots all the time, like how
Speaker 1: do central bankers deal with them?
Speaker 2: Absolutely, I feel like I've said this a number of
Speaker 2: times at this point, but one of the themes of
Speaker 2: this meeting seems to be how do central bankers get
Speaker 2: a better understanding of the real economy and then actually
Speaker 2: respond to it. So things like supply chain issues or
Speaker 2: booming fiscal spending. How does monetary policy actually react to that?
Speaker 2: And it is fairly new at a time when the
Speaker 2: unemployment rate is at multi decade lows. We have this
Speaker 2: huge run up in the deficit.
Speaker 1: Right, and we had you know, people always talk about
Speaker 1: like the sort of forty year period, but we really
Speaker 1: you know, liberalization, globalization, et cetera. And then in the
Speaker 1: twenty tens sort of the fiscal activism really taking a backseat,
Speaker 1: not much, probably not enough by many people's accounts, of
Speaker 1: like demand management on the fiscal side. And now we're
Speaker 1: getting the reverse right, because we had the aggressive expansion.
Speaker 1: We're also having these in the US, in particular, these
Speaker 1: very aggressive domestic investment plans right to climate semiconductors. It
Speaker 1: intersects with trade in a very big way, tensions with China,
Speaker 1: an attempt to move supply chains, particularly around advanced tech
Speaker 1: or clean tech on US shores, And so how that's
Speaker 1: going to work. How should economists think about it, How
Speaker 1: should regulators think about it? How should central bankers think
Speaker 1: about it? Is sort of like a huge question that hangs.
Speaker 2: Over all this absolutely and you're right, we do have
Speaker 2: the perfect guest.
Speaker 1: We do have the perfect guest because he's someone who
Speaker 1: is spans all of these topics. We're going to be
Speaker 1: speaking with Adam Posen, president of the Peterson Institute for
Speaker 1: International Economics, also a central banker, a member of the
Speaker 1: Monetary Policy Committee at the Bank of England, and someone
Speaker 1: who lately has been somewhat critical of the Biden administration
Speaker 1: and some of the domestic policy and trade choices that
Speaker 1: the administration has made. So let's have a conversation with Adam. Adam,
Speaker 1: thank you so much for coming on outlaws.
Speaker 3: Thank you, Joe, and thank you for the generous introduction.
Speaker 1: Let's just jump right into it. You had a piece
Speaker 1: I think in March in foreign policy that's got a
Speaker 1: lot of attention. I still see people talking about it.
Speaker 1: Adam Toos wrote about it recently in his chart book
Speaker 1: and said, like, this is this sort of I think,
Speaker 1: in his view, one of the defining critiques. We talk
Speaker 1: about this all the time. We've had people who run
Speaker 1: the chips program in IRA et cetera. But like big picture,
Speaker 1: like what is your concern about some of the domestic
Speaker 1: policy choices being made right now?
Speaker 3: Thank you for referring to my article, and it is
Speaker 3: a concern that not just the government's getting involved in
Speaker 3: industrial policy in the US. The US, as you've talked
Speaker 3: about previously, I've heard some episodes at various times since history,
Speaker 3: there's been public investment by the US and technology. There's
Speaker 3: been more aggressive, less aggressive efforts. What I'm worried about
Speaker 3: are potentially four big things. First, so much of this
Speaker 3: has been cloaked as rescuing the industrial sector and not
Speaker 3: so subtly buying the votes of angry white industrial workers
Speaker 3: who feel left behind in Wisconsin and Pennsylvania and West Virginia.
Speaker 3: And I understand that's need. I'm not sure it's going
Speaker 3: to work. I'd like to think there's other ways to
Speaker 3: win an election. But the good news on that is
Speaker 3: several of the people who advocate this policy have now admitted,
Speaker 3: you know, even if it goes well, we're talking affecting
Speaker 3: a few towns several hundred thousand people, which matters, but
Speaker 3: isn't going to make a thing. The second thing, which
Speaker 3: I'm much more concerned about, is whenever you create a
Speaker 3: government program that's about giving money to individual companies and
Speaker 3: you combine it with this trade policy, that's very much
Speaker 3: as the President keeps saying American made, American bills, American exports,
Speaker 3: buy America, buy America. That you end up creating what
Speaker 3: we used to complain about a lot in Japan and
Speaker 3: Korea and China and Europe, these national champions. So you know,
Speaker 3: it may be that Intel or Micron, just to pick two.
Speaker 3: In the names that are out there are great companies
Speaker 3: with great tech, but you put them on the government
Speaker 3: payroll for billions of dollars, and you say that we
Speaker 3: want to make sure there's an American presence in this industry,
Speaker 3: American leadership in this industry, and they can end up
Speaker 3: taking you to town. And frankly, if Trump gets back in,
Speaker 3: the corruption opportunities are horrible. Third thing is internationally, I'm
Speaker 3: hopeful that the Biden administration is realizing that they went
Speaker 3: a little too far in their anti trade rhetoric. We
Speaker 3: can debate how much trade has been fair or unfair
Speaker 3: and how much that matters, but in the context of
Speaker 3: what you said and the lean in, and again, I
Speaker 3: know you've talken about this with other people. You know,
Speaker 3: the US has been basically withdrawing from globalization for twenty
Speaker 3: plus years. Everyone thinks, oh, globalization did us in, but
Speaker 3: we've actually since NAFTA, we've done almost no trade deals.
Speaker 3: We've cut way back on immigration, we take a lower
Speaker 3: amount of investment from abroad than we used to. And
Speaker 3: there's all kinds of blowback from this. There's foreign policy blowback,
Speaker 3: there's development blowback in the South, the global South, there's
Speaker 3: technology races, and so this sends up with these things
Speaker 3: like these subsidies races that we're having with Europe and
Speaker 3: de facto with China. Now the final point. Sorry to
Speaker 3: go on so long, but the biggest thing is where
Speaker 3: I think the bid An administration is right is the
Speaker 3: US had to do something constructive on climate. I mean,
Speaker 3: it's an emergency. We weren't doing anything, or at least
Speaker 3: the government wasn't, and so they were trying to figure
Speaker 3: out a way. They couldn't do a carbon tax, they
Speaker 3: couldn't do a lot of things. This package of investments,
Speaker 3: as they call it, was supposed to get us some
Speaker 3: climate progress, and it is. My worry is that it's
Speaker 3: going to end up being a repeat of what happened
Speaker 3: with COVID vaccines, which is the developing world, and even
Speaker 3: the relatively high income developing world, places like Brazil or
Speaker 3: Turkey are not going to get the access to this technology,
Speaker 3: or when we have good green technology, it's going to
Speaker 3: become a political football. Are you loyal to China? Are
Speaker 3: you loyal to the US and for saving the planet.
Speaker 3: To put it bluntly, the most important thing is when
Speaker 3: we get good new green tech, it gets used and
Speaker 3: adopted as widely as possible. And this is where I've
Speaker 3: been particularly trying to engage with the Biding Administration's extent
Speaker 3: they of interest is to say, if you're doing this
Speaker 3: whole bundle of industrial policy and trade policy and nationalist policy,
Speaker 3: how do we make sure that the technology does get
Speaker 3: down that it's not like with COVID vaccines that you
Speaker 3: hoard it off for yourself and you make it a
Speaker 3: political loyalty test. Do you buy from us or do
Speaker 3: you buy from them?
Speaker 2: So many different directions we could go in already, and
Speaker 2: we're sort of talking about multiple different policies at once.
Speaker 2: So let me step back and ask a big picture question,
Speaker 2: which is is there a good model of industrial policy
Speaker 2: in your mind? Can you sort of distinguish between bad
Speaker 2: industrial policy that potentially leads to protectionist outcomes and perverse
Speaker 2: incentives and you know, good industrial policy that does achieve
Speaker 2: the outcomes that are intended.
Speaker 3: It's a very good question, Tracy, and I think the
Speaker 3: devil's not in the details. With the devil is in
Speaker 3: some basic design choices. So one aspect is I think
Speaker 3: it's much better to have the public investment going more
Speaker 3: into infrastructure, more into public goods. And some people associate
Speaker 3: with the bidenmistration say, well, that's that old neoliberal thing
Speaker 3: that that didn't work, But actually those parts did, we
Speaker 3: just didn't spend enough. So invest in universities, invest in
Speaker 3: R and D tax credits, invest in skilled immigration, invest
Speaker 3: in infrastructure of power grid and fiber and EV charging stations,
Speaker 3: if that's how you want to go. The second thing is,
Speaker 3: and to be fair, the Bidministration and the Congress have
Speaker 3: done a little bit on this is to make it
Speaker 3: so that even if you're trying to get production at
Speaker 3: home for say a good reason like we need to
Speaker 3: have some semiconducting capacity in the US, manufacturing capacity in
Speaker 3: the US, you still leave it open that there's room
Speaker 3: for competition from abroad. So you're trying to avoid the
Speaker 3: whole corruption and international backlash, or at least reduce those
Speaker 3: aspects by saying, Okay, if it turns out it's a
Speaker 3: German or a Korean or a Japanese company that has
Speaker 3: the good tech, you know, we're not going to prevent
Speaker 3: or discourage our people from buying it or discourage them
Speaker 3: from selling it. Here and again there are some loopholes
Speaker 3: like this whole leasing deal they made for electric vehicles
Speaker 3: in the bill, that they could make. There's more things
Speaker 3: they can do. So anyway, to me, those two things,
Speaker 3: that a lot more of the public investment goes to
Speaker 3: general good and rather than specific company capacity, and that
Speaker 3: you make sure that there is competition, including international competition,
Speaker 3: for the industrial policy goals you have.
Speaker 1: I want to go back to something you said, and
Speaker 1: I think there is a little bit of controversy, and
Speaker 1: you may have said this in another context, but the
Speaker 1: idea of like manufacturing, the politics of manufacturing, the maybe
Speaker 1: the nostalgia for manufacturing this side, and you know you mentioned,
Speaker 1: okay that there are the China shock really hurt certain
Speaker 1: areas of the Midwest. Should is the point of accelerating
Speaker 1: domestic manufacturing to maybe placate you know, several hundred thousand
Speaker 1: white men in the Midwest by reinvigorating that but there
Speaker 1: is another school of thought and that I find interesting,
Speaker 1: which is that no, actually manufacturing is really important. Complexity
Speaker 1: is important, ability to produce advanced goods is an important
Speaker 1: aspect of being a rich country. Is that false? Do
Speaker 1: we just have this sort of like false nostalgia for
Speaker 1: the benefits of having a manufacturing economy?
Speaker 3: I think both issues should raise Joe or right. And
Speaker 3: just to be clear, you know, white males have just
Speaker 3: as much right the government large, just as any other groups.
Speaker 3: And anything I've said to indicate otherwise was mistaken. I mean,
Speaker 3: so it's but it is this idea that nostalgia is
Speaker 3: the word I used, Thank you that there's Trump had
Speaker 3: a lot of this, but I think Biden has some
Speaker 3: of it. That you know, there was this sort of
Speaker 3: golden era when a person without a high school diploma
Speaker 3: could make a really good living in a plant, and
Speaker 3: that plant would employ lots of people in one place
Speaker 3: and they could depend on the job and so on,
Speaker 3: and this created a community and all this and the
Speaker 3: point of calling it nostalgia is and meaning that's a
Speaker 3: bad thing is threefold. First, that really only applied to
Speaker 3: a small number of people. I mean, even at its height,
Speaker 3: you know, manufacturing share of employment in the US, I
Speaker 3: don't think ever got much about thirty percent, and that
Speaker 3: was in the immediate aftermath of World War Two, and
Speaker 3: obviously there were people, women, people of color who didn't
Speaker 3: have equal opportunity in that space as other people. But anyway,
Speaker 3: so there's still a lot of people. And even now
Speaker 3: it's thirteen percent of employment, it's still a lot of people.
Speaker 3: But just to say it was never, ever, ever going
Speaker 3: to be the engine for everybody. The second thing is
Speaker 3: to say that there is a bias in that that
Speaker 3: under plays just how adaptable a lot of Americans, white, black, female, male,
Speaker 3: everybody has been, you know, moving around the country. Immigrants
Speaker 3: who come here, but people who moved in the great
Speaker 3: migrations from the South to the North for manufacturing and
Speaker 3: then out of the North and back into the South
Speaker 3: and to the west, but also communities that came back up.
Speaker 3: We think about, you know, Charlotte, North Carolina is a
Speaker 3: financial center, Durham is a technology center. It's this whole
Speaker 3: area in North Carolina that, you know, several decades ago
Speaker 3: was tobacco. And Pittsburgh everybody always cites it because it's amazing.
Speaker 3: Pittsburgh is now a health center and many other things,
Speaker 3: and it's not steel anymore, and so there is this
Speaker 3: sort of bias towards not understanding the change is part
Speaker 3: of economic life and it's actually good. But the third thing,
Speaker 3: which is where I guess it gets a little more controversial,
Speaker 3: is for some people, and I think this was much
Speaker 3: more true of Trump's and some of the people who
Speaker 3: supported him, there's this sort of idea that macho tasks
Speaker 3: of large hot metal or big heavy things you can
Speaker 3: drop on your foot is just somehow more.
Speaker 2: Worthy the allure of welding.
Speaker 3: Yeah, well, and you know, and teresay as people point out,
Speaker 3: it's you don't make fun of people for that. That's fine.
Speaker 3: For some people that's a real calling and they really
Speaker 3: want to do it. But the idea that every son
Speaker 3: of a welder or daughter of a welder wants to
Speaker 3: be a welder and should want to be a welder,
Speaker 3: and doesn't want it, like maybe go into a white
Speaker 3: collar job or maybe work indoors or outdoors or whatever,
Speaker 3: it is just weird. And so sorry, Joe. Your big point,
Speaker 3: which is the more important one, is can we survive
Speaker 3: if we don't have a vital manufacturing sector.
Speaker 1: Or at least advanced manufacturer, right.
Speaker 3: And I think the answer to that is, well, we do.
Speaker 3: We just don't have as much manufacturing employment as we
Speaker 3: used to. So it's just you look at the very
Speaker 3: basic numbers, the share of the US economy and value
Speaker 3: added in manufacturing. It's basically on change or even slightly
Speaker 3: higher than it was when the manufacturing employment chair was
Speaker 3: much more, which is not our way of saying productivity
Speaker 3: and manufacturing has gone up enormously. We're producing more value
Speaker 3: of stuff at the higher end with fewer people. And
Speaker 3: so in a sense we can debate that question you raise,
Speaker 3: but it's also it's just not even a realistic question.
Speaker 3: So like, look at the semiconductors. Yes, it's true we
Speaker 3: did not take into account, and I say we, I
Speaker 3: mean everybody did not take into a count just how
Speaker 3: dependent certain kinds of semiconductors were on This obviously exposed
Speaker 3: very specific set of plants in Taiwan. But the fact
Speaker 3: is there's a huge number of components of semiconductors, including
Speaker 3: the ones made by TSMC and the ones made by
Speaker 3: Samsung and Heinex and others, that are dependent on American technology.
Speaker 3: They're dependent on American design technology, they're dependent on American
Speaker 3: intellectual property, they're dependent on American components, and it's the
Speaker 3: low end stuff the US doesn't make anymore. So in
Speaker 3: theory it's a good question, but in practice it's not
Speaker 3: one we even have to fax.
Speaker 2: So you brought up semiconductors, and they are probably the
Speaker 2: best example of this. But if you take some of
Speaker 2: these stated goals of this new Industrial policy at face value,
Speaker 2: it feels like a lot of it was sparked by
Speaker 2: things that happened during the global pandemic when it did
Speaker 2: become somewhat difficult to get critical components from the East
Speaker 2: to the west. How do you address that supply chain
Speaker 2: resiliency concern?
Speaker 3: Yeah, I think there's no question Tracy that from some
Speaker 3: sort of optimal planning perspective, or if you're meaning, you know,
Speaker 3: if the government tries to take the interests of the
Speaker 3: whole society or economy rather than an individual company or investor.
Speaker 3: We were past the point of resilience. We had too
Speaker 3: few notes. But it's important to recognize that didn't happen
Speaker 3: because of somebody making a stupid decision. That didn't happen
Speaker 3: because of some perverse government incentives. That happened organically. I
Speaker 3: mean you would have things where our multinational company, the CFO,
Speaker 3: on an earnings call or whatever, would say and we're
Speaker 3: going to cut costs fifteen percent next year, and somebody
Speaker 3: working in a plant four levels down says, oh my god,
Speaker 3: I got a memo. I got a cut cost twenty percent.
Speaker 3: And they figure out, oh, if I ordered this from
Speaker 3: Korea or this from Mexico, I can get it cheaper.
Speaker 3: And over time that works and you realize, oh, there's
Speaker 3: a whole group of companies down there in Mexico. Maybe
Speaker 3: I can do some more from them. It just developed organically.
Speaker 3: And during COVID with Peterson's who tried to look more
Speaker 3: into this, and we discovered it really was that way
Speaker 3: that I'm not going to name them, but we would
Speaker 3: talk to major global manufacturing companies and say, we just
Speaker 3: want to do research, we just want to understand what
Speaker 3: you're supplyshing is. And the response we kept getting was
Speaker 3: we don't really know. It just sort of grew up
Speaker 3: and we're just now figuring out where it all is.
Speaker 3: So anyway, that doesn't mean it's still valid. I don't
Speaker 3: want to do a double negative. It's still valid for
Speaker 3: the government to say, you know, in certain critical industries,
Speaker 3: the interests of the society, the economy are not being
Speaker 3: taken account by all these decentralized decisions. But it's worth
Speaker 3: remembering that even if that's right. By creating resilience, what
Speaker 3: you're essentially doing is you're saying, I'm taking out a
Speaker 3: costly insurance policy, I'm building redundant capacity. I'm buying something
Speaker 3: that's more geopolitically safe but more expensive because remember, there
Speaker 3: was a price reason why it was done the way
Speaker 3: it was done. There was a reason stuff was being
Speaker 3: produced in China not Mexico. So it may be worth it,
Speaker 3: and this is the thing I tried to argue in
Speaker 3: the past. It may be worth it to do that
Speaker 3: from a societal perspective, but we shouldn't pretend that it's
Speaker 3: going to be short term beneficial for productivity or profits,
Speaker 3: because what you're doing is you're buying insurance. You're spending
Speaker 3: money against a bad outcome. The other point, just echoing
Speaker 3: something we were talking about a minute ago, is the
Speaker 3: international side. As an economist, and when you talk about resilience,
Speaker 3: the issue is diversification. It's not necessarily reshoring domestic I mean,
Speaker 3: it gets a little confused, because if you decide China's
Speaker 3: a strategic rival or worse, then maybe you don't want China,
Speaker 3: but or you may want to distinguish friends for friends shoring.
Speaker 3: But ultimately what you care about is diversification. And so
Speaker 3: if you have one plant in the US and it's
Speaker 3: hit by a local flood, or it's taken over by
Speaker 3: a terrorist group within the US, or it's corrupt, the
Speaker 3: same way a corrupt company appears in a different country
Speaker 3: and it produces substandard products, and you haven't diversified from that,
Speaker 3: you're still in trouble. So these are the cautions I
Speaker 3: would put in.
Speaker 2: So I'm glad you brought up China because this leads
Speaker 2: nicely into the other thing I wanted to ask you,
Speaker 2: But how much of the current industrial policy do you
Speaker 2: see as a direct response to a potential either economic
Speaker 2: or geopolitical threat from China.
Speaker 3: One thing that's true of big economic policy decisions in
Speaker 3: Washington anywhere, just as it's true of committee decisions in
Speaker 3: central banks, is your goal is to get the majority
Speaker 3: of people to say yes. They can each say yes
Speaker 3: for a completely different reason. You don't need to have
Speaker 3: a coherent one set of reasons. Why you say yes,
Speaker 3: You just want all the people to say yes, right,
Speaker 3: and so we had, in a sense, the perfect storm
Speaker 3: behind the set of policies. So there were people with
Speaker 3: legitimate concerns about China, and particularly from the point of
Speaker 3: view supply chain resilience, but also the national security. There
Speaker 3: are people with overhyped, crazy concerns about China, fearing Chinese students,
Speaker 3: I think to an excessive degree. For example, there are
Speaker 3: people who were very concerned about resilience coming out of
Speaker 3: COVID and the way you said, there are people who
Speaker 3: were very concerned about the left behind post industrial communities.
Speaker 3: There were people who were you know, you go down
Speaker 3: the list. There were so many reasons for this policy,
Speaker 3: and so you know, so for someone like me to
Speaker 3: be arguing against it, this is in some way sort
Speaker 3: of silly because it's overdetermined. Right, There's a thousand reasons
Speaker 3: why they're doing this. When we talk about China specifically,
Speaker 3: I have a new article out in Foreign Affairs, and
Speaker 3: I argue we should be thinking to put a bumperstick
Speaker 3: on it more in terms of suction than sanctions. That
Speaker 3: she and the Communist Party have messed up their economy
Speaker 3: by being interventionists in people's faces, not just politically in
Speaker 3: a way they hadn't been for decades. That I mean,
Speaker 3: obviously the Communist Party, the leaders ruled China, but there
Speaker 3: was a what I called a no politics, no problem
Speaker 3: deal that you see in a lot of autocratic societies.
Speaker 2: Stang Shaoping and idiot sunflower seeds exactly.
Speaker 3: I was just rereading that in the bio, was rereading
Speaker 3: that part of the bio of dung that as Are
Speaker 3: Vogel did a few years ago, and and so you
Speaker 3: see this in a lot of countries. This was true
Speaker 3: even under Putin in his early days in Russia. Basically,
Speaker 3: you don't protest in the street, you don't run for
Speaker 3: office against me. You do the occasional bribe. I'll leave
Speaker 3: you alone to pursue your livelihood, to run your small business.
Speaker 3: But now zero COVID comes along and everybody has to
Speaker 3: study she thought and all these other things, and the
Speaker 3: average Chinese person is spoot. Anyway, the upshot of this is,
Speaker 3: I think we need to worry less about containing China
Speaker 3: in the economic sphere, except for some very specific national
Speaker 3: security technologies. You can make a case I think it's
Speaker 3: more that let she put up barriers, put up interventions
Speaker 3: in his society, Let us and the other allies attract
Speaker 3: capital and people an investment out of China. This worked
Speaker 3: against the Soviet Union, this worked against the ashes in
Speaker 3: the thirties. I'm not saying there's gonna be wholesale exodus
Speaker 3: of millions of people, but you want that positive sort
Speaker 3: of suction pressure on she and the regime. And then
Speaker 3: what usually happens is, as we saw in the Soviet case,
Speaker 3: and as we saw in various other places, the leader
Speaker 3: in Latin America, the leader puts up more and more
Speaker 3: restrictions because he gets worried about the money and the
Speaker 3: people leaving, and he worries about the attractiveness of the alternative.
Speaker 3: And the more he and his party put up restrictions,
Speaker 3: the more the people want to leave. And I think
Speaker 3: that's the kind of dynamic we should be leaning into.
Speaker 3: If we can use that phrase.
Speaker 1: We are definitely going to have to do a history
Speaker 1: episode just about the story of the idiot sunflower seed
Speaker 1: company and what that says about the history of the
Speaker 1: Chinese economic model. But I want to continue along this
Speaker 1: line because I think I don't know, maybe like fifteen
Speaker 1: years ago or pre Great Financial Crisis, you know, when
Speaker 1: people talked about Chinese trade like it was very much
Speaker 1: focused on like what is the level of the un
Speaker 1: right now are they are they holding it too low?
Speaker 1: And are they boosting? You don't really hear as much
Speaker 1: about that now. The story is much more while they're
Speaker 1: really doing a great job investing in domestic battery makers
Speaker 1: and domestic car makers, and they have this airline aviation
Speaker 1: company Comac that's gonna might eat into Boeing and Airbus,
Speaker 1: and it's much less concerned about pure like they're competing
Speaker 1: us because they're too cheap, and more like, actually they're
Speaker 1: really getting good at certain high tech things. Is there
Speaker 1: concern that's legitimate? Like maybe less about the currency level,
Speaker 1: but is there concern that we should have about Look,
Speaker 1: they're investing in their domestic champions, maybe we need to
Speaker 1: respond to them.
Speaker 3: I think you've described accurately the way things have developed. Joe,
Speaker 3: colleagues of mine at the Peterson Institute, Fred Bergston, Joe Ganyan, Morskoldstein,
Speaker 3: Nic Lardy ten fifteen years ago were really out there
Speaker 3: screaming with good reason, with good arguments about the Chinese
Speaker 3: government's undervaluation of the yuan, and a lot of the
Speaker 3: talk about the China Shock, and some of this political
Speaker 3: backlash frankly would have been muted if the US government,
Speaker 3: both Democrat and republican, Democratic and republican had listened to
Speaker 3: US and others and done something about the yuan undervaluation.
Speaker 3: But to be fair, the Chinese government leadership basically around
Speaker 3: the time of the financial crisis two thousand and eight
Speaker 3: nine stopped undervalue in the yuon. They at least stopped
Speaker 3: intervening actively to push down the yuon very much. So
Speaker 3: that is, in essense it mattered, but it was Competing
Speaker 3: on cheap is different than competing on quality. You're absolutely right,
Speaker 3: and so now the issue is competing on quality, and
Speaker 3: there I think it's less about fair unfair than what
Speaker 3: are the risks you know, throughout history, business history, modern
Speaker 3: business history, including competition within the US, you know, intellectual property, theft,
Speaker 3: reverse engineering, getting around people's trademarks has always been a factor,
Speaker 3: and the Chinese corporate sector probably certainly was worse on
Speaker 3: this in some ways. But I think you put your
Speaker 3: finger on it that it's more a question of investment.
Speaker 3: Now we in the US have been the envy of
Speaker 3: the world in commercial terms for decades because our investment system,
Speaker 3: for all our problems, for all what happened in two
Speaker 3: thousand and eight, in the run up to two thousand
Speaker 3: and eight, we do a better job of financing tech
Speaker 3: than anybody else does. And the Chinese have leapfrogged over
Speaker 3: the Japanese and the Europeans to become our closest rivals
Speaker 3: in doing this. But we've also seen huge disaster for
Speaker 3: them in which they've admitted to in their semiconductor industry
Speaker 3: that they spend billions in US terms, billions to develop
Speaker 3: this high end semiconductor industry for the last several years,
Speaker 3: even before the most recent conflict, and they had ended
Speaker 3: up admitting it didn't pay off at all. And they've
Speaker 3: jailed a bunch of people for corruption, and we don't
Speaker 3: know how much what was actual corruption versus just punishing
Speaker 3: poor performance. You know, So just because they throw money
Speaker 3: and stuff doesn't mean they're there. So long wind the
Speaker 3: answer to say, you're right, they've shifted from competing cheap
Speaker 3: on trying to devalue their currency to competing strategically in
Speaker 3: some industries. I still think our allocation of capital is
Speaker 3: better and higher return than there. But there are definitely
Speaker 3: things we should be doing to invest. Going back to
Speaker 3: somethings Tracy and I were saying a minute ago, invest
Speaker 3: in training, invest in skilled workers, invest in infrastructure, invest
Speaker 3: in protection of intellectual property, invest in standards that can
Speaker 3: help us get ahead.
Speaker 2: Can I ask Joe's question on a slightly wider scale,
Speaker 2: which is, to what extent is the US now driving
Speaker 2: deglobalization versus responding to it? Because we're talking a lot
Speaker 2: about China, but of course China isn't the only country
Speaker 2: out there that is trying to boost domestic manufacturing or
Speaker 2: invest more money in strategically important industries.
Speaker 3: It's a very troubling question, Tracy, and it's the right one,
Speaker 3: and it's what I and my colleagues have spent a
Speaker 3: lot of our last few years working on. Because roughly
Speaker 3: midway through Obama's second term, the consensus in Congress and
Speaker 3: in a lot of business as well as the Unions
Speaker 3: already was US had been played for a sucker in
Speaker 3: international economics and globalization. I think this is just fundamentally false.
Speaker 3: As I mentioned, the US has actually been withdrawing from
Speaker 3: globalization rather than grappling with it for many years, arguably
Speaker 3: twenty or twenty five years, and whether or not the
Speaker 3: US has been withdrawing the existence of China, and even
Speaker 3: if they behaved well, the existence of one point four
Speaker 3: billion people who are capable of participating in the world
Speaker 3: economy matters. It's not going to disappear, and they have
Speaker 3: a right to make a living, even if their leadership
Speaker 3: doesn't have a right to do everything they do. So
Speaker 3: the danger, which we've seen come true over the last
Speaker 3: few years, particularly under Trump, but somewhat continued under Biden,
Speaker 3: is to scapegoat foreigners, scapegoat China, not even clear for what,
Speaker 3: given how well the US economy has been doing in
Speaker 3: a lot of ways, but to just create this sense
Speaker 3: of we were cheated, we were played for a sucker,
Speaker 3: we should be the bully. To some degree, That's what
Speaker 3: Trump and Lightheiser and others have said. And I worried
Speaker 3: that some of the things the Biden administration said and
Speaker 3: did in the first couple of years, particularly things Besser
Speaker 3: tie the US Trade Representative is done on the trade front,
Speaker 3: is like that. It echoes. I mean, they independently tie
Speaker 3: and others believe this, but you know, neoliberal trade liberalization
Speaker 3: destroyed our economy. Again, it's not clear that economy has
Speaker 3: been destroyed. Some people have suffered, but that happens all
Speaker 3: the time, and that has to do with the fact
Speaker 3: that in our society we have a very miserly welfare state,
Speaker 3: and if our society would give a better welfare state,
Speaker 3: fewer people would suffer. But anyway, I am hoping that
Speaker 3: between the some feeling for reality and the foreign policy
Speaker 3: realities as well as the economic realities, and just some
Speaker 3: willingness to be open to basic fairness and evidence, the
Speaker 3: Biden administration is going to stop going direction. I don't
Speaker 3: expect them to tomorrow lift the tariffs and sudden they
Speaker 3: become free traders. We saw this in Secretary Yellen's speech
Speaker 3: a couple months ago, into a lesser degree, somewhat grudgingly,
Speaker 3: but still there. In Jake Sullivan's speech. They're two big
Speaker 3: economic speeches, which I know you've discussed.
Speaker 1: What are you worried about? And by that I mean
Speaker 1: like right now, you could look every day there's a
Speaker 1: new factory over it. It looks pretty amazing. There's a
Speaker 1: new battery factory, and there's a lot of investment and
Speaker 1: you look at some of these charges. The lines are
Speaker 1: still the lines are going up, Inflation is moderated. We're
Speaker 1: just talking short term things, but like, what worries you?
Speaker 1: What's the way this goes bad? Or what are the
Speaker 1: scenarios in which okay, we have yeah, all this investment
Speaker 1: does not yield what people hope and what does that
Speaker 1: look like to you?
Speaker 3: Well, I think first point is, again I'm hopeful people
Speaker 3: are realizing this, but it's not going to create that
Speaker 3: many jobs. I mean, in the end, we only have
Speaker 3: a finite number of skilled people for constructing these plants
Speaker 3: and working in these plants. And unless you get a
Speaker 3: lot of other policies and a lot of other things
Speaker 3: going on, you're just going to end up moving some
Speaker 3: of those people from one job to another. So that's
Speaker 3: the first disappointment, is that the end of the world. No. Second,
Speaker 3: as I've tried to say, and building on what you
Speaker 3: and Tracy who were just talking about, is I think
Speaker 3: the international repercussions become real. I think if the Biden
Speaker 3: administration doesn't say okay, we've gone far enough in this direction,
Speaker 3: or the Trump people come back in and go further
Speaker 3: in this direction, you start getting retaliation. So we're already
Speaker 3: in a bad situation where there's this subsidies competition between
Speaker 3: US and Europe and China, and then to some degree
Speaker 3: some other countries are going to try to play, but
Speaker 3: they can't compete, and so it ends up like a
Speaker 3: really bad version of Boeing Airbus. Right, So, yeah, it's
Speaker 3: good to have two companies producing planes. It's also not
Speaker 3: good that they both get enormous amounts of government subsidies,
Speaker 3: in part because the other guy gets the other company
Speaker 3: gets good enormous amounts. It'd be better if we basically
Speaker 3: did arms control and took it down equal amounts of
Speaker 3: reducing the subsidies on both sides, and made a deal
Speaker 3: to keep that from going. And that starts being real
Speaker 3: big numbers. I mean that starts being in the tens
Speaker 3: and hundreds of billions. I mean that's real money that
Speaker 3: could be used for other things. Third thing, mentioning what
Speaker 3: you were saying, since we're at Jackson all is the
Speaker 3: inflation risk. So Chair Palell in his speech was perceived
Speaker 3: a slightly hawkish, more hawkish than expected. I think he
Speaker 3: was about where I expected him to be, but a
Speaker 3: tiny bit less hawkish than he should have been that
Speaker 3: given where our labor markets are, which is wonderful, there
Speaker 3: is still a risk that we could see a resumption
Speaker 3: of inflation, an acceleration of reacceleration of inflation. And you know,
Speaker 3: there's a lot of chattered right now on Twitter about
Speaker 3: different charts and things, but the but the main point
Speaker 3: is it's not what's important to remember is it's not
Speaker 3: under heard of in US experience, in other high income
Speaker 3: economies experience that you go through a disinflation, you get
Speaker 3: most of the way there, another shock comes along and
Speaker 3: inflation reaccelerate.
Speaker 2: The bullwhip effect in prices.
Speaker 3: To some degree. But it's also just if you're and
Speaker 3: this is the every good deed has its downside. If
Speaker 3: your labor market is like it is now, which is wonderful,
Speaker 3: which is unemployment measured below four percent, and labor force
Speaker 3: participation back up where it was before COVID for prime
Speaker 3: age workers, and your anti immigration, unfortunately, you get another shock,
Speaker 3: and it could just be an everyday shock. You know,
Speaker 3: gas prices go up or suddenly because these investments in
Speaker 3: chips production start creating much more demand than we expect,
Speaker 3: you end up with inflation sooner and Sharper and the
Speaker 3: cher Peal talked about that the idea there's this what
Speaker 3: he calls a nonlinear Philips curve, right that if you're
Speaker 3: close to a very full employment and there's a recent
Speaker 3: history of inflation, inflation may increase faster than you look.
Speaker 3: So that's another risk, and that would not be good
Speaker 3: going into the election. That would not be good in
Speaker 3: the past.
Speaker 1: I was just gonna say, Tracy, the two big peaks,
Speaker 1: the Grandee Towns behind the hotel we're at, I can
Speaker 1: every time I look out them. Now, I'm like, that
Speaker 1: looks like the two peaks of inflation in that chart.
Speaker 2: Right now, you see inflation on the horizon, literally on
Speaker 2: the horizon.
Speaker 1: I see on the horizon that peak and the you know,
Speaker 1: the mid seventies of the late seventies when I look
Speaker 1: out at the mountains.
Speaker 2: Okay, well, I'm glad this was Adam's last sort of
Speaker 2: risk factor because it segs nicely into the discussion of
Speaker 2: how monetary policy should respond to the sort of fiscal
Speaker 2: policy that we're talking about. And I guess I'm trying
Speaker 2: to think how to ask this question. But you're you're
Speaker 2: an inside person at the conference. We are not we
Speaker 2: are outside rejects, so we have to rely on you.
Speaker 2: We have to rely on you to convey.
Speaker 3: The hangers on.
Speaker 2: Oh, I say, lobby people, Okay, we're lobby.
Speaker 3: Wait, central bankers don't get lobby.
Speaker 2: So what are the discussions around fiscal policy in that room,
Speaker 2: Because on the one hand, it feels like, you know,
Speaker 2: the actions of twenty twenty, the unleashing of spending, maybe
Speaker 2: made central bankers' lives easier at least in the short term,
Speaker 2: but now it seems like they're complicating them massively, especially
Speaker 2: if you don't know what industrial policy is going to
Speaker 2: look like in the future.
Speaker 3: No, it's great that you brought it back. We are
Speaker 3: here at Jackson Hall, and Joe definitely should become a regular.
Speaker 3: If he looks at the t TODs and scenes inflation charts,
Speaker 3: I mean, that's real central banker psyche. Look. I think
Speaker 3: the starting point has to be it is very awkward,
Speaker 3: and I've experienced this directly in the room for central
Speaker 3: bankers to talk about fiscal policy, because ultimately, if you're
Speaker 3: an independent central bank, which essentially all the free market
Speaker 3: countries have, the deal is politicians can complain about you,
Speaker 3: but they don't or your policies ideally not about you,
Speaker 3: but they don't interfere in part because you don't go
Speaker 3: out and lecture them on what's not your responsibility. If
Speaker 3: you're a central banker, so your responsibility is monetary policy
Speaker 3: in some parts of financial stability, and that's it. You're
Speaker 3: not supposed to be lecturing on physical policy. And in
Speaker 3: developing countries or countries where governance is not those not
Speaker 3: the same thing, but where governance is not as strong.
Speaker 3: You sometimes find central bankers feel they have to talk
Speaker 3: about fiscal policy and budgets and irresponsible policies, and it
Speaker 3: gets very awkward, very quickly. So you don't want to
Speaker 3: do that if you don't have to. But as you're saying,
Speaker 3: there has been a shift towards more activist fiscal policy.
Speaker 3: And it's one thing during COVID, like you said in
Speaker 3: twenty twenty, you don't know what's going to happen. The
Speaker 3: world's facing a pandemic. You've seen unemployment spike, you've seen
Speaker 3: all kinds of things. And I think, frankly, somehow the
Speaker 3: Congress and the Trump administration and by administration did largely
Speaker 3: decent policies in the emergency. I mean, maybe Secretary Manuchen.
Speaker 3: I don't know who to credit, but they really did
Speaker 3: do basically good policies for twenty twenty and twenty twenty
Speaker 3: early twenty one. The issue is going forward from here.
Speaker 3: We're looking at a world where there's likely to be
Speaker 3: sustained increased public spending in all the major economies, so
Speaker 3: China seven, including US, people are spending on industrial policy
Speaker 3: and the subsidies, wars and investment. People should be spending
Speaker 3: on direct green investment to try to get some better
Speaker 3: traction on climate. People unfortunately, should probably be sending more
Speaker 3: in defense given the tensions, given the behavior of Russia
Speaker 3: and the tensions with China. And you start adding all
Speaker 3: these up, and then all the stuff that our friends
Speaker 3: of the Peterson found AI, which is separate, but the
Speaker 3: cousins of ours so to speak, you know about demographics
Speaker 3: and long term sustainability issues. You know you're seeing potentially
Speaker 3: one and a half two maybe even three percent average
Speaker 3: higher public spending over the next several years of GDP
Speaker 3: S or three percent GDP. That's a big number and
Speaker 3: no prospect that I see that the taxes are going
Speaker 3: to be raised to cover most of it. So that's
Speaker 3: a world, it's very challenging for central banks and how
Speaker 3: do you fit that in? And you say, so, what
Speaker 3: was it like in the room, what was being discussed? Well,
Speaker 3: it's interesting that last year actually there was much more
Speaker 3: heated discussion and much more about this issue of could
Speaker 3: the Fed and others have raised sooner more aggressively given
Speaker 3: what the fiscal policy was in the first quarter of
Speaker 3: twenty twenty one. Could they have adjusted more? Should they
Speaker 3: have adjusted more? And then if and getagopine from the
Speaker 3: if raised this somewhat in her remarks last year. If
Speaker 3: there is this green transition, which includes a lot of
Speaker 3: spending even just to adjust the economies, how should central
Speaker 3: banks react to I'm phrase it all is a question
Speaker 3: because partly there are no easy answers, and partly because
Speaker 3: there's no anything close to a consensus yet in the
Speaker 3: central banking community on this. There's a little bit too
Speaker 3: much of well, we can't talk about that, that's not
Speaker 3: our job, but they're going to have to confront it.
Speaker 3: What I will say is, so far this year, the
Speaker 3: discussions that I've heard are mostly about, in a sense,
Speaker 3: the questions of how this plays out into long term
Speaker 3: interest rates and how this plays out into productivity growth,
Speaker 3: and those are the most important things for are central
Speaker 3: bank to think about for the long term. But they
Speaker 3: don't quite capture the political economy of this difficult game.
Speaker 3: And yeah, I wish I knew how to manage it.
Speaker 1: Productivity, this investment in domestic manufacturing, domestic technology, things like that.
Speaker 1: Do you have any hope that maybe, like productivity statistics,
Speaker 1: which I think had been pretty mediocre for a while,
Speaker 1: maybe it gone down. Could they reverse could a smart
Speaker 1: public investment, could we see a reversal on that?
Speaker 3: The slowdown and productivity growth, which started in roughly two
Speaker 3: thousand and four and has been evident basically for the
Speaker 3: last ten to fifteen years, is very concerning because the
Speaker 3: slowdown in productivity growth happened pretty simultaneously across all the
Speaker 3: high income economies at once. It looks and smells like
Speaker 3: what we call a technology shock. So it isn't because
Speaker 3: the US underinvested in this, or your Germany didn't have
Speaker 3: enough workers of that, or Japan got older faster. Since
Speaker 3: we all basically slowed down at about the same time
Speaker 3: the same amount, it's probably something to do with what's global,
Speaker 3: which is technology and the grim news about that is
Speaker 3: that puts you back in the world of the famous
Speaker 3: Robert Solo, the idea of what's called exogenous growth, that
Speaker 3: we don't really control it. So what I've always said
Speaker 3: is what you want to be doing is having the
Speaker 3: government by really expensive lottery tickets. You're you're invest in universities,
Speaker 3: you invest in promising technologies, you invest in infrastructure. There's
Speaker 3: no guarantee you're going to get the next big thing,
Speaker 3: as Michael Lewis puts it at the other end, but
Speaker 3: it increases your chances. And this is like one of
Speaker 3: those good lotteries where there's only one thousand tickets. They're
Speaker 3: really expensive, but if you win, you win big, and
Speaker 3: that's the way to think of it. So then the
Speaker 3: question is, is the specific kind of spending they're doing
Speaker 3: on semiconductors and things like that the best kind of
Speaker 3: lottery ticket. I don't think so it can't hurt. But
Speaker 3: I'm I'd much rather have them investing in broader technologies
Speaker 3: than the specific industries.
Speaker 1: I just have one last question, but I don't want
Speaker 1: to forget it. You you mentioned an unpopular comment. Not
Speaker 1: many people say maybe we need to invest more in defense.
Speaker 1: There's that book that came out a few years. Trade
Speaker 1: wars are class wars. But do trade wars lead to
Speaker 1: hot wars? And do you worry that if we did
Speaker 1: see spiraling tit for tad subsidy raises trade that actually
Speaker 1: it could become more of a geopolitical story.
Speaker 3: Short answer, Yes, I think the trade wars are class wars.
Speaker 3: Concept is actually a particular theory by and Cline exactly,
Speaker 3: and I have some issues with it. We don't need
Speaker 3: to go into that with them. That good. If you
Speaker 3: want to make it happen that I'd be oddly, But
Speaker 3: I think I think the important thing is that the
Speaker 3: some of the Biden people, people like Pedsan Kline, have
Speaker 3: attacked the idea that sort of Tom Friedman worldview that
Speaker 3: if we do lots of good globalization in trade, the
Speaker 3: world will become more peaceful. As with most things in
Speaker 3: social science, it's actually the reverse. It's not that if
Speaker 3: you do good things, good things will result. It's if
Speaker 3: you do bad things, good things won't saw. It's sort
Speaker 3: of the Obama don't do stupid bleep version of social science.
Speaker 3: So there's no guarantee that when we did trade liberalization
Speaker 3: that China was going to become this wonderful, peaceful, democratic place.
Speaker 3: There is a very high likelihood that if we have
Speaker 3: escalating barriers and sanctions and restrictions and hostilities in the
Speaker 3: economic sphere, that it will spill over and pump up
Speaker 3: hostilities in the military sphere. So you can argue quite reasonably,
Speaker 3: don't oversell the benefits of trade to peace and democracy,
Speaker 3: but you shouldn't undersell how much active economic conflict in
Speaker 3: spiral control and cause other geopolitical issues.
Speaker 1: Adam posen, that was a real trade I'm so glad
Speaker 1: we caught up with you here. That was a fantastic conversation.
Speaker 1: Really appreciate your perspective and thank you for I can't
Speaker 1: believe it's taking on long.
Speaker 3: I'm grateful. I'm what's the old line, longtime listening, first
Speaker 3: time caller, So thank you for having me on our box.
Speaker 1: We're gonna have to have Carmen and make a big
Speaker 1: reel and every important people who say the listen. But
Speaker 1: thank you so much, and we should make that debate.
Speaker 3: Have it.
Speaker 2: Let's Adam and.
Speaker 1: DC and you have a conversation about trade and all
Speaker 1: this stuff.
Speaker 3: And love that.
Speaker 2: Let's do a conversation.
Speaker 3: Thank you having thanks every.
Speaker 1: Tracey. I really enjoyed that conversation, a different perspective, a
Speaker 1: sort of robust defense of trade and openness and some
Speaker 1: of the you know, maybe ideas that aren't currently in fashion,
Speaker 1: but a reminder of why they want to wear.
Speaker 2: I think he brings up a lot of valid critiques
Speaker 2: or potential risks, and I am taking notes for our
Speaker 2: next interview with a Biden administration official. The other thing
Speaker 2: I thought was really interesting was when he was describing
Speaker 2: how policymakers are sort of thinking about fiscal at the moment,
Speaker 2: this idea that actually it is very awkward because by design,
Speaker 2: central banks aren't really supposed to opine on what politicians
Speaker 2: are doing fiscally.
Speaker 3: Yeah.
Speaker 1: I really enjoyed his perspective. It is interesting too, like
Speaker 1: the comparing twenty twenty two and twenty twenty three, I
Speaker 1: really appreciate the sort of glimpse inside the vibe. One
Speaker 1: thing I appreciate is this sort of pushback against the
Speaker 1: idea that like the US economy has just been getting
Speaker 1: played for all these years, right, because that is that
Speaker 1: was sort of a key plank of Trump, which is
Speaker 1: that we're the suckers, and the reason that we couldn't
Speaker 1: be part of the transport specific partnership, et cetera. Is like,
Speaker 1: we just keep getting screwed, right, and these trade deals
Speaker 1: and the pushbakers like, actually the economy has been all right,
Speaker 1: We've had our problems, but the idea that like, we've
Speaker 1: been getting screwed by free trade, right.
Speaker 2: But I think it's such going back to politics, it
Speaker 2: is such a harder story to tell that actually the
Speaker 2: US has benefited enormously from this trade system than oh,
Speaker 2: we have all these countries taking advantage of us.
Speaker 1: Well, and this is one of those things. And I
Speaker 1: think it's like the history of trade is that the
Speaker 1: benefits are very diffuse and the people who have lost
Speaker 1: out are very identifiable.
Speaker 2: That's exactly it.
Speaker 1: And this has always been an issue with trade, probably
Speaker 1: going back hundreds of years in the history of trade.
Speaker 1: And so I think he sort of identifies that.
Speaker 2: Well, yeah, we have to do that debate in Washington.
Speaker 2: That'd be fun. Let's make it happen, all right, shall
Speaker 2: we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the ad Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway
Speaker 2: and I'm Joe Wisenthal.
Speaker 1: You can follow me at the Stalwart. Follow our guest
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