Edmund Phelps, the winner of the 2006 Nobel Prize in Economics, is the director of the Center on Capitalism and Society at Columbia University. Last week he spoke to Perfil's Jorge Fontevecchia in an exclusive interview via videoconference.
JF: Could this really be the largest economic depression in history, even worse than the one in 1929?
EP: Well, I think it’s important to emphasise in the beginning that absolutely no-one can know the answer to that question. There is huge uncertainty regarding what the virus is going to do and until we find out how the virus is behaving we don’t know what to expect.
My guess is that the downturn is going to be about as deep as the 1929 downturn. But on the other hand in the 1930s the government wasn’t very well prepared to figure out what to do. Now in the year 2020 we have in mind many measures that can be taken to try to support employment, try to break the fall of employment and to try to boost employment.
I would add that we are going into uncharted land because this crisis is a supply shock, not a demand shock. And generally speaking it will benefit from measures that wouldn’t have been appropriate in the case of a demand shock.
In the collapse of 1929, governments were slow to react but this time they quickly reacted with fiscal stimulus packages and monetary stimulus. Do you think that a different speed of response could make this crisis less or shorter than in 1929?
The slowness of response in the United States has grown to be quite serious. The number of deaths attributable to the virus as a percent of the population is much worse in the US than [in] Germany, which acted promptly and cleverly.
On the other hand the US for one reason or another didn’t suffer as much as Spain and Italy did. In the US we are in a difficult situation with huge unemployment and little consensus about what policy should be next.
The response to the last global crisis was to lower interest rates aggressively. This pushed up asset prices, and many believe it created bubbles and systemic risk. How much of this crisis is due to excessively loose monetary policy?
Well, I don’t believe that the central bank actions in the US and elsewhere have added to the crisis. The only question is whether the central bank’s actions have been helping very much to keep the economy on its feet and preventing further economic decline. Most observers believe that the central bank has taken extraordinary actions of enormous size. The actions taken by the Federal Reserve have had the effect of suspending share prices, which had a very high level that no-one would have expected. That’s an indicator of the magnitude of the central bank actions.
The last global crisis was that of 2008-2009. How is this coronavirus different from that of mortgages?
Well, [the] global financial crisis as everyone knows came from a shock to the financial system, bringing a collapse of asset prices and leading to a suspension of hiring, a great number of firings and a sharp loss of unemployment. That was a classic example of a contractionary demand shock.
Obviously, the coronavirus shock is very different. Workers can’t work with each other anymore without giving each other the virus. They had to be removed from the scene and production suffered declines. This was radically different from global financial crisis.
Since when will the economic and social costs of closing everything be exponentially greater and unmanageable than the spread of coronavirus?
Well, I think that the lockout and the distancing is very depressing and emotionally costly to those of us who are living through this in the US. The government is going to be forced at some point to put an end to the lockouts and even the distancing.
We are still in a dangerous situation regarding the magnitude of the virus and the likelihood that it will return once cold weather comes back – this is all new territory. We have to see what happens over the summer and over the fall.
Before the crisis, the world was awash with liquidity, which some blame from having created asset bubbles. Where did that liquidity go? Will it come back quickly?
It’s an interesting question, where did the liquidity go... the short answer is that the liquidity expanded itself until there was no excess of liquidity. The liquidity created the rocked-up share prices in the stock market. Now we can’t say any longer that there is a surplus of liquidity. In real terms liquidity is back to where it was before. Share prices would have been 20 to 30 percent lower than they are today had it not been for all this liquidity.
The printing of money that central banks around the world are carrying out, could this generate a return of inflation?
Well, again we are facing the unknown. I think the answer has to be yes If the financial authorities did nothing more after having created all that liquidity. But that’s not the scenario that I would expect. I would expect that as the economy of the world recovers central banks would be raining in that liquidity as it won’t be so necessary. With earnings on the rise it won’t be necessary to prop up share prices to artificial levels. Assuming that we have a reasonably intelligent monetary policy there’s no expectation that the situation will be followed by massive inflation. I know other intelligent people in the financial world think otherwise.
Is the fall in the price of oil a symptom of a syndrome where the loss of value of one sector drags the other and the other, spiralling downward?
Yes, I suppose it is.
Are we observing a new economic paradigm where liberalism has been replaced by a sort of new Keynesianism, as countries spend aggressively and even the EU relaxes deficit and debt limitations?
I think you are probably using the term liberalism as Europeans would use that world, which goes back to the 18th century. That’s probably wildly different from what a politician in the US would call liberalism.
Probably the same answer applies in either case. Liberalism will remain intact. I don’t think we are going to move towards a socialisation of the entire economy. But we will be moving towards greater and wider economic justice. The public has become aware that people of the bottom are in an extremely vulnerable situation. There has to be radical steps taken to address that problem. Both for the sake of the functioning of the society but also as a matter of economic justice.
Will consumption and production habits change permanently after the coronavirus?
Well, I would hope not but some people are worried and I’m also a little afraid that some of our beloved activities like theatre, shops, dining out in restaurants, going to the opera, [will] take years to come back. Some of them will. We are already seeing some restaurants beginning to function in New York City and the metropolitan opera company has cancelled the fall season but hope to revive on December 31 – it’s a very disappointing development. I don’t see that there’s much we can do about it.
After the coronavirus, will there be any form of a new New Deal, like after the 1929 crisis with Franklin D. Roosevelt in the United States?
My answer is the answer to the question of whether we are observing a new economic paradigm. It’s the same question but in historical terms. Out of the great depression came new steps to improve life of ordinary people such as social security, insurance against getting old or not having enough money to live. The US government introduced a social security system. We will have a lot of that this time.
And a kind of new Marshall Plan for undeveloped countries?
I wish I could be optimistic about that but I’m afraid the crisis in America and in Europe, plus the climate crisis which we have begun to respond to, is going to leave so little money to deal with the underdeveloped countries. It’s hard to imagine major new initiatives in that direction. A government is an imperfect entity and it can only do so much. The time to help the underdeveloped countries was when prosperity was high in the 1950s and 1960s and during the Internet boom. Those were great opportunities to share part of the income with people in the undeveloped countries but we didn’t do much in that regard. Now we are faced with our core needs of our own, to patch up our own systems. We won’t be able to do much more than what we are already doing for underdeveloped countries.
With the new leadership of Kristalina Georgeva and since the coronavirus crisis, is there a different IMF and more socially committed?
The new leadership has been very helpful to Argentina in its difficult situation and I applaud that. That represents excellent leadership. It’s not just Argentina – a lot of countries are in a position similar to Argentina.
Simon Kuznets, who won the Nobel Prize in Economics in 1971 for his work on growth, said: "There are four types of countries in the world: developed, undeveloped, Japan and Argentina."
I find that very amusing. I hadn’t known about that. I don’t think I ever met him. I did know his son at Yale for a few years. I can only speculate that a nation succeeds only if it has a system of values that leads to entrepreneurship and innovation. An economy that becomes relatively productive with relatively high wages is a country that has been reasonably successful at seizing opportunities for creating new stuff and trying to stay on the frontier and keeping an eye on development elsewhere. That focus for creating things, seizing opportunities, is not so much a matter of institutional features of an economy as it is a matter of attitudes.
You investigated economic growth, the effects of monetary and fiscal policy, and optimal population growth. What were Argentina's mistakes, that made it the country in the world that has grown the least over the last 50 years?
I have some hypotheses about that. No country that hasn’t done well wants to hear any criticism but in the interest of scholarship I’ll give my impressions. I might be wrong about some of these. There are to some extent anti-business attitudes. Whether labour unions are a bad or good idea in the abstract is a long and complicated situation. But I do think the Argentine labour unions have made it difficult for new firms to achieve efficiency, to adapt to changes, make changes quickly. The labour unions are concerned about their workers. Their concern about the world being for the workers leads to a static situation in the companies. Maybe people are not brought up to create, imagine, venture. You are not oriented towards experiencing new stuff. You might say ‘Why do these things matter?’ My book does a statistical test of the question of what explains the difference in performance across a set of countries. It turned out that the countries that appeared to be most successful in the dimensions I was talking about tend to have the right values. We have statistical evidence that that is the case.
In your book Rewarding Work, you point out the importance of earning a respectable salary to build self-esteem, and the responsibility to earn that salary has become increasingly difficult for those at the lower end of the salary distribution, since that productivity has become more dependent on knowledge and skills and less on weight and hard work. Would it be correct to say that this situation has worsened since you wrote the book?
Absolutely. People at the bottom of the labour force are feeling they are needed for essential work like sweeping floors but they are not a part of companies. They are not part of the action. They are used for manual purposes, ones that could be done by mechanisms. An enormous divide has developed between the people at the bottom and the rest of the population which is very troubling.
Another of your books, Mass Flourishing, noted that most innovation was not driven by some isolated visionaries like Henry Ford and Steve Jobs, but by millions of people empowered to think, develop and market innumerable new products and processes in addition to improvements to existing ones. How are those values that made societies prosper today under threat?
They are not exactly threatened, they have already died. I think the US and most countries that have values that supported the exploration of creation, those countries saw loss of those values by the 1970s. What we have seen since that time is, with the exception of the 10 years of the Internet boom, slow growth since the 1970. First in the US and then in other countries that have been drawn by the innovations of the US. We have a slowdown of productivity growth in the US, France, Britain and everywhere around the world. This is because the loss of key values that are central to innovation. Values such as individualism, working for yourself, taking care of yourself, expressing yourself have really taken quite a hit in the past 50 years.
How does your 25 years of work dedicated to the importance of employment values continue in your new book?
It is a book near to my heart. It builds on the ideas of my earlier book Mass Flourishing. The purpose of the new book is not to restate the thesis of the old book but rather to test it. As I explained before in that book I and my colleagues perform numerous statistical tests of the hypothesis that innovation comes from having the right values and that innovation is harmed by having some other wrong values.
It’s very important to emphasise that most innovation comes from ordinary people, not extraordinary. Some extraordinary people get lucky enough to produce some innovation. But a lot of extraordinary innovations are the concepts of ordinary people who are in the middle of income distribution and of average education. When we talk about differences in innovation across countries we are talking about differences in grassroots innovation, not differences in the number of Henry Fords and Steve Jobs, who happen to live in our country.
Nobel laureate Joseph Stiglitz has warned of a wave of defaults and asked for major debt forgiveness for poorer nations. Can you comment on what Stiglitz said?
It’s certainly an important matter to bring up. The worry is that if Argentina and its creditors, foreign and domestic, are unable to get together on terms that make it possible for Argentina to pick itself up and begin to recover and develop, if that proves impossible, that would be very costly for other countries who would have to renegotiate their debt. It’s an important point that Stiglitz is making – that the negotiation between the creditors and Argentina is going to determine what other nations will have to pay. It’s important that we get terms for Argentina that make it possible for Argentina to pick up and go forward.
Argentina made an offer to restructure its external debt that was not approved by creditors. Could Argentina be being used as a laboratory by creditors in the face of certain future sovereign debt restructurings after the coronavirus?
Yeah, sure. Maybe so. That’s exactly right. That’s why it’s important to get an agreement that is feasible for Argentina.
Argentina's last president, Mauricio Macri, was welcomed by the global community as the "slayer of populism," while international investors allowed Argentina to borrow recklessly. Then, the IMF bailed out the country, presented completely inaccurate economic projections, and saw the country sink deeper into stagflation. How much responsibility do private creditors and the IMF have in Argentina's collapse?
That’s a big subject. I am not the ideal person to make an opinion on that subject. I had the opportunity, my wife and I, to say hello to Macri when he was becoming president at the World Economic Forum. We noticed that he didn’t seem to have much of a vision to offer. He didn’t have much sense of what Argentina needed. His thinking was in terms of we are going to build something over there. Like it was an engineering task. As nations often do in this instance a bad leader was chosen. Like in the US with a leader in charge of the country.
To finish, can you compare the leadership of Macri and Trump? They are both businessmen. The problem of businessmen in power is that they have a short-term view because they are only focused on productivity and profits?
Yeah. Making deals. Producing stuff. Short term-ism. No vision. Always catering to interest groups for political support. I had the opportunity to talk about President Trump as he was taking office in January 2016. I said, without intending to be mean about it, that he reminded me of Mussolini. Mussolini wanted to have the companies like puppets doing the betting of the puppeteer. That system creates a tremendous amount of uncertainty and companies spend most of their time trying to get favourable treatment from the leader. A tremendous amount of intellect is wasted, redirected in the wrong direction. It has been a total disaster.
We are seeing in Argentina the images of the violence in the US against the government and the police. What is your view about the future of the elections? Is this crisis going to lead to Trump failing to win re-election in November?
Right-thinking people are desperately hoping that Trump will lose the election in November. There seems to be increasing signs that this will happen, that he will lose.
Trump has shown signs of being desperate. We can hope for a change of government, but there will be a tremendous amount of reconstruction that will have to be needed. Just as I think Argentina needs to think about changing social values, its individual values, the US has a tremendous way to go. We have to go back to celebrating creativity, initiative and not being so wrapped up in money.
It’s hugely important that people begin to see work as fun, exciting, intellectually interesting. It’s not just the money. We have to at last recognise the importance of economic justice which doesn’t mean that a middle-income person gets higher income. We have to pull up people at the bottom. Inequality is a bad word in my language. We can pull up the rewards for people in the bottom as high as we can. Unfortunately it won’t be high enough but it’s the best we can do.