Anatole Kaletsky On 2020

Commentator and consultant Anatole Kaletsky talks with Browser editor Robert Cottrell about lessons learned from 2020, in a Zoom conversation for Browser subscribers and friends which took place on Sunday 20th December 2020, introduced by Uri Bram. This is a lightly edited transcript. Errors and omissions are those of the editor.

ROBERT: Anatole, you and I have known one another for a very long time, and I don't think we've seen a year like this past one. Do you think it's a year to remember or a year to forget?

ANATOLE: The answer depends on who you are. For some people it has been quite a profitable year; very profitable for Jeff Bezos; and a surprisingly prosperous year for many people in the financial sector in Europe, people who've managed to carry on doing their jobs, or, at least, receiving their salaries. But for most people it has been an absolutely terrible year.

Historically, it's definitely going to be a year to remember. A number of things have fundamentally changed course. The world is moving on to a new trajectory for years and even decades to come.

ROBERT: Are we talking here about changes in our systems or changes in ourselves? Are we seeing the world in a new way after the adversities of the past year?

ANATOLE: We have learned some things about human nature, the role of government, relationships between individuals and societies; but I don't think the pandemic has actually taught us that much about the ability of people to cope with extreme adversity, because actually, by the standards of the history, and by the standards of parts of the world today, the so-called suffering that we're all going through in Europe and America is very, very minor. Statistically, for most people the pandemic means the inconvenience of not being able to see one's friends or family, of not being able to go out shopping and so on. I don't think that even registers on a scale of human adversity.

Also, in Western societies, we've been offered the most amazingly comfortable safety mats by our governments. People in Britain have been comparing this year with the Blitz, but we haven't got bombs falling on us. Covid hasn't taught us much new about coping with adversity.

What the past year has taught me is that people in Western societies are now willing to accept more and more restrictions on their lives, which reverses or contradicts the conventional economic wisdom of the last 30 or 40 years.

People are showing themselves willing — even eager — to accept leadership and control from governments and other institutions. In this respect the past year really has marked a turning point. This is the end of an era of neo-liberalism during which the prevailing doctrine in Western societies was that people were individualistic, that they were determined to shake off the shackles of government, that they wanted to make their own way in the world.

What we're finding instead is that people can easily and quickly be tipped into great anxiety and great uncertainty. We keep hearing this word "herd", as in "herd immunity". People are desperate to find this "herd immunity", to find their "herd". They are showing themselves willing to accept instructions from governments which, in my view, do not always make sense.

To the extent that there is any kind of controversy in any of the major Western nations about the extent of government controls, all the opinion polls suggest that people want more control from government rather than less. This refutes the neo-liberal concepts drummed into us since the days of Margaret Thatcher and Ronald Reagan. Whatever people wanted in the 1980s, it isn't what people are really looking for now. What they want now is comfort, and control, and constraints, rather than freedom. That's how it strikes me. I've been really surprised at the degree of public support for lockdowns all over the world.

ROBERT: American individualism seems to have been largely counter-productive in the face of Covid; while in China, we've seen the upside of dictatorship — the forceful use of administrative resources has been very helpful in suppressing the pandemic. Is this a significant moment for the balance of soft power between America and China?

ANATOLE: It is. People are beginning to think: "Well, maybe it is better to live in a more controlled and regulated society than in some sort of free-for-all". The personality of Donald Trump has also been a major factor. So yes, alongside a psychological and sociological turning point, we can also see a geopolitical turning point. Much of the world is starting to accept the inevitability of China's rise to become a full and equal counterpart of the United States, not just economically, but also in terms of influence on the world, shaping the world's future, including the political future.

The rise of China has been under way for decades. But this is this year when the full consequences of that process become clear — equalisation between America and China, between the Atlantic and the Pacific, between the Western European liberal way of looking at things and the Asia Confucian way. It is very unlikely that either side is going to completely overwhelm or somehow sweep away the other.

ROBERT: Donald Trump's presidency has changed most people's ideas of America. Has it changed them irreversibly?

ANATOLE: The belief in American supremacy, in American dominance, has gone. So has the belief among a lot of people that American hegemony is a benign force in the world. You could say that these things have been breaking down throughout our lifetimes — since Vietnam, and then Iraq, and then the Arab spring — and that this is the culmination of a of a long process, it was going to happen anyway, sooner or later. But Trump accelerated things, and I don't think the effects will be reversible.

The other thing which is happening right now, in the last few weeks and even as we speak, is a crisis of of American democracy, of the idea that America is a model democracy. A third of the Congress and something like 50 or 60 million Americans seem to believe that the result of the election should be overturned in order to keep President Trump in office. That's not going to happen, but the very fact that there is this movement to keep Trump in office, a widely popular movement, must raise questions about whether America is still a genuine democracy. I'm not sure that genie can be put in back into the bottle. If much of America has given up on democracy, can we be confident that any democracy anywhere in the world is any more durable? Can we believe in German democracy, or French democracy, without American democracy?

ROBERT: You have been outlining here a fundamental shift in the way that people think about political ideals and political institutions; and a rebalancing of power between America and China. This feels like a prescription for immense uncertainty and for catastrophic mistakes along the way. To say nothing of the further effects of Covid. Why are so many financial markets doing so well, at least as we speak?

ANATOLE: There are two extreme viewpoints, both of which I have believed at various points during the year. One is that markets have just gone mad and that this is a bubble, a speculative bubble. You can point to Tesla, which is worth more than all the auto companies in the world put together, even though it hardly makes any profits. And have you ever heard of a company called Nikola? It is essentially a Tesla clone, which plans to make electric trucks as opposed to electric cars, and the name Nikola associates the company with Tesla in investors' minds. Nikola went public in March with no revenues and no profits and by the end of June its shares were up six-fold, valuing the company at more than $20 billion. They are down again now. So certainly we've had some market madness, and things do overshoot.

On the other hand, given that so many people were expecting that the shock of Covid would be catastrophic and would lead to a complete market meltdown, when that didn't happen, you got, not panic, but the opposite of panic, you got people saying: "Oh my God, I've been out of this market. I've sold everything. Buy, buy, buy". People were willing to buy everything. So you could say it's been speculative overshooting in both directions.

But I think there is another way of seeing things. The prospects for the world economy have actually improved tremendously as a result of what's been happening. What has happened is that governments have responded in ways going far beyond monetary policy. Central banks have been printing money like it was wallpaper since the 2008-2009 crisis, that's nothing new. The really big thing that has happened this year is enormous budget deficits — unlimited spending by governments, in effect, governments all over the world directly pumping trillions of dollars and euros into the private sector, giving and lending directly to companies, paying and subsidising wages, deferring or waiving taxes, on a scale that was not merely way beyond anything ever predicted or experienced, but way beyond anything that anybody even imagined possible.

ROBERT: Except for the modern monetary theorists.

ANATOLE: Even they didn't really believe it was possible. They believed it would work, theoretically, but they didn't believe it could actually happen. And it did. Let me tell you an anecdote.

Just after the lockdowns were announced in Britain and America, I wrote an article for my consultancy clients. I published a version of it on Project Syndicate saying: "Look, people are being prevented from going the workplace, from earning, from spending. In principle, this situation could be stabilised and resolved quite easily by having governments pump the equivalent amount of money into their economies, into their private sectors".

I did a back-of-the-envelope calculation and said that the world economy could be stabilized if every country spent between 15 and 20 percent of GDP, which they would have to borrow in the coming months and pump into their economies, preferably by providing wage subsidies of 80 or 90 percent of lost wages. I said it wouldn't end up costing very much at all because the central banks could print the money; it would be perfectly feasible; but we all know that governments are not going to do this. Anywhere. And, therefore the outlook for the world economy was frightening.

A week after I published that article, the British finance minister, Rishi Sunak, announced a policy of borrowing 15 percent of GDP, which would be £200 billion, and using the money to pay 80 percent of the wages of anybody unable to work because of  Covid. Things that had seemed completely impossible to me and even to the finance ministers themselves were being done. Another week later the American government came along and said: "Well, 80 percent, no, that's not good enough. We're going to pay 110 percent of the lost wages to everybody who's rendered unemployed by Covid". So, as a result of that, it became likely, or at least possible, that there would be a rapid bounce back the moment the public health situation recovered, which of course it hasn't yet.

What I think the business community and the financial markets are beginning to sniff out is that this is not just a temporary reversal of policies. It is a longer-term change in the philosophy of how the world economy should be managed. I think we are going back to a post-war — 1950s and early 1960s — philosophy about the role of government and the management of economic activity, which may lead to economic conditions more like those of the post-war period ... Somewhat higher inflation, but also much higher growth targets, with the object of maximising growth while minimising unemployment, and accepting the higher inflation that might result. Those conditions are actually pretty good ones for the stock markets and the property markets.

We can trace this change in philosophy back to the 2008-2009 financial crisis and the disillusionment that followed. There was a global disillusionment with neo-liberalism, Thatcherism, Reaganomics, whatever you want to call it. There was a sense of impending breakdown, but it wasn't clear what was going to come after this collapse of the market-fundamentalist view of the world.

Ten years ago I wrote Capitalism 4.0, in which I pointed out that capitalism had survived crises in the past by reforming in response to social pressures. It would emerge in some new version, although it was never obvious to anybody at the time what the new version was going to be. It would take ten or fifteen years for something new to emerge, and I think a period like this may be what we are going through now.

ROBERT: So Keynes may yet be proved right in his prediction that people in this century will need to work far less in order to live well? That's pretty much what we have been doing for the past year, albeit involuntarily.

ANATOLE: Or, it may also end in tears, very quickly. This image I've presented of a return to the post-war golden age of economic growth is not shared, I think, by the majority of economic commentators, who believe that the long-term consequences of printing and spending money will be more stagflation and social unrest, as in mid-1970s Britain. But if you look at the way that the financial markets are behaving, I'd say that mine may be the majority view among investors, even if few people consciously share it.

ROBERT: It seems we are re-discovering a whole new world of economics which has been more or less undiscussable for half a century if you wanted to be taken seriously as an economist.

ANATOLE: Something of that kind happened when Britain went off the gold standard in the 1930s. Sidney Webb, the Labour politician, said: "Nobody told us we could do that". Nobody imagined that Margaret Thatcher would be able to get away with making 3 million people unemployed in 1980s Britain, closing down industries that were thought to be the absolute foundation of the economy. What we believe we can or cannot do in economics is usually rooted in some arbitrary rules of monetary policy or deficit spending. The Maastricht criteria, for example, are just beliefs, they are not scientific principles, and I think we have now seen through them.

ROBERT: Your reference to Maastricht makes me realise that we have managed to review 2020 without once mentioning Brexit. For that and much else, many thanks.

[ENDS]