What this covers
The world economy has experienced many shocks over the past few years: A pandemic. Russia’s invasion of Ukraine. Skyrocketing inflation. These are the stories that have dominated headlines — and for good reason.
But they’ve also overshadowed a set of deeper, more fundamental shifts — the rise of China as an economic superpower, the fracturing of trade relations, the realities of the climate crisis — that are transforming the global economic order and prompting ambitious policy responses from leaders across the world.
Martin Wolf is the chief economics commentator at The Financial Times, a former senior economist at the World Bank and the author, most recently, of “The Crisis of Democratic Capitalism (https://www.penguinrandomhouse.com/books/554951/the-crisis-of-democratic-capitalism-by-martin-wolf/) . Across his writings, Wolf has developed some of the clearest frameworks for thinking about how the global economy is changing and some of the sharpest critiques of how policymakers are responding to those changes.
We discuss how China’s meteoric economic rise has shaken the foundations of the global economy, why globalization has remained far more resilient than so many predicted, why Wolf is skeptical that President Biden’s industrial policy agenda will succeed, the debate between “onshoring” and “friendshoring” that is dividing the Democratic Party, why a recession in the United States is looking far less likely than it did six months ago, the virtues and vices of Biden’s “foreign policy for the middle class,” why China’s recent economic troubles could signal a more foundational decline, why the U.S. economy has remained so much more stronger than most economists anticipated, and more.
Mentioned:
National Security Adviser Jake Sullivan’s speech (https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-jake-sullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/)
“The I.R.A. Passed a Year Ago. Here’s a Progress Check (https://www.nytimes.com/2023/07/07/opinion/ezra-klein-podcast-robinson-meyer.html) ” by The Ezra Klein Show, with Robinson Meyer
“The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade (https://www.nber.org/papers/w21906) ” by David H. Autor, David Dorn and Gordon H. Hanson
“Is the Global Economy Deglobalizing? (https://www.brookings.edu/wp-content/uploads/2023/03/BPEA_Spring2023_Goldberg-Reed_unembargoed.pdf) ” by Pinelopi Goldberg and Tristan Reed
“Climate Progress and the 117th Congress: The Impacts of the Inflation Reduction Act and Infrastructure Investment and Jobs Act (https://repeatproject.org/docs/REPEAT_Climate_Progress_and_the_117th_Congress.pdf) ” by REPEAT Project
Book Recommendations:
The Narrow Corridor (https://www.penguinrandomhouse.com/books/555400/the-narrow-corridor-by-daron-acemoglu-and-james-a-robinson/) by Daron Acemoglu and James A. Robinson
Power and Progress (https://www.hachettebookgroup.com/titles/daron-acemoglu/power-and-progress/9781541702530/?lens=publicaffairs) by Daron Acemoglu and Simon Johnson
The Rise and Fall of American Growt (https://press.princeton.edu/books/paperback/9780691175805/the-rise-and-fall-of-american-growth) h by Robert J. Gordon
This episode is guest-hosted by Rogé Karma, the senior editor for “The Ezra Klein Show.” Rogé has been with the show since July 2019, when it was based at Vox. He works closely with Ezra on everything related to the show, from editing to interview prep to guest selection. At Vox, he also wrote and conducted interviews on topics ranging from policing and racial justice to democracy reform and the coronavirus pandemic.
Thoughts? Guest suggestions? Email us at ezrakleinshow@nytimes.com.
You can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast (https://www.nytimes.com/column/ezra-klein-podcast) , and you can find Ezra on Twitter @ezraklein. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs (https://www.nytimes.com/article/ezra-klein-show-book-recs.html) .
This episode of “The Ezra Klein Show” was produced by Rogé Karma. Fact-checking by Michelle Harris, with Kate Sinclair, Mary Marge Locker and Kristin Lin. Mixing by Isaac Jones. Our senior editor is Rogé Karma. The show’s production team also includes Emefa Agawu, Jeff Geld and Rollin Hu. Original music by Isaac Jones. Audience strategy by Kristina Samulewski and Shannon Busta. The executive producer of New York Times Opinion Audio is Annie-Rose Strasser. Special thanks to Efim Shapiro.
Unlock full access to New York Times podcasts and explore everything from politics to pop culture. Subscribe today at nytimes.com/podcasts (http://nytimes.com/podcasts) or on Apple Podcasts and Spotify.
Source description (no synthesized summary yet).
Martin Wolf argues that understanding the global economy requires analyzing three distinct dimensions—long-term structural shifts (like China's rise and de-globalization), sudden shocks (pandemic, inflation, energy crisis), and underlying fragilities (high debt, political instability)—because policy responses that treat these as a single problem will fail to address them adequately.
- Shifts, shocks, and fragilities are fundamentally different phenomena requiring different analytical approaches and policy responses
- The Biden administration's industrial policy attempts to solve multiple distinct problems (jobs, security, climate, inequality) with a single instrument, which violates basic policy logic
- The resilience of globalization data masks real political and geopolitical risks that could materially alter economic trajectories if they manifest
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China's growth rate of close to 10 percent per year that was sustained until about 2012 was never going to be sustained indefinitely because export growth could not be sustained at that rate (China became too big and saturated markets) and infrastructure had already become overdeveloped, forcing China to seek new growth drivers.
“the growth rate that China had up to about 2012 so a few years after the financial crisis which was close to 10 a year there wasn't any doubt that that wasn't going to be sustained it was going to slow and the Slowdown occurred partly because export growth couldn't be sustained at that rate because China just become too big and it saturated so many markets but also they had done so much of the investment that was needed their infrastructure had already become superlative really almost over developed for the size of the economy”
China pursued the largest real estate boom or bubble in world history to maintain growth after export-driven and infrastructure-investment models were exhausted, leading to massive debt accumulation similar to Western economies before the 2008 financial crisis.
“what they went for was the biggest real estate boom or bubble I think in world history which meant that they then started generating huge increases in debt to finance this huge real estate boom on which demand was heavily dependent”
The rise of China and Asia has created a new set of competitors and displaced established industries in developed countries, becoming a major political factor in countries like the US and Europe, and creating concerns about de-industrialization in developing countries that previously made progress.
“it is also created a completely new set of suppliers a new set of competitors very large number of developing and emerging countries but also developed countries have found that industries that they thought were well established and stable have been out competed by China and have disappeared and that's become a very big political Factor”
The Western world, particularly the US, remains absolutely dominant in the global financial system through control of the dollar as the world's most important currency, dominance of capital markets particularly in New York and London, and continued technological leadership, even though these advantages are being challenged more than in the past.
“the world's dominant currencies are those of the United States and its allies the dollar Remains the single most important currency by far the Western Capital markets financial markets particularly those based in New York the tallest extent London remained the dominant financial markets and overall I would say that and this is shown with the recent developments in artificial intelligence that the Western countries remain technologically in the lead”
The economic benefits of focusing on revitalization of manufacturing in a very highly advanced, high-wage economy like the United States is something about which one must be somewhat skeptical.
“the overall economic benefits of focusing on the revitalization of manufacturing in a very highly Advanced high-wage economy like the United States is something that one just has to be a little skeptical about”
Global data flows are absolutely exploding across borders and within countries, making globalization in the digital/information realm very different from trade flows, which have plateaued.
“there are other aspects give you the most obvious one data flows data flows are absolutely exploding across borders just as they are within our countries so it's a very complicated picture”
India's population is now the same size as China's and is expected to grow by 400-500 million or more over the course of this century, giving India essentially limitless human resource potential, though it has not yet successfully developed as a manufacturing export base despite liberalizing trade in the 1990s.
“India is like China inconceivably vast its population is now the same size as China's and it is expected that over the course of this Century it will become maybe um four 500 million or more bigger so the the human resource potential is essentially Limitless now hitherto India did liberalize in the 1990s in its trade opened it has never made itself a really successful base for manufacturing production”
The rise of China over the past 40 years represents the fastest economic transformation in world history, even faster than the rise of the United States in the late 19th and early 20th centuries, and has completely transformed the balance of economic and political power globally.
“this is the fastest economic transformation I think in world history even faster than the rise of the United States in the late 19th century and early 20th century”
Avoiding losing technological leadership to China depends primarily on the nature of domestic policy in the US and the ability to sustain innovation and keep innovation hubs dynamic, where the US clearly has the best systems in the world and should be more confident about its advantages.
“can we avoid losing our technological leadership to China my view is the main issues there will be the nature of domestic policy the ability to sustain Innovation and make sure that Innovation and Innovation hubs continue to be dynamic because I think the US clearly has the best systems in the world it should be more confident about that”
Core inflation may be artificially high as a measure because it includes shelter (about 40 percent of core inflation) which has a well-known one-year lag in the data reflecting the housing market of a year prior, and when rents have actually been falling for some time but not yet reflected in data, 'super core' inflation excluding rent is much lower.
“a huge component of core inflation about 40 percent actually is shelter it's rents and the price of rents has a well-known lag in the data of about a year because most people have one-year leases and so the current rent prices baked into the core inflation measure are still reflecting you know the housing market of a year before”
Global financial and debt crises are likely when you have economies with very high debt levels and debt becomes much more expensive; the global and US economies are among the most highly leveraged ever, which creates fragilities that interact dangerously with shocks.
“the most important fragility in the economic space as it were which is global and National in the US case we have extraordinarily highly indebted economies... if you've got lots and lots of debt around and it gets much more expensive and it is they're just likely to seize Financial shocks financial crisis”
China is currently in a growth trap where expectations that growth will continue drive investment and growth, but once businesses conclude growth won't be robust, they reduce investment, which then causes growth to slow further, creating a self-reinforcing negative cycle that is difficult to escape.
“a lot of the growth in a system like this depends on the expectation that growth will continue as soon as businessmen conclude that actually the economy isn't going to grow very much then they conclude well we shouldn't invest so much and if they decide that they're not going to invest so much then the growth will slow and then you are in a trap”
The United States uniquely thinks it is possible and desirable to be close to self-sufficient in trade, unlike other developed economies which know their standard of living depends on sustained enormous trade with one another; the US debate on trade is fundamentally different from the rest of the world because of America's unique ability to theoretically approach self-sufficiency.
“the U.S sort of thinks and it's the only economy that can think like this at all that it is possible and possibly even desirable to be close to self-sufficient... if you look at any other country the world or even Europe as a whole we can't be self-sufficient we're always going to be huge net importers of Commodities... they know that their stand of living depends on sustained enormous trade with one another”
Xi Jinping's anti-corruption crackdown necessarily slows the dynamism of China's capitalist system because corruption is structurally part of the system; cracking down on corruption is effectively cracking down on the market economy, causing capitalists to become frightened, entrepreneurs to leave or reduce risk-taking, bureaucrats to become more cautious, and underlying growth dynamics to slow.
“the more he cracks down on corruption the more difficult it is to sustain the dynamism of China's capital system many of the capitalists get frightened some of them leave the country some of them stop doing the risk-taking they did before the bureaucrats become more cautious and the underlying growth Dynamic of the system also slows”
Trade policy data is a lagging indicator of actual policy change—political sentiment and policy rhetoric about deglobalization and China competition precede changes in actual trade flows, so current policy changes may eventually show up in trade data as a significant reversal even though flows currently appear resilient.
“what they argue is yes when you look at the data globalization looks fine but the argument they make is that the data on trade flows in particular is actually a lagging indicator right trade is Downstream from trade policy policy is Downstream from political sentiment and when you look at the policies being made right now when you look at the way that political rhetoric around being tough on China and onshoring Industry it seems like we're clearly moving in the direction of deglobalization”
The combination of a communist political system with a capitalist economy in China inevitably led to explosive corruption because government officials controlled access to land and resources needed by capitalists, who naturally compensated officials for permissions, merging the party and capitalist systems in ways that threatened system legitimacy.
“one consequence of that sort of growth within a communist system them with no rule of law is that corruption clearly exploded and it was inevitable that it would because all the resources above all the land that capitalists needed to do their business all this depended on permissions from government and the officials Who provided it uh well quite naturally they wanted a share of the winnings and the capitalists were perfectly prepared to give them a share of the winnings and in the process the capitalist system and the party system merged”
There are two distinct critiques of globalization in the US policy debate—the 'China shock' argument (that outsourcing to China caused manufacturing job losses) and the 'China entanglement' argument (that dependence on China as an increasingly hostile adversary creates vulnerability)—which are often conflated but lead to very different policy prescriptions.
“there are really two major critiques of globalization here that I think are often conflated but lead to very different policy prescriptions so one is what you can think of as sort of the China shock argument... and then the sort of the second argument is what you can think of as the China entanglement argument”
Economic security should be approached with nuance and subtlety—not all domestic production enhances security (trying to produce adequate domestic supplies of items thought to be unlikely needed, like COVID protective equipment, would likely result in chronically inadequate supplies); diversifying production to friendly countries often provides better security than aiming for complete domestic self-sufficiency.
“it isn't the case that if everybody produced their own protective equipment at the beginning of covid we would all be more secure the probability is we would have ended up in that situation with chronically inadequate domestic Supply it would be just as bad so we have to be very subtle in the way we think about economic and National Security in the policies we frame”
The real policy problem in the US is not the China shock itself but the failure of the American government to develop place-based adjustment policies that allowed communities and workers in key industries to adjust to these shocks, representing a broader policy error beyond just trade policy.
“the reason this is such a huge issue in America is that America failed so completely to generate place-based adjustment policies that allowed crucial parts of your economy and particularly places in your country to adjust to these shocks and that's a much broader policy error than just a trade policy error”
Reducing China's economic capacity and reducing US dependence on China also reduces China's dependence on the US, which removes a stabilizing force in the relationship because reciprocal economic vulnerability gives Chinese interests opposed to hostility a strong voice, whereas cutting China off removes this constraint on hostile behavior.
“reducing our dependence on China because it means it also reduces China's dependence on us which I think has significant strategic value and I do think again that the recent visits by secretary blinken and secretary Yellen to China indicates that these nuances are understood in the administration”
The US has a long history of industrial policy with mixed results—some magnificent successes but many failures—and once engaged in industrial policy within the US political system, rent-seeking by actors trying to access subsidies can easily lead to massive economic distortions similar to those already seen in many important US sectors.
“u.s has a fairly long history of industrial policy some of it has been a magnificent success but a lot of it has been a pretty bad failure and once you start on this in the sort of political system the US has rent seeking by people trying to get hold of subsidies can easily lead to massive distortions in fact distortions in the economy which are not so terribly distinct from the rent seeking we're already seeing in many of the US economies most important sectors”
A primary reason for the 2 percent inflation target is that it should result in an inflation rate low enough that people basically never think about inflation and it doesn't become part of decision-making or wage-setting, allowing inflation to 'go away' as a consideration in economic behavior.
“the most important thing we want to do is have a rate of inflation in which basically nobody really thinks about inflation it's just something that it's not part of decision making not part of wage setting it just goes away”
Unemployment is not the best measure of labor market slack; reduction in hours worked, reduction in vacancies, and less job quitting are also indicators of labor slack that may be sufficient to eliminate wage pressure without requiring rises in unemployment.
“unemployment is not a good measure of Labor slack and that in particular there is as I understand it a reduction in ours worked in some economies... and of course there's a reduction in vacancies and that is also an indication of Labor slack”
The only real test of whether industrial policy bets will work is time; the real questions (whether the electric vehicle industry becomes truly competitive globally, whether industries remain viable without indefinite subsidies) won't be answered until after years of implementation have passed.
“the real test will be how costly this is going to be how much of it will generate truly competitive Industries in the long run is the electric vehicle industry going to end up as a American industry fully competitive with the Chinese industry or not these are pretty fundamental questions and the only test there is the test of time”
Globalization peaked around 2008 in terms of trade and capital flows as a proportion of world GDP and has not continued to grow at the same rate since, though it has not dramatically reversed—instead trade has become more politicized and regionalized with suspicion toward countries deemed adversaries.
“using standard measures ratios of trade to world GDP... and perhaps even more important... the extent to which companies became transnational... what happened between let's say 1980 and 2010 or so 2008 to 10 is completely unprecedented in world history... but if we look at it in terms of policy and in terms of actual flows of trade and capital that cease to be dynamic it seems to grow faster than the world economy about 15 years ago and since then we haven't had a huge reversal”
The 2 percent inflation target is partially arbitrary, and there is an argument that inflation should be somewhat higher than 2 percent, though Wolf won't elaborate on it now; changing the target significantly just because it's difficult to hit would undermine the credibility of any future target.
“there is an argument to be made that maybe inflation should be a bit higher I won't go into that argument now because it's complicated but one could make it I think there are two considerations nonetheless that the FED does and I think should bear in mind... If the Fed decides to change its Target significantly just because it's difficult after an unexpected period of inflation to get back down to it it is going to undermine ineluctably The credibility of any Target”
The inflation reduction act's requirement that EVs use critical minerals sourced from the US or free trade agreement countries was intended to onshore critical minerals processing to America, representing the 'onshoring' or autarky-oriented approach to de-globalization.
“the inflation reduction Act was pretty clear about this it said that for an EV to be eligible for one of the major tax credits in the bill it needed to be made with a certain percentage of critical minerals processed in the U.S or one of the handful of countries that the US has a free trade agreement with and the intention there was to onshore a lot of the critical minerals processing back here to America”
China is now facing multiple simultaneous crises including zero-COVID lockdowns that hurt the economy, major unemployment spikes (over 20% youth unemployment reaching record levels), real estate sector collapse after earlier recovery expectations, and a growth slowdown that is much more severe than initially expected after lockdowns ended.
“growth for China has been much lower than expected the unemployment rate among China's Urban Youth recently reached the highest number on record over 20 percent the country's real estate sector which was has long been the engine of its growth looked like it was recovering and then started tumbling again”
The political constraints facing the Biden administration (50-50 Senate dependent on Joe Manchin, highly polarized society, budget reconciliation forcing everything into one bill) meant that the inflation reduction act and infrastructure packages were likely the best policies that could realistically be passed, making them worth pursuing despite imperfections.
“the Biden administration had a 50 50 Senate that hinged on one senator in particular Joe manchin in a highly polarized Society with a budget reconciliation process that forced everything into one bill”
In some areas like automobile manufacturing and green technology (electric vehicles, solar cells), China's leadership might actually grow because China has the world's largest auto market and real expertise in EVs and clean energy sectors.
“in some areas and I think the one of the most interesting is in automobile manufacture where China's Market is Far and Away the biggest in the world and where they are real leaders in electric vehicles and more broadly they are leaders in solar cells in many aspects of the Green Revolution more broadly China's lead might actually grow”
Congress members, even those usually allied with the Biden administration like Ron Wyden and Richard Neal, have criticized the administration's critical minerals agreements with Japan because they prioritize de-risking from China over creating domestic US mining and processing jobs.
“the Biden Administration signed one of these agreements with Japan earlier this year and it got attacked by a bunch of high-ranking Senate Democrats and not just the usual suspects like Joe manchin but folks Like Richard Neal like Ron Wyden who are usually pretty staunch in administration allies”
China will likely remain a central part of global supply chains for the foreseeable future despite de-risking efforts and production diversification, but supply chains will become more Asian and less Chinese as production spreads to countries like India, Vietnam, and Thailand.
“I think it is plausible if people play their hands right that the desire of our companies to diversify their source of production and to resist being swallowed by China will lead to Greater diversification of the location of production across Asia”
Industrial policy will not generate the scale of permanent employment that the Biden administration hopes for, will not generate genuinely globally competitive industries without indefinite subsidies, and the amount of resources devoted to it is not large enough to fundamentally reshape the economy where it might have impact on national security.
“I think they won't end up by generating anything like the scale of permanent employment they hope for they will not I think generate genuinely globally competitive Industries to the extent that they want from this a lot of them will need subsidies indefinitely and most importantly the amount of resources money that is going into this is just not big enough fundamentally to reshape the economy”
The Biden administration's core diagnosis of what has gone wrong in America—that economic insecurity and erosion of middle-class security have driven political vulnerability to authoritarian demagogues like Trump—is correct and represents an important recognition of a serious problem requiring action.
“their analysis broadly defined of what's gone wrong in America and the political consequences of the erosion of the sense of security of what you would call the middle class and their sense of vulnerability and insecurity which is reinforced in complex Ways by cultural changes uh has been a very important economic and political process which has led among other things to their attraction for a classic authoritarian demagogue in Donald Trump and that's very very frightening it has World significance obviously... they are entirely right in recognizing that and wanting to do something about it”
The China shock (manufacturing job losses from outsourcing to China) is ancient history—it basically happened in roughly the first decade of this century, and since then the share of manufacturing employment in total US employment has been remarkably stable with no repeat of the extraordinary shift, making efforts to bring back those lost industries likely to be very costly and mostly unproductive.
“the China shock is ancient history if you look at the data basically happened in roughly the first decade of this century and since then actually the share of manufacturing employment in total employment in the US has been remarkably stable and there's been no repeat of this extraordinary shift”
It is important to build up a domestic plastic manufacturing base not just for jobs or to reduce China dependence, but to have the flexibility to adapt to unknown future challenges, as demonstrated by China's ability to rapidly manufacture PPE when COVID hit and export it globally while the rest of the world struggled with shortages.
“it is truly important to build up a plastic manufacturing base not just because of the jobs it could create or the dependency on China in particular but also because it's important to have the kind of flexibility to adapt to the challenges of tomorrow and I think China here is the ironically the go-to example right when covet hits China is quickly able to manufacture a ton of PPE that it is then exporting well the rest of the world struggles with shortages”
The United States became the largest economy in the world largely as a self-sufficient country with highly protectionist trade policies in the 19th and early 20th centuries, and only liberalized trade after becoming dominant, partly to help develop its allies.
“the United States became the biggest economy in the world largely as a self-sufficient country with a very small amount of trade and highly protectionist trade policies in the 19th and early 20th centuries when it liberalized trade it did it in large measure not entirely because it wanted to promote the development of its allies particularly in Europe and it was perfectly prepared to open its markets to help them”
Paul Krugman and others, including Wolf, made the point that Biden's industrial policy programs have led to more investment than most people expected, though the sustainability and ultimate viability of industries produced remains uncertain.
“the second is and uh um Paul Krugman whom I admire respect has made this point particularly forcefully it does seem that these programs have led to more investment than most people expected and that is important and it might last and I'm just putting the qualifications because we really don't know how this is going to end up”
Manufacturing construction spending increased only 2 percent during the four Trump years but has increased 100 percent in the first two Biden years, and the administration reports more than 500 billion dollars in announced private sector manufacturing investments, with battery, chip fab, and solar projects announced weekly.
“according to the administration's estimates more than 500 billion dollars in private sector manufacturing Investments haven't announced since they took office Biden himself recently pointed out that while spending on manufacturing construction only increased two percent in the four years of the Trump presidency it's increased a hundred percent in just the first two years of his presidency”
High unemployment is not a desirable trade-off for achieving 2 percent inflation when the current economy is delivering pro-worker growth, rising real wages, and strong employment; throwing people out of work to hit a specific inflation number seems counterproductive.
“so it feels strange to say that we're going to bring the hammer down we're going to throw people out of work we're gonna possibly you know risk another banking crisis just to get inflation down from four or three percent down to two percent”
Wolf argued early that huge fiscal and monetary expansion in 2020-2021 created severe inflation risks, was relatively hawkish on this, and opposed the notion that it would be temporary, supporting tighter policy—a view that proved correct.
“I was one of the people who was concerned about the inflationary consequences of the pandemic quite early I thought that the huge expansion of fiscal deficits combined with the huge monetary expansion of the 2020 and the continuation of that in 2021 created very severe inflation risks and so I was relatively hawkish on this in 2020 and 21 and that proved to be correct and I argued this wasn't going to be temporary in the sense that the FED could just ignore it so I supported the tightening policy and I think it was broadly correct”
The global financial crisis created shocks and processes that have been surprising and shocking people for the last 15 years, making the normal approach of forecasting a few years ahead inadequate without a more analytical framework.
“it's obvious really starting with the global financial crisis that a lot of things have been happening in a very disorderly and confusing way over the last 15 years and obviously these processes started earlier which have surprised and shocked people and so the normal way of thinking about the world you know let's just try and forecast the next year or two or three doesn't really work very well one needs a more analytical framework”
The pandemic followed by the recovery and its disruption of global supply chains, combined with energy shocks including but preceding the Russian invasion of Ukraine, produced the sudden and completely unexpected rise in inflation that hasn't been seen for 40 years.
“the shocks that it matter obviously were the pandemic then the impact of the recovery from the pandemic with the pandemic itself on Global Supply chains and the disruptions cause there and then in my view largely as a result of these two things together the sudden and completely unexpected Rising inflation suddenly we were having inflation in the way we hadn't seen for 40 years and it was linked of course to an energy shock partly before the Russian invasion of Ukraine but reinforced by it”
Domestic political developments in the US (and possibly elsewhere) could destabilize much of the world system and potentially the entire Western Alliance, which is an important stabilizing force in global economics and politics.
“and of course we can have political developments within any of our countries but again the US is most likely which will destabilize much of the world possibly even the whole Western Alliance system which is an important part of global stability”
Modeling by the Princeton-led REPEAT project estimates that the inflation reduction act and bipartisan infrastructure bill combined will create around 1.5 million additional jobs by 2030 and 2.5 million by 2035, with over 600,000 of the 2035 jobs in construction and the remainder in manufacturing and related sectors that will continue past the construction phase.
“the princeton-led repeat project... estimates that the combination of just those two bills alone will create around 1.5 million additional jobs by 2030 and 2.5 million by 2035 and you mentioned you know you're not sure how many of these jobs will be permanent but of those 2.5 million jobs created by 2035 just over 600 000 are in construction the rest are in other areas like manufacturing”
Technological changes underway particularly in artificial intelligence might lead to conceivably huge further acceleration in global growth that would be hugely beneficial, representing an upside scenario alongside the downside risks.
“on the more optimistic side again we have technological changes underway notably in artificial intelligence which we're not discussing that might mean conceivably a huge further acceleration in global growth and um these I think would be possibly hugely beneficial”
Secondary scenario: geopolitical turbulence or war between the US and China over Taiwan or other causes would be transformational and economically catastrophic, worse than the Great Depression and WWII in scope and impact.
“the second possibility of course is that for political or geopolitical reasons we have some more really important turbulence and the thing that has worried me most here is uh actual war that it's not just Russia Ukraine which is frightening enough given that Russia has 5 000 nuclear warheads but possibly U.S China over Taiwan um that geopolitical relations are not managed in a stable way... that would be transformational moment as the Great Depression was in the 30s and of course World War II”
The Fed should not further tighten policy given the lags in monetary policy and the substantial tightening already done; instead, it should watch and see whether shelter costs decline as expected, which if true would bring core inflation down toward target without additional tightening or causing unemployment to rise.
“given the Titan we've got in the bank already preemptively against you know bring down the Hammer as you put it any more than we've done maybe we've done too much we're going to watch and see and I think that would have been and would be a perfectly sensible policy”
Despite rhetoric about deglobalization, absolute trade flows have remained resilient or increased—global trade recovered past pre-pandemic levels by 2021, trade between the US and China set a new record in 2022, and oil and gas markets adjusted to Russia's invasion, suggesting data shows globalization's resilience rather than its downfall.
“when you look at the data it looks like the story of the last few years isn't one of globalization's downfall but globalization's resilience... the dollar value of trade between the U.S and China set a new record last year... oil and gas markets have basically completely adjusted to Russia's Invasion”
Many jobs created by industrial policy will simply shift workers already employed elsewhere rather than creating net new employment; manufacturing jobs created may mostly come from workers already in the labor force, making the true net employment impact unclear and potentially lower than gross job creation figures suggest.
“a lot of these jobs will go to people who are already employed and many of those people will be people who already employed in manufacturing so how much of it will be a net capacity increase in manufacturing is I think at least not clear to me”
Wolf was skeptical about anti-corruption policy arguments but now finds them more plausible, though a disinflation process without significant unemployment would show that the modern labor market works very differently from 50 years ago in more responsive and flexible ways.
“it now looks to me at least more plausible than I thought a year or so ago that the disinflation process can be carried out without any significant rise in unemployment and that would seem to me wonderful and it shows that the labor market and economy which is not surprising in a way doesn't operate now in the way it did half a century ago”
Headline inflation has come down from around 9% at its peak to around 3% as of late July, and nearly all other inflation indicators have also declined, while unemployment has remained below 4%, contradicting earlier predictions that a recession would be necessary to bring inflation down.
“according to the June CPI report headline inflation has come down from around nine percent at its peak last year to around three percent basically every other indicator even though stripping out things like energy and food and rent are are down as well and meanwhile unemployment in the US has remained below four percent which is something that most economists really didn't think Could Happen six months or a year ago the story was that a recession was inevitable if you wanted to bring inflation down and that just hasn't really happened”
Current economic conditions show GDP growth is the highest in the G7, labor force participation for prime-age workers is at its highest in decades, real wages are rising for the first time since March 2021, unemployment is low, which suggests this is exactly the kind of pro-worker, fast-growing economy desired since 2008.
“when I look at the current economy right GDP growth is the highest in the G7 in the US right now labor force participation for prime age workers is the highest it's been in decades real wages are on the rise for the first time since March 2021... we mentioned earlier the low unemployment rate”
Fragilities are extremely important in understanding why the world finds it difficult to cope with underlying shifts and shocks.
“the fragilities are extremely important in understanding why we find it so difficult to cope with both the underlying shifts and the shocks”
Recent visits by US Secretary of State Blinken and Treasury Secretary Yellen to China indicate that the Biden administration understands the nuances of balancing security concerns with maintaining economic relationships and avoiding complete decoupling.
“I do think again that the recent visits by secretary blinken and secretary Yellen to China indicates that these nuances are understood in the administration”
Ultimately, despite considerable worries and concerns, Wolf remains an optimist provided the West manages its politics in sensible ways both nationally and globally, as people have the capacity to improve the world if they take advantage of that opportunity.
“I remain ultimately provided we manage our politics in a sensible way both nationally and globally I'm actually an optimist and I want people to feel they should be and can be optimists we have the capacity to improve our world and we should take advantage of that capacity and that opportunity”
The most likely base case scenario is that the global economy will pass through this period of extraordinary volatility without major additional shocks, return to normal, manage the energy transition, achieve strong economies with high employment, and preserve much of what is valuable about globalization.
“the dominant possibility that over the next 10 years or so we'll have a good period and we will preserve a lot of what's really really good about globalization and maybe lose some of it there will be many big problems I think the climate transition is the biggest but I think there's a dominant possibility that we've survived a period of extraordinary volatility and not that badly and it will get back to normal”
'The Narrow Corridor' explores the fragility of democracy and the need to find the sweet spot between excessive authoritarianism and anarchy to achieve organized freedom.
“it's a book he uh wrote with Robertson um this is achimolu and Robinson um called the narrow Corridor and it's about the fragility of democracy and the finding that sweet spot between Leviathan excessively authoritarian State and Anarchy on the other and that's organized freedom”
Robert Gordon's 'The Rise and Fall of American Growth' explores why there was a huge wave of innovation between 1880 and 1960 and then a decline, with pessimistic implications because if productivity growth slows, it becomes much more difficult to sustain democratic society which Wolf argues was the product of growth.
“The last is to me uh a seminal book which is sort of in a way an anti-atrimony and Robinson it was by Robert Gordon it's called the rise and fall of American growth and it really explores why there was this huge wave of innovation between 1880 and 1940 roughly 1950 90 60 actually into the 60s and then the decline and it's much more pessimistic and that is very disturbing for the future because if productivity growth slows I think becomes much more difficult to sustain our sort of society our democracy I think was the product of growth”
Wolf recommends three books that heavily influenced his thinking: 'The Narrow Corridor' by Acemoglu and Robinson on the fragility of democracy, 'Power and Progress' also by Acemoglu (with Simon Johnson) on controlling technology, and Robert Gordon's 'The Rise and Fall of American Growth' on productivity and innovation.
“I have as you know been focusing very much of my efforts intellectually on what's happening to our democracies and the policy and the environment in within which our democracies are operating and apart from obviously my homework there are three Works which are being particularly important in uh my thinking... one of them was really important for me it's a book he uh wrote with Robertson um this is achimolu and Robinson um called the narrow Corridor... the second book he co-authored is the most recent with Simon Johnson he's called power and progress... The last is to me uh a seminal book which is sort of in a way an anti-atrimony and Robinson it was by Robert Gordon it's called the rise and fall of American growth”
'Power and Progress' focuses on whether societies can shape technology to serve human ends rather than being slaves to technological development, which is important for controlling energy and computing technology.
“the second book he co-authored is the most recent with Simon Johnson he's called power and progress and it focuses on something absolutely fundamental which is can we shape technology to our own ends I'm more skeptical than they are but it's the unbelievably important that we manage to find a way of controlling the technology that we are generating the energy technology which we failed to do and now the Computing technology that we are employing so that we are the masters of our technological development not the slaves”