GRI interview: Princeton historian discusses Covid-19 and macro risks

GRI interview: Princeton historian discusses Covid-19 and macro risks

GRI recently sat down (virtually) with financial historian Harold James to discuss Covid-19 and emerging macro risks. James is the Claude and Lore Kelly Professor in European Studies and Professor of History and International Affairs at Princeton University and is also a regular columnist for Project Syndicate. This interview has been edited and condensed for clarity.

Interview conducted by Ryan Hauser – Ryan is a writer and editor based in the Washington, DC metro area. 

GRI: Let’s start with some “30,000-foot” questions. What is your view of the state of globalization today? Has the pandemic dramatically slowed down its pace? And are we at a greater risk of international conflict in the wake of Covid-19?

James: You have to understand the Covid response in terms of the last 12 years or so. There’s been a slow retreat from globalization since the 2008 financial crisis. Very dramatically, you can see the trend for the whole post-war period was world trade growing more quickly than industrial production or manufacturing output. But since the recovery from the global financial crisis, that’s not been the case. And that’s been in part because of some measures of trade protection, but it’s also to do with technology—that it’s easier to produce more locally, it’s easier to have shorter supply chains. (3D printing is pushing it.)

And then you put on top of that the Covid crisis and the most obvious form is increased tension of vaccine nationalism and the struggle that countries have to get access to the vaccines. There’s been a push to try to manufacture more locally, but it’s something that only relatively big countries can do. That’s part of the problem: in the short run, it’s producing shortages, tensions, increased conflicts.

You can see the geopolitical tensions. The relationship between the United States and China is not improving after the departure of Donald Trump. It’s getting more tense. The US relationship with Russia is getting more tense. There are all kinds of tensions building up.

But having said that, actually you really see the emphasis in the response to the crisis that you need goods from other countries, you need pharmaceuticals from other countries, you need computer chips, you need glass vials to transport the vaccine. We’re thinking about a world in which there are considerable shortages and we are looking to solve those shortages without international trade. My expectation is actually in the longer run you will get an intensification of globalization after this rather than a cutting back of liberalization.


What is the risk of armed conflict coming out of Covid-19? 

It’s really hard. Obviously, there are some areas that look as if they’re going to be flash points. One issue is China’s relationship with Taiwan. Is that going to escalate into military conflict? The risks are higher now. There’s also increased risks of a serious kind of incident in the Baltics. There is a direct challenge from Russia to the European Union to try to show up the weakness and the fragility of the European Union.

What would happen if there were a part of Estonia where there’s some kind of manufactured conflict and the Russian population asks for protection from the Russian Federation? We are seeing all kinds of increased risks. The moment that the EU looks very weak, countries that think of themselves as being in competition with the EU will try to show up the weakness by scaling up the potential for military engagement.


How have federal systems in the US and Europe fared during the pandemic? Covid-19 has given us an awful natural experiment by which to judge various centralized and decentralized systems of governance and their ability to respond to rapidly escalating crises. What’s your takeaway?

I’m not sure that it’s easy to generalize on that. First of all, our democratic system is in general doing better than authoritarian systems. But there are anomalies. You might compare, for instance, the Chinese response to Covid, which was extremely effective, with the response of the United States. But that’s not a question of federalism hindering effective solutions. It’s really a question of the degree to which a more authoritarian government can limit the movement of the population. Then you saw also that Japan had a very effective response in comparative terms. New Zealand has had a very good response. It’s easier if you’re in a remote location to do that. So remote islands (including Taiwan) have done very successfully with Covid. Where you’re exposed and globalized, you have more vulnerability.

The two big cases of federal countries with responses to Covid that look in some ways problematic are the United States and Germany. But if we had this conversation nine months ago, we would have said Germany is doing extremely well in its response. Now the conflict is the way in which different subsidiary states, Länder, are producing their own versions of lockdowns and inconsistent regimes, as well as the problems the EU has had in negotiating vaccination contracts. People are pointing out the inconsistency in the lockdown and that’s really blown up. The pandemic has shown up the importance of competent responses, in testing, in limiting mobility when necessary, and in vaccination; and it might be easier to provide those responses in a centralized setting. That’s the contrast that people will make between the UK and Germany. On the other hand, contrast that with France, which has lower vaccination rates, higher rates of sickness, higher hospitalizations, higher death rates. France is famously very centralized, so centralization on its own doesn’t solve the problems.


Has China’s Covid response bolstered its reputation among non-Western countries as a robust alternative model to democratic governance?

Yes, I think that’s right. That’s a dynamic that’s been developing throughout the presidency of Xi Jinping, that China offers a different way of thinking about how one is connected to globalization [through] the Belt and Road Initiative, the big infrastructure investments, and now the provision of vaccines and the model of how to use data to handle the risks of infection and the risks of contagion. It’s actually a comprehensive package and it looks really good to many countries. I think that the test of this will be in Africa and Latin America. It looks to many countries like a very attractive way of dealing with problems. But it’s most problematic laterally in China’s immediate neighborhood, where there’s more suspicion—the same kind of suspicion that you get in Mexico toward the United States, you obviously get in Vietnam toward China.


What is your assessment of the current state of Covid-19 “war financing,” as some have called it, in the US and Europe? How do you expect US and European monetary and fiscal policymakers to respond to what we hope are the waning days of the pandemic?

Something very interesting that is developing is that the fiscal response in the United States has been much, much larger than in Europe, in a situation when the collapse of production is not nearly as great as in the global financial crisis. If you look at the conventional measures of fiscal responses, there’s a lower output gap [in the US] but a much, much bigger fiscal response. And it looks very attractive. It looks as if the United States has got a set of answers to this and the Europeans are lagging behind. It’s going to increase the pressure on Europe to go bigger than the 750 billion euro response.


Are there any risks that emerge from that wide divergence in fiscal responses between the United States and Europe?

There’s a policy dynamic in Europe that results in this. There are clearly more inflationary risks in the United States’ response, and should Europe move more in that direction, that would then revive all the old debates between the North and the South of Europe, whether expansion is good or not. There are different inflation preferences in the population, so Northern Europe is more inflation-averse. They have a lower-rate of homeownership, so people are less hedged against inflation. And in Germany there are larger amounts of savings and bank accounts. In Southern Europe, there is a lesser amount of savings and homeownership. So that is a situation where they’re better off if there’s a bit more inflation, whereas Northern Europeans are worse off if there’s more inflation. When you get this kind of debate, it becomes, as a result, very divisive, very corrosive.


What about inflationary risks in the United States? We often hear US commentators reference the Weimar Republic when inflation is on the rise. Why does that narrative model persist?

To start with, the Weimar inflation analogy doesn’t work at all. There’s absolutely no risk of hyperinflation on the Weimar scale.  There is no risk even of the lower levels of inflation that followed immediately after the First World War. When people are talking about inflation risks, they’re thinking about a push up to over 3% inflation. That’s within the range of possible outcomes. There is indeed a great deal of money being created.  There’s a pent-up purchasing power that’s the creation of the shutdown, and at the same time, the continuation of either normal salary and wage payments or substitutes for when restaurants have been closed. People without jobs in some situations have had more in terms of the temporary relief operations than they would have had. There’s this tremendous amount of purchasing power that’s built up, and the question is, if that’s released, is that a one-time shot, or is this something that has been or is going to be built into future expectations?

We’re also going to see more unionization. This is one of the most so union-friendly US presidencies since the 1960s, so there will be more labor organization. That was part of the push that came out of the Covid crisis if you think of the exposure of workers at meat processing plants or what’s now in the news with Amazon distribution centers where the pace and also the exposure to risk was very high, and this is pushing organization. The more you get of that, the more likely it is that there will be substantial rises in wage levels at the moment when there’s near full employment, and that historically is linked to a great deal of inflation.

Does the Weimar narrative model stick around simply because it is so striking?

Well, it first of all is the most dramatic example of a hyperinflation, and secondly, people will conflate that with a discussion of the collapse of democracy. And the collapse of democracy occurred not immediately as a result of the hyperinflation, although I think it is true that the hyperinflation made for greater potential instability. But the collapse of democracy in Weimar was directly the result of the Great Depression and the opposite of inflation, a deflationary process. But Weimar is used as an analogy because of the extreme polarization of Weimar politics. When we’re looking at polarization in the 2016 election, in the 2020 election, and those analogies look, then, as if they are the compelling analogies, not so much the inflationary experience or the experience of radical deflation. The monetary policymakers really know enough to avoid both the extreme-inflation and the extreme-deflation traps. We’re not likely to see that again. But we do have the political polarization, and that’s really one of the drivers of thinking about Weimar as a comparison.


Your concern is more about institutional ossification and polarization, rather than just runaway inflation?

Right, exactly.


And that’s mostly because this prevents the ability to respond in an agile way to new crises?

Yes. It can be paralyzing. What’s the best way of overcoming it? That’s where the Biden presidency has actually been imaginative in both the big fiscal response to Covid and the longer-term plan. The idea of it is to create new jobs, to compensate Americans who lost out in the process of globalization and lost out in the aftermath of the global financial crisis.

One of the lessons that people took from the Trump years is that the really successful, quick economic growth that people were warning against—because they were warning against inflationary dangers the followed from the immediate Trump tax reductions—that actually produced a lot of growth and produced employment creation, including employment for minorities. The idea is to continue that and to defuse the political route to Trumpism.


What global risks might policymakers in the US and Europe be missing? What are some known-unknowns that people should be paying more attention to?

When you think of known-unknowns, you’re asking for—and people in general are thinking of—bad things that can happen.

There are two things that come out of the Covid crisis that are actually very, very positive. (I want to go back to the original discussion about how globalization is likely to do better or increase after Covid.) One of them is that we’ve learned that we can work effectively in very different locations, so we don’t need to be concentrated in New York or London. The way that we’re doing this interview, for instance, is a nice model of it. But one of the consequences of that, to go back to the European discussion, is that places in Southern Europe that looked as if they were the losers in the long, drawn-out debt crisis will become more attractive.

I expect to see all kinds of development and computer programmers or medical technologies in Greece or in Southern Italy—really transformational. The balance between North and South in Europe can be changed, and the balance between North and South in the world can be changed by the way in which telecommuting can work. Secondly, every day the amazing story of the vaccine success is a story that is not just a success against the particular virus that carries Covid, but it’s also potentially got immediate uses in freezing a very, very wide range of diseases and problems. We may see as well a radical reduction in health costs, and that was one of the things that held down living standards for many, many people. If we see the ability to provide good healthcare more effectively, more cheaply, that’s going to lead into another new era of economic growth.


So maybe there are some windfalls coming out of Covid-19?

The unknowns actually are, to me, more on the positive than on the negative side.


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