Harold James on the Ukraine war, inflation, globalization, and more by Harold James - Project Syndicate

This week in Say More, PS talks with Harold James, Professor of History and International Affairs at Princeton University and the author, most recently, of Seven Crashes: The Economic Crises That Shaped Globalization.

Project Syndicate: You argue that the creation of a “general framework for rebuilding societies devastated by conflict,” resembling the post-World War II approach, could help to bring about a stable peace in Ukraine, not least by showing Russians that there “are much better alternatives to Putinism.” The implication is that winning ordinary Russians’ hearts and minds at least as important as applying external economic pressure, such as energy boycotts. In building a post-conflict framework capable of swaying Russians, where should the West start?

Harold James: In thinking about post-conflict stabilization, we must consider the region as a whole. Ukraine stands little chance of achieving economic (and democratic) development with an angry and vengeful next-door neighbor spreading misinformation and nurturing discontent and violence. In fact, as long as Putinism is viewed as a viable alternative to liberalism and democracy, it will be destabilizing for the entire world.

There is hope that Russians will come to see that Vladimir Putin’s tactics – from the use of conflict to stabilize domestic politics to the emphasis on hydrocarbon production and exports as the key to economic development – are woefully misguided. They will realize that his military adventures, from Georgia to Syria to Ukraine, are not only inhumane; they are costing Russia dearly. And they will conclude that the old authoritarian model needs to be replaced by a balanced approach to the economy and society.

This region-wide perspective must inform discussions about how to rebuild Ukraine’s devastated infrastructure and housing stock and, potentially, how to extract financial penalties from major perpetrators of violence and aggression. For example, while punishing war criminals is an important signal for the future, so, too, is not placing a large financial burden on the entire Russian population: that was the mistake made with a defeated Germany in 1919. If Russians are going to reject Putinism, they must see Putin as a problem, not as a shield that defends them from an aggressive and interfering West.

PS: “[C]urrent challenges and the past failures of economic planning,” you wrote in January, “suggest that we need more market pricing, more globalization, and more growth, not less.” In particular, we need “honest prices that reliably convey information about costs.” Why have markets failed to produce “honest” pricing, and what role should policy play in changing that?

HJ: Prices are key signals that shape behavior. If they are too low – or even completely absent –overconsumption results. If they are too high, they impede economic development. Potentially wrong signaling – for example, internet and social media that we assume is free, or cheap clothing that does not reflect externalities (in particular, the environmental costs of production) – can result in huge costs and social losses.

Policy can help by removing inappropriate subsidies, harmonizing tax rates (for example, equalizing levies on aviation fuel and other fuels), or breaking up “bundles” of goods or services whose prices are misleading for consumers. A well-known case worth learning from is the European Union’s Markets in Financial Instruments Directive 2014, commonly known as MiFID 2, which requires investment firms to disclose to clients whether their investment advice is being provided on an independent basis. MiFID 2 also requires that firms offering a package of products or services disclose the costs and charges of each component. The impact of this regulatory advance has not hit ordinary people yet.

A more difficult, but ultimately necessary, task might be to ensure that consumers are rewarded in cash terms for advertisements they view and more for those they click, as well as having (as is the case with some sites) the option of paying for advertisement-free access to platforms. Prices in this case would present consumers with a balance sheet of the benefits – but also the costs to themselves – of their actions. They might in this way really see the commercial logic of internet use.

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PS: You argued in 2021, that some price increases were doing their job – sending markets a signal to produce a certain response – and did not justify “pumping the brakes on the recovery.” A year later, however, you lamented that US President Joe Biden’s administration had pressured the US Federal Reserve to keep monetary policy loose, and warned that central banks had “sown the seeds of broader political and social dissolution.” Where did policymakers go wrong in responding to the surge in prices, and is today’s inflation still, in part, “good”?

HJ: Yes, it is. I believe that I have been completely consistent in arguing that the higher prices that followed the pandemic and, later, the invasion of Ukraine, were needed to encourage lower consumption of scarce goods (such as fuel). That response is also essential to help drive the longer-term transition away from carbon energy.

Obviously, there was a case for some compensation for temporarily lost incomes, and states have a well-recognized responsibility to provide insurance. Lower-income consumers really need to be supported so that they can make necessary trips and pay for heating. The principle of universal support, however, was overdone, and the broad stimulus that was offered exacerbated shortages, as people rushed to buy consumer goods – especially electronics, from laptops (for work from home) to complex medical equipment – that were in short supply.

In the long run, I’m not particularly worried about a brief surge in inflation. We’re already seeing headline inflation figures fall in many advanced economies. Sometimes price increases are a mechanism for transmitting that relative prices have shifted. And shifts relative prices are exactly what produce incentives that change the output structure and encourage fresh innovation. As historical experience has shown, we may even be able to expect a surge in productivity to follow the supply shock.

BY THE WAY . . .

PS: “The experience of history,” you write in your new book, Seven Crashes: The Economic Crises That Shaped Globalization, “is that some sorts of globalization crisis lead to more, rather than less, globalization: they produce a new energy for communication and innovation.” Which historical episodes best capture this dynamic? What conditions make a crisis more likely to strengthen (or weaken) interconnectedness?

HJ: The crises that clearly and unambiguously led to more globalization were those that took place in the 1840s and the 1970s. In both cases, negative supply shocks – food shortages in the 1840s as a result of failed harvests, and energy scarcity in the 1970s caused by geopolitical shifts and two oil-price shocks – challenged economic, social, and political stability. The scarcities of the 1840s led to the overthrow of governments all over Europe. In the 1970s, industrialized democracies were gripped by fear of imminent government collapse – what was then referred to as ungovernability.

In both cases (as now), efforts to adjust to the shortages produced surges in inflation – short-lived in the nineteenth century, but stubbornly long-lasting in the twentieth. The latter ultimately required painful disinflation processes in the hardest-hit countries, such as the United States and the United Kingdom.

Governments initially tried to find national solutions to both crises, but were ultimately pushed by voters to change course and open up. The opening involved harnessing new technologies: the steam engine in the mid-nineteenth century and the container ship in the 1970s. Increasing trade offered a path out of scarcity: it meant providing more goods at lower prices to more citizens. So, scarcity and expense drove innovation. I hope they will do the same today, particularly in the case of medicine and education, which are massively expensive, and could usefully be traded much more across frontiers.

PS: “In retrospect,” you write in Seven Crashes, “the 2007-08 collapse appears as a debt crisis,” as consumers purchased property on the assumption that its value would increase indefinitely, making the debt more affordable. Rather than bailing out banks, one might argue, governments could have worked to reduce “unsustainably high debt” for American households (or highly indebted countries like Greece). Fears of market contagion discouraged this approach at the time. But with the world economy weighed down by debt, is it worth revisiting? Aside from debt write-offs – in particular, of highly indebted sovereigns – are there other multilateral responses that could mitigate the risk of another global financial crisis?

HJ: We must perform a delicate balancing act. Indiscriminately accumulating government debt risks increasing our debt burdens and triggering market reactions that will lead to greater volatility and, potentially, a sudden plunge into debt unsustainability. A promise – or even the prospect – that debt will be written off in the future would create incentives not only for governments to continue taking on debt, but also for investors to get out before the inevitable haircut.

The existence of a great deal of Chinese-held debt makes debt restructuring even more difficult for many countries, though Ghana’s recent agreement with China and the International Monetary Fund show a way forward. Reforming the governance structure of international financial institutions will be complex, but should make the task of managing debt easier.

Ultimately, however, growth is the surest – and least destructive – way of achieving debt sustainability. Higher growth depends on countries using carefully targeted spending to seize technological opportunities and overcome obstacles like trade barriers.

PS: In a recent podcast interview, you noted with approval that the 2008 crisis has led to greater interest in economic history. At the same time, one of the “seven lessons of the seven crises” you highlight in your book is that the “lessons drawn from a previous crisis often stand in the way of generating effective solutions to a new problem.” As an economic historian, how do you navigate this tension, ensuring that our understanding of the past helps, rather than hinders, our efforts to devise solutions to today’s problems?

HJ: A striking feature of 2008 was that, for the first time for a long time, a repetition of the Great Depression seemed possible. The Great Depression was, above all, a demand shock, induced largely by contagious financial crises. Given this, the view that governments had a responsibility to stabilize aggregate demand through fiscal spending made sense. So did the view, laid out in the 1960s by Milton Friedman, that the money supply needed to be stabilized.

Both the Keynesian and the Friedmanite recommendations were highly apposite in tackling the 2008 financial crisis. In fiscal-policy circles, Keynes was reborn: it was the “return of the master,” as Keynes’s great biographer Robert Skidelsky put it. As for monetary policy, then-US Federal Reserve Chair Ben Bernanke promised to apply the lessons from Friedman’s study of the Great Depression.

That was a case of learning the right lesson from a previous crash, but we sometimes also learn the wrong lessons. Both mechanisms – stabilizing fiscal demand and forestalling a collapse of the money supply – looked too easy, too obviously available as solutions. And they were largely misplaced as responses to the negative supply shock triggered by the COVID-19 pandemic. The monetary boost, in particular, fueled an asset-price boom, which exacerbated inequality.

Now, we have a rather different set of problems, and the solutions to the last crisis are exactly the wrong way to address them. In my book, I suggest that we need more microeconomic analysis – more use of big data in the style of the Harvard economist Raj Chetty – if we are to tackle the social problems, especially inequality, that are driving both domestic political tensions and increasingly obvious geopolitical fractures.

Source Project Syndicate