JOANNE MYERS: Good morning. I'm Joanne Myers, director of Public Affairs Programs, and on behalf of the Carnegie Council, I would like to thank you all for joining us.
Today's breakfast is the fourth in a series of lectures which the Carnegie Council has been hosting in this presidential election season. The purpose of these discussions, entitled "America in the 21st Century: Views from Around the World," is to look at how we are perceived outside the United States, what we as Americans can do to adapt to the changing times, and to help us recognize the limits of American power.
Previously we heard from Martin Wolf on Europe, Marwan Muashar on the Middle East, Kishore Mahbubani on Asia; and today Gillian Tett will discuss how things look from inside America, what we can expect in the near future, and how to ready ourselves for what lies ahead. These discussions are funded by an anonymous donor, to whom I would like to express our sincere appreciation, not only for his generosity, but for his wisdom in sponsoring these talks.
While the election is over at last and the voters have had their chance to speak, electing Barack Obama for another four years, this election was contentious and extremely expensive, and has left us as divided today as we were four years ago. While Obama has finished campaigning and is back to governing, there is much to be done. Our country faces profound budgetary and social challenges at home and many more abroad. The world economy remains fragile, China’s handover of new leadership is under way, the Middle East is unstable, and a nuclear-armed Iran threatens. These are just a few of the points of crisis that our president must contend with. Many more can be added to this list.
The big question is how to have a country we can all believe in, both abroad and at home. As a devoted reader of the Financial Times, I’ve been following Gillian’s columns for some time and confess I am a fan. As one of the few people who, astutely, predicted the current fiscal crisis, Gillian’s reporting continues to impress readers with a mixture of infinite intelligence, perceptiveness, and appropriate skepticism—all qualities that are necessary for keeping us not only informed, but wiser than most, thus securing her reputation as one of the most influential journalists reporting today.
It's not surprising, then, that her new column for the FT is aptly entitled “Insight” and is becoming a must-read for those who want to master the nuances about what is happening in the world. As the fight for change goes on—those are Obama’s words—and the challenges continue to mount, we are so pleased to have Gillian with us to lend her voice and enrich our understanding of the domestic and global problems we are now facing. For old-fashioned journalism at its finest, please join me in giving a very warm welcome to our guest today, Gillian Tett.
GILLIAN TETT: Thank you very much indeed for that very kind introduction.
It's a tremendous honor to be standing here today in the footsteps of people like Martin Wolf, my very dear Financial Times colleague, mentor, and idol. It's also a tremendous challenge to be standing here talking about America, not only because I feel that America is at a very interesting flux point at the moment—we’re still all digesting the results of the election, even amid a rather distracting scandal— but at the same time, I'm speaking here today as a sort of insider/outsider. I have been living in America in recent years. I’m not American, as you can hear from my voice. I'm also someone who was trained, as a social anthropologist, to look at social systems and cultural systems. Yet in recent years I have been actually writing about economics and finance as a journalist.
So I have a rather unusual insider/outsider perspective that I hope to bring to bear in talking about where I see America going today. What I particularly want to talk about is the political economy and the dynamics of that political economy as they exist today in the 21st century.
About six months ago, I was in Washington at a group called the Business Council, which is a bit like a sort of lobbying-cum-self-help group for CEOs, where you have several dozen CEOs of large American or multinational companies—interestingly enough, they are increasingly actually not American these days—who get together, talk about the issues of the day, and try to lobby but I think also engage in an awful lot of group therapy.
The meeting that took place in May was fascinating. They were having a lot of arguments about fiscal issues, about the administration’s relationship with business, about the future of America and the competitiveness of America. But one of the most interesting things was that this group had done a survey of its members a few weeks before, asking the CEOs which institution they thought had done the best job in terms of managing the crisis over the past year. Top of the list of the different social actors that the CEOs thought had done a great job were, in fact, the CEOs. CEOs don't get paid to be modest. Ninety percent of CEOs thought that CEOs had done very well.
Second to that, with 80 percent approval, were the central bankers. I'm not sure they would be quite the same today perhaps. But that was quite interesting.
Right at the bottom, with a 5 percent approval rate—basically, competing with the euro zone for negative marks—was Congress. Just above that was the presidency. Between that you had things like the International Monetary Fund, NGOs, et cetera, et cetera, and the media.
In third place, way, way ahead of Congress—can any of you guess what was there?
PARTICIPANT: The military?
GILLIAN TETT: Sadly not. And it probably wouldn’t be there today. The Chinese government. American CEOs, when they were asked who has done a good job of managing the financial crisis, managing the economic challenges, put the Chinese government way ahead of the American government, and never mind the euro zone. The UK government wasn’t actually there as a separate category, but I don't think they would have been that high.
To my mind, that’s very, very interesting. On the one hand, it speaks to a certain sense of perhaps naïve admiration of the Chinese economy these days. But more importantly, it highlights a very profound sense of disenchantment with the way that the political processes are occurring in America today. In particular, I would argue, it points to a deep malaise with the sense of gridlock, the sense of brinkmanship, the sense of sheer polarization and paralysis that grips so much of the political body. It’s the sense of brinkmanship and polarization that I don't think has, unfortunately, been ended with the election.
In fact, if you were to step back today and look at where we have come from in the last two decades, as some of you may have read in a recent column I wrote, I think we have really gone through three distinct ages.
Until 2007, economists used to say that we lived in the era of great moderation. They used that really in the sense of economics, in that there was an impression that the West had solved the problem of inflation, that central banks were wise and they were steering the economy well, and that although the economies were going through business cycles, people thought they were quite regular and quite understandable and quite predictable. In the era of great moderation, as economists called it, there was a sense that people were able to predict the world, and, more importantly, most investors, policymakers, and bankers thought they could do that by plugging numbers into spreadsheets. There was a feeling in the free market ethos that essentially it was economics that drove the world rather than the unpredictable nature of politics.
Then in the period of 2007-2008, we went from the era of great moderation to the era of turbulence, "the age of turbulence," as Alan Greenspan’s wonderful memoir called it. I don't think he meant it to be quite so appropriate, but when it came out, it was amazing timing.
Today we don't really live in so much of a turbulent era, to be honest. Many of the key metrics you look at as a markets commentator suggest that the level of volatility and extreme fear that we saw in 2007 and 2008 has for the most part died down. People are talking about a new normal. People are talking about a new sense of stability—or at least grinding resignation.
But it's certainly not an era of great moderation. I would argue, in fact, what it is, is an era of political brinkmanship. Essentially, what has happened after 2007 is that people have woken up and realized that their confidence in the ability to predict the future with such certainty and their confidence in the power of the numbers of models to predict where we're going was basically pretty illusory. Politics, political systems, the unpredictability of political action matter enormously right now in terms of what’s happening, not just in the markets, but also in the economy as a whole.
Yet the bitter, bitter irony is that just as people are waking up and realizing this idea that we're all driven by free market forces alone was wrong and politics matters, the state matters; just as people are looking at the political system to provide answers to these extraordinarily large economic challenges of the day that do require governments to get involved, the political system looks incredibly lacking in its ability to provide these answers. Just when politics matters most, people are realizing that actually the system of governance, the political economy, is very, very flawed. That in many ways is a fundamental tension of where we are today.
America is certainly not alone in facing these challenges in this era of brinkmanship. I'm going to come on in a minute as to why I think brinkmanship has become so dominant today. But I was made very clearly aware of this fundamental Western pattern of brinkmanship when I attended a meeting a couple of months ago in Washington at the Atlantic Council where I had a chance to listen to a man who probably has about the worst possible sales job today in America.
That man in question is someone called João Vale de Almeida, who is the European Union's ambassador to America. His job is to go around America and try to persuade Americans that what’s happening in the euro zone today makes sense. Even better, he tries to persuade them that not only does the euro zone make sense, but it’s also a great place to invest. Luckily, he’s charming. He's a very, very good salesman. He has a wonderfully smooth, seductive Portuguese manner, and he actually tells a very good story.
Roughly speaking, the story he tells, not just at the Atlantic Council—I'm not betraying any privileges here—but in general, and the story José Manuel Barroso, his boss, would say, is something like this: "When you Americans look at the euro zone and see the ghastly mess that it appears to be, when you look at the headlines in the Financial Times saying 'Crisis,' when you get tempted to panic, don't, because what's going on today in the euro zone, you would argue, is really part of a cosmetic dance, a piece of carefully staged theater. The leaders of the euro zone know perfectly well that the fundamentals of the euro zone today just don't work. It’s very hard to have monetary union without fiscal union and banking union."
So there's a kind of recognition that the direction of travel is that you are going to have to deal with these contradictions. The problem, though, is that historically in Europe, because you have had a system of consensus amongst those 17 governments, there are really only two ways you can actually get agreement to move forward on big, tough issues. Either you all sit around and wait—i.e., have these long, interminable, ghastly, unbelievably boring committee meetings in Brussels, which I used to cover as a journalist. They take hours and hours and hours, and nothing appears to happen. But if you have enough of them over a period of several months or years, gradually the consensus shifts slowly and action happens.
Or if you don't have time to wait, you have to go for the alternative scenario, which is to have a crisis. That will then shock everyone enough into action and you can move forward.
So if you’re trying to look at the euro zone today through that prism, essentially what you can see is that over the last two or three years, there has been a direction of travel. Essentially the continent has started tiptoeing towards talking about fiscal union and actually implementing some aspects of banking union. But it only really does that by staging a crisis every three to six months. So what happens is you have drama, you have default or threatened default, you have unions having strikes, you have all these kinds of tantrums, you have the Financial Times putting “Crisis” in their headlines, which helps our sales wonderfully, and everyone waves their hands. And just when it seems that the whole system is about to go over the edge of the cliff, somebody—usually Mario Draghi—pulls it back, you move forward, and the game starts again.
Essentially, if you believe that story, what the people around Barroso would argue is that Europe is moving forward even within that crisis, but moving forward very much with a dynamic of brinkmanship, of cliff dancing, and essentially there is a direction of travel.
That’s the sales job from the European Union as far as America is concerned. I'm not sure how many Americans would actually believe it or buy it. I’m less sure how many Americans would be reassured enough to want to go off and invest in Europe right now. But in many ways, it’s a pretty, to my mind, convincing explanation about what’s going on.
What’s fascinating is that if you turn that pattern around and try to look at America today as a European, if you look at America from the perspective of someone like de Almeida, in some ways, whether you like the idea of that brinkmanship pattern or not, that's kind of what America has been going through for the last couple of years as well—not quite for the same reasons. America is not driven by any image of consensus building.
On the contrary, the whole system is driven by checks and balances, and it's built into the American system that there is this assumption that there should be conflict, debate, and tensions. Yet the outcome of that system built around checks and balances, the outcome of a system built on the idea that you need to have competitive debate to get anywhere, has produced very much a pattern of brinkmanship, of cliff dancing, of constant tensions, of constant drama, of a constant cycle of going to the edge of a crisis, everyone waving their hands and wailing, the Financial Times having yet more wonderful headlines to sell newspapers with, and then, just when it looks as if the system is going to go over the edge, you pull back and hopefully—hopefully—you move forward.
The most obvious example of that is on the fiscal side, where we have had this series of standoffs and rolling crises over the last year. I would love to think that that is now over. I would love to think that, in fact, suddenly rationality is going to break out in Washington in the next few months and everyone is going to come together and have some big, grand fiscal bargain.
I would love to do a vote in this room, actually, as to how many of you believe that’s really going to happen. My bet is that that chance of a grand fiscal bargain emerging anytime soon, the chance of actually not going off the fiscal cliff at all, is relatively low. I think there’s every possibility that there’s going to be a lot more brinkmanship, a lot more arguments, a lot more drama in the next few months.
Even just this morning—as some of you may know, I was doing Morning Joe this morning, and there was a discussion about this. We had in the FT on Monday a wonderful op-ed from Glenn Hubbard, Mitt Romney’s economic advisor, who, I'm sure, is known to many of you, saying, “Well, yes, it is time to start talking about taxing the rich. We accept that. We will even agree with starting with that point." It’s a very interesting op-ed. I would recommend that those of you who have not seen it look at it. This, in some ways, sounds quite encouraging.
This morning, of course, though, we had Congressman Paul Ryan coming out and saying that we are absolutely not going to accept tax rates rising on the wealthy, and, of course, we also had President Obama, with saber-rattling comments, coming out, too, saying we’re not going to accept anything other than that.
So already you can see that both sides are staking out the ground. As I say, I think the chance of escaping from the current fiscal battles without more brinkmanship is extremely low.
But what I find fascinating is not simply the short-term dynamic of the fiscal cliff, although I’m very happy to talk about the details of that, if you want to, in questions afterwards. What I find more interesting is to step back for a moment and ask, why is it that the political system today seems so gridlocked? Why is the issue of brinkmanship in America so incredibly debilitating and so very real? Is there something which has always been the case in American history or is there something else going on today which is actually fueling this problem and making this age of brinkmanship so pernicious?
To my mind, there are several factors that people need to look at that are potentially feeding into this particular dynamic. One is the fact that the American population is increasingly split and polarized in its views. You have seen that in the election and that very, very close outcome we had. You can see that in a lot of the opinion polls that are taken in terms of where people identify themselves. You can see it in many, many other aspects of the fragmentation that is under way in a social and economic sense that’s adding to that sense of political polarization.
I don't know how many of you have read that wonderful book called The Big Sort that looks at the geographical polarization that's under way in many parts of America today. Some of you may have read Charles Murray’s book, looking at, again, the social and economic polarization that’s occurring. In many, many aspects of American society, there is a sense of polarization and fragmentation.
That's fueling into a second problem, which is a lack of a unifying vision. For so much of the past century, America had been unified by a sense that either it was trying to create a common vision for the country and people to rally around, or it was unified by the sense of fighting against a clear enemy, be that the Second World War, be it the Cold War years.
Today there is no single common enemy. Yes, there are many, many competitors. There are many challenges. There is no single one common enemy. The dream of social mobility and the dream of opportunity and entrepreneurship that has held America together as a social glue for so many decades is increasingly coming under pressure, precisely because of that economic polarization and fragmentation.
On top of that, I think there’s another, more subtle challenge, which is what I call the challenge of the economic pie. I worked in Japan in the late 1990s, during that country’s financial crisis, and while I was there watching the Japanese respond to their own banking crisis, I was very struck by the degree to which the Japanese appeared to be extraordinarily good at sharing out pain—and not just sharing out pain, but sharing out pain in a way that ensured that everyone in society continued to feel that they had a stake in the system carrying on.
I remember very clearly going to talk to a senior Japanese banker, who told me that he was going to have to cut his wage bill by 10 percent. He said to me, “Well, that means, of course, I’m going to cut everyone’s salary by 10 percent and my salary by 20 percent.”
I went, "Of course."
He sort of looked at me and said, “You’re British. In Britain, I'm sure I would cut 10 percent of the workforce.”
And I went, “Oh.”
He went, "And in America I would cut 30 percent and I'd pay myself 20 percent more."
But if you look back at how the Japanese responded to economic pressure, time and time again during the last two decades, they have managed to respond to the need to make sacrifices by ensuring that they are shared sacrifices. Japanese society is riddled with cultural mechanisms and traditions which I, as an anthropologist, would argue are all about trying to make sure that you not only share the gains, but you share the pain as well.
They’re profoundly irritating to live with, many of those cultural mechanisms and traditions. On so many levels, as a non-Japanese, Japanese society can feel quite onerous to live inside because of these traditions. But they do at least ensure that there is a sense of pulling together. That in turn, I think, reflects the fact that Japan is a country which is acutely conscious that resources are constrained and limited.
The Japanese often like to say, "We're a small island nation, with very few natural resources." In a sense, it's true. There's this baked-in idea that resources are finite, the economic pie has a limit, and you need to divide it up.
Now, America is driven by a very different cultural vibe. It was founded by pioneers and pilgrims who arrived in America believing that the sky was the limit. If you ran out of land in the East, young man, you just went west. You could always grow the pie. There was always more. There was no resource constraint. You could always expand that pie through either conquest, acquisition, immigration, entrepreneurship, or innovation. And during much of American history, that has been true. Throughout most of American history, leaving aside the Depression years, that pie has kept growing.
Even today, it's baked into the American psyche that the pie will just keep expanding. It would almost be taboo for any politician to stand up today in Washington and say, "You know what, guys? In the next few years, there ain't going to be much growth."
Can you imagine anyone saying things are just going to be sluggish? Could you imagine an American politician saying, "Actually, resources are constrained. We're going to have to start talking about how to divide up a pie that may not be shrinking, but probably is actually going to be pretty static"?
Now, maybe that pie won’t actually be static. Maybe it will keep growing. Certainly for the last decade or two, the pie has kept growing, because even though the underlying productivity has been very unimpressive, the credit bubble enabled that pie to look as if it was growing.
But without going into the details of the economic challenges that America faces, the idea that that pie can keep growing indefinitely is probably starting to look at least more challenged. Yet in a country that doesn’t have many mechanisms for actually talking honestly about how we divide up a static pie and many traditions for doing that instinctively, that is one of the big, big challenges. And it's one of the things that makes so much of the rhetoric in Washington today, which seems sometimes quite bizarre, seem more explainable.
Essentially people are constantly talking past the issues. One of the reasons why you end up with this constant sense of gridlock or brinkmanship is precisely because if no one wants to talk honestly about these issues, you don't really have much left except pretensions or all kinds of complex games.
Then, of course, although in theory if you had some external shocks to rally around or to provoke people into action that could help push the dynamic forward, in reality one of the tragedies right now is that there is so little sense of external pressure to break the gridlock. Those of you who are old enough to remember the Sputnik era remember how the sudden shock of seeing that the Soviet Union had put the Sputnik up into space really acted as a galvanizing force to get many, many parts of American society to pull together and start pushing forward with investment in science and technology and a commitment to building the industrial machine.
Similarly, if you think back to 2008 and remember, in the aftermath of the Lehman Brothers shock, how the collapse of the markets was a trigger that actually sparked Congress into approving the TARP [Troubled Asset Relief Program] deal, you can see how a sudden market shock can actually have that kind of impact on the psyche and help to break the gridlock.
The problem today, though, is that the Chinese competitive pressures and threats, the types of challenges you are seeing from elsewhere in the world, are not of a Sputnik variety. They are kind of slow-burn, insidious challenges that almost creep up on the American body politic. It reminds me of the wonderful Japanese phrase: "If you put a frog into a pan of boiling water, it jumps out. If you put a frog into a pan of cold water and heat it up slowly, it just sits there and dies." Much of the Chinese competitive threat is in that second camp.
The markets certainly aren’t providing much of a pressure point either. On the contrary, the bond yield has actually fallen in the last week, even though people are talking yet again, seemingly in a blasé way, about potentially going off the cliff, about running up against the debt ceiling, et cetera, et cetera.
So there are a real lack of external shocks, a real lack of triggers that is going to break the sense of brinkmanship.
If you want to be cheerful about all of this—I don't mean to leave you going out and feeling really gloomy—if you want to be cheerful, there are two things you can point to, one of which is that, even though we have this culture of insidious brinkmanship, this problem of trying to find a way for the American system to talk about dividing up a pie when no one really wants to talk about that, at least the economy is not falling off the cliff, or not yet. If you look at the underlying economic data at the moment, actually, in many ways, the American economy has not been doing too badly. It’s sort of bouncing on the bottom and getting better. Certainly its projected growth rate for the rest of this year and next year is pretty good compared to somewhere like the euro zone. So actually the underlying economic forces are not too bad.
Secondly, if you want to be cheerful, you can also argue that the great thing about the market psychology of the past five years is that investors have kind of become used to crisis. If you think back to where we were 10 years ago, in the era of great moderation, imagine how you might have reacted if you had picked up a newspaper which said, “Greece about to Leave the Euro Zone,” or “America Flirting on the Edge of Default.” You might have actually panicked, been shocked, been surprised.
These days, courtesy of the fact that we have had these headlines coming out every three months as part of this game of cliff dancing, markets have become almost blasé about extraordinary things. It’s a bit like that Alice in Wonderland tag: "I’ve learnt to believe six impossible things before breakfast." Post the Lehman Brothers period, we have all learnt to kind of accept the fact that the sky is falling in fairly regularly, but, hey, we can kind of cope.
I have had a number of people in Washington ask me in recent days, how come the Treasury market is so incredibly calm, even though people are once again talking about potential technical default in six months’ time? I think it’s partly because no one quite believes it, but also because markets have almost come into a zombie-like state, whereby they look at these extraordinary things, they have lost their sense of compass, their ability to predict what’s going to happen, they know that those flashy economic models that used to work in the era of great moderation don't really work anymore because these days it’s about politics—and who the heck knows what’s going to happen next—and so they are kind of resigned.
So that’s the good news.
The bad news is that you can’t always count on markets remaining zombified. History suggests that markets have a nasty habit of not reacting to anything for a very long time and then suddenly panicking. And panic has a nasty habit of being contagious and hard to stop when it finally breaks. I do find it rather alarming that the entire U.S. financial system today appears to be predicated on a one-way bet that interest rates are going to stay low forever, certainly until 2015. If for any reason they popped up again, well, I think you’re all old enough to remember what happened in 1983-94. You can see a replay of that episode all over again.
The second reason to be concerned about this era of brinkmanship is the fact that it's certainly not helping to restore business investment or confidence. You may have seen that the recent falloff in business investment being one of the key factors dragging down the overall GDP rate recently is not very encouraging. I’m in absolutely no doubt that one of the key reasons why businesses are so nervous about investing is just because they are uncertain about where the economy is going in terms of final demand; there’s also profound uncertainty about the political equation.
I was talking just yesterday, in fact, to one of the regional Fed bank presidents, who was saying to me that he has gone around recently polling all the CEOs in the part of America where he lives. The point they make, which is incredibly important, is that this uncertainty about the fiscal cliff is hitting just as businesses are trying to plan at year-end. Everyone is kind of wrapping up their calendar-year results and they are trying to decide what they are going to spend next year. But who on earth can plan for anything right now, when the U.S. could be in technical default in three months’ time?
Then, of course, we have the problems of consumers and the increasing lack of trust amongst consumers in not just the direction of politics, but the very institutions of politics that shape America. I’m running out of time, so I won’t talk on that. But there is a lot of very interesting survey data that has come out recently looking at consumer attitudes towards trust, what they do or don't trust in. Very briefly, what this shows is that not only has there been a real erosion of trust in banks and companies in the last five years; there’s also been a real erosion of trust in government.
In fact, that has gone hand in hand with a shift away from what people might call vertical axes of trust, where people look up to authority figures like CEOs and politicians for advice and leadership, to a world where people increasingly look to a group known as “people like me”—i.e., your Facebook friends. There’s increasingly a shift from the vertical axis to a horizontal axis. But lastly, this era of brinkmanship threatens to cause real damage for the degree of credibility and standing that America—and, in fact, much of the West—has across the world in general.
I have spent much of the last few years going to all manner of international meetings, like G7, Davos, et cetera. What strikes me very forcibly since 2007 is not just that we have shifted from a world of the great moderation into an age of turbulence and then an age of brinkmanship, but also that the sense of self-confidence that used to wrap the G7 leaders, particularly the American leaders, at these international gatherings has really started to evaporate. You can see that we have gone from a world where there was a real pole around which the rest of the globe was congregating, or at least circulating, to a world where it’s much more evenly split and balanced.
The fact that American CEOs are saying they think the Chinese leadership is one of the most effective bodies in managing the crisis does not necessarily mean that China is about to leap out of the woodwork and become the new pole of the global economy. For one thing, I think if you were to ask Chinese business leaders to evaluate their own Chinese government, they probably, ironically, would give much, much lower marks than the Americans. Thus far at least, although China has been rising in financial power and increasingly looking to expand its political footprint, in no way does a country like China represent an alternative pole around which the global system can orbit.
I’m a great fan of Ian Bremmer’s idea that we have moved from a world where we used to live in the G7, where it was the G7 countries that dominated, to the G20, between 2007 and 2011, where it looked for a while as if we were going to have an equal balance of power between emerging market countries and the West, to a world of the G-zero, where, effectively, nobody is in charge [Editors note: Check out Ian Bremmer's June 2012 Carnegie Council talk, Every Nation for Itself: Winners and Losers in a G-Zero World]. Neither is China nor are the emerging market countries coming up with real power to take a leadership role, nor are the Americans or the Europeans actually acting with the kind of leadership approach which is so badly needed.
The longer that we see Washington and the euro zone leadership locked in this brinkmanship pattern, locked in this pattern of gridlock, seemingly unable to act in any decisive way to tackle the really big problems, the more the sense of the erosion of moral authority is gathering pace and the more we have been moved towards a more unstable era where essentially power is eddying around without a clear pole.
I don't mean to provide an entirely gloomy picture. I do think that the good news, as I say, is that the underlying dynamics of the economy are still creating reasonable growth within the U.S. But the challenges are very, very significant. Sadly, I don't think the elections have actually resolved the challenges as of yet, and I don't think we’re going to see any easy or immediate exit anytime soon. I hope I’m wrong. I have a nasty feeling I’m not. In the meantime, I just wish you all the best of luck as you try to find your way through it.
I must say, talking as a British person about the American economy is a bit like sticking my head in the noose or in the stocks. You’re all able to throw at least a croissant at me, if nothing else.
QUESTION: Susan Gitelson.
This was so insightful, and it just leaves open more questions. I would like you to expand on the socioeconomic insights that came from the election. It made obvious that there is a growing gap between the richest and the poorest. There's a change in the ethnic dynamics in America, the rise of Hispanics. There are gender and sexual issues that have become very important, and whether people will accept it. There's the fact that women were so against the discussion of rape by some of the candidates, same-sex marriage, and so forth.
So there are so many underlying issues and so many young people who are disillusioned because they can't get proper jobs, even after a fine education, that this is very much a part of the equation. It's not just the political brinkmanship.
GILLIAN TETT: I think that’s very interesting. One of my first lessons from the election is that democracy is a very powerful, wonderful concept. If nothing else, the election reminded us that elections have the capacity to surprise. Certainly the results were not exactly what people would have predicted six months ago or even six weeks ago. That's point one.
Secondly, it showed very clearly the level of plurality that there is in America today and the level of fragmentation. It also showed very clearly the challenges in formulating a single American dream to unite people around. America has always been, in some ways, pretty fragmented in terms of the immigrant origins, in terms of the lifestyles, in terms of the sheer diversity and size of the country. But it has always been unified by a single dream of opportunity. The fundamental question today is whether, in a world of increasing economic polarization, that dream can be maintained or not.
Just to take a very obvious example, on the issue of education, in the postwar years there was real social mobility, not just because people were working hard, not just because you had far less economic inequality than you have today, but also because after World War II you had that big veterans education program, which was state-funded, state-led. You had a real generation of people who were given the chance to rise up as a result of those kinds of schemes.
These days —you all know about the education challenges and crises; I'm sure many of you are seeing it in your own families—there’s a real question about the degree to which people today in America who don't come from advantaged households can actually rise up and actually take part in that, because the cost of education is spiraling so fast.
So the question of how you maintain that American dream is going to become more and more pressing going forward.
I had a fascinating conversation with Peter Thiel and Garry Kasparov, of all people, over the weekend in England, at the Oxford Union. Peter Thiel put a very interesting idea on the table. He’s the West Coast investor that some of you may have heard of who created PayPal and took a big stake in Facebook. He’s profoundly concerned about the lack of innovation today in America. He and Garry wrote an op-ed for the FT recently about this. The reason he’s worried about the lack of innovation is that he believes that without innovation, you won’t get so much growth. And he doubts whether the American vision of democracy can actually survive in a world with very little growth.
I think he's too negative. But it comes back to this question of the pie and the question of how you continue to divide up the pie in a way that keeps everyone buying in, if there is no common dream and if there hasn’t been an upfront debate about what you’re trying to do with that pie.
QUESTION: Ron Berenbeim.
There was one thing that I didn’t hear in your talk that perhaps can unlock the key to expanding the pie, as you call it, and that is a successful integration of the United States into the global economy. Paradoxically, it seems, at least to me, that the clue lies in the response to Sputnik, which we all recall so fondly—those of us of a certain age. The United States responded to that challenge in exactly the same way that they can and should respond to the challenge of integration into the global economy.
The problem is that it’s easier to mobilize people out of fear than opportunity. Therein lies the challenge for the political leadership.
GILLIAN TETT: Absolutely. I often think that the single best thing that would happen right now for the American political system would be to have a bond market crash and to have the Chinese launch their own iPad. If those things happened at once, if you had the Chinese leading the way with the iPad—in fact, something even sexier than the iPad, maybe mobile television coming out of China—that would really shock ordinary consumers into saying, “Help.”
And if the bond market crashed—I sometimes like to joke that what America needs right now is a Goldilocks bond market crash. People used to talk about Goldilocks inflation—not too hot, not too cold, just a bit of inflation, but without making the whole system go haywire. You kind of need a Goldilocks bond market crash—i.e., not too bad that it’s going to tip the whole financial system into a tailspin, but just big enough to shock people. Unfortunately, we haven’t had that.
The problem right now is really the frog-in-the-pan problem. The threats to America are there, but they’re insidious and multifaceted. How you manage to actually create that sense of drama to move things forward really is a challenge.
QUESTION: Dan Rose.
President John F. Kennedy liked to point out that the Chinese ideogram for “crisis” consisted of the two figures of danger and opportunity. It’s entirely possible that the American economy, American society, will require a crisis to jolt us out of this quagmire we’re in. We are the country, the society, the only jurisprudence that has the concept of the clear and present danger. When Americans face a clear and present danger, they pull up their socks.
Perhaps it would be constructive for us to start thinking of post-crisis activities. What will we do after everything hits the fan? What is the next step after we have done nothing and we have paid the price? Where do we go from there? Wouldn’t that be a constructive step?
GILLIAN TETT: I think it would be very constructive. I should say, I have extraordinary respect for America’s capacity to reinvent itself. One of the reasons I love America so much is because of this incredible ability to bounce back, to reinvent, to start again. As I say, I have absolutely no doubt that if there was really was a clear, big crisis that shook everyone badly, America would display those qualities in a very impressive fashion.
In terms of what the new outlook should be, one of the tragedies is that the crisis of the last four or five years, in some ways, has been wasted, in that you have not seen a really clear vision of the future emerging from the financial crisis. People are starting to half-define it.
I don't know about you, but to me the great disappointment of the election campaign was that even after all the television debates, after all the posturing, all the noise, even after the $6 billion that was spent on the whole election, I still haven’t really got the faintest idea what the Obama administration is going to do for the next four years. I don't know about you, but in terms of laying out a clear-cut vision, there hasn’t been a clear-cut roadmap or vision laid out by the Obama administration. There wasn’t a particularly clear-cut roadmap from the Romney side either.
So the question of people talking about what they clearly hope to focus on in the future hasn't been debated.
Energy is clearly an absolutely crucial issue. I think that should be an area of tremendous innovation and focus going forward, not just the shale gas side, but other aspects, too.
Health care again is a fascinating area which needs to be debated far more, not simply in terms of how we cut health care costs, but where there can be innovation, both in terms of drugs and medical devices and breakthroughs, and also how people deliver health care.
But again, to go back to the debate I had with Peter Thiel and Garry Kasparov, 30, 40 years ago President Nixon said, “We are going to declare war on cancer and fix cancer.” There was that kind of sense of grandiose ambition, reaching for the stars, which was taken for granted.
Today, can you imagine President Obama standing up and saying, “We are going to declare war on Alzheimer’s. We’re going to fix it”?
That level of ambition has been stymied, to a large degree. And that’s one of the things that needs to be rediscovered.
QUESTION: Allen Young.
There was a discussion on Morning Joe this morning, which you participated in, as to whether there is a mandate for higher taxes on the rich. That was a central issue in the Romney-Obama debate, but as Congressman Ryan pointed out in this clip that was shown, the House basically remained the same. Is there really a mandate? If so, how will that be translated into policy?
GILLIAN TETT: The opinion polls suggest there is a mandate, and the fact that people like Glenn Hubbard and Boehner have come out in the last few days and said, “Yes, we need to talk about more taxes on the rich”—or more revenue from the rich—suggests in my mind that there is a recognition even on the Republican side that a majority of people in the U.S. accept the idea that there should be more revenue from rich people.
The problem is, though, that that’s not even the beginning of the hard stuff. Then you come to an issue of, are you going to increase more revenue by raising rates, by letting the Bush-era tax cuts roll off, or are you going to talk about loopholes and exemptions and things like that?
Thus far at least, the Republican side has very much said that they are focusing only on the second part of that equation. Glenn Hubbard’s op-ed, which I would recommend to all of you, in the FT, is very much talking about that second part of the equation, although he doesn’t entirely rule out the first part. Congressman Ryan very clearly was ruling out the first part—i.e., tax rates—and talking just about loopholes.
There are two problems with the loophole route. One is that it would be very hard to raise enough revenue just by loopholes. The math just does not add up. Two is that it’s a very, very slow, messy process. It takes a very long time to start reforming all the loopholes. If you think back a couple of decades to the last time they did it, it took them two years to get it in place, even though there was quite a conciliatory environment back then.
So what that means is that if you were to raise rates on January 1, you would be immediately getting more revenue, more cash coming into the Treasury. That, by the way, has quite an important implication for the so-called debt ceiling, because it does delay the point at which America will actually hit the debt ceiling, because it will be getting more money from raising rates.
If you don't raise rates and say, "Okay, we're going to do that with loopholes instead," you may not actually get any more cash into your kitty for two years. So the math is quite different.
For that reason, I don't think—you know, it's all very well for everyone to sit around the table and say, "Let's all sing 'Kumbay'a and agree to do something about the rich." That's kind of what Glenn Hubbard was trying to say. It actually only just starts the debate and it doesn't stop the argument at all.
QUESTION: John Richardson.
It seems to me that there’s a common thread here in the United States, Europe, and Japan, that these democracies have no control over their public finances. You mentioned that taxing the rich—the math doesn’t add up. My understanding is that, for all our budgetary requirements of Social Security and Medicare and all this, taxing the rich may account for 10 or 20 percent of that, but no more.
So it seems to me that the real issue that politicians don't want to talk about anywhere is that you’ve really got to decide how the government spends its revenues. Does it spend it on bricks-and-mortar and infrastructure or does it spend it on people? If it spends it on people—yesterday I think I read in the paper about Herman Wouk. He’s 97 and he’s still working.
It’s impossible. The math doesn’t add up. And people are living longer, et cetera, et cetera.
Can you imagine a world of rejuvenated charities, massive pilgrimages by elderly people going all over the world, et cetera? How do we do this so that government spends money on infrastructure and education, and less on entitlements?
GILLIAN TETT: I think the way you do it, personally, is that you recognize up front that there is no single magic wand; there is no one big thing that can solve the problem, which, as a journalist, is very frustrating to admit, because we want everything to be boiled down into a single headline and a 400-word article that goes, “Here is the answer—boom.” In reality, what you need are tradeoffs and you need a combination of measures.
There was a very good piece in Bloomberg, actually—just to show that I do read things other than the FT—about a month ago, which said, actually, it’s not impossible to fix the problem if you unveiled 10 different steps all at once. They include things like getting more revenues from the wealthy, getting a bit more revenues from the middle class, cutting entitlement spending a bit—not crazily, but a bit—and, above all, raising the retirement and raising the age at which people can actually go on to medical help and things.
I happen to think the retirement age issue is critical, personally, because it's very clear that longevity is increasing. It’s not increasing amongst the vulnerable groups or the poorer groups of society as much as amongst the wealthy, but it is increasing. And to my mind, it’s very clear that you should be raising the pension age quite sharply. It would probably be one of the fairest ways to do that.
Unfortunately, though, it has been very hard to have that debate in Congress and to talk about that openly and frankly, because it comes back to this point about the fact that Americans don't want to talk about how to allocate pain. You have a real sense of intergenerational fight and tension going on, which, for the most part, is concealed.
One part of the world where they have agreed to raise the age quite significantly is in Japan. There has been a recognition there that actually the elder generation has done quite nicely and they should be paying a bit more to help society more broadly.
But the day that I see someone in Congress stand up and say, actually, "We should be raising the retirement age and the age at which you can claim benefits to 67, 68, 69," or even talking about a staggered raising of the age over a 10-year or 20-year horizon—that would be the day that I really start to feel quite optimistic about the fiscal outlook.
QUESTION: Rita Hauser.
Gillian, I would like to recall that here, after the 2008 election, two of your colleagues, if I can call them that, from The Economist—
GILLIAN TETT: We're all one big happy family at the Pearson Group.
QUESTIONER: They had written a book afterward and they presented it to the effect that the evangelical rise was unstoppable in this country and would dominate American politics. [Editor's note: See John Mickelthwait and Adrian Wooldridge: God Is Back: How the Global Revival of Faith Is Changing the World, Carnegie Council talk, 2009] I took issue with them. I said it had reached its apogee and would fade, and we had had this many times in our history.
Happily, I was proven correct. I think that that is an insignificant force now in American politics.
In the same way, I would argue with you that there will be some kind of messy bargain before this lame duck session ends. I’m certain of that. And it will have some of the contours we’re talking about. Then they will go on to do other things that will shape the framework.
The health care is now in place. That has the advantage of allowing us to raise the age for Medicare, because you can have exchanges and things of that sort. There will be some messy framework. America will not go off the cliff, and I don't know that you should be so inordinately worried about us going off the cliff.
Naturally, it isn't the same as in the great postwar period. Nothing is the same. We will get our way through.
I only want to make one other comment, which I would ask you. Those CEOs—to cite China as having done a good job is, to me, extraordinarily stupid. If you look at the dilemmas that China is facing and the nature of its own economy, I’m surprised that nobody even queried those people as to what their mindset is or their thinking. We had that same thing with Japan years ago. The world was going to be taken over by Japan. That ended pretty quickly.
These are little snapshots you painted, but I think the bigger picture is more optimistic than you present.
GILLIAN TETT: I certainly hope you're right. I'm certainly not endorsing what the survey would say. I would certainly not put the Chinese in third place, myself, at all. But I do think it’s quite a telling sign of the general sense of anxiety. I would be curious to know, if one was to do that survey again today, what the results would be now, not just because I’d love to know whether the CEOs still gave the central banks such high marks, but also whether there is still the level of confidence in the Chinese leadership.
Personally speaking, I am pretty concerned about China. It's very telling to me that very few of the Chinese insiders that we at the FT have spoken to share the same degree of optimism as people outside China about what’s going on there right now.
JOANNE MYERS: Gillian, the new headline for the FT this morning should be, "Gillian Taxes Us to Think about the Issues that Matter." With that, I want to thank you very much for being here