Michael Spence: Don't Expect High-Speed Change

Jan 27 , 2021

Nobel Laureate in Economics. Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University and Senior Fellow of the Hoover Institution at Stanford.


Thank you, Larry, and good evening friends and colleagues. Our time is limited and a lot of people have interesting things to say. So let me plunge into this.

I just want to start with a few facts. As Larry just said, the pandemic economy is still running in most of the world. This is a recent graph produced by Bloomberg. It's basically an index of economic activity. And you can see that the hope for recovery in the summer in virtually the entire developed world has not only stalled but we've actually started to go back down. 

And so this is the dual challenge—controlling the pandemic for health and humanitarian reasons on the one hand, but also I think the proposition that you cannot recover in economic terms without controlling the pandemic. The China experience and in a number of other Asian countries are certainly not inconsistent with that observation.

China, in fact, is the only major economy in the world with a near full recovery and a positive real growth rate in 2020. The rest of us have failed to control the virus using conventional tools. The vaccine rollout has begun, but it's quite chaotic, at this point. I don't think I have time to go into the reasons it will get better as time goes on, but I believe realistically a full recov-ery for most of the countries in Europe and in the Americas will take us well into 2022. And there are some outliers where it will will take longer than that. 

I think you all know that the pandemic economy has produced divergent patterns and divergent patterns in a number of dimen-sions, but probably the most important is that an already prob-lematic situation with respect to distribution has been made dra-matically worse by the pandemic economy. In other words the hardest hit people are the ones in the lower part, or half of the income distribution, and the reason that's important is it condi-tions the formulation of political and policy agendas looking forward. 

And this process has certainly accelerated a trend that was al-ready underway, which is the shift of the center of mass of the global economy to Asia. I think that will continue. But I think Asia is now in a position of really prominent importance in the global economy and what happens to it. 

Having said that there is some light at the end of the tunnel, if this vaccine chaos that we're experiencing now gets taken care of by an essentially effective government, then we can expect fairly rapid recovery including, or especially, in the depressed sectors where we've lost employment. 

These are all generalizations, but in America, the hospitality sector — which is hotels, food, restaurants and so on — em-ploys 17 million people. And most of them are unemployed or furloughed at the moment. So that aspect of the recovery, below the macro economic level is very important. 

So everybody knows we have a new administration in the United States. They just took office. Their senior people are be-ing approved, pretty successfully in the confirmation process in the Senate. They are experienced and balanced. And I think it's way too soon to have a very clear sense of, or at least evidence of, where they're going to go. What we've got now is words, statements. The Democrats control both houses of Congress, but barely, right? So this isn't a kind of clean sweep. Maybe they won't have total freedom of movement with respect to budgetary and other matters. 

I don't have any doubt that the policy focus of the Biden ad-ministration for the next little while will be domestic. It'll be vaccine rollout, virus control, economic recovery and a major at-tempt to try to arrest this adverse trend in inequality. And I'm saying that because they ran on it. And because these are press-ing priorities. I think if they get diverted doing other stuff, they will lose political capital very fast and won't be able to do other things. 

At some point, we're going to have to address these very large increments in debt, including public debt. In general, we have a much more indebted set of economies, and there's a whole set of issues that are actively discussed having to do with monetary policy, the length of time we're going to have low in-terest rates. But I think — skipping to the bottom line — that we're going to have low interest rates for a long time, and that's going to cause potential problems with stability distortions and other things. 

Foreign policy, in my view, will be conducted by adults. But it will be subordinated to domestic issues until we get into a fair-ly advanced part of the recovery. On the U.S.-China relation-ship, I think there is general agreement that it is characterized by strategic competition. The question is what does that mean? I think Kishore Mahbubani is in a much better position to answer that question. I read his book “Has China Won?” It's a really excellent exposition of the transition to sensible adults. Pragmat-ic strategic competition — that is a transition we need to make. And I tend to be an optimist, and I'm cautiously optimistic we'll get there, but I think as a number of people said before we start-ed we're going to have to be patient before we get there. 

On the U.S. side and in foreign policy will be more stable and predictable. But as Bob Zoellick said in his recent book, it's dramatically constrained by domestic political considerations. Right now, the mood in the United States (I suspect you could make similar statements about China) with people's attitudes, it doesn't leave a lot of room for maneuver. 

I noticed this is a bit of color commentary but I've known Ja-net Yellen, who's now the secretary of the treasury in the United States, for probably 40, 50 years. She is not someone who was well known for being aggressive at all. But in her confirmation hearing, she repeated most of the standard American complaints about China in agreeing with the Republican senator who was questioning her. And, by the way, the secretary of commerce is the chairman of the body called CFIUS  that reviews foreign in-vestment, and Treasury is the body that reports to Congress eve-ry year on currency manipulation. So just, you know, let's be re-alistic about the degree of freedom of movement. 

The good news is, the United States is in the process of doing a very rapid 180-degree about-face on multilateralism. So I think the thing we lost under the Trump administration is enormously important and positive. We've already announced the intention to rejoin the Paris accords and the WHO, and I think that's all to the good, and we'll see benefits from that later on, including in the U.S.-China relationship, which I believe will be conducted — if it's done well in the future — in multilateral settings, at least in part.

Areas of cooperation, disagreement and competition — they probably were discussed yesterday and are sort of obvious: cli-mate sustainability, arms control, health and biomedical science. We're entering the golden age of health and biomedical science, and the tensions that we have in the digital area don't — as far as I can see — spill over into this area. So it's a natural area to look for opportunities for cooperation, and so on. 

And I hope this is just me, but I think the lower-income de-veloping countries are going to be shattered by the pandemic ex-perience. And if there's any truth to the proposition that an open global economy really helps in terms of recovery, it's true in spades. For this group of countries and that group of countries need multilateral cooperation and leadership to maintain an ac-cessible global economy in order to essentially ensure their fu-ture. 

Competition. You know, we're going to have competition. The core of it is in technology, and the reason is it's driven, mainly by a wide range of national security considerations. That's not going to go away; we're just going to have to be smart and clever about acknowledging it and working around it in the future.

There are lots of areas of tension and potential risks, looking forward, that are going to have to be addressed, and I hope the other speakers address some of them. There are territorial issues. There are differences in values and governance structures. There are questions about the openness of trade and investment and da-ta, in the internet and technology, that are complex and don't have simple answers. It's not just a matter of going back where we were. 

My prediction is that the Biden administration will sound more aggressive than they actually are, and they'll do that mainly for domestic reasons. But they'll be more pragmatic and quiet in the background so it doesn't muck things up in terms of the do-mestic agenda. They will actually look for opportunities to at least remove destructive measures like barriers in trade in agri-culture which look to me to be, you know, lose-lose. I mean to put it in the bluntest possible terms. I've already talked about the Yellen thing. So this is the end of my brief remarks.

Looking forward, I think if you look at the near term, the fo-cus will be on the pandemic and economic recovery. I don't think international relations with the new Biden administration and sensible people operating on their counterparts in China, I don't think it'll get a lot worse. But it probably won't get a whole lot better for a year or so — after a couple of years when both economies are functioning at close to full potential. Then I think we really can be somewhat optimistic that we can rebuild the relationships. In the United States, we'll probably start re-building the relationships with Europe and its neighbor, Canada. I'm pretty sure they've signaled that already. And so that'll be part of this sort of slightly longer-term process. 

The one exception to this, I think, is climate change. There, I think, we can cooperate under the multilateral structures that we deal with immediately. And the reason is simple: It's just so ur-gent. 

The bottom line is we've got a lot of challenging things to deal with, but I think we have governance on both sides of the aisle now that's capable of tackling the complexity and rebuild-ing of our relationship in a constructive way. 

Thank you.