Podcast: Is a second Great Depression coming?

Transcript

Listen: Most of us are familiar with recession, and experienced the major economic impact of one from 2008-2010. It turns out, the definition of a "depression" is harder to articulate, even for economists, because the US hasn't had one since the 1930s. But as unemployment rises and lockdowns threaten the existence of businesses here and around the world, it's time to ask the question: Is another depression a possibility, and what would that look like today? On the latest episode of GZERO World, Ian Bremmer poses this question to leading economic historian and author Adam Tooze. The two discuss the strength of the US and global economies before and during the COVID-19 pandemic, and realistic timeframes for when the financial outlook will improve.

TRANSCRIPT: Is a second Great Depression coming?

Ian Bremmer:

Hello and welcome to the GZERO World podcast. Here you'll find extended versions of the interviews from my show on public television. I'm Ian Bremmer, and today is all about economies under quarantine. Is it back to business as usual when they all come off life support? What are the risks? What are the opportunities? To help me sort it out is a very special guest financial historian, Adam Tooze, a man who uses lessons from the past to help chart the world's economic future. Let's begin.

Announcer:

This episode of the GZERO World podcast was made possible by Lennar, America's largest and most innovative home builder, and the number one destination for foreign residential real estate investment in the US. Learn more at www.lennargzero.com. That's L-E-N-N-A-R-G-Z-E-R-O.com.

Ian Bremmer:

Adam Tooze, welcome to GZERO World. Thanks for joining.

Adam Tooze:

Pleasure to be on the show.

Ian Bremmer:

So let me start with asking you as an economist, economic historian, how bad is it?

Adam Tooze:

It's looking really bad. One has a sort of professional skepticism about claims to the novelty as a historian, but I think into the first or second week of this, we had to give those up as soon as the American unemployment numbers came rolling in over the last five weeks, these extraordinary 3.3 million, 6.6 million people signing on for unemployment benefit. And now we're in the fifth week of numbers, all of which, each one of which would've just simply been unthinkable at the beginning of this year. We've had to abandon that sense that we really know how to navigate this territory, that this is familiar ground at all. The negative oil price is another symptom of really the radical nature of this shock. The huge withdrawal of funding from the emerging markets globally, which again is unprecedented in its breadth and scale. And then the numbers that are beginning to come out of global organizations like the ILO, which monitors labor relations globally. You don't normally operate on that scale, but because this shock is happening to everyone simultaneously, we need somebody to tell us the global labor market picture.

Adam Tooze:

They think 2.7 billion people currently are trying to work and earn a living under conditions of lockdown. That's 81% of the global workforce. Again, not a number I actually was familiar with. It's 3.3 billion people and they're all disrupted simultaneously. There just hasn't been anything like that. 1.3 billion kids furloughed out of education at this point, an entire generation that wherever they meet for the rest of their lives around the world will be able to look at each other and say, well, what happened to you at that moment? Of course, the experience will be radically different in a slum in urban Africa or Manhattan private school, but nevertheless, everyone will have that shock in common. This is really new territory that we're in.

Ian Bremmer:

Is it more helpful, given the gaudiness of the numbers you're talking about, is it more helpful to be living in a country where it's mostly informal economy, it's not being shut down by Dick Tott from the state where even healthcare couldn't begin to deal with the problem essentially where the de facto reality is herd immunity. Are those countries going to ultimately be the ones that, from an economic perspective, actually have more resilience or not?

Adam Tooze:

That's the kind of question to which we don't have a strong prior, I'd have to say. Never really considered the question of how you shut down Delhi, especially if you announce three hours notice, which is what the Modi government did. We just have never done anything like this before. In terms of the human cost, I think it's pretty evident that the sort of least optimal position to be in, the worst position is in a highly formalized economy with weak state structures, which suddenly decide that they're going to do a very rigorous lockdown, and we have seen that in several places. So India is one such case and we've seen mass panic. We've seen millions of people clearly on the roads walking back to their villages because they're just not confident that in a lockdown they would be able to secure food, full stop, just food.

Adam Tooze:

They live hand to mouth. They're after all in Nigeria and India going on, 200 million people living in absolute, really extreme poverty. That means they struggle every single day to feed themselves and they rely on the street. The street is where they earn their living. In those sorts of situations, that's the absolutely worst place to be. It's possible that de facto herd immunity strategies will work better in more resilient middle income countries. The Indonesias of this world, for instance, that you can see perhaps in a brutal, hard-edged way, kind of powering through this. After all, these are countries with relatively high mortality still for certain vulnerable age groups anyway, so perhaps the shock will be less extreme there. But I feel though in all of these areas, we don't really have good models for this.

Adam Tooze:

The preconception that say the Chinese were doing this because they were in the habit of imposing discipline, no one in China had ever contemplated shutting down a major industrial city. The word itself didn't exist in Chinese. It was a novel phrase the regime used, and so it's really an unprecedented experience.

Ian Bremmer:

Is it true that the Chinese end up by default having the most effective model to respond to a crisis like this? Certainly they would have us believe that in terms of the way they're presenting it publicly. How credible do you think that claim is?

Adam Tooze:

I think it's very difficult for an outsider to judge, but what you see is clearly a determination on the part of the regime to manage the story. On that at least, they clearly are the most concerted and have the apparatus to do it. Whether it's credible to the outside is, of course, another question. There are certain facts which speak for the fact that the regime is handling it differently. It's a fact that VW only has one car plant or one set of car plants up operating right now that produce cars that are sold to people and that's in China. So that's a reality that a global corporation like VW will have to reckon with. But I would, I think, urge the case for the South Koreas of this world as an alternative, which in many respects may represent a much more optimal kind of package, if you like, in terms of the civil rights limitations that were imposed and altogether maybe even the trade-offs in terms of health outcomes and economic outcomes.

Ian Bremmer:

Certainly much more plausible from a governance perspective, though I also wonder, when we talk about the South Korean model, how relevant is it given how early they were in terms of identifying outbreaks, being able to follow them, contact trace, quarantine effectively? The US, the Europeans, the developing world are nowhere close to having the ability to get in at that point in time.

Adam Tooze:

Well, I find that slightly old construction, we were warned essentially at the same time. We had-

Ian Bremmer:

I know, I'm saying but given where we are now. That's all I'm saying.

Adam Tooze:

Oh no, given where we are now, no, this is the nature of an exponential crisis like this. If you miss the crucial moment, there's no way back. After that, all of the options are bad. This is what climate advocates and activists have been telling us all along and they operate in terms of decades and the famous 12-year time horizon and so on. This virus poses that same question in a matter of days. If you miss that crucial two to three-week window, then all of your options from then on in a bad. And absolutely as you say, Korea hit it quickly, had the technology to hit it quickly, had the expertise and the alertness crucially, because they had had this run in with MERS in 2015, which had wired them up. They were ready to go on this problem. Because if you ask civil servants across the advanced economy world, in Britain and the United States, pandemics are on their list of high risk problems.

Adam Tooze:

They both have excellent epidemiological establishments, brilliant scientists who have been warning that there was a risk like this, but they were not alert and I think that's the crucial word. They were not ready to go when the warning signs arrived and the South Koreans were. Having done that, as you say, all of the tradeoffs are way better. And in fact, basically the china remains in place. Nothing gets broken. You don't ever face the moment where you actually have to say, would I rather trash the economy or save a couple of million lives? That's not actually a problem that anyone would ever want to face, and it's not obvious that western democracies are very well-equipped to face it, but that's the scenario that we ended up heading towards by late March because we were late. We missed the start gun.

Ian Bremmer:

The challenge with your climate analogy, of course, is you don't get to be South Korea on global climate.

Adam Tooze:

This is what's really being exposed, because after all the scenarios in climate politics are every bit as bad as what we are witnessing right now. The mortality numbers are terrible. The dislocations of any of the same fragile places is the same, but have we acted on it? No, not fundamentally. They're tinkering around the edges and people take it seriously. We were moving towards taking it seriously, but look at CO2 emissions, look at energy use. It tells you that-

Ian Bremmer:

But individual countries can't get climate right.

Adam Tooze:

Exactly. This is why [inaudible 00:09:29]. In advocating lockdowns, we mildly apologetically say, well, you've got to do it for two weeks and after two weeks you'll begin to see the benefits and your grandmother will be genuinely safer if you just do this for two weeks. For climate politics, we could cancel all flights for the next 50 years and it's not obvious there would be any point to point relationship with any particular benefit anyone will gain.

Ian Bremmer:

Putting your hat on in terms of assessing the economic policies that have been put into place so far, and some of that has been developed world and certainly those are the biggest numbers we're looking at, but we're starting to see from Brazil, for example, we're starting to see from South Africa for example, some pretty significant fiscal packages as well. How would you assess early stage?

Adam Tooze:

They've been dramatic. That's the other side of this story. So the two, as it were, historic breaks are the scale of the initial lockdown decisions and then the counter-reaction, which has been equally epic. We've never seen anything like. Starting on the fiscal side, which is the more moderate part of this story, you're absolutely right. We are seeing fiscal moves around the world. In Europe, the Germans stepping across the famous line of the black zero and the debt break, very substantial fiscal stimulus there. And you are absolutely right, I know this program is called GZERO, but the G-20 framework is not a bad way for thinking about this. There are a lot of very large substantial emerging market state actors out there. We saw this in '08 as well, where a Thailand, for instance, which isn't even part of the G-20, can launch a very substantial fiscal stimulus, not to mention a South Korea or South Africa. These are capable actors and they will react. The lockdown that South Africa is pushing through is martial law. They're using paramilitary methods to shut their population down.

Ian Bremmer:

With support even from the opponents of [inaudible 00:11:20] so far.

Adam Tooze:

And they know, presumably, that they've got 7 million people immunocompromised, living with HIV. This could be a knockout blow for the experiment of modern South Africa. So yes, and then flanking that and enabling it, because you can't do the fiscal stuff unsupported because bond markets will freak out. Central Bank action, this is where it really gets sort of utterly mind bending. The Fed, in late March, was buying a million dollars of assets are second. I first stumbled over that and went to my computer and multiplied by seconds. Yes, it's absolutely spot on. It's like $90 billion a day in assets. That's what Ben Bernanke's Fed was buying in a month. They are rolling out dollar liquidity through the global system.

Ian Bremmer:

30 times the scale of Fed action in 2008, 2009, you don't even need to inflation adjust there, right? [inaudible 00:12:17]. It is what it is.

Adam Tooze:

It's like the unemployment graph. You can attempt to neutralize it by using logarithms and fancy charting techniques. The kinks doesn't go away and it's actually a logistical problem. What kind of operations do you have to have set up within the Fed? And they clearly had set them up. That, within itself, is quite remarkable. Someone in the Fed had conceived that they might need to do QE even bigger so they were actually able to roll this out and that flanks the fiscal policy action. The questions for me are all about the medium term time horizon. In a crisis, everyone's a Keynesian, and in an election year in the United States, the GOP is all on board too, and they've got their man in the White House, so there's no need to cause any embarrassment to anyone, and that makes a huge difference to '09, right?

Adam Tooze:

In '09, this same political party voted almost to [inaudible 00:13:02] against stimulus, which was half the size. The question really, for me, is what are the political implications and what is our capacity to digest the consequences of this 18 months from now, and how explosive is that going to be? Are we going to be facing, as it were, a protracted slow recovery from this crisis, the famous L or the Nike Swoosh that would slowly take us out? And then as we did in 2010, because it didn't get serious until 2010. Paul Krugman has this great line. It all went wrong in 2010. What he means is the politics of fiscal policy got deadlocked, and from then on end, the Republicans of course win the majority.

Ian Bremmer:

And that's when Europe is [inaudible 00:13:44] in the teeth a bit, right?

Adam Tooze:

And Europe falls into the teeth of this and we have this austerity turn suddenly that is devastating to the pace and the speed of recovery. And that is something that we will be, I think, facing 18 months from now.

Ian Bremmer:

But before we get to 18 months from now, let's just talk six months from now. Because when I see a $1,200 check for the average American doesn't make $75,000. That's not lasting them 18 months. When I see the bailout so far for small businesses, that's not lasting them 18 months. We've already spent trillions of dollars in the United States, over 10% of GDP, that has gone to this relief. We're nowhere close to stimulus. As we assume, lockdowns are not close to over yet. And even when they start to relax, they're not over. So given that, what do you think?

Adam Tooze:

I think the really critical test is how much of this lockdown is in fact really the result of government action and how much of it is, in fact, just precautionary behavior on behalf of private citizens? That, I think, is the really fundamental question. If you look really closely, if you time slice it, this is where I put my historian's hat and go back to the timeline. Big sectors like the automotive industry were shutting down quite spontaneously independent of government orders. The Tesla instance is quite misleading because they had to be forced to shut. GM, Ford shut. They were forced to shut by trade unions that were simply saying, we will not cooperate. We will not send our members to work. Then they look at their supply chain and realize they can't get the components to make the cars anyway. And then they look at their yards, they look at their showrooms and realize no one's buying any cars, so the businesses stopped.

Ian Bremmer:

Your schools had a [inaudible 00:15:29]

Adam Tooze:

Exactly.

Ian Bremmer:

De Blasio tried to keep them open, parents are like, we're not sending them. Teachers are like, we're not going.

Adam Tooze:

We feel it in American cities in those institutions, but that was happening to the largest bits of the global economy. And so that's kind of remarkable on the one hand, and we know that politics kind of lag behind, but the question, of course, is then, can politicians wave a magic wand and start it all again? And that's very far from obvious. We may in fact be facing something that looks more like what economists would call an endogenously generated, shut down. And then the question is, where do we get the, as Keynes would say, the animal spirits, where does the optimism come from to restart this economy? How many of us are going to be going to restaurants? How many of us are going-

Ian Bremmer:

Well, Dr. Fauci has been saying that. He's saying the virus itself will determine how society thinks about the virus, not the governments. But if that's true, if that's what we actually think, what then is going to be required from these governments in terms of stimulus in a real way? And is it plausible to think it's going to happen?

Adam Tooze:

Well, I think we maybe need to adjust away from stimulus and we need to be thinking about more sustained life support. To talk about this in terms of stimulus has always been a bit misleading. And that's where all the war economy stuff came from. It's really not our problem and it doesn't recognize the novelty of our situation. We need to pay people to stay at home and not work in their conventional sense and not operate their businesses. And the upshot of what you're saying here now is that if you follow that logic and think of this as a more societally generated process, then what we may need to do is to support people, short of a medical breakthrough, highly effective testing where we can actually reassure ourselves, we basically are going to have to live with a lack of confidence. And then the state will in some sense have to step in into replace certain amounts of private activity. But there will also just have to be extended life support, because otherwise many of these businesses are just never going to come back.

Ian Bremmer:

And if that's the case, then you look at the banks, which right now feel pretty good because of the regulatory changes, they're better capitalized. But at some point, how do the banks keep functioning if they don't have the business?

Adam Tooze:

Yeah, no, this is then a rolling, and I think really to the thing to look at in their balance sheet is the non-performing loans, the loss provisions and the bigger ones with the stronger balance sheets are already making very, very large loss provisions. The JP Morgans of this world, the Wells Fargos, have stacked aside billions of dollars because they know those losses are coming down the line. Our problem right now is that because the unemployment story has moved so fast, all the other indicators, which we know are very tightly correlating. Because this is common sense, if people lose their jobs, they don't service their credit card bills, they default on their car loans. They haven't quite caught up with the pace of the shock. We've seen the horrifying pitches. People are driving to food banks in their SUV. We are in an asynchronous reality right now. When the synchronicity begins to be restored and you've had to hand back the SUV, that's when the damage is going to begin to hit and bite into the balance sheets, and it really will be a test of time. And I don't think America's going to be really the battleground for this. I think Europe and specifically the casualty countries in Europe, Italy, Spain, are going to be the places-

Ian Bremmer:

The southern European countries. But you don't think that that will lead to an existential crisis in Europe. You think the Eurozone will get through this.

Adam Tooze:

I wouldn't really want to bet a lot of money on that at this point. The mood music out of Rome and Madrid is just plain terrible. And I'm not talking the usual clap, the usual ortho-populist kind of ring. I'm talking bonafide pro-European, very serious people on the inside of, say, institutions like the Italian Treasury or the Bank of Italia, who are really struggling with themselves because they know they're committed to the European project and are disgusted and dismayed at the way in which this politics has played out and been allowed to play out. And the weakness, which they, again, have been revealed. Again, it's a humiliating situation to find yourself in from their point of view.

Ian Bremmer:

If that's true, this is a reasonably recent change in view of yours.

Adam Tooze:

Yes.

Ian Bremmer:

In terms of more concern that the EU may not make. So give me some color around that. What is it specifically that you've heard that makes you think, you don't have to give me names, but that makes you think suddenly, my God, they might actually not last.

Adam Tooze:

Well, it's simply that I think patience has run out and you have a moment where nine heads of government from the south, but not just the south, interestingly, the Irish as well, were on board with this, formally say that we think that the answer to this is a mode of solidarity, which involves novel financial instrument. And it's basically just waved aside, it's just dismissed. No, we're not interested. The Dutch lead the charge, but it's clear that Berlin isn't interested either. This is an affront. When I'm trying to explain it to my German friends, including in the German finance ministry, I always say, it's like a relationship. You've been getting along just fine for many years, and then somebody decides to pop the question, shall we get married? And there's no way back from that. And there's only one way forward. Only one good way forward from that. The answer is yes. If you say no, you can't imagine you get back to the status quo because the other person is mortified, humiliated, deeply hurt, and suddenly has to realign their entire understanding of where this whole thing was going.

Ian Bremmer:

See now, I would think that the German response to that would be yes, but then just have an indefinite engagement.

Adam Tooze:

You would think.

Ian Bremmer:

That seems the way that they did Turkey. They said yes, but they never let them in.

Adam Tooze:

Well, you would've thought they would've moved heaven and earth to ensure the question was never put. What on earth went wrong in their crisis management that they didn't see this coming? How is it possible that nine governments were able to concert themselves without the Germans knowing and somehow doing damage limitation? What is something bad has gone on there in the sense that either the nine just said, well, damn it, we're going to do it regardless of what Merkel wants. We know the Germans were asking them to slow down. And then we move into the second phase, so that was the Euro group discussion, and it was bloody, clearly. It went on for two days, effectively, they weren't able to resolve it.

Ian Bremmer:

If the Eurozone were to implode, how would it actually happen?

Adam Tooze:

There are different ways of imagining this. If a weak party leaves, if a big weak party leaves, it's a catastrophe for a weak player because their balance sheets are all in. Imagine a bankrupt Connecticut or something trying to exit the United States or a bankrupt Michigan. That might actually happen, or bankrupt Illinois. They exit the United States, introduce their own currency and all hell would break loose because all of the balance sheets are denominated in the previous currency, and you'd end up with huge debts owed to the dollar zone, which would now be payable in Michigan dollars that were worth less in dollars. It's a nightmare.

Ian Bremmer:

So let me now go to the 18 months in, and it's interesting that you used that timeframe. Let's assume that there is a vaccine and it's coming online just about then. Is it plausible in your mind or what's the likelihood that by that point we're actually in a global depression?

Adam Tooze:

The funny thing is that this shock is in fact induced the conversation amongst economists about how we define a recession and a depression because we know what a recession is. It's two back to back quarters of negative growth. It's all very clear. You just count them off, it's arithmetic. I don't think we actually have a clear definition of what a depression is, because there's only really been one in the modern era in the United States anyway, and that's the depression of the 1930s. Europe, you could argue, experienced one with the Eurozone shock and the Italian economy, I think by any stretch of the imagine should be described as depressed.

Ian Bremmer:

Greece, certainly.

Adam Tooze:

Greece. I think we could well imagine a situation with unemployment still very high, with consumption down. You'd expect consumption in due course to rebound, because that's largely driven by our day-to-day needs. The thing to really worry about, I guess, will be investment, which is fundamentally driven in the end by the calculation of profit up against some scenario of how you think the future world's going to be, in which whatever you invest in is going to generate profit. So I think there's an acute risk of a prolonged, what economists have been calling, since Larry Summers coined the phrase or recoined the phrase, secular stagnation. I think there's a serious risk that the growth tendencies, that were already pretty modest before this crisis hit, will continue to be recessive. That doesn't mean that there won't be growth and innovation in certain sectors of the economy. It's quite easy, I think, to imagine a huge kind of digitization shock coming out of this crisis, which would generate green shoots and would generate some growth. But it would be very lopsided, quite unequal. If we lived in a superstar economy before, that's likely to intensify from here on in.

Ian Bremmer:

So you would imagine unemployment and that scenario could still be 15% plus in the United States in 18 months time?

Adam Tooze:

I'm not going to wager. Like many people, I'm not even going to wager a strong unemployment estimate for this summer. Who knows? The American economy, after all, does have considerable rebound capacity. But to come down from the numbers that we are headed towards this summer, it wouldn't be implausible that you would be in the teens 18 months out from there. Now on the contrary, in fact, given how high we're likely to go, a number around 20% is altogether possible at this point. To have gotten to the low teens within 18 months would in fact would be a reasonably creditable achievement. We may need to start taking lessons from the experience of the Southern Europeans in Europe who've been living with double digit youth unemployment in the twenties and thirties percent for a decade. I don't think that's a likely scenario for the US economy because the welfare system here is so minimal that that's really a barely tolerable state of existence for people who are in that condition. But no, the unemployed, we are going to be, I think, facing a prolonged unemployment problem.

Ian Bremmer:

So one thing we hear a lot from President Trump, and I think a lot of Americans believe, is when he says we had the greatest economy in the world. We'll just build it a second time. Given what we're seeing here in terms of how many people are suddenly being thrown into what certainly doesn't feel like American standards of living, how do you think about, did we really have the greatest economy in the world?

Adam Tooze:

Well, I think one of the questions that's been posed not just in the last three or four months, or even in the last 10 years, but really for many Americans for the last 50 years, since the 1970s, is whether the idea of an American economy of which they are all stakeholders is in fact a meaningful concept at all. The president's clearly right that there are pockets of incredible affluence, of great success, of technological prowess, of world conquering corporate ambition. Think of the tech firms, think of the way in which American banks have swept European competition out of the way. America, corporate America, elite America is one of the great winners of globalization, unsurprisingly, since they were the architects of that project, have acquired other people along the way. The Chinese now are major contributors. But that just doesn't capture the reality of middle America, let alone the bottom 20 to 30% of the American income and wealth distribution who have seen barely any real income growth.

Adam Tooze:

There's huge argument about the statistics, but there's very little real dispute about the fact that the real incomes of those at the bottom third have seen barely any progress since the bicentennial. American history divides into two epochs, the moment of the American dream up to 1976 and the period since. And what this crisis does is, of course, hit precisely the weakest communities. It hits those who are most fragile, whose health insurance is precarious, who are working part-time jobs in the service sector. It hits women as well. And it turns out, from a medical point of view, it hits the African American population, all of which are groups also, which have minimal financial resources. We know that 40% plus of American households can't basically cover expenses for more than a few months without a paycheck and have precious little financial reserve, basically no net wealth. So those people are going to suffer a fundamental shock here. And this idea of rebuilding, really, or making them whole begs the question of what it is that we would plan to return to because they weren't whole in the first place.

Ian Bremmer:

Adam Tooze, thank you very much.

Adam Tooze:

Thank you.

Ian Bremmer:

That's it for today's edition of the GZERO World podcast. Like what you've heard? I hope so. Come check us out at gzeromedia.com and sign up for our newsletter, Signal.

Announcer:

This episode of the GZERO World podcast was made possible by Lennar, America's largest and most innovative home builder and the number one destination for foreign residential real estate investment in the US. Learn more at www.lennargzero.com. That's L-E-N-N-A-R-G-Z-E-R-O.com.