Roundtable #01
In our first roundtable Age of Economics’ participants apply their thinking on economics and capitalism to devising plans and strategies to promote recovery from the Covid 19 pandemic. Are we doing enough to address systemic challenges? Is it enough to repair the economy? What sort of recovery do we need? How could we achieve it?
With the kind participation of: William Hynes (Head of the New Approaches to Economic Challenges Unit (NAEC), OECD), Alan Kirman (Directeur d’etudes, CAMS-EHESS Paris Professor Emeritus, Aix Marseille University Senior Adviser, OECD NAEC Initiative), Steve Keen (Australian economist and author), Megan Greene (Global Economist; Senior Fellow at Harvard Kennedy School; regular Financial Times columnist), Matheus Grasselli (Professor of Financial Mathematics and Chair of the Mathematics of Statistics Department at McMaster University), Ian Hughes (Irish author, physicist and psychologist), Julian Karaguesian (economic advisor and McGill University adjunct professor in Canada), Fabio Dondero (independent filmmaker), Wiliam Fajzel (graduate student at McGill). Recorded February 21th, 2021
William Hynes:
So this is a roundtable to discuss the recovery and we’re holding this meeting in the context of Age of Economics, which I think all of you except Ian have contributed to, and we hope he will join us another time. And the three of us got together, there’s myself, there’s Julian and Fabio who are also here. But maybe I’ll just start off by saying that we came together with this group to basically put together people like you to really explore issues about economics and capitalism. We’re going to talk today about the recovery and many of you have answered some very fundamental questions about economics and policy, and we’ve been in touch to various degrees on various aspects of the recovery. But we want to really apply some of these fundamental issues to understand what governments, what policymakers should be doing and how they should respond to the problems of the day. So, Fabio, perhaps you want to say a few words.
Fabio Dondero:
Yeah, hello to everybody. I know somebody already, professore Kirman, buongiorno, hello to everybody. Yeah, my name is Fabio Dondero, I am a filmmaker based in Berlin. I’m coming from Italy but since more than 30 years I am in Berlin, so in Germany. We had a little bit this idea with Julian to ask some questions, to ask some fundamental questions, about economics and capitalism because, I mean, it’s not really difficult to imagine why. We are in a phase, an historic phase, which is, I guess, also an opportunity with this COVID crisis to think about what is happening at the moment and find many solutions. I have to say, I’m not an economist, so I have the privilege of ignorance.
Steve Keen:
Yeah, that’s a very good privilege for economics, we envy you.
Fabio Dondero:
So, don’t expect many intelligent things from myself. I’m glad to listen to what you are saying and getting inspired. Maybe Julian can say also something.
Julian Karaguesian:
Hi everybody I’m having some technical problems with my camera, I apologize for that. Welcome, everybody. Alan, Ian everybody, Patrick, hi Megan. I’m Julian Karaguesian. So I’m one of the co-founders of this site. I work for the Canadian Treasury, the Finance Ministry, and also teach at McGill. And we thought about this project as one of just many efforts going on around the world to look at just the economy, the national economy, the global economy, in a different way. And the way we see COVID, I think, is - this remark has been made over and over - but it’s an accelerator, it’s kind of a time portal, it’s accelerated many things. And we hope also it sparked a wider awakening, a wider consciousness of one problem that we face: the way we look at the world with the so-called worldly philosophy of economics. And so that’s why we’re here today to talk about a systemic recovery and in a way that is, I think, more comprehensive than some of the orthodox and mainstream roots that we’re seeing. And so with that, I’ll turn it back to everyone and to William. Thank you. And thank you for coming.
William Hynes:
Thanks Julian and Fabio. So I think maybe we’ll just get straight into it and maybe we could start with, first of all, I don’t want to moderate this because it’s more supposed to be an informal conversation. So please feel free to jump in and contradict if you hear something you don’t like or reinforce if you do like it. But maybe I’d like to start with Alan Kirman, because, Alan, you’ve said before that you think recovery is not really what we should be aiming at and we need something more radical, more like Renaissance. So maybe you could start us off by sharing some of your thoughts on that.
Alan Kirman:
I mean, I think the whole point is that… this morning I picked up The Economist and looked at it and it said two things. It said, you know, once we’re back to normal, it said and then it said later, we have to decide what we’re going to do, depending on what some authority or other thinks the output gap is.
And so both those things. But once again, we’re stuck in this idea that there is a normal, we’re going to get back to it and we should get back to it. And the only problem would be if we sort of tried to get there too fast or something like that. And that seems to be such a totally wrong view of the world. We are in a world which is changing so much, so fast that you shouldn’t think of it as coming back to an equilibrium path. You should think of it as evolving all the time and look and try and see where we’re going, what the patterns are and where we can influence it. I mean, there’s so many things going on right now. I just listened yesterday to the interview with the head of Volkswagen and he was relatively conservative. He said, you know, I don’t think that we can stop making petrol engines before 2035, he said. But we are much more conservative than other people. And, you know, and this is going to be a change in the structure. And he said, I’m not… I think people will still want their own vehicles. I’m not sure about that and so forth. And then he then he went on to say, I think the people, the leaders in this field are going to be people like Tesla and so forth and maybe will try to catch up. And he said cars are going to become software. So with all those changes going on, should we be talking about the output gap as we used to measure it? I mean, it’s almost as if you were looking… you’re moving into World War Two and then you’re asking people, well, what’s the output gap? When you’re going to stop making tanks and and doing things like this and doing things completely differently? It just seems to me the wrong way to look at it.
We’re navigating in a world which is changing faster and faster. And it’s not ergotic world. Tomorrow won’t be like today. Even the Geneva Association of Insurers, they said, look, we have to stop calculating premiums on the basis of previous experience. And what we have to do is worry about the evolution in the future. And the tomorrow will look not much like today. And if we keep trying to base our judgments on extrapolating from the past, we’re going to be in huge difficulties. And I think that’s exactly the point. And somehow we haven’t got it yet through people that we’re not looking to some state to which we’re going to get, and then we’re going to look at how that’s going to work, and then we’ll be back to normal. I don’t think there is a normal and probably shouldn’t be, but that’s my objection to the way people are looking at it now. Despite all the talk about change and greening the economy and so forth, they’re still thinking in terms of getting it back on track in some sense. This is really an occasion to get us off track and onto a better track now. So that’s my basic basic point. Sorry.
Megan Greene:
The entire debate in the US where I’m sitting right now is about the output gap and how the output gap is, if we’re filling in the hole or whether we’re overfilling it. And I agree with you that that’s the wrong way to frame the debate, partly because we have no idea how to measure the output gap or potential growth. Along with your argument that we shouldn’t be trying to get back to normal, the goal is GDP growth still, which is a pretty antiquated goal. And so not only are we trying to get back to equilibrium, but we’re trying to get back to some kind of equilibrium that we’ve framed as GDP growth, which isn’t particularly inclusive, doesn’t measure a lot of things, does measure a lot of other things that maybe we shouldn’t. So I agree. We probably need to have a wholesale rethink of what our actual goal is here with some kind of recovery.
Alan Kirman:
Just to briefly respond to that, Megan. I think that’s exactly right. I mean, if normally we continue to extract stuff from our planet and then throw it back in the air and then worry about how we can sort of diminish the consequences, that doesn’t seem to be the sort of normal we want to get to. And yet, if you’re measuring GDP, there are many things we know all the problems with GDP. I think everybody here knows that even better than me. If tomorrow we found, let’s say, a cure for the COVID for example, that might well reduce GDP because all that expenditure going into finding other ones would disappear. But that would be an absurd measure of whether we’re better off or not. But anyway, I shouldn’t be rattling on, I think, as somebody said, more intelligent people should intervene.
William Hynes:
OK, Julian, did you want to say something?
Julian Karaguesian:
I just wanted to say briefly, I just wanted to also introduce someone who’s just joined the Age of Economics, recently agreed to come on board, which was very kind: William Fajzel, he’s a graduate student at McGill. I had the pleasure of teaching a couple of years ago. He’s one of the top students there. So he’s with us also here.
William Hynes:
Thanks and welcome, William.
Alan Kirman:
That’s very unusual in North America. I thought you’d be called Bill. I remember they told me when I was there, they tried to call me Al.
William Hynes:
Just doesn’t work, does it? Steve, do you want to comment on what you’ve heard so far?
Steve Keen:
Yeah, as usual, we’re listening to naive neoclassical economics trying to talk about a return to a textbook equilibrium. And the reality is that framing is still going to win. OK, it’s bullshit. That’s why I’m happy to roll my eyes at it every time I hear it. But when it comes to the political circles that listen to that stuff, that’s what they understand. So whatever we say, we’re going to lose to that in the first round.
Charming start. Now, are you ready for a second round?
And that is that what I’m seeing, from what I had a discussion of on my podcast about apparently claims by some of the central bankers that savings are going through the roof right now, massive levels of savings. Therefore, when we go past COVID, there’ll be a dramatic increase in expenditure and the economy will bounce right back. Now, that’s based on the standard macroeconomic identity of income equals consumption plus investment plus G minus T plus X minus M. And when you do the calculations now, what you’ve got is a large hole and C, not such a large hole in Y, so what you find is that the gap between the two is what you define as savings. It’s just accounting identities with national accounting elements to it. Reality is that that doesn’t take into account at all of people borrowing money because even the consumption doesn’t include expenditure on financing your levels of private debt, you servicing your debt levels. So what people think the savings is occurring is not turning up in the bank accounts. I wanted to show one indicator that I can share my screen.
Is that possible? Thank you. (showing)
Right now, pardon this is being slightly complicated to look at. This is a new software package I’m working on and I’ve just pulled into this database of private debt. This is why we’re having the conversation. I haven’t got a lot of analysis done, but this is the level of private debt for the euro area, the United Kingdom and the United States. And you can see what’s happening after COVID, OK, 10 percent of GDP increase in each. That’s not people saving money, that’s people going further into debt and recent, and that’s in six months, that’s between that’s 2020. That’s June 2020.
OK, so we’re likely to see a 20 percent increase in debt to GDP in the year 2020-2021 and go beyond that. So when our when our standard output gap economists are getting ready for a boom, this is what’s happening to bank accounts in the background. So I think they’re going to be blown out of the water by what they don’t expect to see, which is a financial crisis.
So my feeling is the best way to attack this is to expect to lose round one because we’ll never convince anybody anyway. I’ve had 40 years of experience of not convincing anybody anyway in the Australian administration, just getting ready for things to fuck up when they’re not ready for it. So this is the fuck-up that I expect.
William Hynes:
Well, so a financial crisis. Matheus, you’ve also speculated in that direction. Do you want to say a word?
Matheus Grasselli:
Yes. So I don’t think we know enough to know that this is going to create a financial crisis or not, because I think the central banks have reacted in ways that are much more aggressive than what they have done in the past and even more aggressive than what happened in 2008. So that would be the only reason why we’re not going to get a financial crisis, by the way, is because of tremendous intervention. But what I wanted to jump in on was the possibilities that the COVID crisis opens up for thinking about modelling and how economic modelling could be coupled with other types of modelling. Because if you are a mathematician or mathematically inclined like I am, it was a golden opportunity, COVID, right.
So everybody was looking at curves and exponential growth and then decays and flattening the curve and so on and so forth. So we even had jokes that, you know, we’ll never have to be embarrassed when a student in calculus asks us when am I ever going to use these curves in private life, in real life. There you have it. The New York Times is talking about curves and so on and so forth. But if you look at what the epidemiologists were doing, you know, their modelling were very different from what economists do when they would look at a similar phenomenon.
So the most popular models that got to be, you know, at first approximation were very right and got to the essence of the problem, were kind of simple relationships between groups. These are the so-called CIR models. The one thing that they completely ignore is the type of rationality and equilibrium and expectations and so on and so forth. It’s all about, you know, you have a big group here and have a big group there. And they are observed relationships between them, like when people become infected, when people recover and so on and so forth. And let’s just model those relationships as we see them and pay attention to the little bit about the biology and how the pathogens work and so on. But don’t try to second guess and attribute ultra rationality to the humans that are involved, not the pathogens but the humans that are involved in it. And then those are the kind of first past models. But then if you look at more detailed ones, they were agent based models that again were trying to capture what people were actually doing, not how people ought to behave.
So there were models that were looking at how people move around in cities and how they go to school, how they go to the large public venues and so on, so forth. And then what did they do when there is an intervention? So if there is an intervention, they’re going to change the behavior and they’re going to change their behavior in accordance to what’s happening around them, not in accordance to some, you know, future expectation extrapolated to infinity and looking at, you know, in an overlapping generation model how their offspring is going to react to to what they are doing now, to their change in behavior. And again, this worked, right? So you’ve got to you’ve got a lockdown and some intervention and you’ve got some reduced mobility. And you put that in the model and see how it works out. And you follow the path and not assume that there’s going to be an equilibrium, that is going to be a type of return to normality that Alan was talking about. You just follow the calculations and the computations that the agents themselves are doing. They are going to inform about what the model is going to provide. And it turns out that those models were quite successful and predicted in the short term what the effects of policies are going to be and they were the guides for governments and public agencies. Now enter the economists. There have been several papers that tries, based on the big success of what the epidemiological models are doing, and say ok, now let’s combine this with economics and then say, OK, well, let’s keep those variables about the disease and groups and the population and so on, and let’s model the effect on the economy.
All right: suppose there’s a central planner… and go on and on and on. And it becomes just something that the two hands don’t talk to each other. On the one hand, you have some real disease that is propagating through the population and you try to follow it as it’s happening and the behavior that people actually have. And then and then you superimpose that some kind of economic equilibrium and rationality that doesn’t really match. And so I think it’s an opportunity to try to then push the framework and the methodology that is being used in other sciences, for example, epidemiology, inside economic thinking. And we can do the same analysis for climate change, it’s the same story, you try to do the economics of climate change and you’re pushing together two methodologies that don’t talk to each other.
Alan Kirman:
I agree with all that Matheus, and I think even worse, in some sense, what you’ve got is, in fact two complex systems interacting, and one is being modelled as a very sort of simple thing. But all the sort of action in the one is being attributed to the clever individuals. And all in the other, we have things or people following rather simple rules. And there’s this famous quote from Leon Holford, which I can’t remember exactly, but he said, Economics is all about hyper intelligent people in a rather simple world, trying to do things and work out how the world work, whereas the other sciences typically have very simple individuals or particles in a very complex world.
But he said the second he thought was a much better explanation than the first. That is, we attribute an enormous amount of intelligence. And one of the people that we were, William, was talking about getting involved, Mike Woodford, who is a sort of guru of rational expectations, of DSG, so on and so forth, Mike wrote to me recently and he said, you know, since I’ve completely gone off rational expectations I think I’m really looking into other things with neuroscientists and so forth.
I just don’t think rationally expectations… but he said that on and off for a while.
Steve Keen:
Maybe you’re saying it like John Hicks, he’s a nice guy, actually, unlike a lot of the neoclassicals he’s a nice person. So he might actually do a John Hicks and change a post-Keynesian late in his life.
Alan Kirman:
Well, you know, but I think this is in the spirit of the sort of things that Matheus is talking about is really from artificial life.
You remember the central stock market, simple things you put together and then you watch what happens as they interact with each other and generate the activities going on.
And not some amazingly sophisticated guys who are sort of seeing generations in front of them and working it all out. I mean, how far do you see? I don’t know. I don’t see very far.
William Hynes:
Well, maybe it’s time to hear from Ian Hughes, because Ian has has a very deep understanding of individuals and in particular when things go wrong and they have disordered minds, but perhaps Ian you could take it from there.
Ian Hughes:
Thanks, William. I guess I have a confession to make like Fabio. I’m not an economist.
Steve Keen:
You’re simply bragging.
Ian Hughes:
Just I guess going back to what we started with the question you asked him about recovery. And so I think what Julian was saying, there are parts of what’s happening, the past events that’s trying to drive us back and will try to drive us back to what was before. So you could call it recovery. But also, as Julian said, there’s an acceleration of parts and various things are accelerating and upsetting that drive to recovery to what was before.
And I think to my mind, what I would really - and I think it’s begun to happen, I think maybe one of the most… I would hope that one of the things that will persist after the pandemic is that economics has been knocked off its position of monopolistic dominance of society. If that happens then we get pinched, we don’t get recovery. Yeah. And so you’ve seen in the pandemic that the health aspects have overridden economic aspects in many parts of the world. People’s view of care workers has gone above those who are working on really ‘intelligent stuff’, and in financial, I’m saying that kind of tongue in cheek, really intelligent stuff in financial markets and so forth. I think that’s the paradigm shift we need. We need a paradigm shift that’s one of value now and one that values other means of ordering society above an economic ordering of society.
And I think that’s, as I said, that’s one of the shocks from the pandemic, is that that has happened. As I said, there’ll be huge forces trying to push that back again to reassert the primacy of economics. But I think what may have happened as well is that we’ve begun to reimagine and begin to imagine if economics is knocked off its prime position, what will we not miss about capitalism? You know, have that conversation.
What would we not miss? Injustice, violence, dominance of oil, you know, economies, war in the Middle East. You know, the list could go on. What will we not miss about capitalism? What to pick? What then becomes possible if economics isn’t the driving force in society? And I think there’s a lot of ground swell of that type of thought already, which the Beyond Growth’s report was tapping into, the other strands of sort of less dominant strands of economics.
But I think I would agree with Steve in terms of in the short term, neoliberalism win unless that shift can happen. But I think in the longer term, it’s driving us back into the types of uprisings, the social dislocation, levels of inequality. It’s driving us into a completely unworkable society and a failure to address global challenges. So they may win in the short term, but if it wins in the long term, we’re all done.
William Hynes:
Megan. You should say something.
Megan Greene:
I guess maybe I might be an apologist for a second, which I’m not usually, but I will say that policymakers in the developed world are at least trying to use this crisis as an opportunity to address the next one. So in terms of resilience as part of this recovery, we’re probably doing better now than we were in the past. I mean, there is a huge track for climate and to address inequality and digitalization, all using antiquated frameworks and not going far enough.
But there does seem to be some awareness among those in power even that what Ian Hughes is saying right, and that we’re working towards an unworkable society.
So it’s not good enough, but it’s something.
William Hynes:
I wonder if if we look at the response to the last crisis, then certainly there was a lot of discussion about a green recovery back then and the fact that we need a green growth and inclusive growth. And we tried to bolt on all these additional considerations onto our standard way of thinking about things, and it was rather underwhelming. So, again, this time we hear a lot of people talking about resilience.
But from my perspective, we’re using the words and we’re talking a lot about environment and structural transformation. But it seems to be mostly words in the sense that we’re not displacing the traditional framework, our way of thinking about things. We’re just trying to add these things on. And maybe that’s not the way we can do it, because it’s not just about trade offs and managing these things. It actually requires, as Ian was suggesting, a much more fundamental shift in the way we think about all these systems and how they interacting.
Alan Kirman:
Remember William, after the first crisis one of the things were big promises to spend a lot of money on infrastructure, right? That was what we’re going to do, big investments in infrastructure. And then you, today, you look at the television and you say, wow, Texas has been hit by snowstorms and I’ve forgotten how many million people are without electricity. And they said that’s due to the really bad functioning of the power lines. But nobody has been spending money on that infrastructure.
And so, in fact, these promises to say, you know, we’re all going to invest in infrastructure. In fact, it hasn’t been done. And what I’m worried about, all this talk about resilience, green transition and so forth, I’m afraid that people say that as a sort of they know that that’s the argument that will appeal. But I’m not sure how much is actually going to get done.
And I think about that is Igor, Igor Linkov, for example, he’s sitting there in the US Department of which is called the Army Corps of Engineers, where they couldn’t even manage to sort of deal with the dikes in New Orleans because of a total failure to invest. And I have a horrible feeling that we’re going to keep using, as William says, these phrases, you know, like, well, really going to boost infrastructure. But when you go and see even the New York subway and so forth, you realize that just hasn’t been happening. That was short term, still short term, cutting the costs, of trying to keep the thing running. And we’re not still moving over to a world in which we’d actually try and make things function better for people and that we could do that. I mean, infrastructure would be I mean, even a stupid thing: here’s Kirman’s plan for changing the world, a plan which is rejected by anybody with an IQ of 50.
Steve Keen:
Does that include most politicians?
Alan Kirman:
Imagine you said the following: we’re just simply going to bury a lot of these power lines, then it were much more expensive, much more expensive. But every year we have millions of people without electricity. Why? Because wind and snow and so forth blow the power lines down. OK, people can explain to me that, well, with high high voltage powerlines, it’s complicated. But there are countries that don’t have power lines above the surface like Holland. Go to Holland and you’re shocked when you come from Belgium. Wow, where did they all go, all the power lines? They’re not there. They’re underground. And so Holland doesn’t have this problem. I mean, maybe it has other problems. But what I’m saying is that would be a stupid thing. You know, people used to say about Keynes, well, he just wants to have people digging holes to keep them occupied. But instead of digging holes or if they could dig the holes and then put these powerlines in them.
But this is just a stupid observation. But there’s so many things we could invest in which would make life better for people that I’m just surprised that it is all talk. And now the idea in the United States apparently is, well, we’re going to do this, but we’re going to do this in the old fashioned way. We’re going to pass a bill and we’re going to attach onto it a bit of infrastructure for every senator in the House and every representative in the House, and then they’ll vote for it. But if that’s the only way to get it done it’s kind of disastrous right?
Megan Greene:
I was just going to say I mean, I think I may disagree with you on climate and inequality being part of the discussion after the last crisis. In the US, at least, climate might have been something that was thrown out occasionally, but absolutely no one was serious about it until about two years ago. And then in the US at least, people started to really talk about climate and the private sector started to at least feel like they needed to make this ESG marketing scam appear to be serious.
So I think now it actually is a real topic that everyone really is concerned about. I mean, as an economist, you can’t join anything without climate coming into it, even if the topic wasn’t climate to begin with, which was never the case in the US. It used to be that at global meetings when the Europeans came over, then we might talk about climate, but no one in the US took it seriously.
On infrastructure also, I think everybody agreed it was a good idea, but no one actually thought it would get done until now. And then that bill that every senator is going to get a piece of it. That’s the whole bill. That’s going to be trillions of dollars. I think that’s the goal, at least.
And on inequality, if you look at who the Biden administration is, highered, it’s a load of domestic labor economists. Again, economists, we have our faults, but at least they seem to be moving in a direction that recognizes some of these things are actually a problem and are maybe quite urgent and should maybe start to be addressed now.
So I do think that there has been a kind of a shift in the US, at least in taking these things seriously. I’m not sure the approach is right, but at least they’re considered topics that we should actually do something about now as opposed to in the last crisis when people felt like if if you want to appear cuddly and smart, you would throw out these terms
Alan Kirman:
Certainly in the conversation, what I want to see is more concrete results in some sense. So the conversation is certainly taking account of that. But the pushback is more silent than that in some sense. The guys are against this and don’t want this are not speaking out very loudly, except for the governor of Texas, I think it was, who said, you see, we really need oil.
That’s his conclusion about the snowstorm: we really need oil. If we’ve been using more oil, we would have had more electricity and everything would have been wonderful.
Steve Keen:
Megan, can I quickly ask, how much is the Nordhaus type research talk taken seriously in terms of estimates, the percentage of GDP damage and things like that?
Megan Greene:
Not very, I guess.
Steve Keen:
I’d like to get my paper on Nordhaus into that debate because the guy’s a fraud and I’ve been through the details, you’ve seen that paper at all in Globalizations? I’ll send it to you through William. Literally, he assumed he literally assumed 87 percent of industry be unaffected by climate change because it happens indoors.
I’m not joking. Now I think we need to give a slap in the face to the politicians that have been taking this seriously. It might actually improve the chances of something sensible being done behind political doors.
Fabio Dondero:
But I mean, also in Europe, the situation, I guess, is not really clear. I think their politicians maybe don’t have this awareness of the situation, the gravity of the situation.
I mean, you know, in Germany where you think, OK, we have here an enlightened society or really cultivated society and so on. I think last year they decided to go out from fossil electricity, from coal 2038. Yeah. Compensating also all the companies that are involved into it. And this is it seems to me, not really a long term thinking here, 2038, many people are saying in 10 years it would be like ending up and considering that this pandemic is really a really serious thing but compared probably to climate change it is kindergarten.
Then I guess this is really important to understand. And I see even in Germany, where maybe you think the politics is taking it a little bit more seriously, I’m coming from Italy, so I know what I’m talking about. No, you don’t see this awareness and you have always the feeling that the lobbies are too big and too powerful. I mean, we see in this pandemic there was a big discussion on who to help in this crisis.
And obviously, as an artist, we realized very soon that we are irrelevant to the system, that we don’t need any help, but at the same time, a company like TUI, I don’t know if you know that TUI got like three billion euros, the company that is making charter holidays, going with cruise ships and so on.
And that’s obviously a little bit strange to realize that in a country like Germany where you think, wow, we are somehow in a privileged situation. No, we aren’t apparently.
Alan Kirman:
They’re still burning a lot of coal in Germany because, paradoxically, the environmentalists pushed them to get out of nuclear. All parts of that complex system guys.
Ian Hughes:
William’s question about comparing the financial crisis with the COVID crisis. Again, I think maybe there’s a fundamental difference in terms of the shock. I think maybe the shock in the financial crisis was one of questionable ethics within financial institutions. But I think in the COVID crisis, there’s a deep ethical crisis across all of society. It’s exposed the ethical underpinnings of an awful lot of how we organize society. We need to fundamentally change. So I think there’s a groundswell, maybe there’s a groundswell after this that there wouldn’t have been after 2008.
William Hynes:
Yeah, I mean, one thing Ian is that after the financial crisis, there was a sense that a lot of things needed to change in economics. And I think many things have changed. But it’s been more in the direction of trying to fix up the discipline and as I mentioned, to try and add fixes and stitches to neoclassical frameworks rather than really develop an alternative to that. And so, again, the question is whether this crisis will be severe enough to really displace a lot of the conventional wisdom that we use in economics.
And just the point about the discussion Megan had with with Steve, I think Mark Blyth’s distinction between formal models and folk models is very useful in the Nordhaus case, that maybe the issue is not the formal modelling of Nordhaus, but this idea, the folk model of climate.
Megan Greene:
Can I ask you a question about this financial crisis that he’s predicting? What role do private markets play in that? Because they’re this whole gargantuan behemoth in the US at least that none of our models actually incorporate. That could be quite scary.
Steve Keen:
Yeah, I mean, I’m what I’m looking at is bank debt there. So in terms like the leverage with CDOs and so on, I can’t actually include that. I could get the data and take a look at it and see, but my feeling is that normally, like in 2008, that was all CDOs, collateralized securities and so on, and enormous leverage and all the fragility that goes with that. This time, I think people are just being forced to dip into their lines of credit, whether that’s MasterCard’s for individuals or literal lines of credit for companies to continue paying their current financial commitments.
So rather than having a boom, which you have with large amounts of credit before a slump like 2008, this is going to have a slump with no boom. That’s my expectation, because you’ve taken all these extra commitments. Cash flows come back to something close to but not the same as normal. And therefore you won’t be able to meet your commitments once all the various government supports for COVID are taken away.
Megan Greene:
Yeah, there’s a ton of forbearance that no one knows how to account for as well. There’s a kind of forbearance, so bills just aren’t coming due right now but will at some point.
Steve Keen:
Yeah, there’s a lot of them, for example, that benedictions delays in America and the U.K. At the same time, tenants aren’t paying their rent and mortgages aren’t paying their mortgage. So if you go to the stage of individuals thinking they can start enforcing that, then you can have a collapse and social dislocation to begin with and a financial collapse as well. The banks don’t want to admit that very bad debt for obvious reasons, they take over property and it’s worth one quarter what they what they’ve valued the debt at the time. And they’re not set up to manage the cash flows of rent. They don’t want to go about finding new tenants for vacant rental properties. So there’ll be ways in which they get pushed back to all this. But it will mean financial dislocation when it happens in the credit markets. And that’s what I think is feasible next year or late this year.
Alan Kirman:
If we go back, Steve, if we go back to the previous crisis, what happened there, in fact, the sort of thing you’re saying was actually going on, because we had all these mortgage-backed securities that were being traded around happily, but between people who weren’t evaluating the underlyings. And what happened in the end was as property prices started to drop, people got out because they had hugely over-leveraged it, they simple gave their houses back to the bank. And that’s exactly what you’re saying.
Banks find themselves with all these properties on their hands and the value of those MBS just collapses. And that was the sort of trigger. It wasn’t the cause, but it was a trigger of that. So I think we’re seeing a reflection of something similar. With a lot of debt on houses. And then the houses dropped in price. But that we should have seen it coming because everybody knew, Shiller will tell you that, of course. I think we’re seeing a sort of a similar thing.
Steve Keen:
Yeah, I think I agree with that. That’s not what the output gap model is looking at, of course.
Matheus Grasselli:
But even even the models that are used internally by banks. I participated in a panel with the banking industry here in Toronto a few weeks ago. And all the models are kind of disconnected from reality in the sense that their models would look much worse than what’s actually happening, because they look at the things like unemployment rate and normally a drop or an increase in unemployment of the magnitude that happened would correlate with credit card defaults or all sorts of other defaults. And they would be seeing a very big impact on their loan portfolio.
And nothing like that happened. So there was a dip in employment, but their loans are fine. And that’s because of what you’re saying about the forbearance and the assistance and the wage replacement and businesses that have loans to continue to subsidize wages. And so, in a sense, they really have no clue what’s going to happen when that retreats. This is not going to happen in the next two months, three months.
It’s going to be kind of a medium term adjustment. That is that is going to happen. And it’s up for everyone to guess. But I wanted to just go back to the idea of, you know, what the possibilities created by this crisis are. I’m slightly more optimistic, I think, than Alan. So I’m agreeing with Megan here that the crisis, the COVID crisis showed that many more things are possible than people were led to believe, for example, going back to central banks. Right. So it used to be the case that, you know, central banks cannot make loans to corporations because that’s interfering with the private system. They can only make loans to banks because otherwise, you know, moral hazard and this and that. They went out and bought corporate backed left and right. They created a facility to buy corporate debt. While central banks cannot support municipalities, municipalities need to live within their budget.
They went out and bought municipal bonds and all of those things. So the other thing is the false trade offs. Right. So I heard at the start of the crisis from my American friends saying, oh, but you can’t force people to be in lockdown just to protect their health because that’s going to throw them into poverty. And I said, well, only in your country. And it doesn’t have to be like that. It’s not a choice between death and poverty. You can stay home safely and still have an income. And that has been done in many other countries. And you just you don’t need a model. You don’t need to be all right. You just need to open your eyes and look around what different countries have done. So and so this kind of argument that, you know, do this or else it’s it’s much weaker after the crisis to collapse. People will try again, all sorts of, you know, but now inflation is going to return. But the natural reaction is to laugh at these people instead of to take it very seriously, you need to actually show evidence that this has happened. Oh, you know, bond markets are going to rebel against the increase in government spending. It hasn’t happened in 10 years. Makes the way where is it going to happen? So I think the… and it’s important to have this kind of switch points.
Right, because as I was reading recently, the most recent book by Piketty on ideology, and he tells that a very strong argument for even small change, against even small change, is the slippery slope argument. So, for example, income tax had been discussed since the beginning of the French Revolution. They were trying to have income tax. But the argument was always, oh, no, you can’t possibly tax income even in small amounts, you know, half a percent, one percent.
Because once you start doing a little bit of redistribution, you know, when is it going to stop?
And then, you know, in the beginning of the nineteen hundreds, they did the income tax and they increased and it stopped at some point. So it doesn’t go to infinity. So we are smart people. We can tell the difference between zero and infinity and somewhere in between. And I think what is going to happen with covid is that we’re going to pass beyond this point of, you know, we cannot do because then we don’t know when when it’s going to stop.
We’re going to show when to stop and it’s going to stop when needed. But keep going. Keep going with spending, keep going with that. Keep going with supporting people that are out of jobs. And then stop when it’s necessary.
Alan Kirman:
Right. But, you know, I agree with you entirely, but there are some people who are so hung up on their positions or any movement in this direction, for example, why did the Republicans immediately try and vote against any huge bill to the recovery? Because they didn’t want to pay any money to states or cities. Right. They said, you know, we are not prepared to underwrite states or cities and local governments, and they got hung up on that. But, you know, from your argument, that would have stopped at some point. We do, actually. I mean, even in the US, you do actually underwrite cities in the end when they get into bad enough trouble. But why should that be somehow moral sticking point or, you know, even a theoretical sticking point? But so I think people do have, unfortunately, these frictions. But, Megan, I convey the impression that I am extremely cynical and pessimistic, but in fact, by nature, I’m rather optimistic.
Megan Greene:
And I’m not by nature an optimist, which is the weirdest position for me to be. And I will. Can I just say in response to what Matheus was saying about tiny steps being sea changes, we’re not there yet. So in my conversations with central banks about using their new tools for climate change or inequality, they mainly look at me like I have 40 hats and are completely horrified and immediately rule out the slippery slope argument. So I think you’re right, central banks are kind of stuck in this weird middle ground between monetary and fiscal policy, but they’re not willing to admit it yet. So I think there’s a ways to go before we get there. A great that’s the push button.
Alan Kirman:
You couldn’t find a few exceptions, Megan, who who do see through this a bit further.
Megan Greene:
I would say the ECB is more open to it than the Fed, but…
Partly because they’ve already created the tools to to use would tell stories, and I think also partly because the climate discussion is so much further ahead in Europe than it is in the US. But even they’re pretty tentative.
Matheus Grasselli:
But but it’s not so small mistakes, right, to what the crisis did is because it was of such magnitude that all of a sudden many different things happened, that people were not paying attention. For example, one of my pet ideas is narrow bank. And I don’t particularly think that it’s the solution to our problems, but I would like people to analyze the idea in more detail, not dismiss it out of hand. And one of the arguments for dismissing narrow banking out of hand is, oh, you’ll never be able to raise as much reserves as the amount of deposits that are there because, you know, deposits are much larger than reserves.
It’s going to be hugely, you know, a dislocation from the banks to have to do that. Well, look at the data now and the banks in the U.S. and in Canada, they now have more reserves than deposits. So if you wanted to implement narrow bank tomorrow, that would make no difference to the level of reserves that the banks have. So it’s just that kind of thing because it was such a gigantic shock in financial and economic terms.
You can revisit old arguments and said, oh, really? You thought that this was impossible? This is not impossible. So maybe these other things are not possible as well.
Alan Kirman:
But will undoubtedly keep coming back to the minimum wage story, right, and that is exactly the same thing with some people, that simply as soon as you say that would never be to employ anybody at those wages. But the evidence seems to be so far that, in fact, raising minimum wage has had very little impact on employment and in some places, positive impact.
So I think these are sort of relics from people is the way people have been trained and brought up and thought about things. Right. But right at the beginning, we somebody said something about we should be looking at what’s actually going on, what people are doing. Was it you and and not so much about worrying about what these sophisticated people have in their minds. And I think it was Herb Simon who kept saying, you know, why don’t we stop thinking about how we believe a very sophisticated person would build these expectations and build models of that and start looking at how people do form their expectations, for example?
I think that’s something we have ceased to do. And and he argues that people were much simpler than the things that we attribute to them.
So at best, we should go back to this very simple world and and say, you know, let’s put all together, put together guys with simple rules. People like Gigerenzer would be very happy with heuristics. Everything is heuristics. Nobody actually thinks they just have heuristics. We’re probably in between. But anyway, I mean, I think that’s what we’ve done. We’ve made these such elaborate models and come to conclusions and now we find it very difficult to get rid of the conclusions.
By we I mean everybody…
William Hynes:
We’re almost at a time, I think we’ve oscillated from between more positive, optimistic take and maybe more negative, pessimistic approach to what’s going to happen with the recovery and what implications that’s going to have for economics and policy. But does anyone want a parting word?
Alan Kirman:
Final question as a parting, really, what was what was your objective? I mean, what after this has to come up with a week to come up with?
William Hynes:
Well, so Matheus sent us and I and you actually on the organizing committee of a whole set of meetings around systemic recovery with the Fields Institute and maybe Matheus, you want to say a word about that? And where we’re going and how this conversation is quite useful in our thinking for planning that event.
Matheus Grasselli:
Yeah, it’s extremely useful. So we are going start with what we are calling an extended problem-solving workshop, which is going to be a group of students and postdocs, though it’s currently open for students and postdocs to apply. So if you guys have networks that you can advertise this to, please do and they are going to be working on problems that have been suggested by the OECD, by the Bank of Canada, by the finance department, Julian is off the call but the Department of Finance and Canada’s participation and the local bank here in, well not a local bank, a Canadian bank, Scotiabank in Toronto. So there are problems coming from different perspectives and they all have to do with systemic recovery.
And so they cover things like comparison of what happens in different countries, what what worked and what didn’t work. But from a quantitative and empirically based view, not, you know, what ought to have worked, what what is going to happen in the medium term. Like what what Steve was talking about. Once those instruments are taken out, the support instruments are taken out, what’s going to happen to the economy and then what’s going to happen in the in the very long term, the sustainability?
What what the if there is a different track like what Alan was talking about. And so some of the students are going to be working on practical data sets and questions posed by those organizations and trying to use all sorts of different modeling techniques to come up with with frameworks to think about that not necessarily answers, but frameworks. And then and then that’s going to take three weeks. And I’m very excited about that. It’s going to be like, you know, all over the world.
It’s going to be online. We’re expecting that people are going to be communication morning and evening. Some of, you know, online platforms with the mentors, professors that are going to be just guiding when the students are doing so. It’s going to be exciting, but hard work. And then after that, there’s a two day symposium where we’re going to have different panels with with senior academics that are going to be discussing exactly those questions, maybe informed by what’s coming out of the workshop.
And then this all will lead to. So this is still a two day symposium, more or less, you know, centered on modeling and analytics and suggestions and recommendations from policy for policy. But then it all culminates with a high level panel discussion that the OECD with, you know, people that would listen to the recommendations of this experts and try to implement them in actual policies. So so it’s a whole menu of different activities, but also into the systemic recovered questions.
William Hynes:
Right, and we hope you’ll all join us in helping to further articulate that agenda and maybe to put together some ideas on how we could influence the policy agenda in the direction of a more systemic approach based on new economic thinking and acting. So we’re we’re out of time. So I’d just like to. Ian, did you want to say something just very quickly?
Ian Hughes:
And I think a suggestion maybe for a future conversation is the paradigm shift that beyond gross report points to. Is that possible within the economics profession? Because I don’t think economics is like, you know, in physics, the ideas are the primary currency where our power structures and so forth. But I think that’s much more prevalent within economics. And I think there’s a really fundamental question as to whether the type of attention will be brought about within in thinking can be brought about within the economic conventional.
Alan Kirman:
And I should send you a quote from Frank Hong, who is a hard line general attribution theorist, and he said, I don’t think he was asked what will happen to economics in the truth in the next century. That is this century. And he said, I don’t believe that economists will be able to prove any serious results or give much good advice. The world of the future is going to be in simulation computational models and with simple actors and so forth.
And everybody was deeply shocked by this. But I think in some sense, I think there are a lot of sufficiently intelligent economists to move along with that and maybe and not get off the track that. But anyway, you think that the economics profession is dead? Is that what you’re telling me?
Ian Hughes:
No, I don’t think I’ve said enough.
Steve Keen:
I think that might the actual point.
Ian Hughes:
But I think there is a positive evidence that makes it difficult to bring in other ideas and other the types of power that that’s what they did.
Alan Kirman:
Yeah, that that’s true. Well, that’s what Max Planck said, that new ideas don’t take over because the old guys have learned that they are interesting and then provide them know they take over because the old guys die and they’re replaced by younger people who are open to these ideas.
In actual fact, is that bad news for people like me?
Matheus Grasselli:
Yeah, the actual quote is that science progresses one funeral at a time.
Alan Kirman:
Now, that’s another quote. That’s a different one.
Steve Keen:
That’s not the real quote. That’s the paraphrase. I’ve got Max Planck’s autobiography, that’s a paraphrase. But the point is it doesn’t happen in economics because they want the zombie ideas to continue. So you don’t you don’t get the it’s the first chapter of my new book, Matheus, as you’ll find out on Sunday.
William Hynes:
OK, great. Well, thanks, everybody. I think we need to leave it there, but thanks so much for contributing and I think there will be an edited version of this conversation that will be on the Age of Economics website. I think Fabio, is that right? Do you want to?
Fabio Dondero:
Yeah. Yeah. I mean, it would be really great, obviously, to share this in the next days. I think we will make a transcript. So for people that doesn’t want to watch, they can read it and maybe get inspired by our conversation, it would be great.