C. Peter McColough Series on International Economics With Martin Wolf

Martin Wolf discusses how the outcome of the U.S. presidential election might change the world’s political economy and the path ahead. 

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by RealEcon: Reimagining American Economic Leadership, a CFR initiative of the Maurice R. Greenberg Center for Geoeconomic Studies.
 

CARUSO-CABRERA: Good morning, everyone. Thanks for coming. Welcome to today’s Council on Foreign Relations, meeting with Martin Wolf, chief economics commentator at the Financial Times. This meeting is part of the C. Peter McColough Series on International Economics. And we are also joined today not just by the people in the room, but CFR members are attending virtually via Zoom, more than 300 of them. In about a half an hour—he and I will have a chat, and in about a half an hour we’ll open it up to questions, OK?

Good morning, Martin. So good to see you here. Thanks for coming. Tell us. you know, we have an event coming up in a couple of weeks you may have heard about, the U.S. elections. What’s your opinion on how it’s going, how it’s going to go, how Europe sees it?

WOLF: Yes. We have noticed you have this event. (Laughter.) And it’s always the focus of attention around the world, but I think this one is particularly so. I should say, I’m very pleased to be here again. I’ve done these quite often. I always enjoy it here. But I should also add I’m sensationally jetlagged. And I got up this morning at 5:00 to finish a column. So I’m probably going to be even less coherent than usual. 

But anyway, the answer is, I don’t know what’s going to happen. My impression, from the polling I read, which is supplied to me by people you read, obviously—the obvious one is that it’s very close. My assumption, if it’s very close, has been that Donald Trump will win. And I think it’s sensible for us to think that that is at least a better than evens probability. I have to say, and I’ve written a great deal about this over the last eight years, that if I haven’t got used to the idea, in the sense that it’s become familiar, I still find it incredible on so many dimensions that—it would be a speech on its own. 

But I’m planning a column on this, because it says something extremely profound, and to me extremely disturbing, about how the U.S. has evolved during my lifetime, which is nearly eighty years. And in directions that I would have certainly considered for almost all those eighty years inconceivable. So that’s itself an extraordinarily important fact. I think I now have a better sense of how it’s happened than I would have—ex post than I did ex ante. But I’ll focus on what I think is the core of the question. I don’t think I need to tell people here the significance of the elections for America, or why it’s happened, and what has driven this phenomenon. 

But for the rest of the world, obviously, this has multiple implications. I think the most important—I’ve been trying to think about this, where, to me, the domestic and the international fit together is what is going on here is an undoing project. Or, to put it more precisely, we are watching—or another way of saying, a profoundly reactionary project, in the way people understood that term a hundred years or so ago. That is, an attempt to go backwards somewhere. And for the rest of the world, the most important directions in which America wishes to go backwards—and they’re linked—it clearly wants to go backwards, and this is now bipartisan, on globalization.

It wants to go backwards, and that’s semi-bipartisan but less clearly, on the idea of a multilateral order which is embedded in rules of some kind, which was an American invention. It was a decisive difference from American hegemonic power between—American hegemonic power and British hegemonic power, which never had any interest in that sort of idea. So that’s a second undoing. It’s an undoing of the idea—and here I have much more sympathy—with America as a global policeman, and particularly a global moral policeman. Namely, one whose job is to go around the world and make it a better place and make regimes better in the process. And some really big mistakes happened with that. 

It’s an undoing of the idea—this, I’m talking, obviously, if Trump wins—of the idea of a West with a coherent set of ideas, which is an alliance centered upon the United States, which is a particularly benevolent and protective hegemon towards other Western powers. That’s an undoing, pretty clearly of that. And the emergence of the U.S. as a sort of power, with which I think—I mean, this is ideological in the world—with which I think Viscount Palmerston would have felt very comfortable—though, if I may say so, Viscount Palmerston was a hell of a site smarter than the person you produced to do this sort of—to perform that.

But that, seems to me, a core way of thinking about it. I also think by the way, much more profoundly and more significantly, it’s an undoing of the United States. But that’s another matter altogether. And I don’t want to go there. But I think the key is people have to get their minds around the idea that an America that has elected Trump twice with this—with somebody like J.D. Vance as his vice president and probably a very different administration, is an America that basically is saying: We’re not interested in any of that stuff at all anymore. And, of course, I should add, obviously it means global environment, that’s a joke, and all the rest of it. So it’s a profound undoing from the world’s sense of what America is about. 

Final point. For some people in the world, and my colleague Gideon has a lovely column that—Gideon Rachman—has a lovely column on this this morning, this will be very welcome because that’s how they would like states to be. And for some—Vladimir Putin’s Russia, for example, will find it very welcome. Viktor Orbán will find it welcome. I think Narendra Modi will find it very welcome. But that is—I’m sorry, I know—but that’s—the central point is, that’s what I think is going on. 

CARUSO-CABRERA: Can I ask you, is it just us? Because we read from here that Germany has reinstated border checks. More than 70 percent of French people want borders reinstated again. When we see the rise of parties that would embrace a lot of the same ideas that you’re talking about, it seems to be on the rise in Europe. It seems to be on the rise in a lot of places in the world. Is the whole world upset with the impacts of globalization and the—I’m, you know, throwing an answer at you, and the uneven distribution of some of the positive results and, you know, the distribution of the negative results? Or what do you think is happening there? 

WOLF: So you asked about—to me, you asked me about how the world would view what’s going on in the American election.

CARUSO-CABRERA: Yeah.

WOLF: I have two reactions to what you say. The first is, absolutely. This is a global phenomenon—a very complex global phenomenon, which I’m happy to discuss. But the U.S. is so significant because, as I constantly tell my colleagues have written—this is so banal, particularly sitting here in the Council of Foreign Relations—the world I described was the world the U.S. invented. So fundamentally, it’s the world the U.S. invented. Lots of people embraced it. They liked it. They did very well under it. Some of them less well. But the reaction of the U.S. is by far the most important part of what is a global reaction.

I would stress, however, that in most of the cases you refer to, it’s a reaction to one specific phenomenon, which is also obviously very significant here, which I’m very concerned about and wrote about in my book. And that’s immigration. And it’s clear that there wasn’t a plan. I don’t think of many countries who sort of set down what we’re going to do is completely transform our population demographics, fundamentally to change who lives here. And that happened, for a whole host of reasons we can discuss. And it is pretty—not everywhere. East Asians have been completely outside. It happened for very obvious reasons. People have adjusted to it worse or better. But it’s one aspect of this.

But interestingly, it’s the one bit of it that had nothing to do with some sort of—not really, any sort of global—there’s no global migration agreement or immigration agreement. There was—there are really—there are some principles in how you deal with asylum seekers and so forth, but there’s not been a plan for getting the whole world’s population to move. It happened as a result of all sorts of things. So while that has clearly changed politics in Germany, and in France, and in Italy, and to lesser degree, interestingly, Spain, and Britain. I think of it also as a very special phenomenon, a necessary consequence of all the other—though, there’s some links—of all the other aspects of this global order the U.S. tried to create. 

And if you took away immigration, the Europeans are completely comfortable with free trade. That’s not an issue. They’re really pretty damn comfortable with trade, with China, the—

CARUSO-CABRERA: Is that good or bad?

WOLF: The Germans are a bit upset—of course, more than a bit upset, with what’s happened to their car industry because they’ve been very sleepy, but they really don’t want to close down relations with China which are very, very important for them. So I would say that the—and the idea that, which America has, quite understandably, given its place and power—that it can go back home is not something that anyone else in the world can really believe in. Even the Chinese have some trouble with that idea. So I do think a lot of this, though there are very clear echoes, particularly in the case of immigration, obvious. I think it’s also unique—in some extent, unique in what’s happening in the U.S. Unique in the politics that’s around it. And, of course, necessarily unique in its significance, because the U.S. has been the creator of the world order that we are familiar with.

CARUSO-CABRERA: You brought up China and the desire to maintain economic relations with China. And the other thing you said was on globalization, bipartisan agreement here in this country. We could drill down a little bit more and say there’s bipartisan agreement on China. Biden has only gotten tougher on China, beyond Trump. So we are in this process of, you know, industrial policy in the name of national security, because of China. How do you see that situation? Is it good that Europe is trying to maintain those relations? Or should they go in the way that the United States is moving?

WOLF: Well, let me put it this way. I’m probably somewhere—oh, where am I? I’m certainly not with what I perceive as the core of the American bipartisan consensus, which is, in my view, essentially that China has to be destroyed. 

CARUSO-CABRERA: Destroyed? You really think that’s the view? It has to be destroyed? It doesn’t have to be contained? It doesn’t have to be—

WOLF: Because I—because I think the underlying thrust is that China cannot be allowed to become a peer, or worse, a greater power than the United States. It’s not something that it is safe for the U.S. to live with. 

CARUSO-CABRERA: Is it safe for Europe if China becomes a hegemon?

WOLF: Let me go to that in a second. If that is the goal of this policy, then we are in a cold war mode, but with a far more ambitious project because China is, obviously, vastly more powerful and has vastly more potential than Russia ever did as a great power. Now, I do think that the Chinese are doing such a good job of ruining themselves that you may not have—you may not—and I’ve written a lot about this—you may not have to work that hard. And it may be that Chinese paranoia about U.S. intentions will do it for you. So it might turn out to be a fantastically brilliant project because of the reactions that it is creating in China very obviously. I can’t really see the Xi regime operating as it is now without that. But I start off from the assumption that we’re going to have to live with China in some form, and China is going to be a very great power. That’s my assumption. Could turn out to be wrong, for the reasons I’ve just said. 

Now, then the question is how we live with it. And the way I’ve framed it, and here I don’t think I differ so much from the more intelligent people in the current administration I’ve talked to—I’ve talked to many of them—that we have to distinguish between our vital interests, which focus on security above all, all other areas where we have to cooperate, because we have, I think, very significant global concerns. And I’m one of these strange people who thinks the climate issue is a really big deal, for example. And I don’t see how we fix that without China. And I also think that, in security terms, China is going to remain a great power, and in fact, a greater power. And we’re going to have to live with that and work out a way of doing that which is peaceful, because World War III is not a desirable policy program.

And so handling this in a way that manages what we have to do together, and manages the competition, particularly the security competition where it’s central, without blowing everything up is going to be a tremendously complex art of statecraft. I think, in the lighter period of the Cold War, but it’s a very different circumstance, the Americans handled that pretty well. Particularly, I think, like many Europeans, that detente was absolutely brilliant. Worked far better than I ever thought it would. But if we see—in that way, I’m perfectly happy with what the U.S. is doing. But I think there are far more atavistic urges here, that China is evil because it’s communist and—yellow peril, anyone? And so forth. And I think that’s very dangerous.

CARUSO-CABRERA: Industrial policy in the name of national security. We have embarked on it. Europe has started to embark on it. The FT has written a lot about Northvolt, which is Europe’s best-funded battery startup. And now it’s in a fight for survival. And it reads like a very cautionary tale about well-intentioned industrial policy gone awry. What do you make of this well-intentioned effort? Here, you know, we’re very worried about, you know, Taiwan and semiconductors. And so the natural inclination is, OK, we’re going to make them here. We’re going to do all these things here. Any lessons that you see in that process?

WOLF: This is my general view, which anyone who’s read myself over the decades would recognize. Generally, I expect industrial policy most of the time to fail. Because that’s what most of the time it does. Not always, right? And it’s quite difficult to know, though, though there are some principles ex ante, which will be which. So that’s first. Second, I can see areas where you clearly have to be doing something like this, because there are—you can’t allow, and clearly the Europeans have realized this pretty clearly with their dependence on Russian gas. You can’t allow a potential—an actual or potential enemy to have a chokehold on your economy. And if that means you have to pay a lot of money to produce something or things which otherwise give you dependence on vital inputs from an actual potential enemy, then you have to pay it. 

That’s not—that’s industrial policy as security policy. We’ve always understood that. And that’s not new. I mean, in the old, old days, I still remember and I read about, this used to be about steel. And this is why the coal and steel community—this was all about Alsace-Lorraine. Why was Alsace-Lorraine so important between France and Germany? Why did they want to control it? Well, it was coal and steel. And the—and that’s why the coal and steel community was the most—was what started the EU. So obviously there are products which are of that kind. And in the modern world, I’m perfectly open to the persuasion, seems pretty plausible, that semiconductors are that sort of thing. 

So being entirely dependent on Taiwan, yeah, that doesn’t seem very sensible. So you should be able to build other things. Batteries, I’m not convinced of, but it depends on how many other competitive producers of batteries they could be, and where they would be. But I can see perfectly well that you wouldn’t want to be dependent for essential inputs into your major industries, and even more your defense industries, on products made in China. I mean, that’s all, seems to me, perfectly reasonable. And if that’s what you’re trying to do, you pay a price for that. That’s fine. 

But your industrial policy is designed, I think, to do two other things. And I think that it’s the model you’re showing. One is to rebuild U.S. manufacturing and, with it, U.S. employment in manufacturing. And I’m reasonably confident, ex post, that will fail. I’m prepared to predict with absolute certainty that twenty years from now the share of the labor force in the U.S., and in every other developed country, working in industry will be smaller than it is now. And you just have to look at the figures to know that. 

And the reason for that is something that was pointed out to me actually by an American who now is a British citizen in an article she wrote thirty years ago, that if you start looking at industry manufacturing carefully, you can see it’s going through an employment cycle exactly like agriculture. And for the obvious reason that nobody is going to be making things in factories anymore. Thirty years from now, this will all be done by machines and robots because they’ll be able to do all that. It’s gone. So the attempt that is part of the—I think, the thrust of MAGA and the Biden administration to recreate the old industrial working class, who’s lost, in my view, is pretty serious—politically and socially this is a big theme of mine—is just hopeless. 

The final thing they’re trying to do is to generate new leading industries which will be globally competitive and will generally make the world a better place for existing. And on that, I would say, OK, have a go. There have been successes in this area in the past, and successes we welcome, and there have been failures in the past. We know a bit about where things work. DARPA clearly was a tremendous success. Innovation has classic externalities, so investing in that makes sense. I’m not convinced that anyone in Europe, since you asked about it, has a clue about how to do such a policy. Though, Mario Draghi has put forward—has made an attempt to say just how it might be done. And, at the moment, I have to say, I’m not persuaded that anybody in the U.S. knows how to do it. And I can tell you, a universal tariff, as introduced under President McKinley of 130 years ago, is not it.

CARUSO-CABRERA: You brought up Mario Draghi, and I’m glad you did. We could go in so many directions, but we had Enrico Letta here, former prime minister of Italy, who was in charge of that project to help Mario Draghi come up with this plan to try help to revitalize Europe. And I think a lot of people were here, there was an event here at the Council on Foreign Relations where there was a gasp from the audience of, wow, where—and I’m sure everybody went and confirmed it afterwards, if you look—go back to 2008, the U.S. economy and the European economy were the same size. Today, the U.S. economy is $27 trillion. Back then, it was $14-15 trillion. Today, the U.S. economy is $27 trillion. And the European economy has barely budged. Germany is flat. France is down from 2008. What’s it going to take to get the continent back and growing again? 

WOLF: I think—those are nominal GDP numbers?

CARUSO-CABRERA: I thought they were—I thought they were real—I thought they were real comparisons.

WOLF: Anyway, I’m not sure. The ones I’ve seen, I’ve seen frequently, have nominal GDP numbers. Those numbers sound to me too big to be real—

CARUSO-CABRERA: Would you disagree—

WOLF: But, anyway, there’s no doubt that overall, the EU economy, in GDP per head terms and even more in GDP—there’s the other difference. Obviously, population dynamics are quite different. Which is—which is very significant. But even GDP terms, and particularly in the recent years, the U.S. has clearly done much better than Europe. There’s no doubt about that. I can’t go through all the numbers now, but that’s clearly true. And in particular, the U.S.—this is very much the focus—has been immeasurably more successful, though this is now longstanding, in creating the industries of the future in the tech sector, where all the major companies outside China are American. And, as a result, they have an absolutely dominant position in in the global tech economy, or—yeah, still do.

And that’s something—that’s the thing that the Europeans are particularly concerned on. And it certainly feeds back, more than most people had expected, I think, on to productivity figures. So that’s a very, very big concern. If you’re adding to the—there’s very low growth of productivity and working age—population of working age shrinking relative to the total population, that means GDP grows really very slowly, or even doesn’t grow at all. And then you get these big shifts in global competitiveness, which—so the—to take the most important country, Germany, its comparative advantage in mid-tech industry, doesn’t have the top tech, particularly motor vehicle industry, is being hammered by the technical transformation—the technology transformation to EVs, electric vehicles, which will, I think, continue. So there are a series of very, very significant economic crises for Europe. It’s absolutely clear. 

CARUSO-CABRERA: Do they have the will to do anything about it? (Laughs.)

WOLF: Well, the answer to that is it’s much easier to describe a problem than to work out what to do about it. (Laughter.) This problem, the problems that I particularly emphasize—namely the failure of Europe to be a leader in the new technologies of the last half century. Well, not everyone, but particularly in computer-related activities, the failure of Europe to operate as a single market, these all led to a number of major European programs, of which the most important was the single market program. This was what it was designed to do something about. And the fact that Mario Draghi and Enrico Letta have had to write these reports now shows it hasn’t. So one has to say, since that was sort of their best effort, the—it’s not at all clear they’ll be able to do with it anything much. 

And another factor here, which is obviously very, very important—I’ve talked a lot about the ultimate product, the new tech, and so forth. But another huge factor is that while the U.S. has an integrated financial sector, it’s an integrated America-wide market with a very, very dynamic VC sector and private equity sector, U.S. doesn’t have—European Union simply doesn’t have that. And that’s to do with both of these things. So fundamentally, due to the fact that Europe is not, and doesn’t look at all likely to become, a single market in these sectors. And in addition, there isn’t an entity—a federal entity which is likely to take the sort of big gambles that do—might transform such a situation. So while I think the problem is pretty well known, and it’s not at all new—it’s been a concern of the Europeans for decades and decades and decades—it doesn’t seem to me at all likely, from what I’ve seen of the reaction, that this is going to change,

CARUSO-CABRERA: We have three minutes to questions, so get ready. So you want to talk about the risk of long-term interest rates staying higher? Or you recently wrote: China’s economic ills are serious, but not incurable. Which one—jump ball. Which one would you like to—

WOLF: Well, I’ll talk about China, if I may.

CARUSO-CABRERA: Sure.

WOLF: Because monetary policy, of which I’ve been writing about for the last thirty-five years, bores the hell out of me.

CARUSO-CABRERA: Sure. (Laughter.)

WOLF: Except when egregious mistakes were made. And I remain in a minority of one in thinking the central banks made some egregious mistakes in 2020 and ‘21. And therefore, and we’re living with the consequences, all quite predictable, and rather better than I feared. So where interest rates are going to go next? 

CARUSO-CABRERA: But you said you wanted to do China. (Laughter.) But, OK, why don’t you do interest rates? (Laughs.)

WOLF: Yeah, OK, I will say on China, it’s really, really interesting. There are two things to be said about it. China has got to the end—in my view, it got to the end about fifteen years ago or so of its original forced accumulation mode, Asian development model. And it was a spectacular success in the way these things are when they’re really allowed to work. It didn’t get to the end in the way that Japan did by the 1980. It’s much poorer. But it’s just so big that continuing with that colossal sort of surge of exports wasn’t really workable anymore. It became pretty obvious by 2008 that the world wasn’t going to accommodate this. And they had to shift to something else. 

And they decided to shift something to something else, essentially, which is what Japan did, namely, to—in the Chinese case, to the biggest real estate boom in the history of the world. I mean, just completely in a class of its own. Again, good reasons for it. Lots of people moving and so forth. That’s now ended. And they have now a fundamental strategic question about how the economy is balanced and grows in a very different context, international and domestic, from twenty, thirty years ago. 

And I don’t think they have a clue how to do this. What they’re doing at the moment is doubling down on the old model, with forced industrial policy, creating new gluts which the world won’t absorb, for the reasons we discussed. And so that’s—and, I mean, I think it’s doable because China is very, very big, has potentially a gigantic domestic consumer market which they’ve never allowed to emerge because the income is so multi-distributed, and they’re still relatively poor. So they could fix it. 

Final point, I don’t think that the administration of China as I read it—and I’ve talked to quite a few people and followed it fairly closely—has any intention of making any of the changes that will be needed to make that work. So I think it’s fixable, theoretically, but in practice won’t be. That’s why I said rather earlier, in a slightly mischievous way, that America’s biggest friend in the conflict with China is the Chinese leadership. (Laughter.)

CARUSO-CABRERA: All right. Let’s take questions from the audience here. Right here in the front row. 

Q: Hi.

CARUSO-CABRERA: Wait till your microphone comes. Thank you. Tell us who you’re with, and all that.

Q: Yes. Steve Charnovitz, George Washington University.

I wonder if you could comment on the implications of what you’ve been talking about for the World Trade Organization. The U.S. protectionism, the U.S. industrial policy, anti-China policies, their attack on the rule of law at the WTO, all these things the United States has done that you’ve alluded to. What does that mean for the WTO? Can the—should the WTO continue with these policies that undermine it? Can the WTO reinvent itself as a sustainability organization? What are your thoughts on there?

WOLF: So, first of all, Steve, pleasure to see you again. We’ve been talking about these things for—well, we are rather old, aren’t we? (Laughs.)

So the answer is the WTO is dead, in its original form. Long live the WTO. The answer to that is the U.S. is clearly—does not feel it is constrained by, nor do they feel it—does it feel it has any obligations to the WTO. So we would have to assume it’s outside that system, as I think it is out—will be—is increasingly on a bipartisan basis, but obviously with Trump even more—it will be outside all those systemic orders. That’s happened before. You remember the fate of the League of Nations? That went very well, didn’t it, the decision to withdraw from Europe? It really went so well. (Laughter.) Now—a very good thing. It was so peaceful after that. 

Now, but this is—this is an interesting question. A very large number of countries around the world, not superpowers—China is actually on a good day one of them—think trade is rather important. And if you wander around Asia, as I do, from front to time, particularly small- and medium-sized powers, they are very happy with globalization. They think it’s gone great. In fact, they’ve become unimaginably prosperous. I’ve just finished a column on the latest world economic outlook. And there’s a—you know, China—Asia is slowing. We know Asia is slowing. But their IMF forecast is going to grow 5 percent this year. Now, it might be a bit less because China will do worse, but it’s still around there. And you keep growing at 5 percent a year you feel quite good, particularly as population growth is slowing. 

So and they really like globalization. The Africans don’t quite know how to do this. There are lots of problems. But they really don’t think they’ve got an alternative. Self-sufficiency? Even the more sensible—god, Argentina amazing. (Laughter.) So I think you have to reckon that the U.S. attitude to this—and I include Europe here—is sui generis, because the U.S. is a fortress. It genuinely is a fortress. There’s not an illusion. And it thinks it doesn’t need the world. But the rest of the world has no illusions about needing the world, as it were. So I think the optimistic view is they would say, OK, the U.S. has withdrawn. That’s fine. 

We’ve got all these agreements. As far as we’re concerned, those are still our tariff schedules. These agreements still apply. We can still create an informal arbitration mechanism. They have done so to make them implement. We can have negotiations on our tariffs. Obviously, they won’t bind the U.S., and we won’t be bound towards the U.S., particularly if it goes and, well, upsets all the tariffs outside all the schedules it’s agreed. But we have interest in maintaining the system from which we’ve benefited, even if the U.S. is outside it. And it’s important to remember the U.S. isn’t even the dominant trading partner of most—a vast majority of countries. Europe is, or China even more so. 

So I think that the rest of the world will have to do what it did in the ’20s and ’30s—rather unsuccessfully, in the case of the League of Nations, but there were special problems—and proceed as if the U.S. had temporary left, even if temporary turns out to be a century, and negotiate, and discuss. The alternative is to create a new institution. Why should it do that? The U.S. isn’t stopping things from happening. You can still reach agreements. And they should go ahead and have agreements with a secretariat that is relatively competent and hope—probably foolish hope—that at some point the U.S. will decide actually being part of the world is better than not being.

So that’s, I think, the sensible thing for people to do in almost every agency. I’m told that the U.S. under Mr. Trump—though I haven’t read this anywhere, someone told me—intends to leave the IMF and the World Bank. Same applies. Of course, it would mean that we would have to move the headquarters of these institutions to—I think if the Europeans integrated properly and responded by saying, our shareholdings are united, the headquarters of the IMF and World Bank will become Brussels. Otherwise, I fear it might become Beijing.

CARUSO-CABRERA: Wow. Let’s take an audience—a question from the virtual audience.

OPERATOR: We will take our next question from Fred Hochberg. 

CARUSO-CABRERA: Go ahead, Fred.

Q: Sorry to take a second. There was a little—(inaudible)—transmission.

Martin, this was terrific, as usual. Is part of the issues you brought up about China and migration in the beginning—is part of this it’s just been so rapid in the twenty-first century? In other words, people don’t seem to have an ability to adapt to the change in a way that lets them absorb it. So partly it’s been so rapid. Do you think that’s a factor? Or these are just such different phenomenons that timing would not have made a factor at all?

WOLF: Are you talking about the rise of China or the change in manufacturing, or both?

Q: Rise of China, change in manufacturing, just the fact if the rightward tilt of the United States, the rightward tilt of many European countries, like Orbán and others, the reaction—you know, it’s very reactionary, and looking to go back. Is it because in part we’ve just moved so quickly? Whether it’s on women’s rights, human rights, LGBT rights, the change in manufacturing, the change in China. All of that has been at warp speed, versus the previous, say, twenty years.

WOLF: Yes. I think that must be very, very important. And it has been, as you say, at warp speed. I want to go into the economic history. I mean, I’ve been struck by—and you here would know more about this—but the reaction on immigration. Remember, in Europe, mass immigration. European countries were emigration countries until quite recently. Becoming recipients of mass immigrant—you know, Italians emigrated, Germans emigrated, English people emigrated in vast quantities in the eighteenth and nineteenth, and so forth. So for them, this is really new and unexpected. And, as I said, unplanned for.

In America, of course, you had a massive backlash against immigration in the late nineteenth and early twentieth centuries, because there was a lot of it. So in that sense, it’s not new. My sense is there was lots of economic, political, ideological upheaval in the late nineteenth and early twentieth centuries in the U.S. in response to industrialization, mass immigration, debates about the gold standard. You cannot crucify the people on the cross of gold, et cetera, et cetera. So I think very massive change tends to create very understandable and inevitable social upheavals. And this is particularly so if the benefits and costs of these shifts are felt to be very unevenly distributed in relationship to the prior position of people. 

And one of the main themes of my recent book is that the decline of the industrial working class, which in my view is 75 percent, at least, fundamental economic changes which we couldn’t have stopped, is nonetheless a huge economic and social and political change. And we really didn’t think at all carefully about what it meant and what it would mean. And though it was always going to be very difficult, and has proved very difficult, it was tremendously surprising to me that a big part of the backlash is of the form, this has happened, it’s terrible, and we’re going to reverse it. 

Unfortunately, we are not going to reverse it. And that is—hopeless political programs have hopeless outcomes. And that’s what frightens me. But I think your description of the problem is absolutely great. And the most obvious point is China, not to even mention it, it the relative rise of—in 2000, China’s economy was smaller than Britain’s. 2000. Well, you know where it is now.

CARUSO-CABRERA: Right. Over here.

Q: Thank you. Esther Dyson from Wellville.

I think this is related in an interesting way. You mentioned GDP. The U.S., 20 percent of its GDP, approximately, is finance. Another 20 percent is health care, which is mostly a repair job. In Europe, each of those is 10 percent. And you were just mentioning real estate in China. I don’t know what the numbers are. But can you just talk about that a little bit, and how it’s changed, and whether GDP is a good measure anyway?

WOLF: OK. I’m going to make my truly most provocative thing, since you’ve given me the opening. I have come to think—I’ve always been a bit concerned. We’ve always known that the connection between GDP and welfare—social welfare is—it’s not that they are independent of each other, but beyond a certain—and it’s very clear they’re very highly correlated if you’re really poor. I mean, there’s no doubt, moving from a society in which lots and lots of people don’t have enough to eat to a richer society in which they do is a big deal.

CARUSO-CABRERA: In health terms, you mean?

WOLF: Well, in every—it’s well—so being richer. And, secondly, when countries get richer, and we’ve seen this unbelievably forty, fifty years across the world, dramatic decline in absolute poverty, life expectancy just exploded. Now, it’s partly technological, but a lot of it is simply to improve nourishment. It means you can actually afford clean water, and all the rest of it. So to take the most dramatic outcome I would never have expected, today, as I’m sure everybody in this audience knows, life expectancy in China is the same as America’s. And that was not the case fifty years ago. 

So GDP matters in those circumstances. But I am beginning to wonder about it for high-income countries. So this is related to the U.S. So the U.S. is, by and far away, the most productive rich country. And here are some other facts about the United States. It has the lowest life expectancy of any advanced country. It has far and away the highest incarceration rate. It has far and away the highest murder rate. It has the highest infant mortality rate. I can go through a few others of these things. So what is this telling us?

Well, one point of view, none of that matters. Second, that’s the price of being the most dynamic society in the world. That that’s—you know, the very aggressive fabric of American life is what makes it America. And the other possibility is that the connection between measured GDP and the welfare of a society, for when we get to the level of wealth that most advanced countries have, is just so loose as not to be helpful. And at the moment I don’t know what the answer is. 

But what it does mean is if an enormous—I mean, having more than two million people in prison is very expensive, right? Not very productive. Very, very expensive. So if you add up—is having hundreds of millions of guns, they’re all part of GDP, a contributor to welfare? Whose welfare? Well, obviously, gun producers. That’s obvious. The question of—if a very large part of GDP is actually the production of things which are designed to prevent you from being harmed by the products of what you’re doing, then you have to start asking yourself, well, what is GDP measuring? 

And, of course, the distribution of GDP also becomes very important. So I think yours is a very profound question. And I’ve become much more skeptical about the pursuit of growth in very high-income countries than I was. Even so, Europeans also have huge problems because we’re aging, and the connection between fertility rates and prosperity itself is fascinating. But we’re aging very rapidly, and fertility rates are very low. We are finding our welfare states increasingly unaffordable. And that’s another set of big questions. I know your entitlement programs run into the same problem, but raising taxes would be, at least, theoretically easier. 

So I—all I would say is what it means to be prosperous and to become more prosperous in societies which are societies of abundance by historical standards on an extraordinary extent, where every problem that our great-great grandparents could have ever imagined has been solved. I mean, we’ve got to understand that. If you were my great-great grandparents living in Holland in 1870, they would have said, this is—you’ve got everything. What are you—you are living in paradise. And we’re not living in paradise. So we have to ask ourselves, what’s going on here? 

CARUSO-CABRERA: Back of the room there.

Q: Kevin Chen at Horizon Financial.

A question for you about kind of medium-term economic outlook for the U.S., Europe, and Asia. Let’s separate China and Japan. What’s your outlook? Thank you.

WOLF: What you how—long is medium for you? (Laughter.)

Q: Let’s say one to three years. 

WOLF: Yes. I thought you would mean that. You’re in financial. (Laughter.) To me—to me, the medium is ten and the long is fifty. And there is reason for that, by the way. A lot of the really big things will become more evident over the next thirty or forty years. And some of them are already with us. 

But, OK, the next few years? I’m not a forecaster. I always used to say, I’m not bright enough to be a forecaster, and I’m not stupid enough to believe I’m bright enough to be a forecaster. But my general assumption goes like this: Assume away some inherently unforecastable major shock. There are lots of them, of which I can’t assign probabilities to. But major shocks are obviously possible. We’ve run through a whole slew of them in the last five years. Let’s assume those things don’t happen. No more pandemics. No new wars. No massive worsening of any of the present wars. Very easy to imagine. No colossal earthquakes in the center of wherever that really matters. Assume that away. 

Then I am assuming, with inflation relatively stable, looks like reasonably stable, the world—no major shocks, we’re going to grow roughly in line with potential. Which is, I think, the best plausible assumption. And that means for the U.S. a bit under 2 (percent), something like that. Europe, about 1.1, 1.2 (percent). Roughly Japan probably a bit lower than that, given demographics. And Asia, it’s clear that the underlying trend growth of Asia is slowing because it’s become much richer. Demographics are against it. 

In a trend, China’s growth will tend to slow, even if you leave aside the problems I’ve discussed, towards 4 percent or so on a steady state. India can probably sustain somewhere between 6 and 7 (percent). I don’t see it getting higher. So those seem, to me, reasonable midterm forecasts. As though Asia is now five. And I would have thought that’s reasonable for the next few years, to about twice as fast as the U.S., more less. And no other region of the world will be significantly faster growing. So that’s what would happen if nothing seriously goes wrong. 

Now, then you get to some really—I’ve talked about sectional shocks. The most interesting question, because it’s very near term, is what a trade war launched by Donald Trump will do. Because that’s a pretty big policy shock. Because I think it will lead to retaliation cycles, almost inevitably. And that could lead to quite a significant decline in trade, but also very big problems for companies in readjusting their expectations for investment purposes. So I think it will mean that there will be a very significant increase in uncertainty on investment. Where do you invest? I don’t think that will be macroeconomically dramatic, but it will tend to lower growth rates over those periods below what I’ve just been discussing. 

And that’s, I think, the only useful set of things I can say. I don’t think at the moment—well, there’s one other issue. Discussions people—I’ve just got these figures from the IMF. The IMF forecasts that U.S. public debt ratio to—government debt to GDP will hit essentially 130 percent of GDP by the end of this decade. That’s a very big number in peacetime for a country which is a huge net borrower from the rest of the world, structurally so. And that will not be changed by the tariffs, obviously. So the most obvious wild card is, does there come a point at which, given American political leadership, given American public finances which will remain in equally lousy state whoever wins this election—that seems to be another bipartisan feature of the United States. 

Very, very interesting. There are no fiscal hawks. Clinton and Obama are inconceivable now. And they were the most successful fiscal hawks in the last thirty years, paradoxically. So a public finance crisis—a dollar crisis linked to American public sector debt would seem to me a very interesting wild card. I don’t think it’s likely, but it surely, in these circumstances we discussed, isn’t a zero possibility. And that could create some really very, very interesting consequences. Something like that happened in a very different context in the ’70s, and I lived through it, and it was a mess.

CARUSO-CABRERA: On that happy note, let’s take a virtual question. 

OPERATOR: We will take our next question from Leif Pagrotsky.

CARUSO-CABRERA: Go ahead, Leif.

OPERATOR: Pagrotsky, please accept unmute now button.

We will take our—

Q: My question—

CARUSO-CABRERA: We can hear you now, Leif. Go ahead. Leif just got muted again. We’re going to give you one more try, Leif.

WOLF: Come on, Leif. 

CARUSO-CABRERA: Here we go. (Laughter.) Go ahead.

Q: I have a question about the political consequences of—(inaudible)—of the last one or two decades, where we can see—

CARUSO-CABRERA: If you could start from the beginning, Leif. We can’t hear you. We need you to just be a little bit louder. 

Q: We can see all over the democratic world, in U.S., in Western Europe, that faith in the political system has been in decline, particularly among working-class men, where populists opposing the system, more or less, have been elected in country after country. Do you believe rather that this development is the beginning of something continuing for a long time, worse and worse, or have we seen the peak? Thank you.

WOLF: So, very briefly, I can’t see what stops this. The economic change you mentioned, the decline of the working class, which is essentially the male working class and the industrial sector that employed them, is a pervasive problem. And the statistics here, I don’t know how many of you are familiar with these, are just staggering. So I’ll just focus on the U.K., because it’s one, but the U.S. is very similar. I mean, in the immediate post-war period, more than 40 percent of all employment in the U.K. was industrial working class. More than 40 percent. It’s now 10 (percent). U.S. is not so different. This is manufacturing. Industry is a bit more, because it adds in some sectors. 

So this is a dramatic shift. And it’s overwhelmingly to do—since output hasn’t shrunk. Output has remained reasonably constant relative to GDP. It’s shrunk a little in real terms. In nominal terms, of course, relative price services have risen. I won’t go into all that, Baumol’s law. But the point is, manufacturing has just become so much more productive. And, of course, trade in some countries has made it worse. By the way, this decline is happening in Germany too, from a higher level, because even though it has a huge surplus. So that is fundamental. 

And then these people feel particularly upset about mass immigration, for reasons that don’t seem to me particularly incomprehensible either, because they’re at the bottom. And they feel that they are being forced further below, into the—into the insecure reaches of their economies as the security of industrial employment goes. Now, that necessarily—and that’s the economics. And it has a political consequence, which is that our center-left, social democratic parties were working class parties, without exception. And that’s gone. They’re now middle class parties, predominantly parties of the intelligentsia and the public sector workers. And this is a pretty dramatic shift.

And the—so the working class has been become homeless, economically and politically. It’s a really massive shift. And they have—and the people who’ve been successful in picking them up are populist demagogues of the right. And, as I pointed out my book, this is going in a very slow-motion way what happened very, very quickly in the ’20s and ’30s, and particularly in the ’30s, in Europe. And I don’t think—I think that—my perception is that the Biden administration and now today the Starmer administration are trying to change that through welfare-type policies and industrial policies, to bring them back. That’s what they were trying to do. With Joe Biden, it seems to be pretty clear, that’s his roots, it’s what he wanted to do. 

And I have to say, I’ve been rather depressed because it hasn’t worked. And that might be because they made some fairly serious mistakes in macro policy, I think. But it may be that this won’t work anymore, in which case we have a very, very big problem. And I don’t know how it’s solved. But, one—I can predict some outcomes. Immigration policies are going to become fantastically restrictive. Multinational, global institutions of all kind—and here we include the EU—will be under colossal attack. Their legitimacy is undermined because they’re run by the sort of people who these people feel are enemies.

And that is a tremendous threat to the maintenance of our liberal democratic societies. And that’s the conclusion I reached in the course of writing my book. And since that was finished two or three years ago, it seems to me everything is telling us that it’s even worse than I feared. 

CARUSO-CABRERA: Which is why everyone should buy it.

WOLF: So the answer, Leif—the answer—yeah, of course you should read my book. (Laughter.) But the answer, Leif, is I think you’ve accurately described, for the reasons I’ve outlined, why this has happened and why, in my view, it’s going to continue to happen. Maybe the one hope is that it will get into power and fail utterly, and still have a fair election at the end of it.

CARUSO-CABRERA: All right. We have two minutes left, so a short question—short question, no soliloquies, and a short answer. (Laughs.) 

Q: Short question. Hi. Mandë Holford, Hunter College, the American Museum of Natural History. 

If welfare policies won’t work, what will work? Can you give us a positive outlook to end on? (Laughter.)

WOLF: I’m not sure that I have the talent. I really admire talented politicians, because I lack this so completely. Welfare policies won’t work. And resuscitating the industrial economy of the 1950s won’t work. That’s clear. So the things that are on offer won’t work. What will work? I think it’s—this is a long fight. And that the essence of it is, we have to recognize—this is the most controversial part of my book—that the reaction to immigration and the desire, above all, to feel it’s controlled, is inevitable and has to be listened to. It has to be controlled. Which is completely different from saying it has to be stopped. But I think the Biden administration, in my sense, and our Conservative government, amazingly, just failed utterly to do that, and a number of big policy mistakes. So that is quite a big issue. 

Then the second is we do have to think really well—and my wife spends most of her time—on how do we create good, decent jobs not in the industrial sector for the sorts of people who’ve been losing their jobs? And how do we help, even more important—very important—places that are destroyed by these changes? We made a profound mistake in not thinking seriously about place-based economic policy. And we have to have it. And linked to that is a really aggressive program—and the Danes have been particularly good on this—on reskilling and skilling people for new jobs. We cannot let vast numbers of people feel they’re discarded. So those are the things I would—and that would link with industrial policy, if we could think about the sorts of things that will employ them. 

But this is a tremendous challenge. And, at least for those of us who want to maintain the system that we have broadly speaking, that seems to me the sort of direction we would need to go. And I do discuss that a lot in my book. But this is the big question for the center-left and center-right now, because otherwise they’re going to be overwhelmed. 

CARUSO-CABRERA: All right, Well, thank you so much. (Applause.) Really, a real pleasure.

WOLF: Thank you.

(END)

This is an uncorrected transcript.