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A world of unwelcome replays

Apr 30,2023 - Last updated at Apr 30,2023

STANFORD — Watch any sport nowadays, and you will be treated to instant replays that give you a detailed, often slow-motion, view of important moments. Watch the news, and you may find yourself feeling like you are similarly watching the past on playback. But these replays, of high inflation, soaring public debt, a brutal ground war in Europe, a new cold war, and the rise of potentially destructive technologies, are far from instant and the stakes are much higher.

Readers might recall that I predicted rising inflation and slower growth as early as spring 2021. Former US Treasury Secretary Larry Summers did so even earlier. Yet, today’s inflation, the worst since the early 1980s, caught most people by surprise.

Supply-chain snarls, including energy-market and food-system disruptions linked to Russia’s war on Ukraine, contributed to the initial surge in prices. But the main driver of today’s inflation has been profligate monetary and fiscal policies, which were upheld despite quicker-than-expected recoveries from pandemic lockdowns.

For example, US President Joe Biden’s $1.9 trillion American Rescue Plan, implemented in March 2021, was nearly three times larger than the Congressional Budget Office’s estimate of the GDP gap that still needed to be closed for the economy to reach its potential. One cannot but notice the echoes of President Lyndon B. Johnson’s use of debt to finance the Vietnam War and the “war on poverty” in the late 1960s.

Meanwhile, the US Federal Reserve kept its target interest rate close to zero for too long, and started to unwind its balance sheet too late, an approach that recalls the monetary-policy mistakes it made under Chair Arthur Burns in the 1970s. Central bankers thought that it would not hurt to let inflation run above the 2 per cent target for a while before bringing it back down, because they had undershot the target previously.

There are short-term benefits to running the economy “hot”. Just before the pandemic, US unemployment was low, minority groups had the lowest poverty rate in history and wages were rising fastest at the bottom of the distribution. For the first time in decades, inequality was declining.

But the economic and political price has come due. Core inflation (which excludes food and energy prices) in the US has averaged 5.6 per cent for the last 12 months. While it is now down a bit from its peak, it has rotated to stickier services prices, and remains almost three times the Fed’s target. The central-bank creed is that the short-run interest rate must run above inflation for some time before inflation, after a “long and variable lag”, falls toward the target rate.

Wages have not kept pace with inflation, and most households, especially those which expansionary policies were supposed to help, have been experiencing a decline in real income for two years. Though unemployment remains very low, and the US economy has outperformed much of the rest of the world, almost half of the US population thinks it is already in a recession and most Americans expect their children and grandchildren to be worse off than them. This perceived demise of the “American Dream” has left the public, and politics, deeply unsettled.

Another replay that caught most of the world by surprise is the ferocious ground war in Europe. America’s disastrous withdrawal from Afghanistan in 2021 weakened deterrence. But Russian President Vladimir Putin clearly telegraphed his plans for Ukraine. Beyond lamenting in 2005 that the Soviet Union’s demise was the greatest tragedy of the twentieth century, worse than World War II, apparently, when 20 million Russians died, he seized part of Georgia in 2008, and annexed Crimea in 2014.

Third, despite all the global economic integration of recent decades, the world seems to be on the brink of a new cold war. China’s increasing economic, diplomatic, and military assertiveness, together with its deepening ties with Russia, has raised fears about a realignment in international relations, and even a new clash of systems of political-economy.

The original Cold War pitted totalitarian regimes with centrally planned economies against mixed-capitalist democracies, led by an economically and militarily dominant US. This time, it is autocratic state capitalism versus social-welfare democracies, and America’s resolve and capabilities are in doubt.

Particularly worrisome, nonaligned actors are hedging their bets, and the US appears to be asleep at the wheel. The China-brokered rapprochement between Saudi Arabia and Iran, a supplier of advanced military drones to Russia, stands out. Does this mark a return to traditional balance-of-power geopolitics, or is it a prelude to conflict between the US and China over Taiwan?

Finally, technological advances are disrupting economies and upending expectations about the future. Technology has been transforming economies and displacing workers since well before we had a term, Schumpeterian creative destruction, for the phenomenon. But economies have generally adjusted: computers, for example, did not end up causing massive structural unemployment, because the workforce was redeployed to other jobs. In any case, standards of living rose.

Will this be the case for artificial intelligence? A group of tech leaders, including Elon Musk, are not so sure. In a recent open letter, they called for a six-month (or longer) pause on advanced AI development to gain a better understanding of the risks the technology poses and devise ways to mitigate them. Musk thinks those risks include the very destruction of human civilisation, and claims that Google co-founder Larry Page once called him a “speciesist” for wanting to safeguard humanity from AI.

Ultimately, AI is a tool. It can be used for good, for example, to develop new drugs and diagnostics. But it can also be used to do great harm. I remain cautiously optimistic that we can overcome, or at least sufficiently manage, this challenge, as well as the others mentioned here. But, given widespread nuclear proliferation, the costs of failure could bring the most unwelcome replay of all.


Michael J. Boskin, professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993. Copyright: Project Syndicate, 2023.

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