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Date: 2024-05-18 Page is: DBtxt001.php txt00022020

Covid Showed Us What Keynes Always Knew ... How the pandemic and events of the last decade upended economic policy.

Original article:
Original article:
I studied engineering and economics at Cambridge when Professor Joan Robinson was one of the 'go to' experts on Keynes.
In many ways I am more engineer than economist. In engineering there are practical technical constraints on what is possible and this is the way analysis is done. Engineers do not want the bridges they build to fall down, or the aircraft that are built to crash! The same should apply in economics, but the way economic analysis is done tends to be limited based on assumptions that may be more or less valid. Thank goodness economists don't design aircraft!!!!!!!!!!
My takeaway from my learning about Keynes is that he drew conclusions from a study of the facts and the reality rather than working very hard to fit some theoretical construct onto the situation. My recollection is that his conclusions about future economic performance during his work immediately after WWI were very different from his conclusions based on the realities of the early 1930s and very different again from his recommendations that animated the Bretton Woods Conference in 1944. During my career I always ask myself 'What would Keynes do now?' to help anchor me to the facts as they exist at the time of the analysis.
I am also reminded that while Keynes had considerable mastery of economic theory, he was also a practical person. As a Fellow at Kings College, Cambridge, and I think Bursar, he had the college purchase a large number of Old Master paintings during the depression of the 1930s, a collection that has increased in value astronomically in the subsequent years.
Peter Burgess
Covid Showed Us What Keynes Always Knew

How the pandemic and events of the last decade upended economic policy.

Ezra Klein and Adam Tooze

Produced by ‘The Ezra Klein Show’

Sept. 17, 2021

“The world discovered that John Maynard Keynes was right when he declared during World War II that ‘anything we can actually do, we can afford,’” writes Adam Tooze. “Budget constraints don’t seem to exist; money is a mere technicality. The hard limits of financial sustainability, policed, we used to think, by ferocious bond markets, were blurred by the 2008 financial crisis. In 2020, they were erased.”

Tooze is an economic historian at Columbia University, co-hosts the podcast “Ones and Tooze,” writes the brilliant Chartbook blog and is the author of “Crashed,” the single best history of the 2008 financial crisis. He’s now out with a new book, “Shutdown: How Covid Shook the World’s Economy,” which tells the story of the unprecedented global economic response to the pandemic.

The central thread of Tooze’s work is how the past decade of crises has upended many of the core assumptions that have guided economic policymaking for the past 50 years — including ones that many contemporary economists and policymakers continue to cling to.

So that’s what we mainly talk about here. But we also discuss how the boundaries of acceptable thought in the economics profession are policed, the actual risk of runaway inflation, the limits of green monetary policy, the fight over Jerome Powell’s reappointment as Fed chair, what the Covid crisis reveals about our ability to respond to the climate crisis, the need for a supply-side progressivism and more.

You can listen to our whole conversation by following “The Ezra Klein Show” on Apple, Spotify, Google or wherever you get your podcasts. View a list of book recommendations from our guests here.

(A full transcript of the episode is available below.)

Image Credit...Photo courtesy of the author


Covid Showed Us What Keynes Always Knew

How the pandemic and events of the last decade upended economic policy.

Friday, September 17th, 2021


Ezra Klein

I’m Ezra Klein, and this is “The Ezra Klein Show.”

It’s obviously not a novel observation to point out that the global economic response to the pandemic was astounding in size. But I want to start today with just some numbers to put this in context. So the O.E.C.D., which is a consortium of a lot of richer nations, estimates that its members issued a total of 18 trillion in debt in 2020 alone. That is the largest surge in debt ever recorded in peacetime.

A whopping 11 trillion of that was just between the months of January and May. Nearly 70 percent of that debt — 70 percent — was in the U.S. alone. The $2.2-trillion CARES Act — that was passed by a Republican Senate. It was signed into law by a Republican president. And it was more than double the size of the 2009 stimulus. In a matter of weeks, the Federal Reserve bought 5 percent of the entire $20-trillion bond market. At the peak of its action, the Fed was buying bonds at the rate of a million dollars per second. These are wild numbers.

But the most revealing part of that response wasn’t what happened. It was what didn’t happen. Bond vigilantes didn’t send markets into a tailspin. Interest rates didn’t skyrocket. Inflation — well, we’re going to talk about inflation a lot in this. But there was certainly no evidence of a hyperinflationary spiral. Private investment didn’t plummet. The terrified view of future uncertainty hasn’t stopped everyone from hiring or making new capital investments.

Instead, the Treasury market stabilized. The financial markets not only recovered, they surged. The decades of doomsday predictions of what would happen if the government should spend huge amounts of money without paying for it — they didn’t materialize, not in the moment anyway.

My guest today is Adam Tooze. Adam Tooze is a brilliant economic historian at Columbia University. He’s the author of the book “Crashed,” which, for my money, is the single best history of the financial crisis, and now of “Shutdown: How Covid Shook the World’s Economy.” He’s also co-host of the new podcast “Ones and Tooze.” Yeah, that is Tooze spelled T-O-O-Z-E like his name. So who said economic historians don’t have a sense of humor?

Tooze’s angle, though, as a scholar, is using financial crises as a lens into the ideology of economics, using them as a way to understand where our economic theories and models match the world, how they’re really created, and then the moments in which they are changed by the world, whether or not the economists behind them admit it. And in just the past 15 years, we’ve lived through two such moments. And so that is what this conversation is about.

As always, my email — ezrakleinshow@nytimes. I always appreciate your feedback, your guest suggestions, your recommendations of things to read, listen to, pay attention to, play, watch. But here’s Adam Tooze.

Adam Tooze, welcome to the show.

Adam Tooze

Great to be here.

Ezra Klein

So you’ve written that one of the central takeaways of the last year and a half is that, quote, “John Maynard Keynes was right when he declared, during World War II, that anything we can actually do, we can afford.” Tell me about that idea.

Adam Tooze

So it’s double-edged. I think that’s the key. And the penny took a while to drop, for me. But 2020, I think, illustrates both sides of this. So on the one side, there is the emancipatory promise, this open-handed “we can afford anything,” by which I think Keynes means, money is a technical issue.

In the end, it’s a question of mobilizing finance, stringing together the financial engineering, doing some of the central-banking arithmetic we might need to do. But in the end, what limits what we can do is not whether we can afford something, but whether we can actually do it.

And this is why 2020 is — it’s a slightly academic way of putting it, but it’s a kind of beautiful illustration of the force of this point, because we could pay for all sorts of things. But could we organize ourselves to collectively socially distance? Well, in the end, in some places, yes, and in many places, no.

Could we roll out a vaccine? Well, we didn’t know ahead of time. Early in 2020, I remember sitting in meetings with science colleagues at Columbia and them saying, we’ve never done this before. We’ve never had a coronavirus vaccine. And we ended up with a whole suite of them. And that depended on the extraordinary skill of the scientists manipulating nature to produce that result. But then again, can we actually organize to roll that out to the entire world’s population? Certainly not at the pace that we’d want to.

So the book is really a kind of meditation on that, on the one hand, enabling discovery: that really finding the money isn’t the problem, and not just in the rich countries. But if the Fed settings are right, and you’ve got competent management, in fact, in much of the world economy right now, that isn’t the problem. The problem is the nitty-gritty. The problem is what economists call the — if you like — more the supply side, the real economy. That turns out to be where the problems are that we need to overcome.

Ezra Klein

I want to drill on this idea for a minute because it is simultaneously deceptively simple and not how we have been taught to think. So what you’re saying here, what Keynes was saying here, is that money can be invented in whatever quantity we want, really. The Federal Reserve can just create more of it. But things cannot be invented in whatever quantity we want.

So if you have 100 jet planes that you can make, and you only have, quote unquote, “money” for 80 of them, the government can create the money for 100. But if you want 120 jet planes, and you can only make 100, then you can’t. And so is the idea here that we’ve often gotten which side the scarcity is on wrong?

Adam Tooze

I think that’s a really good way of putting it. And part of the tension, part of the stress caused by discovering that, really, budgetary arithmetic is just really budgetary arithmetic, is that without it, we face the really harsh political questions of, could we agree to do this? And if we’re not doing it, it’s because you, the other people, our antagonists, don’t want to do it. You’ve got something else you’d rather do. Or it’s the humbling realization that, will it as much as we will, we just can’t do it. We just don’t have the technical wherewithal.

So it’s either the stubbornness of power or the stubbornness of nature that constrains us. And there’s moments when you would quite like to have the budgetary arithmetic back, because that presents these constraints in a more abstract form.

Ezra Klein

Well, it also makes a pretense of constraint. So you wrote a great piece in your newsletter, “Chartbook,” which I subscribe to and others should, too, about what you can tell by how much money we spent on the Iraq and Afghanistan wars without an inflationary problem, without a crowding-out problem. We just spent it. We didn’t pay for it. It’s trillions and trillions of dollars.

We clearly could do that, financially. Although, often, when people wanted to critique the wars, they pretended we couldn’t. They would say, you shouldn’t be building, as John Kerry famously said, firehouses in Baghdad when you need them here at home. I think he said Boston, if I’m not misremembering.

At the same time, I’ve covered economic politics and policymaking in Washington for two decades now, basically. And the number of tiny “tens of billions of dollars” programs I have watched die on the view that we can’t afford them are high. Right now, as we speak,

there is a fight going on in the Democrats’ reconciliation bill over whether or not they will make the child tax credit refundable, whether or not that will go to the poorest families who don’t file taxes. And the argument being made by some is, well, we can’t afford this entire bill, which, of course, costs a lot less, in its totality, than those wars did.

So this is what you’re getting at here, which is that it is convenient to say we can’t afford to do something, rather than to say, I don’t want to do something. But if you actually look at the way we act when we do want to do something, you can see that we often can afford it.

Adam Tooze

Well, exactly. And I think, for me, ultimately, the tragedy of the global war on terror is that that was the one thing that the American political elite, over a period of decades, could, in fact, to a certain degree, at least, agree to do together. Whereas everything else came incredibly hard. And when it came to everything else, the budgetary arithmetic rapidly becomes, as you say, penny-pinching. But when it came to that project, in fact, there was a high degree of unanimity, and the budgets tended to move upwards rather than downwards.

And so the criticism is not so much, really, the criticism of, well, we couldn’t afford this. Look at the damage this will do to the balance sheet in future generations. Though, there will, of course, be a bill to pay. But that bill will circulate within society. Other Americans will get paid, and some foreign investors as well. The real critique should be, the real question should be, how on Earth have we arrived at a point where that is the one thing that we can agree on doing on real scale, as opposed to all of the other projects that we need?

Ezra Klein

So you make an argument in the book that the pandemic was a moment where, at least for a period of time, we could agree to spend. And we did spend at a level we’ve almost never seen before. But even that agreement is now beginning to break down around inflation fears, around party polarization. And we’ll talk about all that in a minute.

But in the past, when the U.S. has decided to spend huge amounts of money, the debate at least hasn’t been framed as purely political. If you go back to 2009, 2010, there had been quite a bit of stimulus spending. Obamacare gets passed in 2010.

And the argument that emerges is this deep fear that we’re going to see interest rates rise, that bond-market vigilantes are going to come, people are not going to want government debt, or that the size of deficits is going to create this thing called uncertainty, and businesses will not hire. They’re not going to invest. They will not create or pursue new opportunities, because they’re going to be so afraid of the future taxation environment or the future spending environment that they won’t feel they have the certainty needed to plan.

And we didn’t really see either of those things happen then, and we aren’t seeing them now. So what went wrong in these treasured theories of fiscal consequence, such that there really was no interest-rate or bond-market or even obvious corporate reaction?

Adam Tooze

Yeah. Your description there summoned up memories of Paul Krugman’s famous confidence fairies. There was this idea that excessively large-scale action would send a tremor of uncertainty, as you say. Radical uncertainty was the great buzzword of the moment.

I think, first of all, it’s really important to say that we’re not there yet, right? So on that timeline you just laid out so nicely, the shock to 2008, 2009. There’s still the scrambling response. The argument over Obamacare begins. Dodd-Frank, likewise. And the austerity turn doesn’t happen until 2010. Another Krugman bon mot, it all went wrong in 2010. So if you run that clock on us now, we really need to worry about what happens next year. That’s where these debates will come.

And I would actually wager money that we will see very similar arguments like that made next year. The question is whether they will be allowed to win out. In Europe, you can already see the battle lines being drawn. There was a memo just, I think, by eight conservative finance ministers yesterday on precisely this issue, saying, it’s time for fiscal consolidation. We need to start worrying about how we achieve a sustainable, credible fiscal framework. And from credibility to confidence to uncertainty — that’s a short step.

So those arguments are yet to be had. But what we discovered in the moment was that you could issue truly epic quantities of debt, like we haven’t seen since World War II, without, what as it were, simple, neoclassical, standard economics. And one should not generalize about economics in a silly way, because it’s a huge discipline full of incredibly bright people. But let’s just accept there’s a schoolbook version. And it would say that if you borrowed a huge amount of money, you would expect the price of borrowing to go up. In other words, the interest rate would go up. And in fact, the opposite happened, right? A huge quantity of money was borrowed, and interest rates have fallen to extraordinarily low levels.

Now, I think it would be presumptuous for me to say that we know, or I know, the answer to why that has happened. It’s one of the great mysteries of economics at this moment. There are a variety of different theories out there, some very long-term theories. People see this as the result of the forces of secular stagnation. Or it could be to do with demographic factors.

But in the moment, in 2020, I think the shock factors are more important. And what we’re seeing is a huge quantity of household expenditure just stopping in its tracks in March and April. So money-market mutual funds, where upper-middle-class Americans put their spare cash, are flush with cash. So if the U.S. Treasury wants to issue short-term bills — not long-term treasuries, which they didn’t do much of in 2020, but short-term bills — there’s a huge appetite for them. They get snapped up by those kind of investment funds.

So in a sense, what the government is doing here is basically stepping into the void left by the contraction of private-sector activity. And if that weren’t enough, the other thing, of course, that’s happening is, the central banks in the U.S., but all over the world — they’re also just gobbling up huge quantities of government debt. They’re buying, on the whole, the Treasuries — so the longer-term, the 5-, 10-, 30-year paper, not the short-term bills which are being absorbed by money-market mutual funds and vehicles like that.

But the combined effect of, as it were, a surge in private saving and a huge sucking noise in the accounts of the central banks — the Fed bought 5 percent of the Treasury market in a matter of weeks. It’s absolutely staggering. That naturally, because it drives the prices of Treasuries up, and the inverse of the price of the Treasury is the yield, or in other words, the interest rate. So as that sucking effect happened in the Treasury market, yields plunged. And we had the topsy-turvy. It was a completely topsy-turvy effect.

And faced with that, bond vigilantes attempting to sell Treasuries because they weren’t feeling like holding them, or they were trying to punish the American government for pursuing a large, expansive fiscal policy — they’re just an irrelevance. It really is men on horseback — the vigilantes on horseback — meet the 101st Airborne or something. They’re just complete disproportion of force. So the entire vision of the ‘90s in which bond markets dominate government fiscal policy, which was very much a thing of, say, the Clinton administration, sort of evaporated.

Ezra Klein

This is really important. To extend your analogy a bit, the reason you weren’t supposed to send the 101st Airborne after the bond vigilantes on horseback was, you’d break the time-space continuum. You’re not supposed to fight the past with the future.

And the idea is that if the central banks began buying up the debt, they would spark, potentially, an inflationary spiral. People understood that central banks could create money and buy debt. And then, in some way, it was unlimited — the amount of debt you could offer — because you would never face a problem in interest rates. But it was believed that there would be all kinds of terrible consequences if you did this. And so in general, they didn’t do it. Or if they did do it, they did it in really weird backdoor ways.

But a story you tell in your book, which I’d like you to tell here, is that during the pandemic, there almost is a true crisis in the Treasury markets. And then the Fed steps in. And their stepping in stabilizes the situation, but it doesn’t set off the secondary crisis. So can you tell a bit more of that story, of what almost happened and then why it was unusual to see the Fed do what they did?

Adam Tooze

Yeah, this is really the hidden drama of March 2020. Lord knows we had enough to concentrate on in March 2020. But there was something truly terrifying happening in the most important financial market in the world.

There are three broad segments of the global financial markets. There’s the equity market, which is what generates so much of the headlines, the buying and selling of shares in Apple or whatever. Then there’s the private corporate-bond market, which is much more boring than shares, where companies like Apple issue debt, which carries an interest rate.

But the really crucial one, where all the macroeconomics, all the argument about inflation and central banks comes to bear, is the market for government debt, so Treasuries. And the most important of all is the American Treasury market. It is, depending on how you count it, somewhere between $17 and $21, $22 trillion worth of debt in various people’s hands.

And the thing about those is that they are like a cash piggy bank. So they yield an interest rate. But the market is huge. And normally, you’re able to sell these for cash more or less instantaneously. You can sell huge volumes of them, and your selling of them — that huge volume — doesn’t affect the price. So in any given day, you know what it’s worth. And you can then liquidate as much as you like. So this is the piggy bank of the global financial system. It’s the source of safe assets.

So that market is crucial for the stability of the whole system. And in 2008, what happened is that as people panicked in investment banks, in mortgage-backed securities, people ran for safety into this debt. And this has a stabilizing effect, because as people run in, prices go up, and interest rates go down. And that’s exactly what the economy needs at a moment of stress.

The terrifying thing that we saw, really starting in the second week of March, starting on Monday night, is that, first of all, that relationship broke down. And people were not just selling equities. They were selling Treasuries as well. And when we say people, what I’m talking about are foreign managers of large dollar-exchange holdings.

Not to get out of dollars, but to get out of Treasuries into cash, investment funds of various types, which, again, invest in a range of things — they had their clients panicking, trying to pull their funds out. It was very difficult to sell shares in those days because equity prices were collapsing. So they sold the next best thing, or rather the better thing, which is easy to turn into cash, which is Treasuries. So they were piling into the market.

And then there were a bunch of hedge funds which had done very complicated trades depending on the future development of Treasury prices, which were now completely upended by this. And hedge funds speculate, so they borrow to own these Treasuries. And when their prices go AWOL, those deals unravel. And then you need to sell quickly because you don’t actually have the money to hold the Treasuries in the first place.

And those three forces together created true turmoil in the Treasury market. So as share prices fell, Treasury prices fell, too. So interest rates were going up. And as the panic began to spread, something even more terrifying began to happen, which is that if you wanted to sell Treasuries, you couldn’t find ready buyers at whatever the prevailing price was. In fact, it was quite difficult to find buyers at any price.

I was talking to somebody in Hong Kong the other day who was telling me that he will never forget, for the rest of his life — and this is how significant this is for financial-market actors — the moment when he tried to sell a couple of billion dollars of U.S. Treasuries and couldn’t find a buyer. Because what that tells you — if there’s no buyer for U.S. Treasuries, as this spins out over the next couple of weeks, the buyers for practically everything else will evaporate, too, because in the end, the Treasury is, as it were, the thing that’s almost as good as cash. And that basic relationship was breaking down.

And if it does fundamentally snap, the problem is that all portfolios in the world are anchored on piggy banks of Treasuries, which are used as the cash equivalent. So you can hold the less-liquid stuff, the stuff that’s harder to turn into cash, because you have this stash of Treasuries, which you can instantly turn into cash. If you can’t, any longer, make that transformation, then the entire portfolio is misbalanced. And really, you have to offload the rest, too.

And so the fear was that this tension in the Treasury market would basically just blitz the entire financial system in the United States and globally. The tremors spread to London in the third week of March, where, basically, the gilt market, which is one of the oldest in the entire world, stopped functioning, according to the Bank of England. And there was stress in Europe as well.

And the answer is — and there’s only one possible answer to a crisis like this — is for a buyer of last resort to simply say, look, anyone want to sell Treasuries? We’re here for you. Here’s the cash. And the only agency that can do that is the Federal Reserve. And so from late March, they were buying a million dollars of Treasuries and mortgage-backed securities a second. They were buying over $70 billion a day for several weeks. And this is just an absolutely shocking intervention in a market that shouldn’t need this kind of stabilization.

Ezra Klein

On one level, that’s very convenient. If the Federal Reserve can pop in and buy as many Treasuries as the Treasury Department wants to offer, that means, functionally, the Treasury Department can issue as much debt as it wants to, and we have the money to do anything we want. So tell me, traditionally, why people did not want the Fed to do this.

Adam Tooze

Well, because what you’re doing is just pumping huge quantities of liquidity into the global financial system. And if you have a simple quantity-theory type view of inflation — in other words, the “back of the envelope” idea that inflation results for more money chasing the same quantity of goods — then this should basically be the trigger for inflation.

And this has been one of the great mysteries of the global economy since 2008, is that we’ve seen successive waves of liquidity pumped into the global economy. And rather than inflation, our problem has, in fact, been lowflation, or even deflation, in the worst case. And that, indeed, was what the central banks had been fighting in 2020, is a slump, the fear of the global economy contracting and prices falling, as they did spectacularly, for instance, in the global oil market in April, where, famously, the price went negative for a day.

Ezra Klein

But that is not the problem now. And this is going to connect a few parts of our conversation. You were saying, a few minutes ago, well, we’re not on the timeline yet by which we began having the austerity fears in 2010. And you’re right. And I think we’re getting there. But we’re not going to get there over deficits and interest rates. It’s going to be over inflation.

We are seeing inflation. We’re seeing concerns from center-left economists like Larry Summers, like Olivier Blanchard, like Jason Furman. There is now an argument as to whether or not it’s transitory inflation, it’s just going to ease up once we get more cars on the market and semiconductors out, or whether or not it’s going to become built into expectations.

So it does seem that we are seeing at least part of one of the feared consequences. And the question is how much to fear what we’re seeing. How do you read what’s going on with inflation in the U.S. right now?

Adam Tooze

Well, I think one can see people joining the dots in those ways. And I actually like your political analysis. I think you’re absolutely right. That is the way this argument is going to run. It’s already begun running, basically.

Ezra Klein

Yes. You already see Joe Manchin, the senator from West Virginia, and Kyrsten Sinema. They are using inflation as an argument for not doing the full, at least, $3.5-trillion budget-reconciliation bill. It is already being used to block further investment.

Adam Tooze

Same in Europe. So inflation rates in Germany popped over 3 percent, and there was a lot of hawkish talk there immediately. On the substance, I think this is not a very convincing analysis. It’s not very convincing, because there are obvious drivers of these spikes in prices, which are from the supply side, on the whole. They are completely out of proportion. In other words, they’re far too small relative to the scale of the liquidity we’ve injected.

And then furthermore, I think there’s every reason to think that they will ebb away over time. Already, in fact, we’re seeing signs that the really rapid surge in inflation that we saw in some sectors at the beginning of the year is decelerating. So month-on-month inflation rather than year-on-year inflation is now much calmer than it was earlier in the year. So if you take the year-on-year measures, you are, as it were, lagging. You’re not quite capturing how rapidly things are calming down.

So I think the jury is out. Obviously, it’s too early to tell. But there is a fundamental reason, I think, beyond, as it were, the empirics, for thinking that there’s very little reason to fear a return to 1970s-style inflation dynamics. And let’s face it. That’s the last time we actually had substantial inflation in the United States or Europe.

And the difference is political economy. In the ‘70s, we had the mechanisms of a wage-price spiral. In other words, we had powerful bargaining partners on each side of the labor market — organized labor on one side, capital on the other. And they became directly involved in price and wage setting. And the entire logic of inflation had a dynamic of acceleration, or at least sustained increases in wages and prices.

This is where the economist preoccupation with expectations really had grip, because you could study wage-setting and price-setting in the ‘70s and see the way in which negotiators would explicitly invoke the track record of inflation to date as a justification for further forward-looking increases in wages and prices. There were even cost-of-living adjustment clauses that built this in automatically.

And we know that the power balance in labor markets has radically shifted. In fact, somebody like Larry Summers started 2020 by publishing a rather brilliant paper on precisely this point. And so it’s particularly surprising, I think, to find somebody like him now arguing what seems like the other side of the same point.

Ezra Klein

Can you say what he said in that paper?

Adam Tooze

Well, he was arguing there that the fundamental unifying fact — if you just had to point to one idea, the grand, unifying theory of political economy, in the current moment — is the shift in the power balance between labor and employers, and that it helped to explain profit margins. It helped to explain inequality. It helped to explain the tendency towards low inflation that we see across most of the advanced economies.

And now, all of a sudden, now we’re in 2021, and he’s concerned about inflation. And yet, the power dynamic, of course, has not shifted. If anything, the position of workers is, in total, weaker than it was before. Now we have an administration which is in the business of trying to shift that parameter.

So you could add that in as a political argument. In other words, the markets reflect the fact that they no longer trust the conservative biases of the Biden administration. In fact, the Biden administration has been quite forward about saying that it wants to shift the power balance. But I think to accord that — the efficacy that that would imply — I think, is to exaggerate. And as you say, the counterargument is operating very powerfully already. In other words, there’s x, y, z we can’t do, because, look. Inflation is happening.

Ezra Klein

And so I want to slow this down just a little bit. So one of the arguments being made here is, in the ‘70s, you have stronger unions throughout the economy. You have contracts being set. And one thing you begin to see built into contracts is wage increases tied to inflation. So that becomes very clear how you get a wages-prices spiral. They begin to go up automatically with each other. But there isn’t that dynamic now. And whatever you might say about the Biden administration, they actually have not passed any legislation that is going to lead to a rapid increase in unionization in the next year or two.

But this then cuts into this whole question of expectations. And I do find, traveling around the inflation debate, that how different economists and people think about expectations becomes really important. And so let’s hold on Larry Summers for a minute, because one of the arguments he’s been making is that it is the very things the Fed is doing that will change inflation expectations.

And I’ll quote here from an op-ed he wrote in the Washington Post where he says, quote, “the Fed used to believe in preempting inflation. Then it announced it would not act until there was evidence. Now it is in a posture of not even beginning to reduce the most generous monetary accommodation in history until presented with conclusive proof of excessive inflation.” And what he’s saying there is, the Fed is doing all this quantitative easing. There is evidence of inflation. But they are treating it so differently now that you have to assume that that is going to change how the market thinks the Fed will act in the future, and thus begin to create more inflationary expectations. What do you think of that argument?

Adam Tooze

It’s an interesting argument. It accords huge power to the Fed. That’s not a plausible story in the economy at large, when you look at price-setting and wage-setting at large. But when you invoke the market, as you did there, what we’re talking about is the bond market.

And I think it’s definitely true that in the loop between the Fed commentators, like Larry Summers and other journalists, and the bond market, there is a kind of extraordinary hall of mirrors in which the Fed’s announcement — that it intends to allow prices and inflation to go above the 2 percent target to offset undershoots — induces a kind of idea of a regime shift. But in a sense, you’ve got to go back to the beginning here. The whole point of the Fed’s announcement was to induce a regime shift, because in the real economy, they judge that protracted periods of low inflation are a very bad thing. And so what, precisely, we need to do is encourage the idea that the Fed, broadly speaking, favors slightly higher inflation rates. That’s the entire point. The argument gets serious when you suppose that if you do achieve that goal, it then becomes runaway.

So the Fed’s announced intention is to try and reset inflation expectations to a slightly higher level. The objection to that, I think, is a serious objection — not when you say, well, they’re trying to reset inflation expectations to a higher level, because the Fed pleads guilty to that — but if you say, ah, and then I see a dynamic which could produce escalating inflation, ever-greater tension, panic in the bond market. That would then cause the necessity for some sort of very painful action, and that would be very bad. I think that’s where the argument is.

So then the question is not, will this reset inflation expectations? The intention is to do that. The question is, will they become unstable? Unanchored is the phrase that’s used. And I don’t really see why anyone should think that. And if you look at the bond markets, which, through their pricing of interest rates, give us an idea of what the really big money thinks inflation is going to be, we can read it off the interest rates that you get for investing at different maturities. There’s not much evidence in the bond market for that kind of panic.

And the Fed itself, which, after all, is one of the great centers of data processing about the economy, is also fairly confident, I think, that the inflation shock is transitory. They’re not totally on a consensus about that. And there are bits of the Fed say, the Dallas Fed would like to go begin tightening a little bit sooner. But nevertheless, their general position is one of being reasonably relaxed.

So I think that’s the gamble, right? The gamble is, yes, we want to get to a slightly higher level of inflation. And we think we can do that without this becoming runaway. And the good reason for thinking it’s not going to become runaway is, the fundamental political economy is really different, and the position of workers is much weaker. And that’s actually kind of a bad thing, really. And if it did, in some way, in some degree, shift the advantage in favor of workers, well, that will be a good problem to have. And we’ll address it when we get there.

Ezra Klein

So one of the frustrating parts of this debate, to me, is that inflation gets talked about all as this one thing. And to go back to what you’re saying, there is this question of the productive capacity of the economy.

So something we’ve been seeing in the inflation now is that we’re in trouble on cars because we just need more cars. And there was a supply shock during Covid to key components. But you don’t see a lot of discussion about what we want the economy to produce, and how to make it possible for it to produce that much. Instead, we really talk in these generalities about money supply and inflation and the economy itself.

And yet, when I talk to economists, they will tell me, of course, what we are ultimately talking about is the productive capacity of the economy. But it does seem to me that if you never talk about that in the specific, or rarely do, and instead use these aggregate metaphors, you’re going to end up with very different solutions and very different goals than you would otherwise.

Adam Tooze

Well, I think that’s right. And I think it’s one of the things that 2020 exposed, is that we have a set of conventional assumptions about what makes up the economy, what makes up prices, in general, and how they’ll respond to impulses in general, like an expansion in the money supply. And those assume a certain set of particular structural relationships, a particular set of industrial patterns, a particular pattern of production.

But when a shock like 2020 comes along, which is incredibly idiosyncratic, all of those assumptions are disrupted. And we’re forced to sit back and ask ourselves what we actually mean by something like inflation, what we actually mean by the economy. One of the huge surprises of 2020 was the highly selective way in which the shutdown operated and took out dentists’ surgeries and schools and the entire service sector, which aren’t normally part of the conventional story of a business cycle at all.

And on the flip side, on the recovery now, we’re trying to parse whether or not it really is inflation, if what’s happening is that the price of lumber and then the price of used cars and then anything that has chips in it surges, whereas other prices really aren’t moving, because the movement seems so wildly idiosyncratic.

And economists will say, generally speaking, OK, what we’re talking about is the average moving. But they don’t have elaborate means. It’s not taught. Undergraduate economists, graduate school economists are not sat down with an image of what makes up the U.S. economy or the world economy sector by sector. And they don’t learn lessons, then, separately about each one of those, because these are general sciences. If you want to know about agriculture, you go to ag school. If you want to know about chip supply, you presumably become an industrial engineer or an electronic engineer or somebody who specializes in supply-chain logistics. It’s really the knowledge of engineers, not the knowledge of economists.

And in some ways, the most radical demonstration of this was the vaccine story, that the entire macroeconomic outlook hinges on the development of a handful of products and their supply chain. It’s really not an exaggeration to say that the entire outlook hinged, through the summer and the early fall of 2020, on a handful of labs around the world running tests which, altogether, would generate an output maybe worth a couple of $10 billion, but trillions of dollars if the world’s economy hinged on it.

So we’re exposed to a, for want of a nail, that famous nursery rhyme. For want of a nail, the battle was lost. That kind of logic becomes absolutely dominant. Without those bottleneck things, without that vaccine, without those microchips — whatever it is — the whole, which we like to generalize about, simply doesn’t function.

It also then becomes a serious problem of valuation. What is a working vaccine worth? Do we decide that by what its cost of production is or what it would command in the market or what value it delivers in terms of stabilizing the economy? That’s been one of the disorientating effects of this shock.


Ezra Klein

So I want to bring up something here that may not, at first blush, seem deeply connected to what we’ve been talking about. But I think it is, which is how the boundaries of acceptable thought are policed and defined within the economics profession. And I want to go back here to the line we began with, that “whatever we can do, we can afford.”

This is a line that I have talked about with some leading center-left economists. And they’ll tell you that, of course, they know that. They’ve always believed that. Modern monetary theorists love quoting this line. But they will say, oh, the modern monetary theorists have nothing new to say. That’s just an old Keynes line.

But I will say that, having covered economics for a long time in Washington, that was not a line that used to get quoted to me. And there’s a lot like that, it seems to me, in economics, where if you dig in deep, what you either find is an indeterminacy that could go in many different directions, is a principle that is actually quite radical, like whatever we can do, we can afford, or a lot of disagreement.

But then when the economists come into the political realm, they begin trying to add their theory of how the politics will interpret something into the way they talk. And then it gets much more narrow. And then they become much more nervous about the way they’ll be interpreted, heard, et cetera.

And that, to me, is where a lot of the reliance on things like headline inflation numbers, budget deficits, interest rates comes from. Those are signals that can be a problem or may not be a problem. But it’s been a useful shorthand to just say, we don’t want you getting out of control, and so we’re just going to watch this pretty closely. And if it gets over a certain line, we’re going to slow the whole thing down.

And that seems, to me, to be happening here. I think there’s a lot of fear that if it becomes known, if it becomes believed that whatever we can do, we can afford, that that will be used irresponsibly, and then in being used irresponsibly, will create a lot of real problems for people, like runaway inflation. The idea will be, well, of course we can just give everybody a universal basic income. And then it’ll turn out, that does create a bunch of inflation, and there will be problems. And yet, I don’t know that many economists who disagree with the line.

And so this seems, to me, to be a point of real tension right now. A bunch of different things from the pandemic to the way social media has evolved to just the way political discourse has evolved are blowing up people’s control over the conversation. And that is exposing some nostrums that weren’t really true.

And then the profession wants to say, no, we knew all this. But in fact, they haven’t really been saying it, because they’re a little bit afraid, in my view, of what people will do with these ideas if they get hold of them, if they’re not protected by the responsible economists placing boundaries on what is and isn’t sober-minded policy-making.

Adam Tooze

Yeah, irresponsible was the word that Larry Summers, I think, used repeatedly with regard to the various proposals coming out of the Biden administration. I think that’s absolutely right. And one can see the professional logic of this. One can see the concern of a profession of extraordinarily high status to police the boundaries of who gets to speak in their name.

But I think, also, one could offer a more sympathetic reading, which is that the situation is genuinely opaque. We are in a broken play here. We’re in a gray zone. There’s no longer one best way. There’s no longer a Washington consensus that you can easily subscribe to. There’s a sort of maneuvering. And it’s somewhere between one size fits all, which we’ve abandoned, or one policy fits every situation, which we’ve also abandoned, and anything goes. And figuring out that space is what we all have to do going forward from here, I think.

And it isn’t surprising, I think, that, as it were, the defenders of the authority of a discipline of the kind of potency of somebody like Larry Summers are allergic on these issues. Because they fear mischief. They fear people, frankly, who don’t really understand what they’re talking about, in their view, as it were, acquiring authority.

But I think, underlying that, is actually a situation of profound uncertainty about questions like, why are interest rates so persistently low? Why is inflation not taking off when the money supply has blown up? What is the best way for an emerging-market economy to handle the stresses of globalization? Once upon a time, perhaps people had a sense they actually knew the answer. That’s just, I don’t think, any longer the case.

Ezra Klein

I think that’s a really important way to put it. And I want to say this and recognize it’ll get me in a little bit of trouble. I am a lot more sympathetic to Larry Summers’s take on some of these issues than others I agree with are. But I’m not always sympathetic to how he presents it. Which is to say, I agree with what you just said, Adam, which is, at the core of a lot of these economic policy questions right now is profound uncertainty.

For instance, I would say the economics profession has just been devastatingly wrong about what effect different deficit levels would have over the past 20 years. I think you simply have to look at that, given the credentials of some of the people making these arguments, as, in aggregate, a record of a lot of failure. Not literally everybody has failed. Some people have gotten it right. But there was just a lot of warnings that now look completely ridiculous, a lot of worries about things that didn’t happen.

It’s pretty clear to me, at this point, that the two things that are a problem that could emerge from deficits, one being higher interest rates and the other being inflation, economists just don’t understand well enough to predict. But I don’t quite take that view where some of my friends on the left do, which I would say is in the direction of free for all.

The fact that there is uncertainty doesn’t mean bad things can happen. Bad things can happen. Inflation could begin to bite in a real way. It could move in a way we don’t expect. The Fed could become highly politicized very quickly. And then the markets react in a certain way to that.

And the thing that is frustrating to me is that I don’t see a lot of strong communication of real uncertainty from the economics profession. Because it’s one thing to say, I think we should be cautious because we are in territory that we don’t understand, and things can get out of control. And instead, what I see is very, very strong opinions from just different directions.

But nevertheless, these are hard questions. And I don’t know. I take this as actually quite a bit of the fight between the modern monetary theory types and the new Keynesian types, whereas I think the modern monetary theorists often say things that, at this point, are not that different than the new Keynesians. But the modern monetary theorists are more comfortable that they’ll be able to slam the brakes on if just creating a lot of money out of thin air gets out of control. And the new Keynesians are not comfortable with that.

And so, fundamentally, they have a disagreement over how they’re going to handle the risk of inflation that ends up sounding like a disagreement over whether or not money is an invention or not. But the truth is, neither side knows. And that’s also just a scary thing to know from the outside, right? You’d like to think that people have their hand on the wheel here and they’ve all got answers. But they, at least in my view, at this point, truly don’t.

Adam Tooze

And there is the additional dimension, I think, that it’s very important to not think money simply along the axis of, if you like, the state in the bond market, but to also figure on private finance. We mustn’t lose sight of the fact that the biggest shocks of the last 12 years were the banking crisis of 2008, in the North Atlantic system as a whole, and then this disruption in the Treasury market, which was intimately tied up with new forms of market finance.

And so beyond, as it were, the classic terrain of public finance — government decisions about spending and taxing and so on, and the debt that’s run up, and the question of whether that’s a burden — and the classic macroeconomic topics of employment, unemployment, inflation, there is also this looming, cliché elephant in the room of the flywheel of finance, of private finance, into which government debt, which is the hotly contested topic in those two other fields, really serves as the raw material.

The government debt serves as the key medium through which private speculation operates. It’s leveraged on government debt. And that’s actually the reason why the central bank stepped in in the spring of 2020. They weren’t doing it to monetize a Keynesian stimulus program. This wasn’t World War II.

It kind of looked like it, if you viewed it from a certain angle. But it really wasn’t, because the central bankers will go to their graves swearing, insisting, that no, they didn’t do this to support the efforts of national governments to fight off the crisis. They did it to prevent financial instability, by which they mean to preserve intact this structure of private finance that pyramids on top of that public debt.

And that’s another dimension which — it just wouldn’t be fair to say, at all, that economics has nothing to say about it. But it was blindsided by it by 2008 — is, in a sense, scrambling to catch up with the dynamic, the virtuosity, of that private financial engineering. Which, again, in 2020, we didn’t see the banking crisis. But we did see, in some senses, an even more fundamental disturbance in that Treasury market.

Ezra Klein

I will go to my grave defending TARP. You have to stop things that are too big to fail from failing. But it is a place where I get very populist, because we do seem, to me, to have one financial political system for banks and financial institutions, and another for people.

And I am not making the argument you will sometimes see on Twitter where it’s like, we gave banks however many trillions of dollars, and all the people got was a $1,200 stimulus check. That’s not true, as a matter of policy. But it is true that when the Fed wants to, it can simply open the spigot in the most profound of ways for the banking system. And there is not that same ability to say, there is an emergency for households, there is an emergency for people, because Congress is a much harder-to-move institution.

And it is just weird that we have an institution of checks and balances and filibusters and committees and divided government that operates when you need to ask, should people get help in their everyday lives? And then an institution functionally just run by Chairman Powell and the Fed board that operates around the question of, well, do we just need to begin buying up all the debt anybody wants to sell us? And even if it is better they do that than not, there’s just no doubt that it is a profoundly unfair way to run the system.

Adam Tooze

And it compounds itself, right? The added twist in that tale is the paralysis of fiscal policy because of the complexity of politics. And I think we should be frank about it, right? The obdurate objections from the right to measures which folks like us, on the progressive side of things, think are just essential — that paralysis means that, for a long time, for much of the time, the only game in town, in terms of active economic policy, is the Fed.

And the Fed’s interventions have the effect of not just underwriting speculation to date, if you like, but further accelerating and exacerbating and forcing the process of financial accumulation and growth and profit-taking. So it’s really a very difficult and deeply entrenched structural bias.

No one actually has to necessarily want any of the effects it produces. You don’t have to have a conspiracy of people determined to hand trillions of dollars of capital gains to the top 1 percent of wealth holders. But that, in an emergency, often turns out to be the only thing you can do. And then you expect some sort of massive trickle-down effect to operate from there. And the only way out of that impasse is some sort of structural reform, which is, of course, profoundly unlikely for all of the reasons that much more modest measures of reform are difficult to get through.

Ezra Klein

Well, it also creates different kinds of pressures. So this is an argument I’ve been making forever. I wrote a Newsweek piece about it more than a decade ago. But something I’ve always tried to say is that an issue with gridlock — gridlock in the way we think about it in Congress — is that it’s actually a very good metaphor. As somebody who grew up outside of Los Angeles, when there is gridlock on the freeway, people take side streets.

And one of the things gridlock does is it begins to put pressure on the institutions that are less gridlocked, even if they are less effective, as a way to get to a policy goal, to act. So you have more pressure on the executive to use executive orders for things that maybe one would not have thought executive orders could be used for before. That you saw very clearly in the Obama administration. You saw it in the Trump administration.

There’s pressure on the Supreme Court to do, through decision-making, what the various coalitions cannot do through legislating. You see that on abortion politics. You see that on marriage equality. You see it on gun issues, all kinds of different things.

But you also don’t see it increasingly in the Fed. And this is something I’d like us to talk about, because Jerome Powell, despite being a Trump appointee, has been, I would say, backing up 10 years in the conversation, just an exemplary Fed chair, from a progressive standpoint. If you go back to where progressives were on the Fed 10 years ago, they would feel great about Powell. Not worried about inflation, really. Very committed to full employment. Seems to be pretty committed to a hotter economy where there’s worker power.

But there’s now pressure from the left to not reappoint him, because they want, on the one hand, more done on financial regulation, which we could talk about. But I think the real issue is, they want the Fed to act as a big player on climate change.

And part of the reason they’re desperate to have the Fed step in on climate change, treating it as a systemic risk which it now needs to begin evaluating banks and other players on, is because they are worried, correctly so, that Congress will not act on climate change, certainly not with the power they need to. And so that makes the Fed a much more important game in town, if you could get them off of the sidelines on this.

I’m curious how you see that demand. Do you think it would be a good idea for the Fed, under Powell, to say, yeah, climate change is a huge problem, and we’re going to begin to build it into our financial regulations the way we backstop markets, whatever?

Adam Tooze

So I’ve been of two minds about this. I was one of the people early in the field arguing that central bankers needed to take climate change more seriously. And what we’ve seen in Europe is the wholesale adoption of the green agenda by the ECB against, of course, a radically different political backdrop on the climate issue, specifically.

Broadly speaking, on social and macroeconomic policy in general, I agree that Powell has been an extraordinary surprise. But it’s also undeniably the case that he has been slow to act on climate. But I think you have to ask why.

I’m reliably informed it isn’t because Jerome Powell doesn’t care about the environment. I think he does. But I think he’s acutely conscious of a variety of different constraints operating on the Fed in a way, perhaps, that they don’t operate on the ECB. And the first is that the Fed’s mandate is, in some ways, not quite as capacious as that of the ECB, which is really setting — I’m invoking that because they’re setting the pace, really, on this issue globally.

Ezra Klein

ECB, just quickly, being European Central Bank.

Adam Tooze

European Central Bank. And the central bankers are a truly cosmopolitan network. They benchmark themselves against each other all the time. The Fed has a full employment and an inflation mandate and a financial stability — it’s understood that’s its mandate, too. But it’s not obvious, really, how you shoehorn environment into that. You could maybe do it through a community’s mandate. You could maybe do it through full employment. But it’s a bit of a reach.

They also, of course, know that there is profound political opposition to doing this. They know that they will take a beating in Congress if they make moves in this direction from the usual suspects, from the GOP. And they’ve already been quite vocal demanding that the Fed cease and desist politically explosive research on climate issues which they believe is contentious and risks politicizing the Fed. Their words, not mine.

Then there is the issue of what instruments the Fed would actually use. And for a central bank to be really dynamically active in climate policy, you want it to be doing what the European Central Bank does or the Bank of England or the Bank of Japan, which is actually buying lots of private debt, because that then gives you the leverage of saying, look, we’ll disqualify this as collateral if it’s dirty, if it comes from fossil-fuel pollution.

And the Fed, during the crisis in 2020, indicated it might, but de facto has not bought a substantial portfolio of private debt. So it’s not immediately obvious, beyond financial regulation, where the Fed would go.

And then finally, and nontrivially, the Fed is enmeshed in a financial system with big beasts in it. And America’s big financial players are the largest global backers, outside the oil states themselves, of fossil-fuel investment. So if you push in this direction, you’re going up against the likes of JP Morgan, which is, hands down, globally, the largest fossil-fuel investor.

And I think, for all of these reasons, it’s a little unsurprising that the Fed, under Powell, is leery of moving rapidly on this. That should make one impatient. It’s frustrating. If climate is your central preoccupation, then you want all hands on deck to be moving. But then think about the broader political constellation in the U.S. and consider, do you really want to pick a fight on the Fed over this?

And it seems to me that you could quite reasonably argue the case that you were implying, I guess, which is that, on so many issues, Powell has proven to be highly effective. If we replace him with Lael Brainard or somebody of that type who is more likely to come around to the green side, we make the Fed into a huge political issue, politically, for the GOP in the midterm season. They will be able to say that we’ve politicized the institution. They can come after us on that side.

And the main thrust, given the limitations of what the Fed can actually do in climate policy in the U.S., cannot lie with the Fed. It has, ultimately, to lie with infrastructure spending and regulation. And so it’s critical, presumably, if that’s the way, as it were, we’re going to use policy, not to pick a fight over the Fed that we don’t need.

So for this rather complicated reason, I’ve ended up coming down on a much more — eventually I would agree with you. I think it would be a mistake not to reconfirm Powell, not because he is the champion of green policy — and he hasn’t been, and for all the reasons, it’s unlikely he will be — but because we have to decide, tactically speaking, what the most likely route for success actually is. And I don’t think it’s this way.

Ezra Klein

Let me try to make a stronger argument for the people who want the Fed to play in this more aggressively, and then make my argument for why I’m a little skeptical. If you force me to choose right now, I would say reappoint Powell. That is a fight you don’t need. And you could create more problems than solutions if you win. But let me start at the beginning. The view is, the Fed is a regulator, among other things, of systemic risk. And it is ridiculous, on some level, to not say that climate change is a systemic risk.

There’s a great paper that came out a while ago, from a central-bank consortium, called “Green Swans,” which people can look up — and I used it in a column a while back — all about this. It is a profound kind of risk that could lead to all kinds of assets needing to be repriced that could undermine not just companies, but even countries. It is a profound risk to prices in the future. Of course. Of course it is. So then what could the Fed do? Well, they could begin to say, well, as a bank, if you are not divesting from things that expose you to climate risk, we are going to judge you as highly risky and begin to regulate you in that way. Or, you’ve made the point, Adam, that maybe they can say, well, the Fed does a lot of purchasing of government-backed, mortgage-backed securities. And so maybe they should begin only purchasing these mortgage-backed securities if the mortgages are for houses that are up to a green building code, or for buildings up to a green building code.

There are things you can imagine doing. But, when you begin to think about the Fed acting at that level, really going all in in a way that might make a difference — because I don’t think just giving some speeches on how climate change is a risk will make a difference — then you’re talking about something really different.

Lael Brainard is not going to do that. I have covered Lael Brainard in Washington for years. I’m not saying I know her super well, but she is a cautious economic policymaker. She always has been. She might be, on the margin, a little more green than Powell. But she’s not going to turn the Fed into an instrument of climate policy in this way.

But also, one of the things that has really saved the political system for some years now is that a Republican Party that has been irresponsible in functionally every other respect keeps making pretty responsible Federal Reserve appointments — Ben Bernanke under George W. Bush, Jay Powell, shockingly, under Donald Trump. There’s no reason for Trump to kick Yellen out. But if he was going to, Powell was a great replacement.

And central-banking policy has simply — it has been a rare space that is not that polarized. And if you polarize it by bringing in other issues that are much more polarized, then the right is going to begin judging candidates across this other issue set. And you’re going to begin to find more doctrinaire candidates.

If it becomes very important that whoever is running the Fed also doesn’t believe climate change is a big deal, then people like Ben Bernanke and Jay Powell in the future will not be plausible candidates, because they are not that kind of conservative. They are not that kind of Republican.

And so that’s my worry: that you’re not going to get in somebody who’s going to do all that much on climate change, but in adding that to the vetting process, you’ll begin to create a situation where, on the right, you get much crazier candidates for the Fed because you have to fit the broader set of right-wing concerns. And if we had some of these much crazier candidates in during the 2008, 2009 crisis, the 2020 pandemic crisis, I think what could have happened becomes really scary.

Adam Tooze

I completely agree with you. Let there be no misunderstanding. I’ve literally been called out by the head of the German Bundesbank as a green hawk on central-bank policy [in an] exchange that we had in the fall of 2019. So I fully believe that central banks need to play their part in the green-energy transition, and clearly that the high road to doing that, given their existing portfolio and brief, is by way of regulation.

And obviously, they should be insisting on systematically stress-testing all major financial institutions against some sort of Paris-conforming scenario. In other words, what happens to your portfolio of investments if we are on a path to decarbonization that gets us to net zero by 2050? I take that as read.

And furthermore, I think, whether with Lael Brainard or Powell at the helm, I think the Fed is moving in that direction, right? That inside the Fed, it’s quite clear that they’ve already got several committees working on this problem. It’s such a no-brainer. It’s easy to do. It sits within what they already do. And to reiterate — and we both agree on this — there’s not much else that the United States central bank is going to do in this direction.

So then the question is purely tactical. The question really is, as it were, how do you create a space in which the Fed can, A, not become a problem, B, go on doing the good thing it’s currently doing, and C, under the radar, which is where this is probably going to have to happen because the GOP watches this stuff — they literally read the research papers that come out of the San Francisco Fed, for instance, one of the more liberal branches of the Fed. Some of this is going to have to be, to a degree, surreptitious. It’s going to have to be infrastructural political change, to use that unfortunate phrase. It’s going to have to happen within the deep state in the same way as, for instance, the Pentagon went on working on climate-change issues under Trump.

So the only question in debate here, the way that you framed it in this conversation, is, Powell or not, on green criteria or not? And my view would be, well, Powell is certainly a reasonable option. And to reject him on green criteria would be to shoot ourselves in the foot.


Ezra Klein

You’re currently working on a book — I think you were working on it before lockdown, and presumably, now you’re back to it — about the history of energy policy. And so I’m curious, in your role as an economic historian now thinking about energy policy, what have you learned so far? How has your view changed?

Adam Tooze

I think the fundamental issue that we need to understand is why, A, this problem came to be posed as a problem. I’m trying to stand back, as it were, from the frustrations of the moment and try and understand how we ended up in what feels like such a profound and agonizing impasse.

And the way this is conventionally framed is, people won’t listen to science, because they’re self-interested and basically shills for Exxon. That’s very crudely put, but that is one way of thinking about this problem. And I don’t think it goes far enough.

And we need to think in a more structured and deep way about why our societies are capable, on the one hand, of formulating huge macroscopic problems — a bit like, for instance, the proposal to vaccinate the world with vaccines we didn’t have 12 months ago — and then not capable of, as it were, moving to the next level of actually doing it, because I’m, broadly speaking, of the belief that the energy transition, though it’s a dramatic engineering proposition, and though, at some sort of almost metaphysical level, it’s very hard to imagine transitioning to a world dependent on much more diffuse energy sources — the wind, the sun, and so on — from an economic point of view, which is where I tend to start, it’s not actually the most spectacular transition, well, certainly not ever. It doesn’t compare with the kind of effort that we made during wars. There’s, I think a terrible temptation and a very misleading temptation to compare it in that way. And it’s perfectly within our reach, in a sense.

And so if you start from that perspective, the question is how we might nevertheless fail to make those steps. And that is the conundrum that I’m really struggling with. And Covid, in the 2020 world, which this book “Lockdown” is trying to grapple with, has, in a sense, for me, almost deepened it.

I am haunted by this failure to create and to implement and to properly resource a global vaccine program. It is such a staggering failure of rationality. The program that could deliver $8 trillion of benefits can’t raise $50 billion in funding. If we are failing with that, on that, now, then a thoroughly manageable problem of energy transition might, in fact, be beyond our reach.

Ezra Klein

I try not to let the depth of my pessimism here out of the box too often. But I will say that, for me, the coronavirus experience so deeply affirmed my worst fears about the politics of climate change. Which is, in the models of many climate-change advocates, the mental models people have — not advocates for climate change, but advocates for doing something about it — I think there’s a view that, eventually, this will get bad enough that of course humanity will have to act. There will be big enough storms, big enough droughts, whatever it might be.

And I think what you saw during the pandemic, which is a punctuated period of suffering of unimaginable scale affecting everybody all at the same time with death tolls in the millions, is that the amount of suffering people will get used to, and still not really be willing to sacrifice, is astonishing.

The number of people they will allow to die a day — not just here in America, but to say nothing of globally — and do nothing about it and, in fact, demand that they don’t want a vaccine mandate, they don’t want to have to wear a mask, they don’t want to have to show a test result before they go into a restaurant. If you believe there is some bad-enough line we could cross on climate, we’re not crossing it any time soon. And it’s not even clear that it does exist.

Adam Tooze

I completely agree. And 18 months on, it’s as though it’s dwindling into significance. So I completely agree that the simple story that there’ll be something bad enough to suddenly change your mind ... it could happen. But I no longer have any confidence that I understand how it happens. It’s going to be really erratic, and it will depend crucially on mobilization and the way in which whatever disaster happens is pitched and framed as to whether or not it does have that liberating capacity.

Ezra Klein

Something I’ve come to over the past couple of years and that I believe on climate — and I think the pandemic was an example of this, and it seems, to me, you’ve come to the same place in your book — is that if you take a realistic view of the constraints on political action and the slowness of it and the difficulty of it, you have to put more emphasis on what you end up calling in the book technoscientific fixes: that you really do need to invent your way into technologies that make the politics of a solution easier.

So for instance, we are not, by any means, 100 percent vaccinated in America. But a lot of people have gotten vaccines. And I don’t think we could have sustained simply political solutions. We could not have sustained distancing and masking and so on at the level that the vaccines were able to give us protection. And I think this to be true on climate change. My thinking on this has moved much more towards, really, almost all of the energy needs to be on pumping money into renewable-energy infrastructure and development and then incentives to adopt it.

And just spend as much as you can to make the technology better, and then spend as much as you can to get the people to adopt the technology, because that is your best hope. If you can get things that make this easy for people and don’t feel like a sacrifice, maybe you will get more action faster. But if you try to make it about sacrifice, you’re just going to end up losing. But I’m curious if that’s a fair read of you on this as well.

Adam Tooze

Yeah. The danger, of course, is that you end up, as it were, lurching into a kind of techno-optimism. So maybe what the position is is techno-realism.

Ezra Klein

Yes. It’s not optimistic. This is not an optimistic take.

Adam Tooze

No, exactly. It’s born out of a sense of the limitations of our capacities in other dimensions. And to me, this is why I always go back to Keynes, because Keynes was thinking exactly that way about macroeconomics.

If you think about the dilemmas he was diagnosing in 1920s Britain, he’s basically saying, look, folks. We’re an uncompetitive postwar economy. If we try and address this head-on, it’ll lead to class war and the disintegration of British politics, and quite possibly fascism. So look. Here’s a macroeconomic fix I’ve got for you. And this is a way in which we can, in fact, reduce the real wage. It’s not a full-frontal progressive politics. But do it in a way which will hurt less. People won’t notice, and overall employment will be high. And so this is the way we can solve this. Let me take this off your plate, because I can see you’re a little overwhelmed.

And the way in which we’re going to, as it were, manage — this is this meta- politics of what’s political and what not. And if we can, through a variety of devices — whether it’s macroeconomics, we can afford anything we can actually do — if we can take those issues off the agenda so as to enable democracy to function, we have a chance. But if, as it were, everything has to be resolved by way of grand political bargains, including, exactly as you say, comprehensive rhetorics and logics of sacrifice, one has to be, I think, deeply, deeply pessimistic.

So then, for me, as you say, the question is, how serious are we about this technological last-resort path? And that’s where the gloom comes back, right? Because, say, in the Biden programs, where is the $100 billion biotech program that’s going to make us proof against the next pandemic? There’s some money there, it turns out. But it’s a couple of billion here, a couple of billion there. It’s small change.

Ezra Klein

Although, I will say that in their $3.5-trillion reconciliation plan, which very well may not pass at that level, they do have a lot of money in this. I would say the Biden administration is mostly moving towards this big techno-fix approach. The question is, will it pass? And I want to be clear on this. That is not to say they are funding everything I would. Among other things, I would just be putting so much more money into “direct air capture technology” —

Adam Tooze

Yes, certainly.

Ezra Klein

— research than we are, not because I’m sure it will work, not because I think it is good that we will end up needing it, but because we have to be trying everything. And this loops us back to the very first point of this conversation, that idea of, whatever we can do, we can afford. And we’ve, I think, mostly been talking about this, of, if we want to spend the money now, can we get it? But I think, on climate, you also need to think about that in the reverse direction. We need to spend the money now to create the productive capacity —

Adam Tooze


Ezra Klein

— so that we can then spend the money later —

Adam Tooze

Yeah, widening the pipeline —

Ezra Klein


Adam Tooze

Right? Increasing the scale of that research-and-development pipe. If we can only spend $10 billion on vaccine development, we need a bigger vaccine-research establishment, because we might need to be able to spend $50 billion on it. And I would like to be able to do that. And I want to be able to buy 8 billion doses of vaccine in one fell swoop for delivery in three months time, thank you very much. So we need seven serum institutes. That’s the sort of scale we need to get to.

Ezra Klein

This seems, to me — it’s funny to put it in this language, but that what you’re proposing, to some degree what I’m arguing for, too, is supply-side progressivism.

Adam Tooze

Yeah, absolutely.

Ezra Klein

That if you’re progressive, and you’re worried about many of these problems, that you have to begin taking the supply-side constraints as the real problem. And it’s not true for every issue. There are things where we can give people the child tax credit now and help get them out of poverty. But on a lot of things where we’re going to need technologies that we either don’t have or that there are constraints on how much of it we can deliver all at once, you need to begin really investing in the supply side for the future.

And I think that’s nowhere truer than climate, where — imagine a world where six years from now, we get the kind of horrific disaster you and I both fear but also fear will not create enough change to — “fix a problem” isn’t even language I like here, but make as much progress as we need to make.

Nevertheless, it is a disaster that creates a lot of political will to do something. A world where we’ve created productive capacity, such that we can use that political will to actually buy a tremendous amount of renewable energy and a tremendous amount of resilience and a tremendous amount of negative-emissions technology — that’s a better world than one where even if we decide to spend the money, we just can’t get that much for it, because we haven’t built out the capacity to get that much for it.

Adam Tooze

Yes. And I love this idea of progressive supply-side politics. And I would extend it in the widest possible terms. And in a sense, my greatest sympathy amongst the Biden programs — which, generally, I wholly agree with, they’re just too small — is, in fact, the Families Plan, because the ultimate progressive supply-side policy is people, right?

And supporting care work, supporting child-rearing, supporting early-childhood education is the root. That’s where we start. 20 years down the line, those are the brilliant grad students that we need that are going to, as it were, supercharge the energy research, the molecular biology. So we need to be thinking comprehensively about this program. And phrased in those terms, I think it does become a rather good description for the kind of interventionism, the kind of progressive vision that we need.

Ezra Klein

I think that is a good place to end. So Adam Tooze, always our final question: what are three books you’d recommend to the audience?

Adam Tooze

Well, we’ve been talking a lot about MMT. I think Stephanie Kelton’s book on “The Deficit Myth” is a good one for people to start with. I’m sure this has been recommended before. But it’s really a brilliantly lucid, accessible account of the MMT position. And it would be, I think, wrong not to mention it in this context.

Another book that has profoundly influenced me more than, I think, anything I can remember reading in recent years is Vasily Grossman’s giant, two-volume mega-novel about Stalingrad. So the first volume is published in English as “Stalingrad.” The second is “Life and Fate.”

And then, given the Keynesian tone of the conversation today, John Maynard Keynes’s “Essays in Persuasion,” which contain many of the sort of arguments that we’ve been making here in a version coming out of the 1920s, that I think he would have been entirely sympathetic to the kind of case that we’ve been elaborating here.

Ezra Klein

Adam Tooze, thank you very much.

Adam Tooze

It’s a pleasure to be here. Thank you for having me on.


Ezra Klein

“The Ezra Klein Show” is a production of New York Times Opinion. It is produced by Rogé Karma and Jeff Geld, fact-checked by Michelle Harris. Original music by Isaac Jones, and mixing by Jeff Geld.

“The Ezra Klein Show” is produced by Annie Galvin, Jeff Geld and Rogé Karma; fact-checking by Michelle Harris; original music by Isaac Jones; mixing by Jeff Geld; audience strategy by Shannon Busta. Special thanks to Kristin Lin.

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