A 70,000 Year View on the Covid-19 Crisis

It's given him a particular perspective on the way we've responded to this pandemic and where it may all lead. You'll hear my extended conversation with him in a few minutes, But first I did want to talk to Bloomberg Economics columnist Ferdinando Giuliano about some big news from Europe this week,

which we might still be talking about many years from now. Ferdinando, I mean, I've been reading you for for for many years, and you're often disappointed did by Europe, and like most of us who wait for the European politicians to do exciting things, we often have left waiting for a long time. But I was struck that your assessment of this new proposal for a European recovery fund was that it could be one for the history books. Why do you think

it's so significant. Let me start with the could, just because this proposal has not been approved yet. So this is a commission plan which now the governments need to agree on, and as we know, there are some governments, especially Austrian the Netherlands, who are skeptical of this plan, and so we shall see. But if the plan indeed goes on, or anything close to this plan actually happened,

I think it's truly historic for three reasons. Really. One is because this is the European Commission borrowing on the market seven hundred and fifty billion funds euros, which is a substantial amount of money, and so this is something resembling some form of European fiscal policy, which we've been calling for years and years and years now. The eur Zone does have a bailout fund, the European Stability Mechanism,

but it only gives out loans. And that's the second reason why I think this is historic is because two thirds of the amount of money which the Commission will distribute will be grants, money which states won't have to give back and that's historic because this money is going to the countries that most needed. So we have some form of transfers from rich areas of the EU too poor area of the use, or bets from areas of the EU which have not been so severely affected by

the pandemic to others that have. And that's the closest we have to a transfer system just like the one which happens in any well functioning monitory union. Now the EU is not a monitory union, but the Eurozone is,

and that's why it's significant. And the last point, it's because the Commission is starting to talk about some taxes which could be left at EU level, looking at areas like taxes on multinational corporations or environmental taxes, which are really you know, natural areas for the U to intervene, because that's that's where member states have problems in tackling

issues individually. Multinational corporations are by definition, you know, sparring go across borders, so it's naturally if you have, if you can, if you can have a U tax base, that would be a great thing. And so these three things really make me think this is a big deal. And if you're sitting in the US, of course you think, okay, so the Europe is taking a few steps closer to being more like the kind of federal system you have in the US, which is something that people have said

for many years. Why would you why would you decide to have the same currency when you still when you don't have that kind of federal system in place. So clear, if if it means what you're hoping it might mean, that is significant. But we have been taught, Fernando, and you've seen this many times, and we saw it in the Eurozone crisis recently, that this the Germans will never

wear this. We're always told you can't have this degree of burden sharing of you know, the richer countries implicitly giving money to the likes of Italy without major change in Italy because they feel that Italy is on the

wrong path and needs a lot of reform. And yet here we have a proposal that was initiated by the French and the German chancellor, French president and the German Chancellor Angela Merkel, which as you say, talks about giving money apparently with not very many strings attached to Italy. So what's changed? So, first of all, what's changed I think is that the coronavirus is a different shock from the ones we are used to. Here is very hard

to accuse any country of mismanagement. Now we know there have been different experiences, and I think the Germans have shown themselves to be particularly competent to handling this pandemic, I think globally, not just at European level. But this is a shock which is you know, will be very hard to attribute to any country. So you don't have the kind of moral hazard argument which you've seen in the past, for example, with regard to Greece blaming politicians

for the mess they've left the country in. So I think that's one issue. But the second one, I think has to do with the rise of populism and the fact that I think Germany has seen the damages which euroskepticism can produce. And now we're having in Italy a government which is back to a more pro use stands. But for the last year we had a pretty you know, tough euroskeptic government. I think, you know, Germany is realized that's not the kind of government you want next door.

And I think finally there is just a realization that you know, the geopoulolitics here, there is a geopolitical project at stake. The pandemic has exposed the limits of the US to play an active role in as it were, you know, being Europe's best friend. China and Russia are you know there, and China in particularly is looking more and more aggressive. And we saw in the early phases of the pandemic China Russia really trying to push their soft power into Italy and into the southern tier of Europe.

So I think this is a way for Germany to reassert as it where it's political message of coesion across Europe, and personally, I think that's a very good thing. Well, and it's interesting that, of course Italy has become the sort of home of of euroskepticism to some extent, you know, the country that had been very much in favor of being part of the EU had seen those numbers creeping up, the antipathy towards the EU. And I'm sure some people

in Germany are watching that. Okay, before we we run away, Fernando with this crazy I you that Europe is actually going to solve its own problems. What could get in the way of this of this great future I mean you've mentioned there's countries that opposed that will be opposed to this idea. Um in your gut as a long time europe watcher, how likely do you think that something

like this will end up actually happening? And I guess the second part of that, will it happen you know on a time scale, that the money can actually get to countries in time to solve this crisis as opposed to the next crisis. I think this time is different because Germany is on board, and you know the opposition is coming from the Netherlands, Austria, perhaps Sweden, Denmark, which

obviously are you know, big and important countries. But you know, when you have you don't have your traditional powerful allied Germany on board, is going to be very I think this is more of a negotiating position, you know, trying to contain as you wear this project as opposed to I tried to opport it, what could get in the way. My biggest fear is over how this and it will

be spent. And this responsibility I think is primarily SIT's primarily with the countries that will receive them Italy, Spain and others. This is a one off project it's linked to the pandemic, but it's not supposed to be renewed. Now. If it doesn't go well, I if this money is misspent there is you know, it doesn't is not accompanied by reforms which are really needed in this country, then you know, countries from the north will say, look, you know,

we've tried. You've told us what you needed was more money. We've given you this money and yet nothing has changed, so why should we do more of this? However, you know Italy in Spain managed to do make good use of this money. I think this will reinforce that their argument that what's needed is a proper physical union which is not just linked to the pandemic, that goes beyond that,

and obviously that I would welcome that very much. But again, the responsibility is not just with the stingy and naughty Nordics, is with the Sutherners, who need to really show that what they claim are just prejudices from the north are indeed such Fernando Diano, I think we will all be following the money and waiting to see where this goes.

Thank you very much. Thank you. When I was a graduate student at Harvard in the mid nines, everyone wanted to take a course taught by Jeffrey Sex because, unlike most of his colleagues at that time, he actually talked about the real world in his classes, stuff that you

actually needed to know to understand the world now. Since then, he spent a large part of his academic and public intellectual life over the years thinking about the challenges of developing an emerging market economies, most recently serving as Special Advisor to the u N Secretary General on the Sustainable

Development OWLS. And he's written a new book, The Seven Ages of Globalization, which the economic historian Jared diamond says summarizes everything you really need to know about the history of the last seventy thousand years. So, Jeffrey Sachs, welcome to Stephanomics. We should also say that you have been for many years a professor at Columbia University. The tagline of the book, or one of the taglines, is that you're using history to offer solutions to the most urgent

problems of our time. I mean, COVID nineteen is obviously the problem that we are all focused on at the moment. What are the key lessons of your book for governments wanting to chart a better way out of this crisis, and I just potentially build something better out of it. Great to be with you, Stephanie, and thanks thanks for

the opportunity. You know, I think the main lesson of history is that moments that are as momentous as the one we're living through right now can have dramatic consequences for the quality of our lives, even peace on the planet. And fortunately, and unfortunately, this dire crisis right now could have very positive outcomes if we handle it properly, and it could have utterly disastrous outcomes, far beyond the already

huge loss of life and burden of disease. So I'm a I'm a worried person because knowing the past of historical conflicts and crises, I know that they can go in either direction. I know this one is not off to a great start in a sense in mobilizing the kind of global cooperation we need and the global foresight that we need. And so not only is this a drama in health and economics, that is quickly becoming a

drama of geopolitics as well. Yeah, I think, I mean one of the of the many conclusions that people have started to draw about this is that there could be a real long term impact on US leadership. I mean, of course, particularly with the Trump administration, people have been saying that for a while, but it was it's almost

like we might reach a tipping point. The US has been able to be able to make a lot of mistakes and behave in an unproductive way for a very long time while still retaining this status that it has, whether as a safe haven in financial markets, but also as still as a as a leader that we we look to on these kind of crisis. Do you think that will be gone for good as a result of

this or is that the risk? Right now, we're seeing a deliberate attempt by the US government to stoke a new Cold War with China that was underway already before COVID. The epidemic is being used actually to ratchet up deliberately the tensions with China. Somebody is calculating in Washington that this epidemic weakens China and now is the time to double down. I think it's very dangerous, and I think it's also quite naive when you take the seventy year perspective.

Does this ever end well? I mean, clearly, these kind of geopolitical clashes. We can remember in more recent history times that it's gone very badly. But was there things that you learned about in writing this book that actually gave you some some hope. Well, I'm in general a believer in human progress, and I just can't shake that somehow over decades of work. So I believe that increases of know how, technology and institutions are the fundamental ways

of making progress. I can't help as a development economist to emphasize how much progress has been made over the millennia and over the recent centuries. So the book is in that sense fundamentally optimistic. But history is just littered with utter disaster and human stupidities. And I always refer to one of my gurus, EO. Wilson, the great evolutionary biologist at Harvard University, who has said that we have stumbled into the twenty one century with our Stone Age

emotions are medieval institutions and are near godlike technologies. When you have massive shocks world War one, world War two, and I think CO of nineteen might become such a shock, you learn things change in a big way. After World War One, the collapse of multiple empires after World War two, the formation of the United Nations. You ask, well, what does that big change mean for COVID nineteen. It's an epidemic.

If we said we've got a pathogen that is traveling the world, we need to cooperate intensively, exchange best practices, use each other's applications, work together to develop a new vaccine, helped impoverished regions that are suffering and are at risk of grave hunger and infection from this. That would be that would be quite a response, and we'd actually get

this epidemic under quick control. Instead, we don't have that, and we are not yet wedded to the disastrous path but we sure have taken a couple of steps in the wrong direction. And now I would put it this way, if we don't have the good luck of a vaccine in the next half year, which would be kind of the miracle wish and way out of this, I think we're more likely than not to fall into a deep depression covering a large part of the world and a

very very tough geopolitical situation. You've described the clash between the US and China. We know there has certainly been an absence of leadership in the international institutions. You know, the gap where the US used to be in places

like the International Monetary Fund. You've had extensive experience in the u N. But you know, we've spoken to the chief economists of the I, m f G, Got Enough and others about the resources that are there to support developing economies from a financial standpoint getting through this and potentially debt restructuring is all the things that one talks about when developing countries are in crisis. It's not doesn't it's not necessarily going to resolve the disease catastrophe. But

those institutions are still there. I mean, they can still there is a prospect of them giving some of the support that these countries need. You know, history looms so large in this and when you're aware of the history, it really absolutely is both captivating, promising and worrisome. So when I was a student a long long time ago in economics, the book we read was The World and

Depression by the great economic historian Charles Kindleberger. Fantastic book, but his basic theme was the Great Depression was so eep because there was no global leadership at the time. Britain had basically lost the leadership after World War One.

The United States had not yet accepted the leadership that it would after World War Two, and so there was this period of the nineteen thirties where there was no cooperation and bad went to worse, and then to worse, and then to Hitler and then to World War two. And it was a captivating read. But as a student, I said, well, thank god, we're out of that mess. We won't have that again. And here we are with another mega crisis and clearly no leadership of that kind.

So here we are today. I believe that the i m F is the most important institution on the scene to stop the current public health crisis from turning into a mega financial, humanitarian, and economic crisis for much of the world. And I'm working with the i m F every day, including workshops today actually on helping the i

m F to lead. But it's balance sheet is too small, and its board includes the United States and of course China and other major countries that have to agree if the i m F as an organization is to play the role that it should be. In effect, the i m F should be a central bank for at least the emerging economies and the low income countries. The United States government has the FED to print money in effect,

and the FEDS printing a lot of it. It's issuing credits of trillions and trillions of dollars overnight, not even a vote of a Congress. So that's the privilege of the US having the key international currency, at least for the moment. UH. But the developing countries don't have anything like that. They may have their own central banks, but

they can't print internationally accepted currencies. And if they do print their own currency a lot, they get a balance of payments crisis or spiraling inflation sooner rather than later.

And the i m F is the place to step in and say, you know, you can address this crisis because we're going to be providing in effect an international currency or a basket like the SDR that will enable you not to have a balance of payments crisis, giving you some of those resources that are now under deployed globally that should be for you, not just for the rich countries. Long story short, Yes, the i m F

can make a huge difference. It was designed for this moment, but it needs a greatly expanded balance sheet and it needs more of the kin's vision, and unfortunately vision is not exactly the word you would attach to the Trump administration.

It's finally many people will have seen very vividly and been reminded of the importance of having an effective government and can see that when it's really needed, you need government to not just be involved, but spend a lot of money, and somehow, when it's really needed, a lot of money appears. Um. Those are things that certainly have been Americans and Brits have been taught to not think over the last few years. You couldn't there was no more they could. The UK you talk about there's no

magic money tree. And in the US, obviously the government institutions have been sort of consistently undermined. You know, it's hard to sustain that sort of antique government rhetoric in the face of this crisis. Surely Canes taught us to think about the macro economy. That is, the idea that you can think about an economy as a whole and choose to move resources in a particular direction. We haven't

been making society wide choices. Now we're going to have in the wake of COVID, not only a tremendous amount of suffering, but back to Keynes and his understanding of the nineteen twenties and nineteen thirties, a lot of dramatically underutilized people and resources of other kinds, of factories and buildings and so forth. How will we deploy those? One approach will be saying, we don't deploy them, what what happens?

Happens again? If there's no miracle solution of a vaccine in or a cure to this, those underutilized resources are likely to stay heavily underutilized. I would say double digit unemployment rates in a lot of the world, including the United States, for years to come, not months, not quarters,

years and years to come. But if we do choose to deploy the people, the skills, the technologies in the right way, then, as Kane said, you get back to using the potential of this society and solving social problems, actually not just putting people back to work, but thereby alleviating poverty, restoring dignity and well being, and even building the clean economy so that we're not wrecking our lives and our health by air pollution or destroying the planet

with climate change. So I think the right way to think about this is we're going to have an opportunity if we understand it to make choices at national, regional and global level. Two build our societies in better ways. And part of that is the technical issues of government's running budget deficits or using the central banks to redeploy those resources. But a lot of it is not just to boost aggregate demand in the jargon of macroeconomics, just

more spending. But for what for a better world, for a fairer world, for a socially inclusive and environmentally sustainable world. We will have a constructive opportunity in front of us. We will have a need for cooperation, and I think the lessons of history show it can go either way, so it's really worth the effort to make it go the right way. I get to see is a chance.

We started looking into the ABYSS at the beginning of the interview with the potential impact of this, of this catastrophe, but we had good uplifting moments there of a proactive and positive approach on the world. So we definitely that's where we should leave it. But Professor Jeffrey Sacks, thank you very much. How great to be with you as are always. Thanks thanks for having me on your series.

It's so striking that one spends so much more time talking to economists now about history and politics than about economics. We're back to back to political economy and Adam Smith. Thanks for listening to Stephanomics. We'll be back next week with more on how COVID nineteen is turning the global economy upside down. Remember you can always find us on the Bloomberg terminal, website, Apple, wherever you get your podcasts. For more news and analysis from Bloomberg Economics during the week,

follow our Economics on Twitter. This episode was produced by Magnus Hendrickson, with special thanks to Professor Jeffrey Sachs, Fernando Giuliano, and Andrea Bussell. Lucy Meakin is the acting executive producer of Stephanomics, and the head of Bloomberg podcast is Francesco Levi.