Three Perspectives On the Biggest Issues at Davos

including Greta Tunberg. There were also a hundred nineteen billionaires and many many chief executives and bankers. But luckily, tackling global inequality has also been high on the agenda here, so you can stop worrying about that as well. I'll be talking about the potential physical and social impact of climate change with the director of the McKinsey Global Institute later on, and I'll be asking the leader of one of the world's biggest trade unions, Christie Hoffman, how she

would make the world a fairer place. But first I wanted to catch up with the Davos veteran attempted to say the Davos Institution, so Dr Jacob Frankel is a very distinguished economist and former colleague of mine at JP Morgan. He served as chairman of JP Morgan Chase International since two thousand and nine, and before that, among other things, was Governor of the Central Bank of Israel for nearly a decade. Jacob, love you to have you on Stephanomics.

It's been fifty years they've been holding the World Economic Forum. You just told me this is your thirty three say. I'm struck how the economic debate here has broadened in the past few years. Most of the people I've spoken to here, and indeed the speaking to it for the podcast, and not focusing on just the narrow macro economic issues. They're talking about the environment, about populism, about social inclusion.

Do you think the discussions were having here up a mountain have become more or less useful over the past few years. I think that the definition of useful has evolved so in a way they are all relevant given the interests of the time. For example, thirty years ago, there was no question about what does it take to do good economics. There was the so called Washington consensus.

You knew you have to have budget responsibility, monetary policies that focuses to achieve price stability and the things of that type. And at the same time the issue was will government have the political will to execute what we all know needs to be done? The compass was clear. The great financial crisis of a little bit more than a decade ago marks the most important change because that crisis, in which still has the consequences seen today, That crisis

shuttled the compass. The question was not anymore how do I execute what we all agree needs to be done, but rather what should be done? The narrative world experts have failed. We need to have a new theory. We need to throw all the textbooks away, in my judgment, a big overshooting, with the danger that you will throw away also a lot of good wisdom. It all started with the notion that somehow all the conventional modeltor my macroeconomic policies up analyzed. Fiscal policy could not be used

because that was already too big. Structural policies could not be used because it takes more time to show fruits and we are in a crisis. Therefore, the theory when we need to show quick results. Hence, all the lights were put on the central banks and monetary policy. Before long, central banks became the only game in town and they needed to do the only things that could be done, namely lowering interest rates. The file was extinguished and the question was how do you go back to the old

power time of growth and prosperity. However, what was coined as unconventional policies to be understood as a temporary departure has become almost a conventional policy because the consequences are still with us. Your expertise is monetary policy, your former central banker, and I'm struck that the Bank of England, the Federal Reserve and the European Central Bank are all now under or now undergoing a review of their tools

and their targets everything they did with monetary policy. Um, what do you think where do you think they should end up? We should not expect a new textbook to be written in this context. That's not the issue. The main focus will be on various procedures, on various mechanisms, on various regulations. It will not be the new perspective of macro economics because those things are not done through

a review within the central bank. Those are things that are generational things That's what I'm saying, don't throw the old textbooks away, but also recognize that being the only game in town for monetary policy is a very dubious compliment because it means that you are granted or taking upon yourself tasks that you are not equipped to deliver. You do not have the tools to deliver. The name of the game today is innovation, growth, technology, creativity. Where

does this come from? It comes from everywhere but monetary policy. It is fiscal policy, it is tax system, it is structured policy policies that remove these totions, policies that realize the flexibility of the economy is the key for further growth. But if we do all of these re examination within the monetary policy domain, it leaves the impression that also the answer to the current challenges will come from the

central bank. I all welcome to see reviews of monetary policy, but I warn't against the illusion that here we will see a new framework that will allow the only game in town to continue. But on that precise point, and where does inflation fit into that? I mean, do we have to be have an understanding of why all those inflation targets are being missed and where we're going to get inflation from, if not from the any game in town. Well, I my answer when people ask me where is the inflation?

After all, you we were told that if you print, that's what happens. Well, the inflation found itself in another place in asset markets. You have kept interest rates so low that you have provided artificial stimulus to investors and others to invest in the financial markets because that's well the incentives go. And as you do that, you inflate

asset prices. You have stock markets all over the world reaching new heights every day, and as a result, you have a greater disconnect between the real economy and the financial economy. At the end of the day, the mirror and the reality needs to be aligned. Let make a long story short and say macroeconomic policies have been pushed to be out of balance, excessive reliance on monetary policy. And I think that therefore, as we do the review of monetary procedures all over the world, it's time also

to wake up other one under policy instruments. Okay, final question. We've talked about this. That you are soon retiring from JP Borgan, you're gonna have a bit more time to take grand thoughts. Um, you already have PhD. But I wonder if you were going to go and get another one, go back to school, what would knowing everything and seeing the world as it is, what would you want to go and study? Well? To begin with, I would ask

myself what is the name of the game today? And I will say those things were not even on the curriculum when I was stilled AI, Artificial intelligence, big data? Who knew all of the Internet, all of that kind of thing? So I think that, but in more general way, I think the future will not depend on how many degrees you have, but rather how many how much knowledge

you have accumulated. And knowledge is not a set of information, but capability to operate in a changing environment, capability to know where to find the information that you need once you need it, but really capability to operate across section. Most of the curriculum of important universities has moved away from narrow discipline to interdisciplinary approach. And the reason why it is the case because there is greater understanding that to be a good physician you need also to be

a good psychologist. To be a good psychologists, you must understand how other systems work. Etcetera. And on the job training will become a very important thing. We spend a lot of resources on training and too few resources on retraining. Why do we need to retrain? Because the things that we are training for have changed, and hopefully we will move into even a more rapid change and if there result, the whole concept of education and training will need to

be modified. Well, we're being very interdisciplinary on steconomics, is we You're the only economist I'm talking to, But Dr Jacob Franko, thank you very much, thank you. We talk a lot about the future of work here at Davos, and these days I think there is also a lot of talk about capitalism needing to deliver a better deal for people. Trade unions you might have thought would be useful things to have around when you're trying to navigate

both of those things. But by and large, I would say that the trade union movement is not very well represented here at Davos. One exception is the Union Network International UNI, which represents twenty million people around the world. And I'm delighted to say that the UNEDS UNEDS General Secretary Christie Hoffman is here with me. Christie, thank you and welcome to Stephanomics. Thank you for having me pleasure.

I guess I should start by asking you, you know, what kind of reception you get here at the World Economic Forum? I mean, they do talk a lot in these sessions about giving workers a better deal, But do they want to do a deal with the likes of you? Yeah? Well, actually there are ten of us here, and I think more or less that's that's been the same for for several years, just to you know, spice it up when

there we'reds, you know, three thousand. But in any event, um, where some of the top you know, international leaders are here and so we're a feisting group. Um, how do

they react? I think that you know, the question of um, that the hard question that a lot of the companies here have to face with us is that our demand is we want to, in particular UNI's voicing this this year and other as well, that we have to really re strengthen and restore the role that collective bargaining plays in our economy because without that we will never solve

the issue of inequality. And we talk about inequality breaking down social cohesion and diminishing economic growth and all the problems of inequality, immorality, the number of working poor, um, the gross you know pay that goes to the CEOs these days, and all these things. But at the core of it is we have broken down an attack to collective bargaining for so many decades, and that's at the point where we need a conscious campaign to restore collective bargaining.

And yeah, I mean, is that the message that companies really want to hear. No, I think they'd rather hear you know, you should give everybody a little more time off, or you should think about rescheduling or some like benefits they could sprinkle down to make life better for workers.

And that's all good, but we need a power shift and if we don't have that, we're not gonna we're not going to solve the issues of inequality and we're not going to be at the bargaining table to navigate, as you pointed out, the new world of work, where it's critical that unions are able to workers through their representatives, are able to sit down and navigate how we're going to implement new technology, What are the skills required, how are how old will this impact the workers? UM and

climate change. We need to be able to negotiate just transitions so all the problems we've faced in every direction. We need to have a worker voice at the core.

That's why there was a good line I heard earlier in a session from the chief executive PayPal who said that the multi stakeholder capitalism that people talk about couldn't just be about having two wolves and a sheep decide what to have for dinner, which I thought was But it is true that if you think about the nineteenth century, you know the real changes in working conditions and pay happen because they were forced on businesses by legislation and to some extent by by trade unions. I mean, do

you think it will be any different this time. I think there's always room for voluntary movement in the right direction. We negotiate with companies all the time. We try to persuade good companies that they should negotiate agreements on the whole range of issues, and we're successful in that within limits. But we want governments also to step in. They're not Governments are not just there to protect the corporate elite.

They need to step in and strengthen their collective bargaining institutions. But I guess one of the reasons why, I mean, there's been. The US famously has this legislation which does make it very difficult to organize a union. M But one of the reasons why employers not always very welcoming is they unions have not been associated with helping change to happen. So is that is that a fair criticism that unions also have to be a bit more flexible.

I think what you find if you look at unions all over the world is that unions where there is a more equal balance of power tend to be way more flexible. Um. And so when you look at our Nordic unions, so from Sweden, North Norway, they are really welcoming, open arms with their employers towards how to make the employer more efficient, how can we use technology to advantage everyone because they know they're going to share in the

gains um and they don't feel threatened by change. They feel that they want to embrace change and embark upon change in a way that makes their jobs more interesting, their companies more competitive, shared prosperity, etcetera. So, and then when you look at unions in the UK who are

a little more embattled, maybe they're not as flexible. Same for the US, but a lot of that also depends on whether you have work site you know, enterprise bargaining or you know work site by work site relationships or a sectoral relationship where you have sectoral bargaining. So just in one industry, right and that I mean, there was a big study UM that came out this year from the O E c D, which is not known as being a radical institution, that said sectoral bargaining is really

healthy for economies. It's better for employers and better for workers. Now, they didn't say every form of bargaining is is the greatest, but they did say that, but it's a real change and they've really said, Look, you want stronger economies, better ability to weather the ups and downs, better ability to implement new technology. I mean, I know, I started out my working career in a factory and a very big machine.

And when they introduced numerically controlled machines that didn't require me to turn the wheel all day, I could not have been happier. I was so happy that my job was easier, safer, cleaner, UM and I had a union so that it wasn't gonna Uh. You know, nobody felt threatened by the implementation of new technology because we knew our company needed to be productive and high tech if they were going to succeed. And I think most workers

weren't their companies to succeed for sure. It's really that they also have to think about, well, does this mean I'm growing out on the street with no protection? And I did hear it, actually hear it dens. I think I had a Scandinavian unionist saying that that we're not worried about new machines, were worried about old machines. They're the biggest threat workers. What about the gig economy, because it feels like, again when you look at the debate

around you know, what's an employee? You know, lots of these gig companies, you know, Uber and others, famously they've kind of not had to worry about workers right so much because they say that all of these people working for them are not employees. Um and there's a sort of legal debate around that. Don't you haven't seen until recently, you may correct me traditional unions really active in that debate and or indeed kind of reaching out to the workers.

Is that kind of the next runt? Is that going to be new unions that do that or the old ones. Uh, you know, I think it is maybe the next frontier. But I also know that a lot of members of UNI are or or the Transport Workers, two different federations. But I'm aware of a lot of unions reaching out to Uber workers. And now some of it is a question of making sure they're regulated in the same way

as taxi drivers. For example, so um like in Stockholm, the uber drivers were not allowed to operate unless they registered as a taxi company. Brussels they're not allowed to operate. Geneva they're not allowed to operate. So many cities across Europe are saying either you act like an employer, or you act like a taxi company, or you're you're out, and so this we're seeing this increasingly. But we're also

seeing unions talking to the drivers a lot. And then in the US you have a big fight in California about whether or not they're an employer, and I think that that's going to play itself out. But increasingly Uber is facing like all these different doors, none of which are especially attractive, because to be an employer doesn't meet with their business model to be a taxi company. That's also kind of burdensome and then to just be free

to do what they want. More and more governments are saying no so, and unions are talking to the drivers and trying to especially in California. The unions are really really involved in California, and I think that will be a little bit of a test because that's by far their biggest market. Climate change has been around as an issue for years here at Devils, but it's all felt a bit well, superficial. The movers and shakers coming here have been urged to take a bust up the mountain,

not a limo. Instead of the usual freebees, we got plastic free drinking bottles in a recycled bag. This year. The streets up still full of cars and chauffeurs, and a lot of those bottles still seems to have ended up in the trash. But it does feel a bit different, and not just because Greta Tunberg was here, not just because we've had weeks of coverage of the fires blazing

in Australia. I think it's also because serious money is now going into making the world zero carbon and business leaders really are starting to think about what it means for them. The McKinsey Global Institute has brought a report here to Davos on what exactly climate change could mean, not just for the planet, but for people and the global economy. And I'm glad to say I have one of the directors of the Institute who co authored the report,

Jonathan Wetzel, sitting down with me here. Jonathan, thanks very much for being on Stephanomics. We have had a lot of consciousness raising here over the years about the cost of climate change. What's different about your report, Well, we're looking at the physical climate risk. So what's different is that this is we think the deepest and most comprehensive assessment of both the hazard and it's social and economic impact.

There are a lot of reports out there which take a look at a specific area, whether it's wildfire or a heat wave or flooding uh in a specific geography. What we have tried to do is step back and take the global view while going deeply into nine different cases of extreme climate today and then looking forward and say how wild all this play out across the world. So that's that's what we've tried to do here, and we think that is a step forward for the conversation contribution.

We hope to decision makers. And when you talk about the socio economic impact, what's an example, what's the kind of thing we're talking about. I was very struck. For example, you had the figure about the percentage of the world population that could face a quite significant risk of a of a change of weather that could actually make it unlivable. Well, yes, so we're looking at impacts that are affecting our three basic sources of capital, human capital, economic capital, and natural capital.

And we look at the hazards in terms of the droughts, the heat waves, of floods and so forth, and how those hazards effect those systems. So the intersection of that is physical climate risk. But there will also be places that maybe for some period of time, would benefit or even find it easier to grow food for example. I mean it's very differentially impact. Indeed, physical climate risk is spatial. It happens in a place, and as a result those

those impacts in those places may differ. As you say, agricultural yields in northern latitudes are likely to increase uh and warmer weather for some parts of the world would be a benefit, and cold weather kills lots of people. But on the other hand, it's this is not a report that tries to make a trade off. It says we're trying again measure the full risk so that people

can decide what is the appropriate action. Just to play devil's advocate, I mean, I wonder when you're very clear, and a lot of other reports are also very clear on the differential impact, and that it's often the poorest countries that are going to suffer most, which of course

ought to be a call to arms. But if the richer countries that have also been most reluctant to change their behavior, if it's increasingly clear to them that they're not going to pay the full price of failing to do anything and may even benefit in the cases you say of some Northern European countries, I mean, do you just is there a little bit of you that worries that actually more information in this debate could make the political argument harder because you're saying to people you're probably

not going to suffer from this. We know that now with a bit more certainty than we did a few years ago, but we still want you to help pay for it to avoid it. The reality is, I don't think we can in there's ever more interconnected global world somehow pretend that what happens somewhere doesn't affect us or

wherever we are. Whether it's the supply chain that gets interrupted, it's migration, it's a financial wealth being dissipated because of the unexpected systemic knock on effect, and tax revenues for

Florida being affected by the devaluation of coastal properties. Ultimately, physical climate risk affects every geography and uh and because it is so nonstationary, because it's changing all the time, it challenges our assumptions those thresholds that we have basically built our economies and our physical infrastructure, whether that is the grid transformers and how much heat they can bear, or is the sea walls and how high they are,

or it's our ability to stay outdoors. I mean, these things are going to be changing and challenged globally, and that's that's that's the reality of where we are. And even in countries that the UK, where there's a commitment for zero colbum by, I think even there people criticize it for not being a near target. Um Even there, people haven't thought about getting rid of all that aspied boilers in the house and things like that, so people

are definitely underestimated. I think that we are just at the beginning of incorporating this risk into our financial and economic calculations. That and with without a measure, of course, it can't be managed, and so we are attempting to help provide some of those measures. So we can now

think that through. And as others in the financial community have said, that should then factor into portfolio allocation for capital, it should re be reflected in insurance premiums and reinsurance premiums, and those decisions ultimately are going to be I think the ones that affect decisions like what should my boiler be and how should I what I what will my city council invest in? Because it's simply put, will be more expensive to invest in UH assets which are either

climate exposed are our climate risk inducing. I'm interested. I said at the stop that I thought that there had been a che a change is sort of maybe a tipping point has been reached in terms of people taking it, not just taking it seriously and talking about this, but

it actually as you suggest people. Mark Carney, the Government of the Bank of England, for example, this week, was talking in a session about reminding people that every British financial institution was going to be stress tested now by the Bank of England, not just for a financial crisis, but for what it would look like in a zero

carbon world. Um a lot of investors, they had a black rock talking about how environmental factors might have to start sort of factoring into how they think about companies. How has this report been received here? Do you sense a change of mood? Well, I think it's first of all, I mean, it is the topic. I think the entire Dabo's experience too, so far from me, has been all about climate and I think that so there's a recognition.

I think there's also a bit of a I don't want to say that the good news is that people seem to know what to think. They know what the bad news is, and it's without again knowing what that risk is. It's very hard to justify putting incremental capital to work to do something about it. And so one might have the best will in the world, but there are all these priorities, and whether those are saving for

pensions for the orphans, or climate or something else. This allows us to say, well, this is not a question of choice, this is an underlying change that affects everything, and so it gets factored in now across the financial community. So the protection, I think has been to say, well, great, now we have something that we could work with. We actually have some data that we have a methodology that says, well, this is how we think about physical climate risk, this

is what we can do about it. Jonathan Weistle, thank you very much, my pleasure, Thanks for listening to Stephanomics. We'll be back next week with the final episode of our second season. Sad as Donald Trump would say, but you can always get news and analysis from Bloomberg Economics by following as Economics on Twitter. This episode was written by me and produced by Magnus Hendrickson. Special thanks to Dr Jacob Frankel, Christie Hoffman, Jonathan Witzel, Clive Tarling, and

Victoria Cochrane. Our executive producer is Scott Laman and Francesco Levy is the head of Bloomberg Podcasts.