This is part of a series, ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists
In the last decade and a half, advanced western economies have struggled with the fallout from the global financial crisis. During that catastrophe, emerging economies surged forward, ending the global north’s unchecked dominance. For Brad DeLong, economics professor at the University of California at Berkeley, 2010 marks the end of what he calls “the long 20th century”, which started around 1870 and was marked not just by Anglo-American dominance but by a historically unprecedented pace of technological innovation and economic growth.
In this conversation, DeLong discusses the long 20th century and his new book devoted to it, Slouching Towards Utopia (which was longlisted for the FT Business Book of the Year award). In this, he puts particular stock in the industrial research lab and how it made the most of innovators’ ideas. But he also discusses what was special about this era, noting the historical contingencies that allowed social democracy to evolve in the west as a counterpoint to rapid and productive growth. For example, had the US Democrats won in 1928 and American voters then elected Herbert Hoover four years later in reaction to the great depression, history would have been “very different and . . . substantially worse”.
DeLong’s study of economic history gives him an unusual perspective on today’s inflation debate. He argues that in periods of fast and wide-ranging economic restructuring, when you “wheel the economy into a new configuration”, you need a “burst of inflation . . . to grease things”. He mentions 1947 (the first post-second world war demobilisation) and 1951 (the defence industry recruitment boost relating to the Korean war) as analogies for the post-Covid recovery.
But his argument suggests our challenges are bigger than inflation. The free-market revolutions of the 1980s dismantled much of the socio-economic model of the long 20th century, which can’t simply be rebuilt. On top of that, climate change is a serious threat to productivity growth. While DeLong is sceptical that an authoritarian China can provide a better model, he warns that the west has a hard slog ahead.
Martin Sandbu: Your book is about “the long 20th century”, 1870 to 2010. Can you set out the potted history of what that is?
Brad DeLong: Well, starting in 1870, history changed into a very different register. After 1870 you get humanity’s technological confidence doubling every generation with these enormous waves of Schumpeterian creative destruction that create huge wealth, but they also upend and destroy industries, occupations, livelihoods, communities. You’re at a pace never, never before seen. And this causes both huge opportunities and problems.
The opportunity is that for the first time it’s becoming clear that humanity is heading in a direction in which it will be able to bake a sufficiently large economic pie for everyone to have enough. The problems of slicing and tasting [the pie], of distribution and utilisation continue to flummox us pretty much completely.
And one of the big reasons they flummox us is precisely that the speed of change is so fast that we are unable to rewrite our social, political, economic software for running society, on top of the changing technological courses of production hardware. And so, the thing crashes all the time, as bargains and arrangements and deals and modes of operation that worked a generation ago, no longer work today.
MS: All this sounds as if it could still describe the world we live in today, in 2022, but you seem to mark a kind of end of an era, you bookend this period at 2010. Why do you think that was a significant moment?
BDL: For one thing, because the engines of the industrial research labs start to run dry around 2006. We have an extremely large productivity slowdown. We have the end of about 120 years of Anglo-American hegemony.
And we do, indeed, have the coming of global warming and the under-appreciated problem of nuclear proliferation. Which are going to make it much more difficult for us to continue to move forward, in terms of making humanity wealthier over the next 30 years, as we have to deal with the fact that, say, 3.5bn people right now really do need the monsoon in the right place, at the right time, in the right intensity, at the right temperature.
Plus, the US is no longer seen as the furnace where the future is being forged. The US is now an anti-globalisation outlier. And this is a bad thing for the dominant economic power to be.
MS: Were these challenges inevitable because this is where technology has brought us to now? Or is it that we don’t understand what we should do anymore, is it that the wrong ideas have become dominant?
BDL: You can argue it falls apart for deeper reasons, connected with the fact that the underlying forces of production are undergoing this big transformation away from mass production to more sophisticated things. And so, you’re losing the large, unionised, assembly-line worker base of people who thought they had interests in common and a certain solidarity, which pushed forward a dominant political force, which meant that even a very conservative Dwight D Eisenhower says “you should elect me president because I’m going to be a good steward of the New Deal order”.
The late 1970s, the coming of neoliberalism, is not just the rich want to get richer, but a lot of people think that things are too bureaucratised, that there’s too much rent seeking going on, that there needs to be more space for entrepreneurship, there needs to be more decentralisation. Left neoliberals saying we need to use market means to social democratic ends, in order to properly crowdsource solutions to social problems.
MS: The third way.
BDL: Yes, very much the third way. Tony Blair and Bill Clinton trying to dress up social democracy in left, neoliberal sheep’s clothing, and saying the era of big government is over . . . When even a diehard, lifetime near-Stalinist like Eric Hobsbawm [denounced] unions that try to base their social power on their ability to inconvenience the public, rather than to be a part of a productive division of labour, it kind of tells you how great the strength was of the reaction against the New Deal and the social democratic order in the late 1970s . . . But the neoliberalism thing turned out to be completely incompetent at financial regulation in the late 2000s and then substantially incompetent at figuring out how to get the economy moving again and back to full employment after 2010.
Plus, I’m one of the ones who thinks that a concentration on the corporate bottom line really hollowed out the industrial research labs on which so much of technological progress depended.
A whole bunch of the things about the way the neoliberal order worked undermined its ability to continue to push forward a modern economy. Hence today’s situation, in which no one likes neoliberalism at all, but in which the political movements that seem to have substantial energy, they all look to be things that we like even less. Or that those of us who are ruthless cosmopolites, interested in general peace, prosperity and technology, like substantially less than we like neoliberalism.
MS: All these come down to one common factor, which is that the economic system has failed people and is seen as having failed people. As you write in the book, that leads to a reaction in the case of the 1930s and the New Deal. What would a New Deal look like today then? Is it a question of restoring something that we lost?
BDL: There I’m on two sides. The rationalisation and routinisation of discovery and development around 1870 — the fact that someone like Nikola Tesla could do his work and push forward electricity 10 years faster [with the support of the Westinghouse Electric Corporation and its industrial research lab] that was a wonderful thing to invent. And so, on one hand, yes, we need to get back there.
On the other hand, the rest of the history since 1870 has been that if I were a semi-orthodox Marxist, I would say that you have changes in the mode of production every 30 years that are as large in their impact as what Marx and Engels thought of the change from the feudal agricultural to the commercial industrial bourgeois order . . . so trying to rebuild just ain’t going to work.
At most, you may be able to take some of your old furniture and find a new use for it. Discovery, development and deployment are now so much harder and really need to be done at the level of the state. Then you have the problem that you don’t want R&D exclusively conducted by governments because of bureaucracy. Simply saying we need to return to the days of IBM and their labs, probably isn’t going to cut it either.
MS: What is going to cut it? There’s quite a lot of experimentation happening, a little bit in the spirit of Roosevelt. President Joe Biden, I think, sees himself quite in that mould.
BDL: What ultimately got us out [in the 1930s] wasn’t any particular set of ideas. When [John Maynard] Keynes collects everything he’s written in the 1920s in his essays on persuasion, his introduction is about how he never persuaded anybody of anything enough to matter. That these are just the croakings of a Cassandra. What really did it was Franklin Delano Roosevelt coming in in 1933 and saying I don’t know what to do, we’re going to try everything and we’re going to reinforce success. And it’s Roosevelt reinforcing what he thought of as success, that then turned into the ideology of the New Deal order. Then what was originally a pragmatic and non-ideological thing, became the ideology of social democracy for the post-second world war generation.
If the Democrats had won the 1928 presidential election . . . well, then Herbert Hoover would’ve come in as president in 1933 and would’ve had absolutely no idea what to do. He’d have been talking . . . about how we have to make the system work, we can’t do any of these bizarre New Deal-like experiments. And then history would’ve been very different and, I think, substantially worse.
MS: Until Covid, people might say China actually did have the answer to the inability of the west to keep productivity going. They had their own state-dominated model, and it did very well, and it may even have been edging towards the hegemonic role that, as you wrote in the book, helps co-ordinate the global economy. What do you think about that?
BDL: I take that point. That’s a very powerful argument that may well, from the perspective of our grandchildren and great grandchildren after 2100, be the most productive and useful way to look at the history that started in 1945. A generation of false starts in the global south, followed by China and India’s ascension.
MS: So, you agree?
BDL: No, I don’t agree.
MS: Why do you disagree then?
BDL: The transformation of China from oligarchical collectivism into monarchical collectivism is unlikely to work. Xi Jinping may well live for a very long time and I do not think his judgment is terribly good on a huge number of questions. I think he has a very idealistic view . . . of what the Chinese Communist party can do and what he can control it to do. He wants to see an extremely prosperous, I would call it state surveillance capitalism, with Chinese characteristics and utopian, egalitarian aspirations.
Moving such people out once they get themselves entrenched, seems to be a remarkably difficult thing to do.
I look at my Republican no-longer friends here in the US. Nearly all of them are desperate to somehow get Donald Trump out of the picture as the great helmsman. And that’s precisely because they’re hoping to benefit massively from the positions they will have when he does depart, all of them being essentially in the position of the rest of the Chinese elite during the Cultural Revolution. “This is a crazy man who’s doing enormous damage, but we cannot move against him. If only we hang on and frantically do his bidding as long as we can, we’ll get through it all right, at least personally.” Never mind that it’s a disaster for the cause we supposedly all espouse.
MS: At least internationally, the systems that seem to economically succeed gain adherence. You talk about this in your discussion about the cold war. Do you think there’s any prospect that whatever we in the end come up with as our next phase in the transatlantic west will again be seen as an example worth following in the rest of the world?
BDL: I really very much hope so, but you also have to recognise that the age of Trump and Boris Johnson does not give one confidence.
MS: Can I ask you about the current debate, especially in the US, on inflation? Suddenly now, it feels like we’re back to a very old and conventional debate on inflation, that we’re almost intellectually back in the 70s and 80s.
BDL: I think that [former Federal Reserve chair] Paul Volcker, who’d stopped [tightening monetary policy] when inflation was down to 4 per cent, was right. And Alan Greenspan [his successor], who said we should be happy that it has fallen to 2 per cent and stick there, was wrong. You really do, given the difficulties and getting your fiscal policy ducks in a row, want to have the ability to deliver a major stimulus to the economy when it falls into recession, to be able to cut interest rates by five percentage points or so. It really does require that the average inflation rate be something significantly higher than two, for interest rates to be in a configuration so that you can respond, rather than finding yourself once again at the zero lower-bound and you’re unable to convince people to spend to get the economy back to full employment.
That reversing the shift from Volcker’s 4 per cent to Greenspan’s 2 per cent is something that really needs to be done. But Biden, in his wisdom, has taken the possibility of that off the table for the next three years or so by renominating a Republican worthy, Jay Powell, to head the Fed. What we really need to do, we can’t.
Right now, we have succeeded in reopening the economy after a plague, in a different, much more delivery-and-goods-production orientation, relative to in-person sales. More people driving delivery trucks, making goods and programming websites than before. And as always, when you wheel the economy into a new configuration — 1947 and 1951 are my stock examples — you need a little bit of a burst of inflation to grease things. If things go well, you just get a short transitory burst, after which things return to normal because everyone understands that this isn’t that monetary policy has lost its anchor. It’s more that the market economy is doing its thing by putting high prices on things that are [stuck in] bottlenecks. And offering higher wages to workers who will move into expanding industries.
MS: Is that what you see happening?
BDL: Basically, I thought that Larry Summers had a 20 per cent chance of being right [about inflation] through Christmas of last year . . . [as if] our Odysseus had sailed too near to Charybdis and we were likely to vanish into the inflationary whirlpool.
Then, of course, Vladimir Putin decides that he wants to convince the Ukrainians that they’re merely part of the Russian ethnicity, rather than a separate nation. And he decides to do so not by sending orchestras and ballet companies into Ukraine and hiring people to read the poems of Pushkin aloud in public squares. But that the way to convince the Ukrainians they’re really Russians, is to send in [killers].
I haven’t looked at how bad the famines are going to be late this winter. And certainly I really haven’t looked recently at exactly how much trouble north-west Europe is in, in terms of keeping itself heated this winter. But this is a substantial additional inflationary impulse, which does run the risk of destabilising expectations, especially since so much of, not the bond market, but real-people expectations are tied to what happens to the price of petrol, of gasoline. There may actually be no space between Scylla and Charybdis for us to sail right now. But we’re trying and [this month the US] got inflation numbers that finally looked somewhat nicer than the ones we’d seen before.
MS: We’re in a situation now where we’ve just come out of a pandemic, there’s been a lot of disruption. What are the priorities? If the White House calls you and asks for advice, what do you say?
BDL: Curiously, yesterday I was on a call . . . I would say first, expand the earned income tax credit and get a real child tax credit in there. To try to repair some of the neoliberal damage to income distribution by the huge increase of inequality, has got to be priority one.
One of the lessons of the fall of social democracy is that it’s much, much better if you can deliver people their aid by having the government create a configuration of market prices in which wages are high. Perhaps [transform] our earned income tax credits from something that is given to you on your tax form, to something that is given to your employer and then passed through. People like to have large pay cheques because it shows that they are valued in some social gift exchange network sense.
We really need to get back to free tertiary education for anyone who wants it. Getting people their human capital is about the only way we’re going to right this ship. Plus, we need a major, major attack against my neighbours at Berkeley, who think that Berkeley should still be the same community of wood shake, single-family houses that it was 60 years ago. It’s no longer a sleepy college town but in the hub of a metropolitan area that leads the world in software technology and now has 7.5mn people in it, and that really ought to have 15mn people right now.
That infrastructure and denser urban development, no matter what the people who want their neighbourhoods to stay the same say, is a major thing that the US should be doing. Because the past generation is the first one in which Americans have been unable to move to opportunity because they can’t afford to buy houses where the opportunity is.
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Plus, America needs to resume what it did from 1776 on, up to I would say the election of Trump. To realise that we are skimming off a great deal of the human capital cream from the rest of the world by being a place to which people can move and then do extremely well. Forcing the government of India to subsidise US economic development by freely welcoming the graduates of the Indian institutes of technology was one thing that truly did make America great.
I think that’s maybe four priorities. Income redistribution towards the bottom, especially for mothers of relatively young children. Free education with a much bigger effort to publicly fund tertiary education. The war on Nimbyism. And taking the Statue of Liberty seriously.
MS: You mentioned that there’s an advantage when the economy itself pays higher wages. The strongest example of that we’ve had in a very long time has been the last year or two. Yet it seems like everyone in power is dead-set on stopping it.
BDL: It is certainly true that the Biden administration bought much too much into the “economy is in trouble” narrative, rather than saying: “Our car had broken down by the side of the highway, we managed to fix it, we now need to rejoin the highway at speed.” We have done so. Yes, we have left some tyre tracks on the road. Yes, this thing smells like burnt rubber. But to say that we should not have done that, that we should avoid the burning rubber, but instead get rear-ended as we joined the highway travelling at only half speed and got smashed by the person coming up behind us. That is still stupid.
Friedrich von Hayek would say you actually need market prices to move, to incentivise, to tell people what social requirements really are. In a world of rigidly downward nominal wages, that means you’re going to have a burst of inflation when you rejoin the highway at speed. Simply suck it up and recognise that this is a case in which the market has a logic. We should accept it.
The above transcript has been edited for brevity and clarity