An Interview with Michael Spence, Winner of the Nobel Prize in Economics

Economics, Medium Reads
Reading Time: 9 minutes

I had the privilege of being able to interview Michael Spence, winner of the Nobel Prize in Economics in 2001. A professor at the business schools of New York University and Stanford University, he taught Bill Gates in graduate-level economics at Harvard. At the time of the interview he was in Italy teaching at the SDA Bocconi School of Management in Milan.

Many criticisms leveraged at the United States’ response to the COVID pandemic centered around its lack of a public health care system that arguably made it worse off than, for example, similarly affected European countries. Do you think that would be a valid criticism? Does the epidemic expose this vulnerability?

I think this depends – many criticize the United States for the health care system because of the differential access to it in terms of quality based on your income level. And I think those criticisms are legitimate – it is indeed very expensive, even inaccessible for some. But in this case, I think the main criticism cannot be levied upon only the health care system. It is that the whole system, including the government, didn’t prepare – even though there were studies that said that at some point we were going have to deal with a pandemic. And that’s true pretty much everywhere, meaning it isn’t unique to the United States. We were unprepared and we reacted far too slowly. We seriously underestimated how fast this virus would spread and how invisible the early parts of that spread would be. So I think legitimate criticisms are differential access, slow response, and not following through on getting prepared. Bill Gates gave a Ted talk in 2015 after the Ebola crisis and said countries have to figure out where their vulnerabilities to such threats lie. The political system did not follow through.

Many have criticized globalization, free trade and free movement as increasing the vulnerability of our societies towards pandemics. But on the other hand, it’s also arguably given us more resources to fight the pandemic in the first place. How would you weigh these up?

You know, how do you think about this? Depends a lot on where you live, right? There’s been a lot of criticism of globalization that runs along these lines: it has been conducted and directed with inattention to its distributional consequences, particularly in the developed countries. I think that’s a fair criticism. And maybe it was carried too far. Meaning, maybe we should have had a less messy system that, you know, paid more attention to distributional things, to environmental issues, and so on. Having said that, you know, the global economy and its openness was the principal enabling factor in developing country growth in the post-war period. And so the people who don’t like it, probably don’t count the extraordinary improvement in the options and quality of life and so on that has been experienced by approximately 85% of the world’s population. So, as I say, it depends a lot whether you’re in Washington or the Midwest, in the United States or London, or whether you’re in southern India or Shanghai.

Next to questions about articles you’ve written online. The first I read was about China’s ability to respond and bounce back. I think one crucial aspect of China’s economic strategy is expansion, capturing new markets through exports, loans, etc. Do you think that’s going to be hampered by the coronavirus, or do you think China’s remarkable ability, better than the United States, to absorb the costs will help it?

Well, you know they’re able to set on the virus itself. They’re able to do things that,  we can’t do, with for example digital technology. They can track people, determine their location, give them QR codes that are pretty good estimates of the risk that an individual presents when they are in circulation, not locked down in their house. And overall, there are lots of strengths in that economy, but they’re still an economy with a big tradable sector and a very large amount of their external markets have just been shut down, so there’s no way they can get past that. So that’s a significant headwind. The other thing I think that I and others underestimated is the extent to which people will come. People meaning people who were consumers, people who go to restaurants or get a massage, which is something Chinese people like to do a lot. And so the extent to which the shock of this and the risk associated with it will change their behaviour will mean they have taken a hit on their balance sheets. You know, a friend of mine told me in the last two hours in a call, that people in China are saving again at very high rates, because before the young people weren’t thinking there was going to be a shock this big. And now they’re thinking their bank balance ought to be a little bigger when the next one comes along. Risk aversion, damaged balance sheets, all their behaviour is going to slow the recovery in China down because it’s significantly dependent now, unlike 20 years ago, on the consumption of their domestic middle class. That’s not going to come back as fast as they would like. And so I think the China experience is relevant because I don’t think it will come back as fast as most people would like.

We’re going to be talking about the article you wrote about climate change, and you noted that there was very great difficulty in cutting emissions in the colonies that were growing quite quickly. And so do you believe that therefore the endemic through economic harms, energy demand being reduced in most countries for example, will actually stall or even curtail the rate of climate change? Or alternatively, does the crisis take away attention and money from actually solving the problem, for example investing in renewable energy.

It probably does both. But I think the first one is the bigger effect. At least in whatever period we’re going to be affected by this, including the recovery period, I think it’s probably a plus from the point of view of fossil fuel-related emissions, and maybe a big plus. You know, if travel for business and tourism stays depressed for a long time, that’s a major source of emissions. So, yeah, I think I mean net for a while, anyway, it’s a positive. I mean in the long run, the thing that made climate change things so challenging, as I think I wrote several times actually, is that if we were all living in developed countries and growing at 2% a year in real terms, and then we discovered we had a problem with the carbon dioxide content of the atmosphere and we had to reduce it, you know, it would be a big global economy, but we could probably get on with it if we worked at it really hard. But right now, what we’re doing is we’re essentially racing against growth, right? So if you had a catastrophic economic outcome in the world and all of the developing economies, the ones that are below $20,000 a year, stop growing, it would be a big plus for climate change, right? And indeed the initial attempts to deal with climate change sort of sounded like we better stop growing. If you say that in London at a cocktail party, perhaps some people will nod their head and say yeah, but if you say that in rural India, I think you’re crazy. So the big challenge has always been to make the carbon intensity of our various economies go down fast enough to outrun the growth that’s coming mainly from the developing economies. We’re still behind, but we’re catching up. I think there’s some really good news, which is this is a question in part of the cost. When I looked at this 10 or 12 years ago, it looked like the major developing countries like India were going to use mainly coal to generate electricity, and we knew they were going to need a ton of incremental electricity as the economy grew. The reason for that is coal was the cheapest by far. They have a lot of it, right? And so if they were going to use something that’s much more expensive, it would slow them down significantly, because energy is a core driver of the growth process. Now, talking to experts, some say the cost of renewables is comparable to the cost of coal and some people even say it’s cheaper. So this draconian choice between something that’s clean but expensive and something that’s very unclean but cheap, relatively speaking, is now much less draconian and it may not even be a choice at all. To put it its simplest form, India, with the right set of policies, could probably build a very substantial amount of their incremental and required electric generating capacity with very clean technologies and without paying a big, big price in terms of the cost of doing it.

So that’s a victory for technology, then?

Yeah, it is. It’s a huge victory for technology and the policies that supported it. I mean the costs of both wind and solar have come down so fast. It is just really impressive.

I think perhaps it is the case that the trade-off countries operate between growth and the environment is decreasing, but to a great extent it still exists, right?

The growth is still going to, unless it’s all clean, flatten out. And that’s not possible right now. You’re still going to have to deal with these two parameters: the energy intensity of the economy and the carbon intensity of the energy. Most people were concerned with the second, but probably an important lever in dealing with the climate challenges is the energy efficiency of the economy as well.

How would you navigate that, then? Do you believe, for example that India should have to put its development on hold? Or do rich countries have a duty to provide aid or make the changes themselves?

No. I think it’s somewhere in the middle. I don’t think you can ask India or any other developing country to not grow while we get ourselves organized. They’re going to say no. I think we’ve known for a long time the solution to this has got to be whatever you call all the things that go into lowering the carbon intensity of the economy that run all the way from individual behaviour, like whether they turn the lights off, to how you generate the electricity, to how you build cities, to the energy efficiency of construction, as well as dwellings, both commercial and residential. There are a hundred and fifty different dimensions of the problem, but when you have them all together, it’s that collection, probably driven in part by improved technology over time, that has to outrun the growth. But we’re a long way from where we need to be. I think I reported on this, but we’re at about 36 gigatons of carbon dioxide per year, at least from fossil fuel sources. And who knows what the exact safe level is, but probably it’s around 14 gigatons, if you want to avoid significant climate change, But 14 is a fairly different number from 36 by a factor of more than two, so we’ve got a long way to go.

But presumably, even if development makes the change worse, to a great extent it also improves our ability to mitigate the harms, to build infrastructure.

That’s absolutely right. Provided you don’t burn the place up, you have a greater capacity to withstand it as development proceeds.

Do you think that’s a path that we should be taking? Not focusing on solving it? At this point, many people claim the tipping point is coming close.

I don’t think so. I think we have to be prepared to think carefully about adaptation. What you just said is that as incomes go up, especially in the developing world, their ability to engage in adaptation goes up, and that’s correct. But I think because of the unknown character of the risks and issues like tipping points that we really don’t understand in detail, the risks of giving up on mitigation are just way too high.

Brexit was dominating headlines before Covid-19 happened, and now it’s almost like the elephant in the room that we know we have to get onto at some point but we’re not really ready to confront. So do you believe that the UK needs to massively cut services and increase taxes, or will there be benefits from a hard Brexit because of, for example, regulatory divergence company meeting to adopt, such from? Do you think that is not mutually exclusive with recovery from Covid-19?

It depends on who you talk to and their macroeconomic point of view. I don’t think Brexit will turn out to be a wonderful thing, but then it depends on where you are. In economic terms, to the people who are the most well off in the UK right now, particularly in the Midlands and North, I don’t think it will be as big an improvement as they’re hoping for. There’s a subset of people for which this is not an economic issue. For them, it is rather a sovereignty issue, and they’re going to be quite happy. And if there’s a price to pay for it, they’re okay with that and that’s what democracies are about. People get to make choices. I think in London the question is really going to be whether they work out arrangements with not only Europe but the rest of the world that maintains its status as a major financial centre. There’s a lot of expertise, talent, infrastructure there. I think there’s a reasonably good chance that will continue to be true, and it’s not in anybody’s interest to flush the city of London just because British citizens decided to go their way. So on the whole I mean, I think it’s a mixed picture.

One thing that’s true is that this was going to be a year of negotiating with Europe on the exact terms of the departure. Once everybody had accepted, it was going to occur. That’s almost surely gotten delayed by the current pandemic. So I don’t know what they’re going to do with that. I mean, the smart thing to do would be to say we didn’t expect to have to take several months or more to deal with an economic and health crisis of this magnitude, so we’ll just extend the deadline. That would be the smart thing to do, because they’re not going to be ready. Prime Minister Johnson was in the hospital. He has to focus, and his cabinet has to focus their attention on this, like everybody else in the world. They’re not going to spend a whole lot of time discussing the terms of departure with people in Brussels. So my guess is that will get delayed by another year.

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