Martin Wolf is the doyen of global economics journalists.
His weekly Financial Times column, which also runs in The Australian Financial Review, dissects the performance of the world’s top economic policymakers in prose of elegant and sometimes merciless clarity. Few are let off easily.
Normally, he would be sitting on the other side of this table, grilling a central banker or a Nobel laureate. It is vaguely unnerving to play the interviewer to him. Don’t worry, he confides: “It’s a lot easier asking the questions than it is answering them.”
We have come to Matt Moran’s Aria restaurant next to the Opera House, easy for a visitor arrived from London that morning to find.
Wolf might be lead columnist at the house journal of the world’s financial elites, but he has written a hefty book called The Shifts and The Shocks, in which he says these people have collectively screwed up. They did so with “complete insouciance” before the global financial crisis in 2008, he says, and have failed ever since to manage the recovery as well as they could have.
He is keen to order. Sashimi to start, then barramundi for both of us. I offer wine. He will have a glass of white, but gladly changes his mind when I don’t join him.
The GFC has been the crisis of my lifetime and his, I suggest, badly shaking the post-1945 era of prosperity we were both lucky enough to be born into. That makes it feel personal. I go through some of his book’s damning conclusions.
The banking sector has produced serial crises since it was unchained in the 1970s and 1980s, Wolf writes, and “no industry should be able to inflict damage equivalent to a world war” as it did in the GFC.
AN INTELLECTUAL AND MORAL FAILURE
Globalising finance allowed the “transferring of excess savings of Chinese into the wasteful consumption of Americans, which made no sense. To generate a huge financial crisis as a result was worse than senseless”.
The crisis was an intellectual and moral failure of the Western elites that now threatens their political legitimacy, he concluded.
“It’s an angry book,” I say. “Yes,” he replies, “surely angry with myself because it ended up so much worse than I thought”.
“Here was a financial sector that had enormous power and influence, and wealth that had been fantastically mismanaged in a way that was familiar from 19th-century writings but which I assumed, in more modern times, could not recur,” he says. “It was a huge shock.”
But bad as the crisis at the banks was, Wolf thinks the GFC has masked deeper, more disturbing problems of declining growth, investment and productivity that were already bedevilling Western economies.
He squints through the midday glare at the Harbour Bridge in front of us. That was a massive Great Depression-era investment project, he remarks. It’s his theme: growth in the world economy is stagnant and disappointing not because it is sinking in debt, but because it is awash in a glut of savings for which there is nowhere to safely invest to get things going again.
“It is very clear to me that the engines of the world economy have not been working properly for quite a long time – that is, supply and demand,” he says.
SITTING ON HUGE PROFITS
Wolf tackles the beautifully sliced sashimi with just a fork. He eats quickly and keeps the conversation going without missing a beat – a valuable skill for a journalist – which I admire as I struggle to keep up.
The private sector in the advanced countries is sitting on huge profits and savings, he goes on. But there is nothing to unlock them for better use. There are no great new innovations, which demand enormous capital investment. Workforces are ageing and shrinking, and often now work in services.
“There are real reasons why our corporate sector does not see any need to invest a lot,” he says. And demand growth is even weaker than investment growth, he says, with one feeding off the other.
“In the developed world we don’t have much productive use for our savings. And that has meant that in normal times with normal interest rates, demand is insufficient. So what we do is create abnormal times with abnormal credit growth, which then blows up, and that seems to be the cycle that we are in,” he says. “The only way we get consumption to grow adequately is all these bubbles.”
Wolf says that the genuinely strong periods of economic growth in the 19th and early 20th centuries, and into the 1960s, all had the same thing: “a tremendous investment dynamic in the private sector … a huge investment boom to get the motor going”, even if it is not clear what caused those booms to happen.
It certainly isn’t there now. “What’s peculiar is that there has been no investment boom in the developed world for a very long time. The only investment booms are in housing, which is very nice but it doesn’t make us any richer.”
No longer needed or valued, our savings have become flows of hot, cheap money destabilising the economies they crash into, from the West into Asia in the 1990s, then from Asia into US houses, and more recently into a bubble of everything.
THINGS MIGHT HAVE BEEN DIFFERENT …
As our plates are cleared, Wolf starts quizzing the maitre d’ about the barramundi. Excellent eating, but he has never seen it anywhere else in the world. Is it found in Indonesia, perhaps? These fish were from Broome in WA, he is told; though he guessed right, it is also common in Asia.
Things might have been different if China and other emerging economies had successfully absorbed the West’s surplus savings.
“You could perfectly imagine another world history,” Wolf resumes. “China invests 50 per cent of GDP, it saves another 40 per cent of GDP, and imports the rest in foreign investment. All the other countries run huge surpluses, and accumulate large claims on the Chinese economy. That would be a perfectly normal economic relationship,” and it’s how America and Australia were financed.
But China is not normal. It would never allow foreigners to own its development.
Instead, he fears, China has just copied the West’s mistakes – a theme he would stress if he were writing his book again.
“It relied ludicrously on exports, saved too much. When the crisis hit, it had a temporary, distorting credit boom. It has slowed.”
Greece’s long agony is nearing a head as we meet. “Greece is proof that the euro was a very bad idea, at least when it was extended to countries so profoundly different from those of core Europe. It is not obvious whether it should seek to stay in or leave,” he tells me after the vote is announced.
I have never met anyone who can speak (and presumably think) in fully formed sentences at this sustained pace. Wolf came to journalism late, nudging over 40 in 1987, after a decade at the World Bank, and then at a London-based trade think tank.
He had thought of politics, but decided he would be bad at partisanship: “I tend to think everybody is wrong.”
It made a fine qualification for chief leader writer at the FT when the invitation came, and then chief economics commentator.
DOWNSIDE OF GLOBALISATION
The post-1945 prosperity was the first time in history that the common person, at least in the West, has been treated well, I venture. Now that idea seems threatened by continual crises, and the spectre of technological unemployment to come.
Even Marx’s prophecies have been recently dug up again, I say: on the lines that globalisation and digitisation mean capital does not seem to need labour as it once did.
He says globalisation has benefited lots of people in the developing world, and lots of upper middle-class and upper-class people in the developed world. But not the middle and lower classes in the developed world.
“If you looked at the world economy in 1970, there had been tremendous growth, a lot of which had gone to the Western working classes who lived in a few relatively rich countries which shared income relatively widely, and had developed welfare states.
“Their incomes did not reflect any extraordinary talent or knowledge. They were just fortunate to live in countries that had the know-how, and live off the rent of scarce know-how, as it were.”
But that know-how has been globalised. “It is as easy to open a car plant in China as in the US,” he says. “In a global sense, inequality has fallen.” But there is more inequality within Western societies. Those with knowledge do very well, especially in the financial sector. Others are left out.
There is genuine tension, he says. “Globalisation and technology have given so many human beings opportunities they would not have had.” But the downside is “enormous stresses on Western societies, pulling them apart and making them less functional, less pleasant in pretty obvious ways”.
What should be happening, he says, is “that we go back to the beginning of economics, that the gainers should compensate the losers … they should be prepared to pay some of their winnings so that society remains civilised”.
NO NEW QUESTIONING
It now surprises Wolf that we have “gone through the catastrophe of the GFC with no new questioning of economic models”.
When stagflation in the 1970s blew up the Keynesian world – which as he says, meant high taxes and, extraordinarily, a more egalitarian society run against the direct interest of elites – then the new model of monetarism and free markets was ready to step up.
He did not see it at the time, he says, but that intellectual change suited powerful interests.
“No comparable process has taken place this time,” he says: the GFC has not changed how we think about society because there is no countering political force to push an alternative view. That’s less to do with economic thought, he thinks, than who is powerful.
Giddy with that whiff of revolt from the top of the pink paper, I let Wolf return through the winter sunshine to his hotel.
