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南方财經全媒體記者 施詩 廣州報道
In order to combat the high inflation, the U.S. Federal Reserve has raised interest rate by a total of 525 basis points in 2022 and 2023, entering into the high interest rate range. While high interest rate has pushed down the inflation in the United States, it also triggered major events such as financial turmoil in the United States, banking crises in Europe and the U.S., and the debt crisis for U.S. government.
During the interview with SFC reporter, Thomas J. Sargent, the winner of 2011 Nobel Prize for Economics and professor of New York University commented that there are still many uncertainties about monetary and fiscal policy in the United States. The way the U.S. government has handled and responded to the pandemic has led to more uncertainties in the United States than before the outbreak of the COVID-19.
He explained that the growing debt of the U.S. government was unsustainable and would fall into a vicious pattern, arousing more uncertainties for the Fed, since the Fed officials don't know when the growing debt problem of U.S. government will be solved.
While Sargent believes China deserves credit for the decisions it has made on fiscal policy compared to the United States, as it has not gone off trajectory but with a day-to-day basis during the pandemic.
“When I come here, I see entrepreneurs all over the place. They have ideas. They're creative at all subtle levels.” Sargent presented his observation of China. He considered that China has produced a large number of scientists, engineers, mathematicians... All of these provide a solid fundamental for innovation. He suggested that China is a fertile ground for innovation.
There are lots of uncertainties on the monetary fiscal side from the U.S.
SFC Markets and Finance: Let's begin with the global economy. As we are at the end of 2023, would you like to go over the global economy in 2023 for us?
Thomas J. Sargent: Well, it's been quite a year. When I think of big developments for the world economy, I think of three. One was around this time last year that China opened up to allow people like me and our friends, to come back and see my friends in China. So, the first half of 2023, that was going on, and that had big gratification, not only over China, but for the rest of the world. So that's a big thing, a positive development.
Then the second thing is some development in the United States. And I think there is a couple kinds of developments. There is superficial development that inflation went up in the United States in 2022, in early 2023. And if inflation goes up, interest rate is going to go up because of the way bondholders price things. And you could say that the Fed raised interest rate, or you could say the Fed had it raised interest rate. So, they both happened. That's been going on.
But that reflects the inflation and interest rate changes are consequences of deeper things. I think there are two kinds of effects on inflation. One is definitely temporary, and that was because of the COVID-19 and government's responses to it. Governments all over the world, and I'm taking my government, because lots of supply change, disruptions, and that increased a bunch of costs and changed relative prices, and that had consequences for inflation. But that was temporary. Those things have mostly been worked out.
But the other thing, which might be more permanent is that my own country with the fiscal authority, meaning the taxes and expenditures. According to some researches done by my friend and I about how my country responded to the COVID-19, lots of Americans were withdrawn from the labor force. They were essentially paid by the government not to produce things. But from the government's fiscal policy, the government increased the expenditures, but it did not increase taxes. So we issued lots of debt, huge amounts.
And then there's a pattern that the United States hasn't figured out yet. After the COVID-19 left our expenditures came down somewhat, but not all the way to where they were. And after every previous big war, we had an expansion in the size of the government, a permanent expansion. After World War One, the Federal government got bigger. After World War Two, it (also) got bigger. And it not only spent more, but it taxed more. So here's the situation the United States (has) today. We're spending more, and it looks like there's no end in sight to that. So the US government got bigger, but our taxes didn't increase. That means we're borrowing more and more, and we can't do that forever.
That has generated a lot of uncertainty, uncertainty for lots of people, uncertainty for the Federal Reserve, because they don't know how long they're going to have to be managing this bigger and bigger debt. And if you go underneath the announcements, the Fed doesn't just set interest rate. It has been doing lots of other things, very unusual things during the COVID-19. It has taken on a lot more risk. It has gotten into a bank insurance company now. It took a lot of risk that the banks faced for the interest rate onto its own balance sheet, and that has lots of consequences, and it has not been worked out.
So my answer is, on the monetary fiscal side, from the United States, there are lots of uncertainties. There are much more uncertainties than there was before the COVID-19 because of the way our governments responded to the COVID-19. That's one thing.
But then there's a whole other kind of thing in the United States, which is concerning to me and to many other economists. During the Trump and Biden administrations, they agree on a lot of things. So they agree on basically pursuing a trade war, tariffs and subsidies. And that was something that the United States, before Trump and Biden, recommended that other countries not do. If you go back ten years ago, we were in favor of globalization. We were in favor of lots of trade. Why? Because it made lots of Americans better off as well as making other people better off. So that has been a change, and that's a headwind for the whole economy, and I mean for the world economy. Because it puts other countries in a situation where some of them retaliate, and the whole trading system gets diminished. So that's a concern.
And then there's a third set of things, which I think concerns us are wars in Eastern Europe and in the Middle East. The situation has got worse and the businessmen don't like wars. One reason is (that) it's very hard to predict how they're going to turn out or what happens. So, that generates economic uncertainty.
The Fed was operating under certain rules
SFC Markets and Finance: To combat high inflation, the Fed became more hawkish in the past year. Do you think the Fed made right decision?
Thomas J. Sargent: So, here's the way I think about it. In many ways, the way to think about the Fed is not just one year or two years at a time. In lots of ways, if you look back 50 years, try to figure out what the Fed was doing, using some machine learning on it and thinking about the statistic, they tend to have rules, and they operate in the same way that it's an institution that has certain ways of doing things. When the inflation takes off, they're going to raise interest rate. And it's whether (or not) hawkish they're doing it. That's what the whole institution tells them to do, that there's a whole bunch of things. I think what they've done is pretty much on track.
So now that changes your orientation. You might ask when did they do something? Did they deviate from that? And maybe they did a little bit at the beginning of the COVID-19, and you've kind of asked why.
Well, they thought it was a new situation that they hadn't been in their lifetimes. They hadn't been through a big surge like that, and they didn't know what to do, so they maybe deviated. That's the way I look at it.
SFC Markets and Finance: How did the hawkish Fed affect global economies and financial market?
Thomas J. Sargent: Well, if U.S. interest rate goes up, you could say, capital investors are short-term. The money market managers are moving money across countries regularly. And they like higher interest rate. So if U.S. interest rate goes up, it puts pressure on other countries to raise their interest rate. So it's natural.
Now you could say, some of that pressure came from the U.S., but some of it came from inside of their own countries. Europe was under the inflationary pressure. China is a different story, for various reasons, China didn't have the same inflationary pressure. Now, it is an interesting thing to ask why they didn't do what the U.S. did during the COVID-19 to their fiscal policy. So for a scientist, it's a really interesting experiment.
Nevertheless, that put pressure on China and what you want is to appreciate it as a consequence of that. That's not because anything the Chinese government did or it's partly what the U.S. government did. The Chinese authorities are doing things on a day to day basis.
But like I said the Chinese Central Bank is very sophisticated. They are very smart. Technically, (they have) very smart people, very good economists, statisticians. And they understand their constraints, and (how) the world economy constrains them, and influences what they do.
China is a fertile ground for innovation
SFC Markets and Finance: Let's move to China. You have visited China for many times. So how do you think about the development of China's innovation?
Thomas J. Sargent: I'm a complete outsider, so you know more than I do because you live here. But I think about basics, about what are the strengths of China. As an economist, I think about the fundamentals like what created Shenzhen, which is a city basically didn't exist. And now it's a modern (city). There's no U.S. city like Shenzhen and how beautiful and modern it is, clean and the way things work. That came 40 years ago when I was older than you, it didn't exist. So what created and what's present in China for the future.
So the first thing is China produces large numbers of scientists, engineers, mathematicians, basic science, engineering, math, biology, physics, chemistry...You look at the numbers who graduate and then you look at the number in the pipeline, it's, compared to the United States, it's many more. And they're good. They are world-class. You can measure that by all kind of publications and not just patents but publications and reading. So that's the foundation.
The second thing is manufacturing. If you go to a Chinese manufacturer, I had the privilege of going to one this summer. It just blew me away. Just how it was engineered, the robotics, the mixture of advanced technology. You know they are beautiful engineering, the organization, who was doing the work and how it was produced by engineers all in house. Both in general infrastructure for science and then proven engineering ability. Engineers are problem-solvers and China has lots of them.
And then another element which was with this manufacturing plant, entrepreneurship. I've known this since I was a kid because when I was growing up in San Francisco, I knew Chinese kids, Chinese Americans, they're from here. Their grandparents or parents were from here as immigrants who came into the United States, they immigrated. They were uneducated, but they were entrepreneurial and they became successful. I knew them in college, and I saw a characteristic of entrepreneurship.
And when I come here, I see entrepreneurs all over the place. They have ideas. They're creative at all subtle levels. I mean you could see someone from a village who has an idea how to start a little (business). So entrepreneurship and taking risk. That's there. So you combine that with science. The fundamentals are there. This is the way an economist thinks because economies go up and down , there'll be a bad year, a good year. That's kind of hard to figure out. It's kind of hard to predict. But you know, as long as you have entrepreneurship and a government to rule and things are stable. But as long as you have a fair playing field and the fundamentals are just good.
But there are problems in the U.S.. There's demographic problem. There are going to be more and more people of my age and fewer your age. And that means there's going to be some adjustments. But you know that's true in many countries. And so that's kind of a challenge. But the positive thing is China has great economists and political scientists. They know how alternative ways to confront that problem in ways that are constructive. So I look at the fundamentals.
And then the final thing is that those are all kind of economic fundamentals. There's another fundamental which I put a lot of weight on and this is just a casual observation. But China has a long history and culture of a valuing scholarship and education. It goes back hundreds of thousands of years with the honor that scholars and bureaucrats. To be in the Chinese government, you had to pass tests and so on. I even see that you can tell that's different from my country which doesn't hold scholars in such esteem. But I think that's a value in learning and then kids, their parents valuing education. That's something that's present in China and it's not present as much in my country. So that's a fundamental that I wish my country had. Anyway, lots of positive things.
SFC Markets and Finance: What role will innovation play in reshaping globalization and international order?
Thomas J. Sargent: Everything. Well, not everything. It will be a very positive thing. If you just look at, it's innovation and then how people respond to it. Because this is an interesting thing with society. Every time there's an innovation, there are people that want to stop it. That's what kind of tariffs and somebody's coming into it. That's why innovations are beautiful. That's the insightful and creative destruction. Innovations are creative. But in order to be creative, actually there's some new idea, there's a new way to do something. That means we're going to start doing it in this new way and stop doing in the old way. There are plenty of people who are doing it in the old way. So guess what? Those people are going to want to stop it. They're gonna go to the government and say we have to stop it. That's as old as the industrial revolution. It was going on in Britain.
When I said it's everything, it's the force. But you need a society, a social arrangement that can foster innovation. This is true in my country. You could see a struggle. I know much more about my own country than I do about China. But differences interest me.
The thought of teaching AI to learn is fabulous
SFC Markets and Finance: How will new technologies like AI change the future direction of economic growth? Do you believe machine’s judgment?
Thomas J. Sargent: Oh, it's never the machine. It's always the person running the machine. So when you say machine learning, it's a very good sales pitch, but if you actually look and do it, there's a very smart person that's telling the machine what to do. Of course, the person couldn't have done it without the machine. It does a bunch of calculations, but the person conceptualized the calculations that he or she could do.
A beautiful example of that is AlphaGo, which beat the best go player. But if you look at the clever thought that went in to teaching the machine how to do it, How will new technologies like AI change the future direction of economic growth? It's hard to say. Here's the way I think about it.
I think about things simple. I think of economic growth. It's created by people doing things. One thing is how you measure economic growth. How do you measure economic growth? Is it that we just have more of what we used to have? Or is that we have better versions of the same things we had before? Or is that we have new things, we have things we never thought of?
So like you can consume a lot of things that for most of my life, it didn't exist. I didn't even imagine it. Like your cell phone, and then various things you do on the cell phone that I don't do, like social media and stuff. So those are completely new things.
Now the question is, how do we value them and how do we measure them? That's actually very hard. Because you know there are people who tried to think about this. In many ways, you or I, like a kind of an average citizen. I live better off than the king of England lived 100 years ago. If you kind of look at cell phone, various health things. If I get (sick), he didn't have penicillin. If I go to the dentist, various things. And that doesn't show up in the growth statistics as much. I think there are people all over the world trying to think about how to measure things but it's a good question.
There are some activities that we've been doing a long time that because we're hardwired to be something and do something. But there are ways we can learn better. Like my friends and I, you can watch videos online if you want. That'll teach you all sorts of things, for free. I study these things. There's much more than I have taught. No one is charging. That's not measured. It's an innovation that makes me better off. It gives me joy.
策劃：于曉娜
監制：施詩
責任編輯：和佳
記者：施詩 楊雨萊
剪輯：蔡于恬
設計：林軍明
新媒體統籌：丁青雲 曾婷芳 賴禧 黃達迅
海外營運監制: 黃燕淑
海外營運内容統籌: 黃子豪
海外營運編輯：莊歡 吳婉婕 龍李華 張偉韬
出品：南方财經全媒體集團
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