The Paper's reporter Jiang Mengying
An outbreak in 2020 caused the global economy to enter its worst recession since World War II, will 2021 be better?
In its semi-annual Global Economic Prospects, the World Bank said the global economy would rebound slightly slower than previously expected. Looking ahead to 2021, there are still many risks to the outlook, including a new outbreak, vaccination delays, financial pressures caused by high debt, and long-term unemployment and business closures. Continued economic weakness could lead to corporate bankruptcy and fuel the financial crisis.
Meanwhile, the start of 2021 has not been quiet. The COVID-19 pandemic is still raging, and the riots in the US Congress have exposed the risk of polarization of American society under the epidemic.
Looking back at the past year, in response to this crisis, many countries have launched large-scale quantitative easing policies, what social consequences will this lead to in the future? Should we worry about systemic risks in the future? Need to be wary of a possible financial crisis? The COVID-19 pandemic caused the worst recession since the Great Depression, what is the significance of the history of the Great Depression for the current situation? Technology stocks out of the "beautiful" market in the epidemic, how should we view the new monopoly formed by technology giants? What difference will US President-elect Biden make in the next 4 years?
With the above questions in mind, The Paper conducted a video interview with the Fung Foundation Chair Professor at the University of Hong Kong and Zhiwu Chen, director of the Asia Global Institute and former tenured professor of finance at Yale University. Chen Zhiwu is a former Winner of the Merton Miller Prize in Economics and is the author of several best-selling books in finance and economics in the areas of financial theory, stock, futures and options markets, and macroeconomic and economic history. In the "Logic of Finance" series, Chen Zhiwu explains in detail why human society needs financial markets and what the logic of finance is.
Chen Zhiwu
Populism is more prevalent because of the pandemic
The Paper: In your book The Logic of Finance, you discuss the impact that the development of finance will have on culture and society. Under the impact of the new crown epidemic, will the large-scale quantitative easing policies introduced by various countries cause the gap between the rich and the poor to further widen? What are the social consequences of this in the future?
Chen Zhiwu: In recent years, countries such as the United States and the United Kingdom, and even some Asian countries, have had a lot of social resentment and great public indignation. Populism is high in various countries, and anti-immigration and anti-international trade sentiment are very strong. In these countries, politicians run on populist tones and slogans. This is so because the new technological developments and the new round of globalization in the past few decades have left many ordinary people without the benefits of technological change and economic development, and the income gap has widened.
The reason is simple, because only those with special talents and special abilities have the ability to take full advantage of the opportunities brought about by globalization and technological change. Many ordinary people do not have the knowledge, experience and networks needed to take advantage of these opportunities, resulting in a widening income gap over the past few decades.
This year, from the Federal Reserve to the European Central Bank, the Bank of Japan and other central banks launched large-scale quantitative easing, a large number of money printing, multi-government also launched a large-scale fiscal stimulus, not only did not narrow the income gap and the gap between rich and poor under the impact of the epidemic, but also made the wealth of the already rich group more and more, and those ordinary people who have no money and no financial assets have not benefited so much from quantitative easing. Worsening wealth disparities could affect the direction of the world in the future – populism in various countries is not only not falling because of the epidemic, but rising further – which leaves a lot of trouble and bad seeds for future societies, especially for international politics.
The Paper: Global financial assets have risen sharply this year, should we worry about systemic risks in the future? Need to be wary of a possible financial crisis?
Chen Zhiwu: Policymakers should be worried about the almost unlimited amount of quantitative easing last year, and even the negative interest rates in some countries. One consequence is that governments, businesses and households in many countries have been encouraged to become heavily indebted, resulting in an asset bubble. But we must know that the wool is out of the sheep, in the short term, we can print more money to carry the challenge of the epidemic, and we will still have to repay the debt in the future, and no one will be happy at that time. In particular, the Fed's repeated statements that it will not abandon the monetary policy of quantitative easing until 2023 will leave a large systemic risk to the US economy.
The impact of the virus is so large, according to the laws of history, this often leads to a sharp decline in asset prices and a sharp contraction in financial assets. In human history, large-scale wars and plagues have reduced the income gap and the gap between rich and poor, thus digesting a lot of civil resentment.
The great plague of 2020, due to the support of global large-scale quantitative easing monetary policy and fiscal policy, made financial assets and real estate prices not only not fall, but rose a lot. The stock market in the United States continues to reach new highs, the gap between the rich and the poor has further widened, and private grievances have risen to a new height. This is simply due to excessive intervention in monetary and fiscal policy. One consequence of this is that populism will intensify further.
The Paper: Covid-19 caused the worst recession since the Great Depression. During the Great Depression, per capita income in the United States fell sharply, and it was not until 1937 that it returned to pre-Great Depression levels; in Europe, everything that happened after the Great Depression gave birth to fascism. What reference and significance does the history of the Great Depression have for the current situation?
Chen Zhiwu: There are many similarities between the two periods. There were already some signs before the outbreak, such as Trump's victory in the 2016 US election and the UK referendum to leave the EU. The widening gap between rich and poor in recent years has led to the prevalence of populism, xenophobic policies and anti-globalization, etc., much like Europe in the early 1930s.
Based on the experience of the late 1930s, the rise in populism, anti-immigration, and anti-foreign trade sentiment in various countries could lead to geopolitical deterioration, even wars and other conflicts. Leaders and elites should learn some lessons from that period, keep their heads straight, and calmly deal with domestic grievances, rather than allow populism and xenophobia to balloon. It is necessary to avoid the situation at that time, otherwise it will have a great impact on the world economy.
The economic miracle that has been able to occur in China in the past 40 years is closely related to the fact that the rules-based world order after the end of the Cold War is very good, and the world is generally very peaceful. In that environment, countries are doing their best to promote global trade and open up to the outside world, while carrying out marketization and privatization reforms. As a result, the rapid economic and per capita income of China and other developing countries has become possible. In the future, world leaders should learn the lessons of blood from the Fascism and Populism-led World War II.
The Logic of Finance by Chen Zhiwu
Biden cannot reverse the global populist momentum
The Paper: Biden's economic policies aim to narrow the income gap, and its financial source is a massive tax increase for businesses and the affluent. How do you think this will affect Wall Street? Is it good for reviving the U.S. economy?
Chen Zhiwu: Tax increases for high-income groups, as well as higher corporate income taxes, could put negative pressure on the growth of the U.S. economy. In that case, both the stock market and real estate could go down, slightly easing the gap between rich and poor and income. But it also poses other problems, such as employment challenges. Not only has the tax burden on enterprises increased a lot, but many people's return on investment income has to be taxed, which will be detrimental to the growth of the US economy.
The Paper: Biden's economic team is mostly ethnic minorities and women, how do you view the penetration of identity politics into the US political system and economic team?
Chen Zhiwu: Four years ago, When Trump came to power, it was a correction to the Obama presidency, because Obama may have favored too much toward black groups and minorities when he was president, at least many white people think so, which gave Trump an opportunity to correct from a white perspective, so he got so many white votes, which led to a lot of conservative and even racist bias in American politics in the past four years. Then, if Biden is too extreme, it will not only not ease the situation of tearing the United States apart, but will further aggravate the division between the two sides. Or turning intra-American anger into an offensive against other countries. This is not good for solving the problem of governance within American society.
The Paper: After the Biden administration comes to power, is it possible for us to return to the globalization of the past?
Chen Zhiwu: To a certain extent, it will return to some of the situations before Trump became president, for example, Biden will try to create a better multilateral international trade environment and communicate with each other on a global scale. But unfortunately, populism in the United States has reached such a high level that Trump did not concede defeat and create a lot of political turmoil in the two months after the election, which is a reaction to the rise of populism and the high degree of social rift in American society. Therefore, the probability of Biden fully returning to the previous globalization policy is very small. In particular, he is not a charismatic leader, and it is very unrealistic to return the United States to the road of globalization completely.
The main thing Biden has to do is to stabilize the mood of American society, reverse some of the negative effects that Trump has created in the past 4 years, and not let the United States continue to go further towards unilateralism, return to multilateralism, and use the United Nations and other multinational organizations to do more, rather than continue to act willfully. Trump's one-way behavior has done a huge harm to the world order, and Biden can do some corrections, but he can't reverse the momentum of global populism.
The Paper: Will the Biden administration be Obama 3.0?
Chen Zhiwu: At present, Biden has appointed more core cabinet members on the left, so it makes sense to say that Obama 3.0 will be in the next few years. But from a policy perspective, it is difficult to become a complete "Obama 3.0". In terms of social policy, health care and Social Security may continue or return to the status quo ante of the Obama era, but it is difficult for international policy to go back, and the populist wave in the United States has become a trend. Much of what Trump has done during his four years in office has been legislated by Congress, and it will be difficult for Biden to veto those laws. In the short term, no matter who is president, it will be difficult to change too much.
China's tech giants need to be constrained and constrained by antitrust
The Paper: The performance of major giants under the epidemic is very prominent. Should we be wary of the winner-take-all situation in the modern economy? Is this phenomenon unprecedented in economic history? What are the bad consequences?
Chen Zhiwu: First of all, there has never been such a winner-take-all situation in the global technology industry as it is today, and this situation can be regarded as the inevitable result of technological change. Take Yao Ming, for example, who earned about $250,000 per basketball game he played before he retired. This was unthinkable before the age of television and the Internet, because there were no such conditions in the past. We know that so many advertisers are willing to pay a lot of money because Yao Ming's ball game can be widely broadcast through the Internet and television, broadcast to China, so hundreds of millions of people will watch, you can advertise, generate a lot of income. If there was no TV and the Internet more than 100 years ago, even if anyone had the ability of Yao Ming, or even the best basketball player in the world, it would be difficult to bring too much commercial value, because the technical conditions were not available at that time.
Second, let's make a distinction between the winner-take-all situation between China and the U.S. tech giants, although comparable, but not 100% similar. Because America's tech giants are more restricted. In contrast, China's tech giants have been constrained too little over the past few years, and the degree of monopoly is almost at its peak.
China's tech giants should be subject to some of the restrictions and constraints of antitrust, and cannot force all companies that develop business on its platform to accept the investment and control of these giants; otherwise, it will only further strengthen the winner-take-all situation, which is very bad for consumers.
Third, anti-monopoly must treat state-owned enterprises and private enterprises equally. As long as it is an oligarch or a monopoly enterprise in the industry, some restrictions should be adopted.
The Paper: What are the new characteristics of the current monopolies and oligarchies? And how should we deal with this new situation?
Chen Zhiwu: The monopoly formed by the technology giants is because it brings convenience to the public, masters the user traffic, and after they have more and more users, it is the monopoly position brought to them by the scale of users. This is very different from the nature of the monopoly formed by Standard Oil through the establishment of "trust" organizations in the United States at that time. Standard Oil is artificially achieved through the form of franchising, through a very strict exclusivity organization.
The Paper: However, precisely because of the new monopoly characteristics of technology giants, there are also opposition voices pointing out that anti-monopoly measures are a threat to a free competitive market.
Chen Zhiwu: We cannot oppose antitrust and free markets. There are always some industries that will cause natural monopolies, and the tolerance for these industries is higher, and the key is to require them to open up the platform, open to related and unrelated competitors, so that all industries have an open competitive environment. Any industry with a market share of more than 60% should provide a legal environment that allows other competitors to have the opportunity to enter as well. Industries that are not fully competitive are no longer truly free markets. Once an industry is formed by an absolute monopoly by one or several enterprises, there is no competition in that industry, and it will not be a real free market.
If the platforms of these giants are open to any third-party company, there will be no natural monopoly; from the perspective of market share, whether to constantly acquire potential competitors in order to eliminate competition in this way. This is getting tighter in the EU, but there is no similar action in China.
Editor-in-Charge: Zheng Jingxin
Proofreader: Yijia Xu