Introduction: At 8:00 p.m. on May 13, the Globalization Think Tank (CCG) invited Angus Dietton, the winner of the 2015 Nobel Prize in Economics, and Anne Keys, an emeritus professor at Princeton University, to analyze the core issues of the current gap between rich and poor and poverty, discuss how to deal with inequality in the development of globalization, interpret the enlightenment brought by the new crown epidemic to social and economic development issues, the enlightenment brought by China's poverty alleviation process to the world, and the future development direction of economic globalization. CCG Director Wang Huiyao and CCG Deputy Director and CCG Senior Economist David Blair held a dialogue with the two scholars. This article is the second part of the conversation.
(Dialogue Part I)
David Blair: There are three points in my opinion about the evolutionary causes of inequality. The first is globalization, and competition in the labor market has had a negative impact. Second, there is a change in domestic policy, and I noticed a quote in your book that states that "rent-seeking is the main cause of wage stagnation in the American working class, and it has a lot to do with the emergence of despair." "I hope you will explain this in detail and explain what rent-seeking means for us." The third is technological change and automation. The reasons for this dilemma are diverse, so what do you think are the main reasons?
Angus Deaton: Let's set aside globalization and technological change, because all countries are facing one problem or another that globalization brings, but you don't see the same despair in Europe as in the United States. Let me turn to the definition of rent-seeking. Rent-seeking is a business practice, and what companies should do is to make and sell products, innovate to get rich, and make our lives better. It's a great thing. This is capitalism and what the market is really good at.
But there's another way people can make money, and that's by pushing the government to get rich at the expense of other people through certain rules or regulations, which is rent-seeking. In many industries, such as health care, they are adept at pushing governments to introduce measures to protect them from market competition at the expense of others' interests. In addition to automation and globalization, rent-seeking threatens the jobs of many American working class.
Rent-seeking in the U.S. healthcare industry is twice as high as the rest of the world. China spends 5 percent of GDP on health care, the United States spends 20 percent, compared with 10 percent in Europe, but both China and Europe have longer life expectancy than the United States. The U.S. healthcare industry is not promoting health, and our health is the worst of any wealthy country in the world. Medical device manufacturers, especially pharmaceutical companies, make a lot of money, and the problem is that this money is used for further rent-seeking. The government is currently working to roll back some of these controls, and U.S. Treasury Secretary Yellen is a good friend of ours, and she has studied our books, but they also don't seem to be able to reform the health care industry.
Anne Case: One of the most critical things about healthcare is that people don't want the free market to play a role in it. When Kenneth Arrow studied the health care industry, he said it wasn't an industry that could operate like a free market, it was an industry that had to rely on government organizations. The healthcare industry must be distinguished from other industries, such as barbering. In the state where I live, you need a license to give someone a haircut. So it will protect those who are able to get a license, not just those who cut their hair, but a lot of others as well, while also keeping others out. But the healthcare sector is different.
Angus Dieton: We understand the benefits of the market. We are not anti-market, just as China really became rich and powerful because it deregulated the market or deregulated the agricultural market. As the famous saying goes: release the vitality of sleeping. We support this, but we also need a strong government to regulate the flooding of the market.
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Wang Huiyao: I think what you just said is very profound. Yes, the U.S. spends 20 percent of GDP on health care, while China accounts for only 5 or 6 percent. As you said, governments should play a more active role in the field of public goods, rather than condoning monopolies and rent-seeking. Your book showcases various forms of capitalism, such as casino capitalism, rent-seeking capitalism, crony capitalism, democratic capitalism, state capitalism, and so on. What is the ideal form of capitalism? China's market economy includes 65 percent of the private sector, 15 percent of multinational corporations, and 20 percent of state-owned enterprises. What is the best form of capitalism? And how to ensure that cooperation with the government while serving the people.
Angus Dieton: People fighting to make money is a very powerful force. Some people call it greed, but you have to guide it in a way that's good for society. There is always danger, and there will be danger in China. I have a friend who wrote a book about creative destruction. This is another thing that capitalism is very good at, it brings new ideas and these new ideas put the old ones aside, all the people who made a lot of money before are now starting to lose money, and similar cycles happen again and again. The danger is that recent innovators may try to prevent the next round of innovation, a risk that any country carries.
There are many famous stories in China, where Zheng He went to the West with a huge fleet of ships, so large that the Mayflower looked like an insect. They sailed all the way to East Africa, and when they returned home the emperor no longer allowed the use of these ships, a potential innovation in the 15th century before Columbus came to the Americas. It's blocked because those in power are afraid, and that's what we've been seeing in America all along, where new innovations are stifled because the old-fashioned people don't want to see them. Therefore, we must make the market serve the people, not the capitalists.
Anne Keys: One of the reasons is that if you want to develop in the process of creative destruction, someone loses. If you want it to be able to develop peacefully, that means providing a safety net for those whose interests are compromised when this innovation happens. I think one of the things that happens in the U.S. is that when globalization or innovation comes along, there's really resistance to helping those who are damaged. I think we have to think of social safety nets as part of the system of running markets.
David Blair: Next, I would like to ask a few specific questions that China is currently dealing with. When I was a graduate student in the late 1970s, the deregulation movement was in its heyday. Proponents of antitrust policy don't think there's a need for an aggressive antitrust policy because the market will solve the problem, people think we can deregulate the financial system and they can assess their own risks. China is also assessing the direction of these two issues, can you talk about these issues, do you think they are the main reasons for what has happened to the US economy in the past 40 years.
Angus Dieton: I think deregulation was right at the time, but now it's wrong. That's not to say the whole thing is crazy, because regulation has also generated a lot of rent-seeking behavior. When I was younger, George Stigler noticed that regulators were captured by regulators, and then they banded together to exploit people. Deregulation spurred economic growth at the time, and we generally agreed that action was needed against big tech companies and regulation of those companies, but at the same time to keep the benefits going. I think China is trying to solve this problem. These companies are very powerful and they bring us huge benefits, but we are worried about what they will do in the future.
David Blair: The Chinese market is more competitive, Alibaba is comparable to Amazon, but it has a lot of competitors in China, such as JD.com, Pinduoduo, and only one Amazon in the United States.
Angus Deaton: I'm not an expert on China, but I feel that the Chinese government is proactive and can stop the Internet giants from getting too big, whereas in the U.S. it doesn't. I love Amazon so much I think it would be great if there were 2 or 3 of them! I'm also not sure if the world needs Twitter and Facebook, that's just my personal opinion. I think China is doing a good job of antitrust, and the U.S. needs to do something about it.
Anne Keyes: Whether or not the financial markets assess their own risk, we can let it move forward without anybody regulating it, and I think we've seen the consequences of this in the U.S., where people fall against the wind and the U.S. comes to their back because we can't let them go down. So the idea that financial markets are an industry that can manage itself independently is a bit naïve.
Angus Dieton: I agree with that. But the deregulation policy of the 1970s wasn't entirely wrong, and we benefited from it, but it went too far, and there was always a cycle of these things, and there were some things that would change over time.
David Blair: I also agree that the deregulation of the 1970s was correct. I want to mention a conversation I had with the regional president of Bank of America a few years ago, and that conversation impressed me, and he said that the main customers he wanted were individual customers who could pay a lot of fees every month, and he didn't want to lend to small businesses unless he could get fees from them. As a result, the traditional role of the banking system – lending to small businesses and homeowners in the 1970s – has now completely transformed.
Angus Dieton: It's going into hedge funds on a massive scale, and most of the hedge funds aren't playing with their own money, but there are banks involved, and basically we're doing this kind of thing with our own money, and I think it's a disaster.
Anne Keyes: I think there's been some progress in protecting people from what you call Bank of America managers. So it's also an example of not allowing the market to function freely. It will take care of itself, but we need to make sure that the people involved are protected and that the vulnerable people will be greeted with hell without that.
After the financial turmoil, the "Occupy Wall Street" social movement broke out in the United States Video screenshot
Wang Huiyao: Yeah, I think what we're talking about is very interesting. For the U.S. government, the smaller the government, the better. But now we're seeing the Biden administration invest a lot of money in response to the pandemic, $2.3 trillion in infrastructure, and the administration is launching all sorts of big projects. Other countries are doing the same thing, such as European countries. China has a very active private sector, multinational corporations and state-owned enterprises, which have assumed the obligation to reduce poverty. The world is learning how to find the right balance to allow capitalism to flourish while preventing it from getting out of control, which is a new challenge for all of us. If it is not handled well, there will be a phenomenon of anti-globalization, and globalization will become a scapegoat. So how to really strike that balance is a very interesting study for economists.
Angus Dieton: Yeah, this study is interesting. Rent-seekers are spending more and more money to rein in the government, but that's not entirely the case, and companies have lobbied little in the past, only exploding over the past 50 years. I don't think it's a coincidence, because during this period both the profit share and the workers' share fell. China has a promising government and is independent of interest groups such as industry, banks, and large technology companies. This kind of government independence is very important, and democracy should be able to do it, but it is not doing very well in the United States and the rest of the world. Similarly, in Europe, many people participate in the Populist movement in Europe, believing that parliamentarians do not represent their interests, but that they represent highly educated people who have benefited from the process of globalization and who do not respect their traditions and way of life.
Wang Huiyao: China has adopted a consultative democratic approach, and it is advisable to sacrifice a little personal freedom for the well-being of society. For example, during the pandemic, people followed lockdown orders, and then they now have better economies and freedoms. It's very interesting to note that China has more than 2,000 counties and 260 cities with a population of more than 1 million, more than 30 provinces and municipalities directly under the central government, which actually compete with each other at all levels, and each mayor is responsible for the well-being of the citizens, which is one of the reasons why I think China's economy is growing at a high rate. But I hope that China's innovation can be intensified, and China is still a latecomer in terms of innovation. This year marks the 20th anniversary of China's accession to the WTO and its active participation in globalization, what are your views on globalization? If China rises peacefully, how will China, the United States, and the European Union work together to achieve better economic prosperity?
Angus Dieton: Yeah, I agree with you, I think we're in a very worrying situation, moving from complete deregulation to full regulation, like dumping the kids with the bathwater. There are a lot of people in America who no longer believe in capitalism in any form, although I don't think they have enough power to wreak havoc, like populism in the United States.
Anne Keyes: When we first started studying economics, we were told that trade pays off. It's really good, the cake is getting bigger, but as the cake gets bigger, the question becomes how to distribute the cake, by the winners of globalization or by other beneficiaries? It is the minority that derives great wealth from globalization, while many lives are destroyed, their communities are destroyed, their families see no way out, no one helps them. So we need to ensure the interests of the entire political community, and if that is ignored, bad things will happen, as we see in the United States right now.
Wang Huiyao: Therefore, every country should seriously think about how to solve domestic problems through innovation, new technologies and new plans. I'm glad to see that President Biden will revitalize America's infrastructure. China is also embarking on an infrastructure revolution, such as building high-speed rail to help it eradicate poverty. If we really focus our attention on domestic issues instead of blaming each other, the world could be a better place, and that will require our joint efforts. We want China and the United States to be a cooperatively competitive relationship, which Graham Allison, Joseph Nye, and Thomas Friedman have all mentioned in previous conversations with me. Even in competition, we need cooperative, peaceful relations of competition, not geopolitical competition or strategic confrontation.
I love this book about consumption related to your 2015 Nobel Prize. Consumption is very important, in order to build a "double cycle" development pattern, China is paying more and more attention to consumption. One of the things China is usually blamed for is that it has taken away a lot of jobs abroad. But Walmart and other U.S. companies have bought so much goods from China that they have helped keep inflation low in the United States over the past few decades, despite some job losses for technical reasons. But China has also bought trillions of dollars in U.S. Treasury bonds, which is very good for the U.S. economy. We benefit from each other, and there should be a more peaceful narrative between China and the United States, rather than adding up the same vicious words as Trump did. How should we view all this?
Angus Dieton: I don't know if I understand your question. Is consumption level low in China?
Wang Huiyao: These are actually two questions, China is stimulating consumption now, I wonder if the consumption of the United States is now largely dependent on China? China uses high-quality, low-priced products to keep inflation low in the United States, but China is heavily blamed.
Angus Dieton: I haven't had anyone accuse me of making it more expensive to consume in the United States. I predict that China will have a series of policies to make the national consumption more. I often say that if China had more children, it would boost consumption. Health care is also very important because people are worried about the large amount of health care costs. Another thing you don't want to know is that many economists don't understand very thoroughly that high-growth societies have high deposit rates. So China's economy will gradually grow rapidly, and it will also generate more consumption, which is not policy-oriented.
Of course, there are some people who want to get a pension in the future. In addition, the elderly will worry about not having children to take care of them when they are old, so they need to save money for the elderly. China is now undergoing change. I noted that China's recent census showed that Chinese growth has stalled almost. I think it would be better if China had more children. It would be better if the U.S. had more children. More young children are a sign of health with a good future.
David Blair: I would like to add one more point. We need to pay attention to wage growth rates. After Zhu Rongji's reforms in China at the beginning of this century, real wages increased by 9% in 15 years, and in the past five years, from 2015 to 2019, real wages have increased by 5-6%. When the median real wages are growing rapidly, it's easy to boost consumption and savings. However, the way the United States stimulates consumption through debt growth is a very bad path. I wonder if you've ever compared the difference between wage-driven consumption and debt-driven consumption?
Angus Dieton: No, I think the point is that when wages are growing very fast, consumption won't catch up for a long time, so people will stick with the patterns of consumption that used to be. They don't adapt as quickly. If wages are growing for a long time or when growth rates start to decline, the rate of consumption is bound to increase. The pandemic has led to a sharp drop in consumer debt as people adopt government subsidies to repay credit cards. I hope that the epidemic will pass quickly so that more consumption is possible. People spend a lot of money eating in restaurants, flying, traveling, etc. These have been hit hard by the pandemic, so consumption in the United States has fallen sharply during the pandemic.
Wang Huiyao: Absolutely. The pandemic has reduced consumption, for example, tourism, which accounts for 10% of global GDP. There are 100-150 million Chinese outbound tourists. I hope that the epidemic will be controlled as soon as possible and that the Tokyo Olympics and the Beijing Winter Olympics will be held as scheduled. I hope that the vaccine will revive tourism consumption.
Angus Dieton: We're going to be able to have this conversation face-to-face.
Wang Huiyao: Right. Hopefully, when we can travel again, I can invite you to CCG. Towards the end of the conversation, we collected some media questions. One of the questions came from the South China Morning Post. According to China's latest census data, population aging appears to be the primary concern of the world's second-largest economy. There is also growing concern that competition among Chinese cities for young people will escalate. Do you think this is a factor that could widen or narrow China's wealth gap?
Anne Keys: This is a difficult question to answer without more data. But that's a good question.
Angus Dieton: Structural stuff is very important in the field of economics as a whole, and often a little under-researched, but the answer is yes.
Wang Huiyao: Very good. Of course, in terms of technology, with the advent of artificial intelligence and automation and the like, if people don't understand these things, there may be an impact on this. Another question comes from CBN, will wealth taxes help eliminate the gap between rich and poor? Do the policies introduced by the Biden administration indicate a resurgence of the era of "big government" in the United States? Biden is raising the minimum wage and has also proposed a flat tax on global operations. So, what do you think about that?
Angus Dieton: I think this is really an era when big companies like Amazon and FedEx are really paying any taxes. I think that's certainly one of the things that fuel populism. There's a sense that really high-level people, especially through companies, aren't paying a lot of taxes. I am certainly very much in favor of international negotiations, such as setting a minimum corporate tax. That way, there won't be this huge distortion of companies moving around pretending to be headquartered in Ireland or in the Cayman Islands to evade taxes. That's a problem. I think it's already very corrosive. It's hard for the government to collect taxes, and it needs to collect taxes to do things. It's also seen as obviously unfair and fuels populism, and we need to reduce that.
Wang Huiyao: We have a question from China Radio International. Many people talk about capitalism. French President Emmanuel Macron said at the 2021 "Davos Agenda" Global Leaders Summit online that modern capitalism "can no longer play a role". What do you think about that, and how do we really compare the global governance of the future with respect to capitalism?
Angus Dieton: I think what Macron is saying is that the way it works now is not working, and I think these are the issues that we talked about, namely rent-seeking and all the other issues. We need a strong government. This will be a countervailing force representing people's excess of capitalism, not to abolish it. And it's hard to know what it will mean to abolish it.
Wang Huiyao: We really had a fascinating discussion tonight. My staff told me that about 800,000 people online were watching our conversations. It's really amazing and the topic is very engaging. So, I would say that we had a very interesting discussion, the United States and China are really the two largest economies in the world, the United States has always been the largest economy, China is the second largest economy, and we have a lot to learn from each other. Of course, the theories presented in your book are also very interesting, related to education, health care, and the future of capitalism. Inequality also needs attention. China must also be aware of this, even though it lifted 800 million people out of extreme poverty. China has just conducted the latest census, and the population is aging, which needs to be prevented. You have provided us with a lot of valuable experience and advice. So, finally, maybe each of you can say a few words to the audience that is still paying attention to us. There may be a better future for how the two countries can work together, rather than repeating lessons we have learned from each other because we have not learned.
Anne Keyes: I think you're absolutely right. I think we need to look at the good parts and not discard them. We need to work hard to build on success. But I think a lot of the problems of globalization, in terms of its domestic problems, are about how we can take advantage of the benefits of globalization and better distribute them locally within our own countries. If we focus on that, I think we can make considerable progress.
Angus Dieton: Yeah, I think that's an important piece of information. In the past 5 or 10 years, countries need to deal with their own domestic affairs, not blame outsiders for what is happening, they should take care of domestic affairs, and they should take care of those who are living in difficulty. This is a domestic problem. This is a policy issue. This is something that our Government must be able to do. Conversely, they have the potential to have terrible things happening domestically or bad things happening internationally, and they're going to feel like they're being exploited, and then they're going to look for scapegoats, and they're going to blame whatever happens to be around them, whether it's China or automation, artificial intelligence, and others. If a large percentage of your population has a low life expectancy, that's a really bad thing. This is a domestic issue. We have to solve this problem, otherwise the United States can't really perform well.
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Wang Huiyao: This is very enlightening and reasonable advice. I think this applies not only to the United States, but also to China and many other countries. We have to take care of the elderly, and we have to do our own domestic public works. Because over the years, many countries that used to do well have begun to do badly. Indeed, the same is true of international politics. Therefore, we must focus on domestic issues and properly manage our own affairs. This is absolutely wise advice for all of us. David, what is your last thing you want to say?
David Blair: I think it's a good conversation, and I hope we can continue to discuss it because I still have a lot of questions for you. You mentioned at the beginning of our conversation that you have some thoughts on how the pandemic affects death, and I would like to ask you to talk about that before we conclude.
Angus Dieton: It's shocking that the people who are suffering more from the pandemic now are the same people who suffered before. And this gap is not obvious, because the cause of death changes. Working at a grocery store wasn't risky before, but working at a grocery store now is risky. But if you have a bachelor's degree, the protection you get seems to be very resistant to pandemics, just like before. In the U.S., if you're white Hispanic, you're like being protected by a Johnson & Johnson vaccine, with a 75 percent effective protection rate. Of course, we also know why this is happening, those of us with bachelor's degrees stay at home, we keep our jobs, we don't have anything bad happening. But it's always the same group of people who benefit, the same group of people who lose. The pandemic hasn't really changed that pattern.
David Blair: Very good. Thank you for explaining this. This is one of the most important issues facing the United States and the rest of the world, and I really appreciate your contribution to this dialogue.
Angus Dieton, Anne Keys: Thank you too for giving us an amazing audience. That's great. Thank you.
Wang Huiyao: Thank you, Professor Deaton, Professor Keith, for bringing us such a fascinating discussion. I really appreciate your advice at the end and throughout the conversation, as well as the theory and concrete examples. Your theory actually applies not only to the United States, but also to China, including Education, Health, and Equality issues in China. You're proposing that countries should focus on their own problems at home and do it well, which is fine. Once again, on behalf of the CCG, I would like to thank you and thank the audience for watching this trans-Pacific online forum. Thank you very much. I hope to see you again in Beijing.
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