Interview with author Daron Acemoglu, Professor of Economics at MIT
Project Syndicate: Last July, you wrote that economists and investors were right to be apprehensive about deficit spending, public debt, and the risk of sustained price growth, but “it would be a mistake to respond to these concerns by pumping the brakes on the economy.” US inflation has now reached its highest level in decades, and the US Federal Reserve is taking increasingly aggressive action to rein it in. Is the Fed doing enough? How concerned are you that sharp tightening will stifle the economic recovery, especially given the additional inflationary pressures stemming from the war in Ukraine?
Daron Acemoglu: Well, I am concerned. It’s hard not to be. What I emphasised last July was that high inflation and deficit spending carry significant risks, but not trying to save US democracy carries even larger ones. We’ve gotten the worst of both worlds: inflation rates are very high, and democracy is in even more trouble now than it was then.
Six months before the US midterm elections, it seems incontrovertible that the Republican Party has become the party of Donald Trump, whose explicit support has practically become a prerequisite for GOP candidacy. To many well-educated, left-leaning Americans, this is still incomprehensible – and that, I suspect, is an important part of the problem. To safeguard US democracy from Trumpism, we must first understand why people are drawn to it.
Rather than label Trump supporters misguided or even “deplorable” – an approach that merely deepens the schism in American society – we must recognise that a very large share of the Americans who have not benefited from economic growth and who have felt cast aside, both economically and socially, support Trump. We must acknowledge their suffering, and work to ease it. Economic growth that brings some degree of shared prosperity is the surest way to help this group – as well as many others – in the United States. This is why delivering job and wage growth, and thus showing that US democracy works, is so important.
In the meantime, however, it is clear that Trump is a hugely flawed – indeed, truly awful – emissary for discontented, economically disadvantaged Americans. He is a corrupt, mendacious, and unstable would-be authoritarian. So, the defining question of US politics becomes: Can anybody wrest these discontented voters from Trump’s grip? Worryingly, the answer may well be no, at least in the near future.
High inflation is also an important problem. The expectation that prices will rise and wages will keep increasing removes firms’ price-raising inhibitions. With that, inflation becomes self-sustaining.
To be sure, there’s nothing magic about the Fed’s longstanding 2% inflation target. If everybody agreed that a 3% target was acceptable or even superior, inflation could run at that level without destabilising the economy. The problem is the sense that we are facing runaway inflation, which fuels discontent and creates instability.
Of course, the war in Ukraine is not helping, and not just because it is placing upward pressure on energy and food prices. The conflict also generates a huge amount of uncertainty. The danger that we could sleepwalk into a much bigger conflict remains very real.
Yes, indeed, these are worrying times.
PS: In March, you argued that the war should spur action to close tax havens, arguing that Russian oligarchs and others elites had no incentive to rein in authoritarian leaders because Western countries’ policies and financial systems provided an attractive haven to stash their ill-gotten gains. Today, Western leaders seem convinced that sanctions against oligarchs can affect Russian President Vladimir Putin’s calculations in Ukraine. Can they, or are oligarchs’ holdings already too integrated into Western economies? What steps would increase the pressure on Russia’s economic elites in the short term?
DA: The system of tax evasion and money laundering we have for the world’s ultra-rich is truly shameful – doubly so, because this is not a sin of omission, but commission. The international financial system more broadly has been fuelled by ill-gotten money from Russia, Ukraine, China, and the Mideast. Ending these flows of illicit money is essential to build better institutions, and it is a moral imperative.
I also genuinely believe that Putin would not be where he is today – having turned Russia into a mafia state controlled by former KGB lackeys – had it not been for the largesse that the West has shown to current and past Russian oligarchs. That is why I was heartened that the West took meaningful action against Russia and its oligarchs.
Will the sanctions topple Putin? I’m not sure. He has such a strong grip on Russian institutions, and his security services are so powerful and ruthless, that there is very little room for manoeuvre. But his regime will get weaker, not least because its ideological basis is being challenged. Russians might be facing Soviet-style repression, but these are not Soviet times. With only a VPN – and, to some extent, even without one – they can access information from all over the world. Many have personal contacts in Ukraine and even in the West. Opinions will shift over time.
For now, the West should do more to support Ukraine, beginning with ending all energy imports from Russia. There is also space to increase pressure on Russian oligarchs.
PS: US President Joe Biden’s administration is also cracking down on cryptocurrency firms to prevent them from helping Russia evade sanctions. Last October, you suggested that Bitcoin ultimately has little to offer beyond a “puerile libertarian fantasy” and support for criminal activities. How salient is the risk of sanctions-evasion via alternative currencies, and how would an appropriate regulatory response work? Does Ukraine’s embrace of cryptocurrencies to help fund its war effort point to genuine benefits that should be taken into account?
DA: It is a huge risk. Digital currencies are part of the reason why fighting money-laundering is much harder today than in the past. As for Ukraine, I don’t think cryptocurrencies are really helping; after all, it has the West’s support, so it doesn’t need cryptocurrencies to receive funding. What is helpful is a good digital infrastructure, which is completely separate from crypto-tools and may or may not benefit from a blockchain-type decentralised ledger, as it enables the rapid transfer of funds from individuals, charities, and nongovernmental organisations.
As far as I can see, cryptocurrencies are helping only Russia.
PS: The US Labour Department’s March jobs report showed unemployment declining to just 3.6%, nearly a 3% drop from when Biden took office. Clearly, the US has made progress in creating jobs. But to what extent are they the kind of “good jobs” you have called for? More broadly, one would expect today’s employment picture to benefit the party in power, so why are the Democrats projected to take a shellacking in November’s midterm elections?
DA: Headline unemployment is only one of the statistics we should consider. The employment rate among men in their prime working age, for example, is much lower than it was a few decades ago. More importantly, many of the jobs that are being created are not “good jobs.” While wages have risen over the last few years, inflation has risen faster, meaning that real wages have declined for many workers.
True, wages at the bottom of the distribution have increased faster, and the conditions of some of the lowest-paid hospitality workers have improved. But, while this is to be celebrated, my belief continues to be that the US has a good-job problem, which can be tackled only with much more concerted efforts to redirect technology and create labour-market institutions that encourage investments in labour and labour-complementary innovation.
• Daron Acemoglu is co-author (with James A Robinson) of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty.
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