The historian and author of the new text Civilization explains why the G-20 Summit was a washout and why Greece and Italy are “too big to bail.”
Historian Niall Ferguson
Tavis: More evidence even today of how the turmoil in Europe is affecting the worldwide economy as situations in Italy and Greece continue to spark global fears. Meanwhile, the news today out of China is a bit more positive, as inflationary fears there start to recede.
All of this is the backdrop for the timely new text from noted historian and Harvard professor, Niall Ferguson. His latest is called “Civilization: The West and the Rest.” He joins us tonight from Cambridge. Niall, good to have you back on this program.
Professor Niall Ferguson: Nice to be back, Tavis.
Tavis: Let me start with some news of late before we get into the text. Anything that we should be celebrating, anything at all out of this G20 summit recently in France?
Ferguson: Well, that was a real washout. If the Europeans went into that hoping they were going to get some help from China and other emerging nations, they were slapped down good and hard. It turns out that without some outside help they seem quite incapable of solving their own problems.
What we’re watching is an absolutely classic collapse of market confidence in a sovereign borrower. The difference is that Greece was small. Italy is big, and now the Europeans are in the territory of not so much too big to fail as really too big to bail. I struggle to see how they are going to solve the problem that they have created for themselves.
So in the sense that my book’s about a crisis of Western Civilization, well, here we are – a crisis in Athens and a crisis in Rome, the cradles of Western Civilization.
Tavis: So if they’re too big to bail, how does this issue get addressed in Greece or in Italy?
Ferguson: Well, given that it’s very unlikely that the Germans are going to agree to write a check big enough to bail out an economy as large as Italy’s, I think the only solution now open to the Europeans is for the European Central Bank to follow the example of the Federal Reserve and print money pretty aggressively.
That means that the ECB has to break all its promises in the past and start buying government bonds from the Greeks, from the Italians. It’s done some of this already, though in a rather subdued and subterranean way.
I think the new head of the ECB, an Italian by the name of Mr. Draghi, is going to have to get serious and get out there with his printing press, because I don’t see any other way of avoiding a complete breakdown of the single currency. Mind you, Tavis, I argued 10 or more years ago that Europe was making a big mistake creating a single currency, so I have my “I told you so” t-shirt on right now.
Tavis: So you think a lot of this is directly related to the origin of the EU?
Ferguson: Well, the EU itself isn’t the problem. The idea of creating a single currency for 17 out of its 27 members is the problem, and this idea was sold to ordinary Europeans as a great way of speeding up the integration of Europe.
It’s done just the opposite. It’s actually caused a split between the members and nonmembers of the single currency. My country – you can tell by my funny accent I’m British – my country’s not in the single currency, though it is in the European Union.
Then inside the single currency you have incredible economic divergence between the German core and the Mediterranean periphery, who just can’t compete with German workers on a unit-cost basis.
So the problem’s a really profound one, and it seems to me that if they don’t move very swiftly at the ECB they’re going to be staring a breakup of the euro zone, potentially not only Greece, but other countries, having to leave, and that would be some mess, because it would be really, really hard to restore these old currencies we used to have, like the drachma in Greece or the lira in Italy, without bankrupting a very large number of these countries’ companies, which of course owe money to people outside of their national borders, which would still be denominated in euros.
Tavis, it’s a real mess. It makes the United States look almost good.
Tavis: Is the verdict on austerity as the answer, is the verdict in?
Ferguson: I think the verdict is in, Tavis, and it’s this – if you wait until the bond market calls you out, if you wait until you lose market confidence and then start introducing your austerity measures, it’s too late. You’re going down.
The lesson, I think, from the British experience was if you act sooner rather than later, if you get in ahead of the market, then it’s a damn sight easier. But there is no real alternative for any major developed economy but to get its house in order, fiscally, and that includes the United States.
The problem is if you postpone and postpone action, if you put off the evil hour of trying to set your house in order and lose market confidence, then you’re in a death spiral where you are having rising borrowing costs that force you to cut expenditure and raise taxes, which causes the economy to crater, which makes the deficit bigger, which makes the investors panic more, and down you go.
That’s what’s happening in Italy right now, and of course the nightmare scenario is that one day we might see something similar happen here.
Tavis: To your point about the U.S., I’ve talked extensively for the last three years, as everybody knows, about holding President Obama accountable, but you’ve been tough on him as well, and you’ve basically said that what he promised hasn’t matched up to what he has delivered, specifically where the economic matters are concerned.
Give me your take on Barack Obama as the leader of this country, given all the economic turmoil the world’s enduring right now.
Ferguson: Well, Tavis, I have some real sympathy for the president. He inherited one hell of a financial mess and I think was also advised that it would be relatively easy to fix. We’d have this wonderful, V-shaped recovery sparked by a stimulus bill that the Democrats and Congress would design, and I don’t think this was good advice, because it wasn’t enough and more importantly – I think this is the critical point – everybody was underestimating the immense drag on the economy of consumer debt.
They were also underestimating the uncertainty that people would start to feel in the business sector as public debt, as the federal debt, started to soar. So I think you have to acknowledge that he inherited an incredibly challenging situation, and I agree with my old boss, Larry Summers, when he says we could be in a worse position.
We could be in something more like a Great Depression, and maybe expectations were just a little unrealistically high four years ago when people started to think that we found a messiah who was going to very quickly get the U.S. back out of the financial hole.
I think this hole was much deeper than anybody knew when Barack Obama entered the White House, and in reality I think even the best economists, and he did surround himself with some of the best, underestimated the scale of the challenge.
Tavis: Well, two responses – actually, one response and one question. I hear your point about Larry Summers, that it could have been worse. I just don’t think, Niall, that’s a winning political slogan.
Tavis: You can’t tell the American people that it could have been worse and somehow think that’s going to garner votes for you. I digress on that. But the second issue is when you say that the stimulus wasn’t big enough, I argue with you on that. Other economists come to mind – Joseph Stiglitz and Paul Krugman and others agree with you on that. Christina Romer, for that matter, inside the White House, agrees with you.
But if the president were here he would say what he’s said consistently, which is that we got everything we could, even though they controlled both houses of Congress at the time. They would argue that they could not get any more. So when we say that it should have been larger they say they couldn’t have gotten more, and then you say what?
Ferguson: I think one of the things – and this is where I differ from Paul Krugman – that was done wrong was that they didn’t combine stimulus with some credible path back to stability over a 10 or so year period, and the worry was that this was stimulus today and it would be followed by stimulus tomorrow and the day after that, and that’s exactly what’s happened.
We’ve had deficits of around 10 percent of GDP three years running now, and I think people understandably worry about where this leads. If you look at the Congressional Budget Office numbers, the alternative fiscal scenario, which is the one they say is more probable, has absolutely terrifying implications.
It means that by 2050, if we don’t change our path, all of federal tax revenues – that’s right, all of them – will be absorbed by interest payments on the federal debt, even if interest rates stay relatively low.
So the problem, I think, was in some ways to fail to combine a strong stimulus in the short term with a credible plan for getting back to stability in the medium term. So in a sense we got the worst of both worlds. The stimulus wasn’t big enough to begin with, and there wasn’t credibility for the return to stability over the medium term.
Tavis: Let me jump right into the book now, “Civilization: The West and the Rest,” the new text from you. You argue in the book, if I can top-line it this way, that there have been six things that really have allowed the West to grow and to succeed in the way that we have down through the years – competition, science, property rights, medicine, the consumer society and the work ethic. But you argue in the book that that’s changing now.
Ferguson: I think that’s right. If these were the killer apps, and I call them that to try and excite the interest of my teenage children, if these were the killer apps that propelled the West from a position of parity with the West to a position of world dominance by the 20th century, the troubling thing is that we no longer lead in any of these fields because A, the rest of the world, like China, has been frantically downloading our killer apps.
In other words, they’ve been copying the way we do things, the institutions and the ideas, but at the same time we have kind of been deleting these apps. We’re not as good as we used to be on a whole range of these things.
For example, if you just look at what the world economic forum says about the United States in terms of its competitiveness, over the past seven years it’s gone down really steeply. It’s one of the biggest declines in the world economic forum’s index, whereas China is the biggest climber.
You could look at science and say the same thing. We may still get the Nobel prizes, but Nobel prizes are won by old guys. If you look at how teenagers are doing in the sciences (laughter) or in math, if you look at our teenagers today, our 15-year-olds are lagging behind the 15-year-olds in Shanghai when it comes to mathematical attainment, and they’re as far behind the Shanghai kids as we are ahead of kids in Albania and Tunisia. The gap is the same gap.
That is a real sign of trouble for the future, because let’s face it – in this globalized world, with very, very competitive wage rates for the unskilled, if you don’t get on, if you don’t succeed educationally, it’s very hard to see how you can be a center of innovation, which is what the U.S. has been in recent years.
Tavis: When I first saw your book, Niall, I wondered whether or not it was fair to actually subtitle it “The West and the Rest” as opposed to “The West and China.” Isn’t that what we’re really talking about? Throw in India, maybe, but aren’t we really talking about the West and China?
Ferguson: I don’t think we are, although China’s obviously the biggest story. Let’s face it – it’s a fifth of humanity. It’s bound to be a big player here. But if you look at the projections that the IMF does or for example the Goldman Sacks BRIC projections, although China overtakes the U.S. in terms of GDP very soon, possibly within five years, India does catch up too.
The last time that Goldman ran these numbers they had India catching up with the U.S. by 2050. Then you’ve also got Brazil, you’ve got Indonesia, another big and very rapidly growing economy. I make the argument in the book that it’s not a question of inevitable decline. Rather it’s a question of what can we do, what must we do, to revive our institutions and get our mojo back, not only in terms of economics but in terms also of science, of the way our legal system works.
Tavis, we used to have the rule of law in this country. Now we have the rule of lawyers – an amazingly expensive, cumbersome system that makes it harder and harder to start a business in this country. I’ve been discovering this for myself. I’m running a little experiment – how easy is it to start a business in the United States.
I’ll tell you, it’s harder than it is in England and it’s even easier to do in Hong Kong. So all the things that we used to be the best at, all the institutional advantages that we’ve come to take for granted, I have a sense that we’ve let them slip away, but we can get them back.
We just need to focus on what it is that’s going wrong, and at the moment we’re not so good at that. A lot of the debate that goes on in Washington seems to me to be about the wrong thing. An arbitrary debt ceiling, a completely arbitrary ceiling consumed how much, six weeks of political energy?
We hardly ever discuss the problem of international educational standards, the fact that we’re slipping down the rankings in terms of mathematical attainment at the teenage level. So we keep debating the wrong things. That’s what the politicians are doing wrong.
Tavis: Hard to do justice to this new book by Niall Ferguson, but I wanted to have him on because one, I love the text, “Civilization: The West and the Rest,” but also because he’s the only professor of business at Harvard cool enough to talk about how to get our mojo back. (Laughter) Niall Ferguson, always the –
Ferguson: It’s the Austin Powers side of me. (Laughter)
Tavis: Always good to have you on. Thanks for the text. Good to talk to you.
Ferguson: Thank you, Tavis.
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