books
The Devil We Sort of Know
Over the last several years , it has often seemed as if the financial world has been turned upside down , what with negative interest rates , bailouts of huge banks , and a widespread shift from optimism to pessimism . Just as Robert Gordon wants to upend the conventional wisdom about growth , Adair Turner wants us to shift our thinking about debt 180 degrees . As head of the U . K . Financial Services Authority , Turner had a front-row seat at the first great global financial crisis of the 21st century . And Between Debt and the Devil has , at its core , an argument that I trace to an economist who had a front-row seat at the greatest global finan- cial crisis of the 20th century . Taking a page from John Maynard Keynes , Turner in effect argues that we are approaching the age of the “ euthanasia of the rentier .” What does this mean ? In the past , the world was poor enough , economic growth was fast enough , and the capital requirements of enterprise were high enough that the world was genuinely short of savings . As a result , society found that the promotion of enterprise required more than those who brought to the table labor , skills , knowledge , drive , technology , and a willingness to experiment and bear risk . But to get the capital that would turn these ingredients into growth , society also needed to induce those who would otherwise consume resources
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to delay consumption and deploy their capital . Thus the simple com- mitment of one ’ s current purchasing power to an enterprise could command a healthy return , and one could live well as a rentier off the coupons from bonds and debt that were safe stores of value . On the plus side , this form of economic organization did induce people to mobilize savings and resources for the enor- mous capital investments needed for economic growth . On the minus side , this form of economic organization would inevitably lead to episodes in which debt securities that had been widely believed to be safe turned out not to be so — and there would then follow one hell of a mess .
Now , however , we are in an age of what Larry Summers , the former Treasury secretary and Harvard University president , calls secular stagnation , in which
low growth , low interest rates , and low prospects for innovation make it unattractive for people to deploy capital . Because too much cash is chasing too few opportunities , the mere willingness to postpone con- sumption no longer commands a real return , as any- one who has tried to augment wealth without taking on risk since 2008 knows very well . Indeed , there ap- pears little prospect that the mere willingness to post- pone consumption will command a real return as far out into the future as financial markets forecast . As of July 2016 , some US $ 13 trillion in bonds around the world were carrying negative interest rates . This state of affairs is metaphorically killing off the rentiers .
Turner ’ s insight is that in such an environment , debt no longer has a pro- ductive role to play . And yet it still carries its dangers . And so it ’ s time , Turner argues , to treat debt as a form of economic pollution and tax it . Labor and skills and knowledge should be recompensed with wages and salaries . Technology should be recompensed with royalties and licensing fees . Drive and willingness to experiment should be recompensed with profits and options . And a will- ingness to bear risk should be recompensed with equity returns . But , in Turner ’ s view , the era in which debt is good and we can look benignly on high or increasing leverage is over — if it ever truly existed .
Turner concludes that we need to revise economic policy and economic policymaking in two important directions . First , we must recognize that we will never be able to attain the perfected economic system . We will always face a choice of institutional imperfections . So we need much higher capital requirements and much stronger lending standards , and we need to build a political economy that can resist the howls of those who want to leverage up . Second , we need to abandon the belief that public policy can be reduced to simple and stable rules . The idea that it can be is , Turner argues , as much a fatal conceit as the now outdated belief that central planning could do the job .
The Decline of Pragmatism
The low yields on government bonds reflect a high level of faith in the functioning of the governments whose credit backs them . And yet , as political sientists Jacob S . Hacker and Paul Pierson write in American Amnesia , that faith may be misplaced . American Amnesia is the best business book of the year on the economy . In part it is my favorite because its thesis runs exactly par- allel to the thesis of my own book , co-written with Stephen S . Cohen , Concrete Economics : The Hamilton Approach to Economic Growth
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